<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 2, 1998
REGISTRATION NO. 333-38381
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
USN COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 4813 36-3947804
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) 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
USN COMMUNICATIONS, INC.
10 SOUTH RIVERSIDE PLAZA, SUITE 401
CHICAGO, ILLINOIS 60606
(312) 906-3600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
GARY P. CULLEN, ESQ. BRUCE S. MENDELSOHN, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & STEPHEN E. OLDER, ESQ.
FLOM (ILLINOIS) AKIN, GUMP, STRAUSS, HAUER & FELD,
333 WEST WACKER DRIVE L.L.P.
CHICAGO, ILLINOIS 60606 1333 NEW HAMPSHIRE AVE., N.W.
(312) 407-0700 WASHINGTON, DC 20036
(202) 887-4000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO PUBLIC: As
soon as practicable after this Registration Statement becomes effective.
If any securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
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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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<PAGE>
EXPLANATORY NOTE
This Registration Statement contains a Prospectus relating to an offering in
the United States and Canada ("U.S. Offering") of an aggregate of 6,400,000
shares of common stock of USN Communications, Inc., par value $.01 per share
(the "Common Stock"), together with separate Prospectus pages relating to a
concurrent offering outside of the United States and Canada ("International
Offering") of an aggregate of 1,600,000 shares of Common Stock. The complete
Prospectus for the U.S. Offering follows immediately after this Explanatory
Note. After such Prospectus are the following alternate pages for the
International Offering: a front cover page, an "Underwriting" section and a
back cover page. All other pages of the Prospectus for the U.S. Offering are
identical and are to be used for both the U.S. Offering and the International
Offering. The complete Prospectus for each of the U.S. Offering and
International Offering in the exact forms in which they are to be used after
effectiveness of this Registration Statement will be filed with the Securities
and Exchange Commission pursuant to Rule 424(b).
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED FEBRUARY 2, 1998
PROSPECTUS
8,000,000 SHARES
USN COMMUNICATIONS, INC.
LOGO
COMMON STOCK
-----------
All of the 8,000,000 shares of Common Stock, par value $.01 per share (the
"Common Stock"), being offered hereby are being offered by USN Communications,
Inc., a Delaware corporation ("USN" or the "Company").
Of the 8,000,000 shares of Common Stock offered hereby, 6,400,000 shares are
being initially offered in the United States and Canada by the U.S.
Underwriters (the "U.S. Offering") and 1,600,000 shares of Common Stock are
being offered in a concurrent offering outside the United States and Canada by
the International Managers (the "International Offering" and, together with the
U.S. Offering, the "Offerings"). The initial public offering price and the
aggregate underwriting discount per share will be identical for both Offerings.
See "Underwriting."
Prior to the Offerings, there has been no public market for the Common Stock.
It is currently anticipated that the initial public offering price per share of
Common Stock will be between $16.00 and $18.00 per share. See "Underwriting"
for a discussion of the factors to be considered in determining the initial
public offering price.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "USNC."
At the Company's request, the U.S. Underwriters have reserved up to 800,000
shares for sale at the initial public offering price to certain of the
Company's employees, members of their immediate families and other individuals
who are business associates of the Company (including certain vendors and
consultants), in each case, as such parties have expressed an interest in
purchasing such shares. The number of shares available for sale to the general
public will be reduced to the extent these individuals purchase such reserved
shares. Any reserved shares not purchased will be offered by the U.S.
Underwriters to the general public on the same basis as the other shares
offered hereby.
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COM- MISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPEC- TUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share............ $ $ $
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Total(3)............. $ $ $
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</TABLE>
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(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses of the Offerings payable by the Company estimated
at $1,100,000.
(3) The Company has granted the U.S. Underwriters and the International
Managers options, exercisable within 30 days of the date hereof, to
purchase up to an aggregate of 960,000 and 240,000 additional shares of
Common Stock, respectively, solely to cover over-allotments, if any. If
such options are exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
-----------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, and subject to
the approval of certain legal matters by counsel for the Underwriters and
certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the shares of Common Stock will be made in New York,
New York on or about , 1998.
-----------
MERRILL LYNCH & CO.
COWEN & COMPANY
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
-----------
The date of this Prospectus is , 1998.
<PAGE>
[MAP SHOWING USN LOCAL SERVICE AREAS]
CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF SHARES OF COMMON STOCK TO STABILIZE THEIR MARKET PRICE,
PURCHASES OF SHARES OF COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION
IN THE SHARES OF COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (No. 333-38381) (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Common Stock covered by this
Prospectus. This Prospectus does not contain all of the information set forth
in the Registration Statement and the exhibits and schedules thereto, certain
portions of which have been omitted pursuant to the rules and regulations of
the Commission. Statements made in this Prospectus as to the contents of any
contract, agreement or other document are not necessarily complete. With
respect to each such contract, agreement or other document filed or
incorporated by reference as an exhibit to the Registration Statement,
reference is made to such exhibit for a more complete description of the
matter involved, and each such statement is qualified in its entirety by such
reference.
The Company is subject to the periodic reporting and other informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files reports and other information with
the Commission. The Registration Statement and the exhibits and schedules
thereto and reports and other information filed by the Company may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and will also be available for inspection and copying at the
regional offices of the Commission located at 7 World Trade Center, 13th
Floor, New York, New York 10048 and at 500 West Madison Street (Suite 1400),
Chicago, Illinois 60661 at prescribed rates. Copies of such material may also
be obtained from the Public Reference Section of the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The
Commission maintains a web site (http://www.sec.gov) that contains reports,
proxy statements and other information regarding registrants that file
electronically with the Commission.
The Company intends to furnish to its stockholders annual reports containing
financial statements audited by an independent public accounting firm and will
make available copies of quarterly reports containing unaudited financial
statements for the first three quarters of each fiscal year.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act,
including statements containing the words "believes," "anticipates," "expects"
and words of similar import. All statements other than statements of
historical fact included in this Prospectus including, without limitation,
such statements under "Prospectus Summary," "Risk Factors," "Pro Forma
Consolidated Financial Statements," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" and located
elsewhere herein, regarding the Company or any of the transactions described
herein, including the timing, financing, strategies and effects of such
transactions, are forward-looking statements. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. Important factors that could cause actual results to differ
materially from expectations are disclosed in this Prospectus, including,
without limitation, in conjunction with the forward-looking statements in this
Prospectus and/or under "Risk Factors." The Company does not intend to update
these forward-looking statements.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and consolidated financial
statements and related notes appearing elsewhere in this Prospectus. Except for
the historical financial information and as otherwise noted, all information in
this Prospectus, including share and per share data, has been adjusted to
reflect (i) the conversion of all of the outstanding shares of the Company's
9.0% Cumulative Convertible Pay-In-Kind Preferred Stock (the "9% Preferred
Stock") and 9.0% Cumulative Convertible Pay-In-Kind Preferred Stock, Series A
(the "Series A Preferred Stock") into an aggregate of 5,943,916 shares of
Common Stock concurrently with the closing of the Offerings (excluding for this
purpose the effect of Common Stock issued in connection with such conversion in
respect of accrued but unpaid dividends on the 9% Preferred Stock and Series A
Preferred Stock subsequent to September 30, 1997) and (ii) the conversion of
each outstanding share of Class A Common Stock into one share of Common Stock,
par value $.01 per share (the "Common Stock"). Unless otherwise indicated, (i)
the information in this Prospectus assumes that the Underwriters' over-
allotment options have not been exercised and (ii) all references to the
Company or USN refer to USN Communications, Inc. and its subsidiaries. Please
refer to the Glossary for the definitions of certain capitalized terms used
herein and elsewhere in this Prospectus without definition.
THE COMPANY
USN is one of the fastest growing competitive local exchange carriers
("CLECs") in the United States. The Company offers a bundled package of
telecommunications products, including local and long distance telephony,
voicemail, paging, teleconferencing, Internet access and other enhanced and
value-added telecommunications services, tailored to meet the needs of its
customers. Upon the consummation of the proposed acquisition of Connecticut
Telephone (as defined), the Company will also offer wireless telephone service
on a resale basis. See "--Proposed Acquisition." The Company primarily focuses
its marketing efforts on small and medium-sized businesses with
telecommunications usage of less than $5,000 per month. The Company's strategy
is to continue to increase its customer base by being more flexible, innovative
and responsive to the needs of its target customers than the regional Bell
operating companies ("RBOCs") and the first-tier interexchange carriers
("IXCs"), which have historically concentrated their sales and marketing
efforts on residential and large business customers. The Company primarily
differentiates itself with a value-based marketing strategy by providing an
integrated, customized package of telecommunications services on a single bill
and responsive customer care.
The Company is presently selling service to customers in certain states in
the NYNEX Corporation ("NYNEX") region (Massachusetts, New Hampshire, New York
and Rhode Island) and the entire Ameritech Corporation ("Ameritech") region
(Illinois, Indiana, Michigan, Ohio and Wisconsin) and is currently in
negotiations to expand its bundled services offering throughout the 14-state
Bell Atlantic/NYNEX region. Management anticipates implementing service in at
least two additional states by the end of 1998. In August 1997, NYNEX merged
with Bell Atlantic Corporation ("Bell Atlantic"). The Company continues to
operate in the former NYNEX regions, which are now a part of the Bell Atlantic
territory.
During 1997, the Company increased aggregate local access lines in service
from 8,364 lines to 171,962 lines, including the provisioning of 55,371 lines
in the fourth quarter. As of December 31, 1997, the Company had sold 191,069
local access lines, including 55,897 lines which were sold in the fourth
quarter. Services are primarily marketed through an approximately 425 member
direct salesforce in 34 offices located in nine states. As part of its
customer-focused product offering, the Company provides personalized customer
service, 24 hours a day, 365 days per year, through its two regional customer
care centers.
COMPETITIVE ADVANTAGES
Providing local exchange services is a highly complex process that requires
overcoming significant barriers to entry. Since inception, the Company has
spent significant time, resources and capital to enter the local market. In the
process, it has gained substantial experience in this complicated market
segment. Consequently, the Company believes it has the following competitive
advantages:
4
<PAGE>
. COMPLEMENTARY RELATIONSHIPS WITH RBOCS. The Company believes that the RBOCs'
networks will continue to be the predominant means for providing local
telecommunications services to the Company's target customers for the
foreseeable future. Accordingly, the Company has positioned itself to take
advantage of the opportunities created by the Telecommunications Act of 1996
(the "Telecommunications Act") by leveraging its complementary relationships
with the RBOCs. The Telecommunications Act requires the RBOCs to complete a
number of "checklist" items in order to qualify for long distance entry in
their local service areas. Although certain provisions of the
Telecommunications Act restricting the RBOCs' ability to provide in-region
long-distance have been held unconstitutional by a Federal district court,
the Company believes that significant parts of such decision may be reversed
and vacated on appeal, but no assurance can be made as to the outcome of any
appeals. See "Risk Factors--Competition." By moving aggressively to enter
into resale agreements and to develop electronic interfaces with the RBOCs,
the Company believes it has positioned itself to play a key role in enabling
the RBOCs to meet a number of those requirements. The Company was the first
to enter into comprehensive resale agreements with Ameritech and NYNEX,
served as the systems beta customer for Ameritech, NYNEX and Bell Atlantic
and is currently one of the largest CLECs in terms of access lines in service
in the Ameritech and NYNEX markets. Consequently, the Company is often
requested by state and federal regulators to provide information on the
Company's experiences. The Company believes its complementary relationships
with the RBOCs have facilitated the Company's rapid growth in its existing
markets and enabled it to become a valuable and viable resale channel
partner. The Company further believes, based on discussions with RBOC
officials and industry experts, that the RBOCs will continue to develop
strong resale channel partners in an effort to mitigate the potential
negative effects of facilities-based competition.
. UNIQUE RESALE AGREEMENTS. The Company has executed comprehensive local
exchange resale agreements with Ameritech for the greater metropolitan
Chicago area, Ohio and Michigan, and with NYNEX for the State of New York. In
addition to the cost advantages associated with the term and volume
commitment contracts, these contracts provide "most favored nation" and other
pricing protections designed to maintain the competitiveness of rates and
position the Company to purchase capacity at rates at least as favorable as
those of other potential resellers of Ameritech and NYNEX local services. In
addition, the Company has executed an interim resale agreement with Bell
Atlantic for the State of Massachusetts. The Company is currently in
negotiations to expand its resale agreements throughout the 14-state combined
Bell Atlantic/NYNEX region and the 5-state Ameritech region. In advance of
completing these negotiations, the Company has or plans to enter certain
additional states by reselling local service pursuant to state-mandated
wholesale discounts. The Company estimates, based on data compiled by the
Federal Communications Commission ("FCC"), that the regions covered by the
current comprehensive Ameritech and Bell Atlantic/NYNEX resale agreements
include access to over 10 million business access lines. Management believes
that upon expansion into the remaining Bell Atlantic/NYNEX region and the
Ameritech region, the Company will have access to approximately 20 million
business access lines. The Company continuously evaluates opportunities to
enter into agreements with additional RBOCs, other local and long distance
service providers and enhanced and other value-added service providers in
order to aggressively build its customer base as well as to provide
additional services to its existing customers while reducing costs.
. PROPRIETARY ELECTRONIC PROVISIONING AND INTERFACE SYSTEMS. By serving as the
systems beta customer for Ameritech, NYNEX and Bell Atlantic, the Company was
among the first CLECs to develop electronic provisioning systems for resale
of RBOC services. Development of provisioning systems is critical for
carriers seeking to grow rapidly in the complex, competitive local
telecommunications market. These systems must address the numerous technical
configurations associated with local service, including correctly coding
customers into data bases for 911, 411, white pages and customer service, as
well as provisioning thousands of local services, known as universal service
ordering codes ("USOCs"). Electronic provisioning between the Company and its
RBOC vendors allows the Company to provision a significantly greater volume
of lines than would be possible if transmitting orders by mail or facsimile.
Moreover, because the proprietary systems developed by the Company lessen
manual input and reduce repetitive data entry, the Company experiences
5
<PAGE>
improved efficiency and accuracy in transmitted orders, thereby reducing costs
and increasing customer satisfaction. The Company believes it has established
an industry leadership position in the deployment of these systems, and it is
committed to their continuous improvement.
. LARGEST DIRECT SALESFORCE AMONG CLECS IN ITS MARKETS. The Company's services
are currently sold through an approximately 425 member direct salesforce,
located in 34 offices in Illinois, Indiana, Massachusetts, Michigan, New
Hampshire, New York, Ohio, Rhode Island and Wisconsin. Additionally, the
Company intends to hire approximately 75 new salespeople by the end of 1998
to expand service in the Ameritech and combined Bell Atlantic/NYNEX regions.
The Company primarily recruits salespeople with experience in selling
competitive telecommunications services to businesses in the markets where
they are based. The Company's salesforce is trained in-house with a rigorous
customer-focused training program that promotes activity-based selling.
Salespeople are given an incentive through a commission structure, with a
target of 50% of a salesperson's compensation based on performance. The
Company believes its large, experienced, face-to-face salesforce has been,
and will continue to be, vital to expanding its customer base in today's
highly competitive telecommunications industry.
. STRATEGIC FLEXIBILITY. The Company believes that its business strategy
affords it more flexibility to take advantage of regulatory and industry
dynamics than its facilities-based competitors. For example, the FCC's
position on unbundled network elements has evolved to the point where
competitors are now able to purchase on an economic basis unbundled network
elements from the RBOCs and rebundle them into an alternative local service
option. The Company expects to exploit this opportunity by rebundling network
elements, thus expanding its products offering and improving its strategic
position. In addition, the increased construction by facilities-based CLECs
has improved the value of the Company's services by creating alternative
resale partners other than RBOCs. The Company is currently evaluating
proposals from facilities-based CLECs to provision local service.
GROWTH STRATEGY
The Company's objective is to be a leading provider of integrated local and
long distance services and other telecommunications products to small and
medium-sized businesses in its target markets. The Company expects to achieve
this goal through the successful implementation of its growth strategy which
includes the following:
. PROVIDE AN INTEGRATED TELECOMMUNICATIONS SOLUTION. A key element in building
its customer base while minimizing churn has been, and will continue to be,
the implementation of a marketing and operating strategy which emphasizes an
integrated telecommunications solution to its target market. To a large
extent, the Company's target customers have not previously been provided the
opportunity to purchase bundled services. The Company attracts and retains
customers by combining responsive customer care with a pricing package to
provide high-quality service at a cost which is usually afforded to only
large business customers. Specifically, the Company provides a single source
and bill for integrated local and long distance telephony, voicemail, paging,
teleconferencing, Internet access and other enhanced and value-added
telecommunications services, with a single point of contact for customer
service, product inquiries, repairs and billing questions. Upon consummation
of the Proposed Acquisition (as defined), the Company will also offer
wireless telephone service on a resale basis. See "--Proposed Acquisition."
Based on its experience, the Company believes that this marketing and
customer service approach has minimized customer acquisition costs and churn.
. FOCUS ON LARGE, UNDERSERVED MARKET. The Company utilizes a direct sales
approach and primarily focuses its marketing efforts on small and medium-
sized businesses with telecommunications usage of less than $5,000 per month.
The Company believes this target market is best served by a direct sales
approach because most of these customers do not employ in-house
telecommunications specialists and in most cases obtain services from various
vendors. The Company's experience indicates that these customers prefer a
single source for all their telecommunications requirements, including
products, billing and service. The Company believes that its gross
6
<PAGE>
margins on services provided to its target market are generally higher than
for larger business customers. Since the RBOCs and the first-tier IXCs
primarily concentrate their sales and marketing efforts on residential and
large business customers, the Company will continue to focus its marketing on
this underserved market to rapidly expand its customer base.
. LEVERAGE UBIQUITOUS NETWORKS. The Company believes that a key factor in its
success has been its ability to provide through the RBOC networks the
complete range of local services currently provided by RBOCs across their
entire service territories. There is currently no competing network with the
product breadth, capacity and geographic reach of the RBOC networks. By
contrast, facilities-based CLECs are currently limited primarily to servicing
customers in areas where they have network facilities.
. RAPID MARKET ENTRY. The Company believes its ability to enter a market early
and provide ubiquitous service will continue to allow it to rapidly build a
customer base across a large geographic area prior to the lifting of
regulatory restrictions on the ability of first-tier IXCs and RBOCs to offer
integrated services. Based on continuing legal challenges, the Company does
not believe that any RBOC will provide in-region long distance services on a
significant basis prior to 1999. As a non-facilities based provider, the
Company believes it is able to build a customer base quickly and efficiently
without incurring significant costs and the developmental delays inherent in
constructing network and transmission facilities. In addition, the Company's
proprietary software interface systems facilitate its rapid customer
acquisition strategy by allowing it to provision high volumes of access
lines.
. EXPAND LOCAL SERVICES. The Company plans to expand its local services
offering, positioning it to offer a full range of local services over a broad
geographic area at a competitive cost, by: (i) entering into term and volume
resale agreements in new territories with RBOCs; (ii) entering into resale
agreements with one or more facilities-based CLECs; (iii) rebundling network
elements from RBOCs; and (iv) reselling local service in new territories
pursuant to state-mandated wholesale discounts prior to entering into resale
agreements with RBOCs and/or facilities-based CLECs in such territories. The
Company believes, based on its experience and industry analysts' reports, as
well as recent regulatory and industry developments, that RBOCs have an
incentive to continue to negotiate wholesale agreements with respect to small
and medium-sized businesses to stabilize this revenue base and deter
migration of such customers to RBOCs' facilities-based competitors. The
Company also believes that its demonstrated sales and provisioning expertise
is attractive to facilities-based CLECs which may not be having similar
success.
The Company, a Delaware corporation (formerly United USN, Inc.), was formed
and commenced operations in April 1994. The Company's principal executive
office is located at 10 S. Riverside Plaza, Suite 401, Chicago, Illinois 60606,
and its telephone number is (312) 906-3600.
RECENT DEVELOPMENTS
. In the fourth quarter of 1997, the Company provisioned 55,371 local access
lines, an increase of 47% from the number of lines in service on September
30, 1997.
. On January 13, 1998, Merrill Lynch Global Allocation Fund, Inc. ("MLGAFI")
and Merrill Lynch Equity/Convertible Series (Global Allocation Portfolio)
(collectively, "MLAM") purchased $13.0 million aggregate principal amount at
maturity of the Company's 9% Consent Convertible Subordinated Notes due 2006
(the "Consent Convertible Notes") for an aggregate purchase price of $10.0
million pursuant to an option granted by the Company in October 1997 in
connection with the Consent (as defined).
. The Company has entered into a definitive agreement to acquire Connecticut
Telephone, a reseller of telecommunications services which currently provides
cellular service to more than 64,000 subscribers and paging service to more
than 15,000 subscribers in the Connecticut area.
7
<PAGE>
PROPOSED ACQUISITION
The Company has agreed to acquire all of the outstanding capital stock of
Hatten Communications Holding Company, Inc., a Connecticut corporation doing
business as Connecticut Telephone ("Connecticut Telephone"), pursuant to a
Stock Purchase Agreement, dated as of January 7, 1998, by and among the
Company, Connecticut Telephone and the stockholders of Connecticut Telephone
(the "Stock Purchase Agreement") for approximately $68.0 million, which
includes the assumption or repayment of approximately $13.5 million of existing
indebtedness (the "Proposed Acquisition").
Connecticut Telephone, through its wholly owned subsidiaries, is a reseller
of cellular, paging, long distance and local exchange services. Connecticut
Telephone currently provides cellular service to more than 64,000 subscribers
and paging services to more than 15,000 subscribers in the Connecticut area.
Connecticut Telephone operates through nine retail sales and service facilities
throughout Connecticut and a direct sales force of over 40 persons.
In the event that prior to the closing of the Proposed Acquisition (the
"Closing"), Connecticut Telephone receives a bona fide written proposal for the
acquisition of Connecticut Telephone or a substantial portion of its assets for
consideration in excess of $68.0 million (which includes satisfaction of
obligations for existing indebtedness), the Company will be required to deposit
$2.5 million into an escrow account to secure its obligation to complete the
Proposed Acquisition or the stockholders of Connecticut Telephone will be
entitled to terminate the Stock Purchase Agreement.
The consummation of the Proposed Acquisition is subject to customary closing
conditions, including the receipt of necessary consents and approvals and the
entering into of certain employment agreements reasonably satisfactory to the
Company, and the completion of the Offerings. The Stock Purchase Agreement may
be terminated by either the stockholders of Connecticut Telephone or the
Company in the event that the Closing does not occur by March 1, 1998.
It is presently anticipated that the Closing will occur shortly following the
consummation of the Offerings, but there can be no assurance that the Closing
will occur by such date, if at all.
The summary set forth above of the Stock Purchase Agreement is qualified in
its entirety by reference to the Stock Purchase Agreement, a copy of which has
been filed as an exhibit to the Registration Statement of which this Prospectus
is a part.
8
<PAGE>
THE OFFERINGS
Common Stock offered by the
Company:
U.S. Offering................ 6,400,000 shares
International Offering....... 1,600,000 shares
Total................. 8,000,000 shares(1)
Common Stock to be
outstanding after the
Offerings....................
21,180,387 shares(1)(2)
Use of Proceeds............... Approximately $56.6 million of the net proceeds
of the Offerings will be used for the
acquisition of Connecticut Telephone, including
the purchase of the outstanding capital stock,
the repayment of certain indebtedness and the
payment of certain fees and expenses related to
the Proposed Acquisition. In the event the
Underwriters' over-allotment options are
exercised, up to $10.0 million of the net
proceeds from such exercise will be used to
repay indebtedness of Connecticut Telephone.
The remaining net proceeds, including the net
proceeds from any exercise of the Underwriters'
over-allotment options, will be used for
general corporate purposes, including funding
the expansion of the Company's sales, customer
care and provisioning organizations,
enhancement of the Company's billing system
and, potentially, future acquisitions. See "Use
of Proceeds."
"USNC"
Nasdaq National Market
Symbol..................
- --------
(1) Assumes no exercise of the over-allotment options granted by the
Company to the Underwriters.
(2) Excludes (i) shares reserved for issuance upon the exercise of options;
(ii) 2,989,840 shares reserved for issuance upon exercise of outstanding
warrants; (iii) 2,936,090 shares reserved for issuance as of November 30,
1997 upon conversion of the Convertible Notes (as defined); (iv) 988,142
shares reserved for issuance as of January 13, 1998 upon conversion of
the Consent Convertible Notes; and (v) shares issuable upon conversion of
the 9% Preferred Stock and Series A Preferred Stock with respect to
accrued and unpaid dividends. As of December 31, 1997 on a pro forma
basis giving effect to the Offerings, there were 3,245,540 shares
reserved for issuance upon the exercise of outstanding options, 1,526,400
of which were vested. Of the vested options, as of December 31, 1997 on a
pro forma basis giving effect to the Offerings, options for 623,560
shares were exercisable and options for an additional 649,600 shares
become exercisable 180 days after the closing of the Offerings. The
remaining vested options covering 253,240 shares become exercisable at
such time, if any, as the Convertible Notes are converted into Common
Stock.
RISK FACTORS
Prospective purchasers of the Common Stock should carefully consider the
information set forth in this Prospectus, and in particular, should evaluate
the factors set forth under "Risk Factors" beginning on page 12.
9
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following summary historical consolidated financial data for the periods
from inception of the Company in April 1994 to December 31, 1994 and for the
years ended December 31, 1995 and December 31, 1996 was derived from, and
should be read in conjunction with, the consolidated audited financial
statements of the Company and the related notes thereto included elsewhere in
this Prospectus. The data presented for the Company for the nine month periods
ended September 30, 1996 and September 30, 1997 are derived from the unaudited
financial statements of the Company appearing elsewhere herein, and in the
opinion of management include all adjustments (consisting only of normal
recurring adjustments) that the Company considers necessary for a fair
presentation of the Company's results of operations and financial condition for
those periods. Results of operations for the nine months ended September 30,
1997 are not necessarily indicative of results of operations for the year ended
December 31, 1997 or indicative of future periods. The summary unaudited pro
forma statement of operations data for the year ended December 31, 1996 and for
each of the nine month periods ended September 30, 1996 and September 30, 1997
give effect to the following transactions as if they had been completed on
January 1, 1996: (i) the sale of Series A Preferred Stock on October 17, 1997
for an aggregate purchase price of $15.0 million; (ii) the conversion of all of
the outstanding shares of 9% Preferred Stock and Series A Preferred Stock
(including the shares of Series A Preferred Stock sold on October 17, 1997)
into an aggregate of 5,943,916 shares of Common Stock concurrently with the
closing of the Offerings (excluding for this purpose the effect of Common Stock
issued in connection with such conversion in respect of accrued but unpaid
dividends on the 9% Preferred Stock and Series A Preferred Stock subsequent to
September 30, 1997); (iii) the consummation of the Offerings and the
application of the estimated net proceeds therefrom as described in "Use of
Proceeds;" and (iv) the Proposed Acquisition. The summary unaudited pro forma
as adjusted balance sheet data as of September 30, 1997 gives effect to items
(i) through (iv) above and the issuance of the Consent Convertible Notes as if
each had been completed on such date. The summary pro forma data does not
purport to be indicative of the Company's actual results of operations or
financial position that would have been reported had such events actually
occurred on the dates specified, nor do they purport to be indicative of the
Company's future results of operations or financial position. The following
summary historical and pro forma consolidated financial data should be read in
conjunction with "Selected Historical Consolidated Financial and Operating
Data," "Pro Forma Consolidated Financial Statements," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
historical and pro forma financial statements, including the notes thereto, of
the Company and the historical financial statements, including the notes
thereto, of Connecticut Telephone appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ---------------------------------------------
INCEPTION TO --------------------------------
DECEMBER 31, PRO FORMA PRO FORMA PRO FORMA
1994 1995 1996 1996 1996 1996 1997 1997
------------ --------- --------- ---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net service revenue.... $ 1,737 $ 7,884 $ 9,814 $ 40,132 $ 7,599 $ 29,725 $ 26,998 $ 56,818
Cost of services....... 1,455 9,076 9,256 28,835 6,587 20,931 23,983 42,290
--------- --------- --------- ---------- ---------- ---------- --------- ----------
Gross margin........... 282 (1,192) 558 11,297 1,012 8,794 3,015 14,528
Sales and marketing
expense............... 2,869 5,867 12,612 16,901 5,837 8,815 43,087 47,044
General and
administrative
expense............... 4,686 11,100 20,665 34,770 10,920 21,309 26,882 40,182
Interest expense....... 26 734 1,797 2,871 46 831 8,573 9,540
Interest and other
income (1)............ 152 646 9,469 9,439 8,572 8,551 1,889 1,844
Minority interest...... -- 150 -- -- -- -- -- --
--------- --------- --------- ---------- ---------- ---------- --------- ----------
Net loss............... $ (7,147) $ (18,097) $ (25,047) $ (33,806) $ (7,219) $ (13,610) $ (73,638) $ (80,394)
========= ========= ========= ========== ========== ========== ========= ==========
Accumulated preferred
dividends............. $ 707 $ 3,103 $ 3,691 $ -- $ 3,466 $ -- $ 1,012 $ --
Net loss to common
shareholder........... $ (7,854) $ (21,200) $ (28,738) $ (33,806) $ (10,685) $ (13,610) $ (74,650) $ (80,394)
Net loss per common
share................. $ (6.56) $ (7.01) $ (5.63) $ (1.77) $ (2.44) $ (0.74) $ (10.35) $ (3.80)
Weighted average shares
outstanding........... 1,196,780 3,025,200 5,102,330 19,046,246 4,384,993 18,328,909 7,212,511 21,156,427
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
INCEPTION TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------ ------------------
1994 1995 1996 1996 1997
------------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA (2)............... $(7,087) $(15,901) $(30,390) $(14,385) $(64,429)
Cash flows from operating
activities.............. (6,141) (14,247) (23,910) (14,092) (57,822)
Cash flows from investing
activities.............. (1,708) (2,556) 7,274 7,647 (10,071)
Cash flows from financing
activities.............. 13,828 24,589 63,689 64,157 125,018
Depreciation and
amortization............ 186 2,258 2,329 1,360 2,525
Capital expenditures..... 1,728 1,740 2,259 285 10,071
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------------------
PRO FORMA
1994 1995 1996 1996 1997 1997
------------- ------------ --------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents.......... $ 5,979 $13,766 $60,818 $71,390 $117,944 $211,458
Total assets.......... 12,747 20,471 78,052 88,083 179,157 348,800
Long-term debt (net
of current
maturities).......... 3,176 518 59,864 58,352 167,287 189,053
Redeemable preferred
stock................ 15,306 44,396 10,045 9,853 41,048 --
Common stockholders'
equity (deficit)..... (7,830) (28,768) (3,606) 14,022 (58,428) 122,700
<CAPTION>
AS OF AS OF AS OF AS OF AS OF AS OF
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1997 1997 1997 1997
------------- ------------ --------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Local access lines
sold................. 4,630 10,283 35,397 79,321 135,172 191,069
Local access lines in
service.............. 4,356 8,364 18,557 65,142 116,591 171,962
Total employees....... 225 464 641 766 868 1,071
Direct salesforce..... 81 206 256 332 321 426
</TABLE>
- --------
(1) Interest and other income for the year ended December 31, 1996 and the nine
months ended September 30, 1996 includes a gain of $8.1 million realized on
the sale of the Company's switching facilities in Ohio.
(2) EBITDA consists of operating income (loss) before depreciation and
amortization. EBITDA should not be construed as a substitute for operating
income or a better indicator of liquidity than cash flow from operating
activities, which are determined in accordance with generally accepted
accounting principles. EBITDA is a measure commonly used in the
telecommunications industry and is presented to assist in understanding the
Company's operating results and as a tool for measuring the ability of the
Company to service its debt. EBITDA is not necessarily a measure of the
Company's ability to fund its cash needs. See the Consolidated Statements
of Cash Flows of the Company and the related notes to the Consolidated
Financial Statements thereto included herein.
11
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, prospective
purchasers of the Common Stock should consider carefully the following
factors.
NEGATIVE CASH FLOW AND OPERATING LOSSES; LIMITED OPERATING HISTORY
The Company has experienced operating losses from its inception in April
1994 through the date of this Prospectus, excluding the effect of a one-time
non-recurring gain, and has, to date, not generated positive cash flow. For
the period from April 20, 1994 to December 31, 1994 and the fiscal year ended
December 31, 1995, the Company's operating losses were $7.3 million and $18.2
million, respectively. These operating losses were primarily the result of the
one-time installation costs and fixed ongoing costs related to switching
facilities of the Company which were sold in February 1996, and the sales and
marketing and general and administrative expenses required to build the
Company's sales, customer, management information and marketing
infrastructure. Excluding an $8.1 million non-recurring gain on the sale of
such switching facilities, the Company would have lost $33.1 million for the
year ended December 31, 1996. The Company lost $15.3 million (excluding the
$8.1 million non-recurring gain) and $73.6 million for the first nine months
of 1996 and 1997, respectively. The Company expects to realize additional
operating losses on a consolidated basis while it continues to expand and
develop its service offerings and its customer base. There can be no assurance
that the Company will be able to develop or expand its customer base or that
it will achieve profitability in future years.
The Company has a limited operating history. Prospective investors,
therefore, have limited historical financial information about the Company
upon which to base an evaluation of its performance and an investment in the
Common Stock offered hereby. Given the Company's limited operating history,
there can be no assurance that the Company will be able to achieve or sustain
positive cash flow from operating activities or to implement its growth
strategy. See "Business--Growth Strategy."
SUBSTANTIAL LEVERAGE
The Company has and will continue to have consolidated indebtedness that is
substantial in relation to its stockholders' deficit. As of September 30,
1997, the Company had $177.3 million principal amount of long-term debt and
total common stockholders' equity of $122.7 million, as adjusted to give
effect to (i) the sale of Series A Preferred Stock on October 17, 1997 for an
aggregate purchase price of $15.0 million, (ii) the conversion of all of the
outstanding shares of 9% Preferred Stock and Series A Preferred Stock
(including the shares of Series A Preferred Stock sold on October 17, 1997)
into 5,943,916 shares of Common Stock concurrently with the closing of the
Offerings (excluding for this purpose the effect of Common Stock issued in
connection with such conversion in respect of accrued but unpaid dividends on
the 9% Preferred Stock and Series A Preferred Stock subsequent to September
30, 1997), (iii) the issuance of the Consent Convertible Notes and (iv) the
Offerings (after deducting underwriting discounts and commissions and
estimated expenses of the Offerings and the receipt of the estimated net
proceeds therefrom) and $189.1 million principal amount of long-term debt and
total common stockholders' equity of $122.7 million, as further adjusted to
give effect to the Proposed Acquisition. See "Capitalization."
The Company's ability to make cash payments with respect to its outstanding
indebtedness and to repay its obligations on such indebtedness at maturity
will depend on its future operating performance, which will be affected by
prevailing economic conditions and financial, business and other factors,
certain of which are beyond the Company's control. Because the Company
currently has a consolidated cash flow deficit, there can be no assurance that
the Company will be able to make cash interest payments on its outstanding
indebtedness when required or to repay its obligations at maturity. See
"Description of Certain Indebtedness." The Company and its subsidiaries may
incur additional indebtedness under certain circumstances. 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.
12
<PAGE>
The degree to which the Company is leveraged could have important
consequences to the holders of the Common Stock, including the following: (i)
the Company will have significant and increasing cash interest expense and
significant principal repayment obligations with respect to outstanding
indebtedness; (ii) the Company's degree of leverage and related debt service
obligations may make it more vulnerable than some of its competitors to the
effects of an economic downturn or other adverse developments; and (iii) the
Company's ability to obtain additional financing could be impaired. In
addition, pursuant to the terms of the Senior Note Indentures (as defined) and
the Convertible Note Indentures (as defined), the ability of the Company to
sell assets is restricted. See "Description of Certain Indebtedness."
ADDITIONAL CAPITAL REQUIREMENTS
The Company believes that the net proceeds of the Offerings, following the
consummation of the Proposed Acquisition, will be sufficient to meet planned
capital expenditures and anticipated negative operating cash flow for the
foreseeable future. To the extent that the Company has additional financing
requirements, sources of funding may include public offerings or private
placements of equity and/or debt securities, bank loans and additional capital
contribution from new or existing stockholders. There can be no assurance that
additional financing will be available to the Company or, if available, that
it can be obtained on a timely basis and on terms acceptable to the Company
and within the limitations contained in the Senior Note Indentures. Failure to
obtain such financing could result in the delay or abandonment of the
Company's development and expansion plans.
DEPENDENCE ON BILLING SERVICES AND IMPLEMENTATION
The accurate and prompt billing of the Company's customers is essential to
the Company's operations and future profitability. Historically the Company
has relied on two third-party vendors to provide billing services. In the
fourth quarter of 1997, however, the Company completed the process of
transitioning to a single vendor. No assurances can be made that the
transition to a single vendor will not adversely affect the Company's
financial condition and results of operations. Presently, the Company relies,
to a significant extent, on its billing vendor to rate, print and mail its
customers' bills, and the Company is not in a position to control the
management of or the provisioning of billing services by such vendor. In
addition, such vendor has limited financial resources and personnel, and the
Company's expected growth may strain such vendor's available resources. The
Company is currently exploring a number of alternatives with respect to its
billing services, but there can be no assurance that any such alternatives
will be successfully implemented. The failure of any third-party vendor to
provide all of the billing services required by the Company or the failure by
the Company to implement other alternatives could have a material adverse
effect on the financial condition and results of operations of the Company.
In addition, the Company is dependent upon the prompt collection of payment
of its customers' bills and, in turn, upon the creditworthiness of its
customers and the continued implementation of adequate revenue assurance
programs. The failure of its customers to pay their bills in a timely manner
or the Company's failure to continue to properly assess the creditworthiness
of its customers and implement adequate revenue assurance programs could have
a material adverse effect on the Company's financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview."
DEPENDENCE ON 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 customer phone calls. For each local
exchange market in which the Company operates, there currently is a single
provider from whom the Company can purchase local exchange services on a
ubiquitous basis. Under the Telecommunications Act, the Company is entitled to
access to local exchange services in such markets. Although the Company
believes that its relations with its underlying carriers are good, the
termination of any of the Company's contracts with its carriers or a reduction
in the quality or increase in cost of such carriers' services could have a
material adverse effect on the Company's financial condition and results of
operations. In addition, the accurate and prompt billing
13
<PAGE>
of the Company's customers is dependent upon the timeliness and accuracy of
call detail records provided by the carriers whose service the Company
resells. There can be no assurance that the current carriers will continue to
provide, or that new carriers will provide, accurate information on a timely
basis, and such carrier's failure to do so could have a material adverse
effect on the Company's financial condition and results of operations. For
example, there have been a number of provisioning and billing difficulties
related to the local and long distance services provided to business customers
in Manhattan, New York pursuant to an agreement with NYNEX. The problems
included failure to provision customers, lost customer traffic information and
receipt by customers of multiple billings for the same service. Much of the
difficulty was due to the nature of the private local network with dedicated
facilities designed for resale purposes. NYNEX required the services of a
third-party billing vendor to help implement the billing portion of the
arrangement. The Company has now contracted directly with that vendor for
billing and systems support in order to avoid problems associated with such
provisioning. However, because other RBOCs with which the Company may enter
into agreements do not have significant experience handling large volumes of
resold local exchange traffic, there can be no assurance as to the quality of
the service that the Company will receive or that similar problems will not
occur.
In addition, physical damage, power loss and software defects of the RBOCs,
the Company or its billing vendor may cause interruption in service and/or
reduced capacity for the Company's customers. In the event that the Company's
long distance carriers are unable to handle the growth in customer usage, the
Company could transfer such traffic to a carrier that had sufficient capacity,
but there can be no assurance that additional capacity will be available. If
any of the local exchange carriers ("LECs") are unable to handle the
provisioning or growth in customer usage, then the Company would be required
to use another local carrier, which could be difficult in light of the limited
development of facilities-based competitive local exchange networks. In the
event the Company otherwise elects to use other carriers, the charges for such
services may exceed those under the existing contracts, which could have a
material adverse effect on the Company's financial condition and results of
operations. See "Business--Vendor Agreements."
COMPETITION
The Company operates in a highly competitive environment and has no
significant market share in any market in which it operates. The Company
expects that competition will continue to intensify in the future due to
regulatory changes, including continued implementation of the
Telecommunications Act, and the increase in the size, resources and number of
market participants. In each of its markets, the Company faces competition for
local service from larger, better capitalized incumbent providers.
Additionally, the long distance market is already significantly more
competitive than the local exchange market because the incumbent local
exchange carriers ("ILECs"), including the RBOCs, have historically had a
monopoly position within the local exchange market.
In the local exchange market, the Company also faces competition or
prospective competition from one or more CLECs, many of which have
significantly greater financial resources than the Company, and from other
competitive providers, including some non-facilities-based providers like the
Company. For example, AT&T Corp. ("AT&T"), MCI Communications Corporation
("MCI") and Sprint Corporation ("Sprint"), among other carriers, have each
begun to offer local telecommunications services in major U.S. markets using
their own facilities or by resale of the ILECs' or other providers' services.
In fact, certain competitors, including AT&T, MCI and Sprint, have entered
into interconnection agreements with Ameritech with respect to the States of
Illinois, Michigan and Ohio. These competitors either have begun or in the
near future likely will begin offering local exchange service in those states,
subject to the joint marketing restrictions under the Telecommunications Act
described below. In addition, some of these competitors have entered into
interconnection agreements with NYNEX and either have begun or in the near
future likely will begin offering local exchange service in New York and
Massachusetts, subject to such joint marketing restrictions. In addition to
these long distance service providers, entities that currently offer or are
potentially capable of offering switched services include CLECs, cable
television companies, electric utilities, other long distance carriers,
microwave carriers, wireless telephone system operators and large customers
who build private networks. Many facilities-based CLECs and long distance
carriers, for example, have committed substantial resources to building their
networks or to purchasing
14
<PAGE>
CLECs or IXCs with complementary facilities. By building or purchasing a
network or entering into interconnection agreements or resale agreements with
ILECs, including RBOCs, a facilities-based provider can offer single source
local and long distance services similar to those offered by the Company. Such
additional alternatives may provide such competitors with greater flexibility
and a lower cost structure than the Company. In addition, some of these CLECs
and other facilities-based providers of local exchange service are acquiring
or being acquired by IXCs. While certain of these combined entities, such as
the entity to be formed by the proposed merger of WorldCom, Inc. and MCI, may
continue to be subject to the joint marketing restrictions in the
Telecommunications Act (as discussed below), others will not be subject to
such restrictions. Any of these combined entities may have resources far
greater than those of the Company and may provide a bundled package of
telecommunications products, including local and long distance telephony, that
is in direct competition with the products offered by the Company.
With respect to wireless telephone system operators, the FCC has authorized
cellular, personal communications service ("PCS") and other commercial mobile
radio service ("CMRS") providers to offer wireless services to fixed
locations, rather than just to mobile customers, in whatever capacity such
CMRS providers choose. Previously, cellular providers could provide service to
fixed locations only on an ancillary or incidental basis. This authority to
provide fixed as well as mobile services will enable CMRS providers to offer
wireless local loop service and other services to fixed locations (e.g.,
office and apartment buildings) in direct competition with the Company and
other providers of traditional fixed telephone service. In addition, in August
1996, the FCC promulgated regulations that classify CMRS providers as
telecommunications carriers, thus giving them the same rights to
interconnection and reciprocal compensation under the Telecommunications Act
as other non-LEC telecommunications carriers, including the Company.
The Company will also face competition from other fixed wireless services,
including Multichannel Multipoint Distribution Service ("MMDS"), 28 GHz Local
Multipoint Distribution Service ("LMDS") and 38 GHz wireless communications
systems, 2.8 GHz Wireless Communications Service ("WCS"), FCC Part 15
unlicensed wireless radio devices, and other services that use existing point-
to-point wireless channels on other frequencies. The FCC has announced plans
to hold an auction for LMDS licenses in all markets for the provision of high
capacity, wide-area fixed wireless point-to-multipoint systems. In addition,
the FCC has adopted rules to auction geographical area wide licenses for the
operation of fixed wireless point-to-multipoint communications services in the
38 GHz band, although many 38 GHz licenses have already been issued
nationwide. The LMDS auction is scheduled to begin in February 1998 and the 38
GHz auction is expected to occur later in 1998. The MMDS service, also known
as "wireless cable," also currently competes for metropolitan wireless
broadband services. At present, wireless cable licenses are used primarily for
the distribution of video programming and have only a limited capability to
provide two-way communications needed for wireless broadband
telecommunications services, but there can be no assurance that this will
continue to be the case. The FCC has initiated a proceeding to determine
whether to provide wireless cable operators with greater technical flexibility
to offer two-way services. The FCC also has indicated that it plans to propose
rules for the issuance of licenses in the 24 GHz band for Digital Electronic
Message Service ("DEMS"), which also is designed to offer high capacity, wide
area fixed point-to-multipoint service, and many 24 GHz DEMS licenses have
already been issued nationwide. Finally, the FCC has allocated a number of
spectrum blocks for use by wireless devices that do not require site or
network licensing. A number of vendors have developed such devices that may
provide competition to the Company, in particular for certain low data-rate
transmission services.
Under the Telecommunications Act and related federal and state regulatory
initiatives, barriers to local exchange competition are being removed. The
availability of broad-based local resale and introduction of facilities-based
local competition are required before the RBOCs may provide in-region
interexchange long distance services. Also, the largest long distance carriers
(AT&T, MCI, Sprint and any other carrier with 5% or more of the pre-subscribed
access lines) are prevented under the Telecommunications Act from bundling
local services resold from an RBOC in a particular state with their long
distance services until the earlier of (i) February 8, 1999 or (ii) the date
on which the RBOC whose services are being resold obtains in-region long
distance authority in that state. The RBOCs are currently allowed to offer
certain in-region "incidental" long
15
<PAGE>
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.
Section 271 of the Telecommunications Act prohibits an RBOC from providing
long-distance service that originates (or in certain cases terminates) in one
of its in-region states until the RBOC has satisfied certain statutory
conditions in that state and has received the approval of the FCC. The FCC has
to date denied each application for such approval, including the application
of Ameritech for in-region long distance authority in Michigan. The Company
anticipates that a number of RBOCs, including Ameritech and Bell Atlantic,
will file additional applications for in-region long distance authority in
certain states in 1998. The FCC will have 90 days from the date an application
for in-region long distance authority is filed to decide whether to grant or
deny the application. Based on continuing legal challenges, the Company does
not believe that any RBOC will provide in-region long distance services on a
significant basis prior to 1999.
Once the RBOCs are allowed to offer widespread in-region long distance
services, both they and the largest IXCs will be in a position to offer
single-source local and long distance services similar to those offered by the
Company. On December 31, 1997, a United States District Court judge in Texas
held unconstitutional certain sections of the Telecommunications Act,
including Section 271. This decision would permit the three RBOCs that are
parties in the case, including Bell Atlantic, immediately to begin offering
widespread in-region long distance services. Unless stayed or overturned on
appeal, this decision could have a material adverse effect on the Company. The
FCC and certain IXCs have filed a request for a stay and the Company expects
that the FCC and certain IXCs will file appeals of the decision with the
United States Court of Appeals for the Fifth Circuit. Although there can be no
assurance as to the outcome of this litigation, the Company believes that
significant parts of the District Court decision may be reversed or vacated on
appeal.
While new business opportunities will be made available to the Company
through the Telecommunications Act and other federal and state regulatory
initiatives, regulators are likely to provide the ILECs with an increased
degree of flexibility with regard to pricing of their services as competition
increases. Although the Ameritech and Bell Atlantic/NYNEX resale agreements
contain certain pricing protections, including adjustments in the wholesale
rates to be consistent with any changes in the Ameritech and Bell
Atlantic/NYNEX retail rates, if the ILECs elect to lower their rates and
sustain lower rates over time, this may adversely affect the revenues of the
Company and place downward pressure on the rates the Company can charge. While
the Ameritech and Bell Atlantic/NYNEX resale agreements ensure that the
Company will receive any lower rate provided to any other reseller, under the
Bell Atlantic/NYNEX resale agreement if such lower rate is provided to a
reseller committing to both a longer term and a greater volume commitment, the
Company receives the lower rate, but must negotiate with Bell Atlantic a
reasonable transition to similar commitments. If the Company cannot
successfully negotiate such a transition with Bell Atlantic, then the Company
may be unable to maintain the lowest rate. The Company believes the effect of
lower rates may be offset by the increased revenues available by offering new
products and services to its target customers, but there can be no assurance
that this will occur. In addition, if future regulatory decisions afford the
LECs excessive pricing flexibility or other regulatory relief, such decisions
could have a material adverse effect on the Company.
Competition for the Company's products and services is based on price,
quality, network reliability, service features and responsiveness to customer
needs. While the Company believes that it currently has certain advantages
relating to the timing, ubiquity and cost savings resulting from its resale
agreements, there is no assurance that the Company will be able to maintain
these advantages. A continuing trend toward business combinations and
alliances in the telecommunications industry may create significant new
competitors to the Company. Many of the Company's existing and potential
competitors have financial, technical and other resources significantly
greater than those of the Company. In addition, in December 1997, the FCC
issued rules to implement the provisions of the World Trade Organization
Agreement on Basic Telecommunications, which was drafted to liberalize
restrictions on foreign ownership of domestic telecommunications companies and
to allow foreign telecommunications companies to enter domestic markets. The
new FCC rules are presently scheduled to go into effect in February 1998 and
will make it substantially easier for many non-U.S. telecommunications
companies to enter the U.S. market, thus further increasing the number of
competitors. The
16
<PAGE>
new rules will also give non-U.S. individuals and corporations greater ability
to invest in U.S. telecommunications companies, thus increasing the financial
and technical resources available to the Company and its existing and
potential competitors.
ABILITY TO MEET MINIMUM COMMITMENTS; TERMINATION OF AGREEMENTS
Substantially all of the resale agreements between the Company and local
exchange carriers or long distance carriers contain term and volume
commitments. The local exchange resale agreements typically provide a minimum
usage which requires the Company to have a minimum number of lines in place at
the end of the applicable measurement period (typically one year). The long
distance resale agreements typically require certain annual commitments from
the Company. The inability of the Company to meet its minimum annual
commitments or designated thresholds may result in substantial
underutilization charges, and, in the case of the long distance agreements, a
significant increase in the rates charged to the Company. The majority of
resale agreements also contain carryover provisions which permit the Company
to carryforward volume shortfalls and may serve to delay, or possibly
eliminate, the payment of a significant portion of any shortfall the Company
may experience. While these "carryover pools" may provide the Company with
some additional time to build its customer base, any underutilization charges
or rate increases could have a material adverse effect on the financial
condition and results of operations of the Company.
Each of the resale agreements contains termination provisions which, among
other things, require the Company to pay termination charges if the Company
terminates an agreement prior to the end of term. The incurrence of any
termination charges could have a material adverse effect on the Company's
financial condition and results of operations.
LACK OF EXPERIENCE OFFERING ADDITIONAL PRODUCTS AND SERVICES
The Company's strategy includes offering additional telecommunications
products and services, including, in the event the Proposed Acquisition is
consummated, wireless telephone service. 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. There can be no
assurance that the Company's products or services will receive market
acceptance in a timely manner, if at all, or that prices and demand in new
markets will be at a level sufficient to provide profitable operations. See
"Industry Overview" and "Business--Competition."
REGULATION AND RISKS OF THE TELECOMMUNICATIONS ACT
The Company is currently subject to federal and state government regulation
of its telecommunications services. The Company is regulated at the federal
level by the FCC. It is required to obtain and maintain an FCC certificate in
connection with its international services, and to file and maintain both
domestic and international tariffs containing the currently effective rates,
terms and conditions of service for its resale long distance services. The FCC
issued regulations eliminating this tariffing requirement for all interstate
nondominant carriers, except for, under certain circumstances, the RBOCs.
Those regulations have been stayed on appeal by third parties, and the Company
is currently required to file tariffs with the FCC.
The intrastate local and 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.
17
<PAGE>
The Telecommunications Act has already resulted in comprehensive changes in
the regulatory environment for the telecommunications industry as a whole, and
will have a material impact on the local exchange industry and the competitive
environment in which the Company operates. The Company believes that the speed
with which additional competition in local exchange services develops will
depend on a number of factors, including the extent to which each ILEC actively
attempts to maintain its local exchange market share or to enter new lines of
business, particularly, in the case of RBOCs, the in-region long distance
business. While each ILEC now has the duty to negotiate on a good-faith basis
access and interconnection agreements with facilities-based competitors and
resale agreements with competitors such as the Company, the timing and terms of
such agreements are at least in part within the control of the ILEC. An ILEC
that places the highest priority on maintaining its market share in local
exchange service may have less incentive to negotiate such agreements swiftly
or on terms favorable to potential competitors. Indeed, numerous potential
competitors, including AT&T, have requested, under the provisions of the
Telecommunications Act, that various state regulatory authorities arbitrate
their negotiations with various RBOCs and GTE Corporation ("GTE") because they
have been unable to reach agreement with those RBOCs and GTE for access and
interconnection to provide competitive local exchange services. In addition,
all negotiated resale and long distance agreements must be submitted to and
approved by the relevant state public service commission. The speed with which
additional competition in local exchange services develops will also depend on
the effect of the rules and policies recently adopted by the FCC and individual
states in implementing the relevant provisions of the Telecommunications Act.
If competition in local exchange services develops slowly, the ability of the
Company to compete may be adversely affected.
The concept of resale of local exchange services is a relatively new
development in the telecommunications industry, and the Company cannot predict
how the relevant provisions of the Telecommunications Act will be interpreted
and implemented by the FCC, state regulators, courts and the ILECs. In August
1996, the FCC issued regulations that, among other things, established pricing
methodologies and interim default rates for resold ILEC services and unbundled
LEC network elements. A number of RBOCs, state regulatory commissions and other
parties have asked the FCC to reconsider these and other regulations
implementing the Telecommunications Act. In July 1997, the U.S. Court of
Appeals for the Eighth Circuit struck down certain of the rules (including the
provisions establishing pricing methodologies and default rates for resold
services and unbundled network elements). The appeals court concluded that the
Telecommunications Act granted the states the authority to set the rates for
interconnection, unbundled network elements and resold services and that the
FCC therefore lacked jurisdiction to issue the pricing rules or to preempt
state pricing rules. Although many state commissions followed the FCC's pricing
rules prior to the Eighth Circuit decision and are not likely to repudiate
these actions, carriers seeking entry into the competitive local exchange
market have expressed concern about the lack of uniformity in pricing that may
result from the court's rejection of national pricing rules. The Company cannot
predict the impact of the Eighth Circuit's decision on the Company's
operations. In October 1997, the same court issued an order clarifying that the
RBOCs were not required to rebundle unbundled network elements that competing
carriers had purchased separately. If upheld, this ruling would make it more
difficult for the Company and its competitors, including the large IXCs, to use
rebundled unbundled network elements or the "UNE Platform" to enter and compete
in the local exchange market. The FCC, numerous IXCs and various other parties
filed petitions for certiorari with the U.S. Supreme Court, which accepted the
case for review on January 26, 1998. The Supreme Court is not expected to issue
a decision before the end of 1998. Some of the same parties and certain other
parties also have asked the FCC to reconsider these and other regulations
implementing the Telecommunications Act. On January 22, 1998, the Eighth
Circuit Court of Appeals ruled that the FCC cannot apply its local competition
pricing rules in reviewing applications of the RBOCs for authorization to
provide long distance service that originates and certain long distance
services that terminate in one of their in-region states. If upheld, this
decision would make it somewhat easier for the RBOCs to enter the market for
in-region long distance services and would make it more costly for facilities-
based competitors to enter the local exchange market. The Company cannot
predict the outcome of the FCC's reconsideration or the Supreme Court
proceedings, either of which could have a material adverse impact on the
Company.
On December 31, 1997, a United States District Court judge in Texas held
unconstitutional certain sections of the Telecommunications Act, including
Section 271. This decision would permit the three RBOCs that are
18
<PAGE>
parties in the case, including Bell Atlantic, immediately to begin offering
widespread in-region long distance services. Unless stayed or overturned on
appeal, this decision could have a material adverse effect on the Company. The
FCC and certain IXCs have filed a request for a stay and the Company expects
that the FCC and certain IXCs will file appeals of the decision with the
United States Court of Appeals for the Fifth Circuit. Although there can be no
assurance as to the outcome of this litigation, the Company believes that
significant parts of the District Court decision may be reversed or vacated on
appeal. In addition, no assurance can be given that other changes in current
federal or state legislation or regulations would not materially adversely
affect the Company. See "Business--Government Regulation" and "--Competition."
ABILITY TO MANAGE GROWTH; RAPID EXPANSION OF OPERATIONS
The Company's officers have had limited experience in managing companies as
large and as rapidly growing as the Company. The Company's strategy of
continuing its growth and expansion will place additional demands upon the
Company's current management and other resources and will require additional
working capital, information systems and management, operational and other
financial resources. The continued growth of the Company will depend on
various factors, including, among others, federal and state regulation of the
telecommunications industry, competition, and the ability of LECs, including
the RBOCs, to provision the Company's additional customers. Not all of the
foregoing factors are within the control of the Company. In particular, there
can be no assurance that the RBOCs with which the Company has resale
agreements will be able to provision new customers in a timely manner. The
Company's ability to manage growth successfully will require the Company to
continue to enhance its operational, managerial, financial and information
systems and controls. The Company has modified and will continue to modify its
billing and customer care systems to address the resale of local services
under the Ameritech and NYNEX agreements. However, there can be no assurance
that such systems will be adequate to manage the Company's anticipated
expansion. No assurance can be given that the Company will be able to manage
its expanding operations and, if the Company's management is unable to manage
growth effectively, the Company's financial condition and results of
operations could be materially adversely affected. See "--Proposed Acquisition
of Connecticut Telephone." Furthermore, there can be no assurance that the
growth experienced by the Company in the past will continue.
PROPOSED ACQUISITION OF CONNECTICUT TELEPHONE
The Company recently entered into the Stock Purchase Agreement to acquire
all of the outstanding capital stock of Connecticut Telephone for an aggregate
purchase price of $68.0 million, which includes the assumption or repayment of
approximately $13.5 million of existing indebtedness. The consummation of the
Proposed Acquisition is subject to a number of conditions and there can be no
assurances that the acquisition will be consummated. See "Prospectus Summary--
Proposed Acquisition."
If consummated, the Proposed Acquisition will involve significant risks and
uncertainties for the Company, including risks related to the integration of
the operations of Connecticut Telephone, the diversion of management's
attention from other business concerns and risks related to entering markets
in which the Company has limited or no direct experience. The success of the
Proposed Acquisition is largely dependent on the ability of the Company to
integrate the operations of Connecticut Telephone into its operations in an
efficient and effective manner. There can be no assurance that there will not
be substantial unanticipated costs or problems associated with the integration
effort. There can be no assurance that, if the Proposed Acquisition is
successfully consummated, it will be integrated on a timely basis or that the
anticipated benefits of the acquisition will be realized. Failure to
effectively accomplish the integration of Connecticut Telephone could have a
material adverse effect on the Company's results of operations and financial
condition.
DEPENDENCE ON KEY PERSONNEL
The Company believes that its continued success will depend to a significant
extent upon the abilities and continued efforts of its management,
particularly members of its senior management team. Many of the
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<PAGE>
Company's executive officers and other key employees have only recently joined
the Company. The loss of the services of any of such individuals could have a
material adverse effect on the Company's results of operations. The success of
the Company will also depend, in part, upon the Company's ability to identify,
hire and retain additional key management personnel, including senior
management, who are also being sought by other businesses. Competition for
qualified personnel in the telecommunications industry is intense. The
inability to identify, hire and retain such personnel could have a material
adverse effect on the Company's financial condition and results of operations.
See "Management--Executive Officers and Directors."
IMPACT OF TECHNOLOGICAL CHANGE
The telecommunications industry has been characterized by rapid
technological change, frequent new service introductions and evolving industry
standards. For example, increases in technological capabilities or
efficiencies could create an incentive for more entities to enter the
facilities-based local exchange business. Similarly, such changes could result
in lower retail rates for telecommunications services, which could have a
material adverse effect on the Company's ability to price its services
competitively. Although the effect of technological change on the future
business of the Company cannot be predicted, it could have a material adverse
effect on the Company's business, results of operations and financial
condition.
ABSENCE OF A PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offerings, there has been no public market for the Common
Stock. There can be no assurance that an active trading market will develop or
be sustained or that after the Offerings the market price of the Common Stock
will not decline below the initial public offering price. The market price of
the Common Stock is likely to be highly volatile. Factors such as delays by
the Company in achieving its expansion goals, fluctuations in the Company's
operating results, announcements of new services offered by the Company or its
competitors, changes in earnings estimates of securities analysts, regulatory
changes and general market conditions, among other things, could cause the
market price of the Common Stock to fluctuate substantially. The initial
public offering price will be determined pursuant to negotiations between the
Company and the representatives of the Underwriters, and may not be indicative
of the market price for the Common Stock after the Offerings. See
"Underwriting."
ABSENCE OF DIVIDENDS
The Company has never paid a cash dividend on the Common Stock and does not
anticipate paying any such dividend in the foreseeable future. Earnings, if
any, which might be generated from operations of the Company will be used to
finance growth of the Company. See "Dividend Policy." The Senior Note
Indentures include significant limitations on the Company's ability to pay
dividends to the holders of Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of shares of Common Stock in the public market
or the perception that such sales could occur could have a material adverse
effect on the price of the Common Stock. All of the shares of Common Stock
issuable upon the conversion of the Company's 9% Convertible Subordinated
Notes due 2004 (the "Convertible Notes") (2,936,090 shares as of November 30,
1997 and accreting to 3,449,598 shares by September 30, 1999) and the
2,989,840 shares of Common Stock issuable upon exercise of warrants will be
available for sale pursuant to a shelf registration statement 120 days
following the consummation of the Offerings. In addition, the Company has
agreed to register the Consent Convertible Notes and the shares of Common
Stock issuable upon conversion thereof (988,142 shares as of the date of
issuance of the Consent Convertible Notes) under the Securities Act, which
shares will be available for immediate sale without restriction upon such
conversion and registration.
20
<PAGE>
The 7,212,511 shares of Common Stock outstanding as of November 30, 1997 are
"restricted securities" under the Securities Act and may be sold only if they
are registered or qualify for an exemption from registration under the
Securities Act. In addition, the outstanding shares of 9% Preferred Stock and
Series A Preferred Stock will be converted concurrently with the closing of
the Offerings into an aggregate of 5,943,916 shares of Common Stock (excluding
for this purpose the effect of Common Stock issued in connection with such
conversion in respect of accrued but unpaid dividends on the 9% Preferred
Stock and Series A Preferred Stock subsequent to September 30, 1997). Pursuant
to a registration agreement dated as of June 22, 1995, as subsequently
amended, the Company has granted certain registration rights to the Original
Purchasers (as defined) covering a substantial majority of the outstanding
Common Stock and all of the Common Stock to be issued upon conversion of the
9% Preferred Stock and the Series A Preferred Stock. See "Certain
Relationships and Related Transactions" and "Description of Capital Stock--
Registration Rights." In addition, as of December 31, 1997 on a pro forma
basis giving effect to the Offerings, there were 3,245,540 shares reserved for
issuance upon the exercise of outstanding options, 1,526,400 of which were
vested. Of the vested options, as of December 31, 1997 on a pro forma basis
giving effect to the Offerings, options for 623,560 shares were exercisable
and options for an additional 649,600 shares become exercisable 180 days after
the closing of the Offerings. The remaining vested options covering 253,240
shares become exercisable at such time, if any, as the Convertible Notes are
converted into Common Stock. The Company intends to file a registration
statement on Form S-8 to register shares of Common Stock reserved or to be
available for issuance under the Company's existing stock option plans.
Except for the issuance by the Company of Common Stock pursuant to existing
stock option plans or upon the exercise of warrants, the Company, its
directors and executive officers and certain existing stockholders have agreed
not to, directly or indirectly, sell, offer to sell, grant any option for sale
of, or dispose of, any capital stock of the Company or any security
convertible or exchangeable into, or exercisable for, such capital stock, or,
in the case of the Company, file any registration statement with respect to
any of the foregoing pursuant to the Securities Act without the prior written
consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated on behalf of the
Underwriters for a period of 180 days following the date of this Prospectus.
MLAM has agreed to substantially similar restrictions for a period of 180 days
following the date of this Prospectus, subject to certain exceptions.
CONTROL BY EXISTING STOCKHOLDERS
Following the consummation of the Offerings, approximately 60% of the
outstanding Common Stock will be owned by the management of the Company and
Chase Venture Capital Associates, L.P., CIBC Wood Gundy Ventures, Inc.,
HarbourVest Partners, LLC, Northwood Capital Partners LLC, Northwood Ventures
LLC, BT Capital Partners, Inc., Prime New Ventures and Fidelity Capital
(collectively, the "Original Purchasers"). Consequently, management and the
Original Purchasers will 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. Additionally, MLAM holds Convertible
Notes which were convertible into 2,936,090 shares of Common Stock as of
November 30, 1997, Consent Convertible Notes which were convertible into
988,142 shares of Common Stock on the date of issuance and warrants which are
currently exercisable or will be exercisable following the consummation of the
Offerings for an aggregate of 935,940 shares of Common Stock.
ANTI-TAKEOVER PROVISIONS
In connection with the Offerings, the Company's Certificate of Incorporation
will be amended and restated (the "Restated Certificate of Incorporation") and
its By-Laws will be amended and restated (the "Restated By-Laws") and will
contain certain provisions that may have the effect of discouraging, delaying
or making more difficult a change in control of the Company or preventing the
removal of incumbent directors even if a majority of the Company's
stockholders were to deem such an attempt to be in the best interests of the
Company. Among other things, the Restated Certificate of Incorporation will
provide for a classified Board of Directors and to allow the Board of
Directors to issue up to 10,000,000 shares of preferred stock and fix the
rights, privileges and preferences of those shares without any further vote or
action by the stockholders. The rights of the holders of
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<PAGE>
Common Stock will be subject to, and may be adversely affected by, the rights
of the holders of any preferred stock that may be issued in the future. Any
such issuance of shares of preferred stock could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding
voting stock of the Company. In addition, the Restated By-Laws, among other
things, will limit the manner in which directors may be nominated by
stockholders and limit the manner in which proposals may be made at
stockholder meetings. The Company is also subject to Section 203 of the
Delaware General Corporation Law (the "DGCL"), which could have the effect of
delaying or preventing a change of control of the Company. To the extent that
these provisions discourage takeover attempts, they could deprive stockholders
of opportunities to realize takeover premiums for their shares or could
depress the market price of the Common Stock. See "Description of Capital
Stock--Certain Charter and By-Law Provisions" and "--Certain Statutory
Provisions."
IMMEDIATE AND SUBSTANTIAL DILUTION OF SHARES
Purchasers of the Common Stock offered hereby will suffer immediate and
substantial dilution of $12.69 in the net tangible book value per share of
Common Stock from the initial public offering price (assuming an initial
public offering price of $17.00 per share). In the event the Company issues
additional shares of Common Stock in the future, purchasers of Common Stock in
the Offerings may experience further dilution in the net tangible book value
per share of Common Stock. See "Dilution."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock being
offered hereby (assuming an initial public offering price of $17.00 per share
and after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company) are estimated to be approximately
$125.4 million ($144.3 million if the Underwriters' over-allotment options are
exercised in full).
The Company currently intends to use approximately $56.6 million of the net
proceeds of the Offerings to finance the Proposed Acquisition, including the
purchase of the outstanding capital stock, the repayment of approximately $1.5
million of indebtedness and the payment of certain fees and expenses related
to the Proposed Acquisition. The $1.5 million of indebtedness to be repaid
bears interest at a rate of 10% per annum. Additionally, in the event the
Underwriters' over-allotment options are exercised, up to $10.0 million of the
net proceeds from such exercise will be used to repay indebtedness of
Connecticut Telephone outstanding under the Second Amended and Restated Master
Credit Facility, dated May 23, 1997 (the "Credit Facility"), between
Connecticut Telephone and BankBoston, N.A. and State Street Bank. Borrowings
under the Credit Facility bear interest at a rate of prime plus 1.25% per
annum (9.75% as of December 31, 1997). In the event the Proposed Acquisition
is not consummated, all of the net proceeds, including the net proceeds from
any exercise of the Underwriters' over-allotment options, will be used for
general corporate purposes as described below.
The remaining net proceeds of the Offerings, including the net proceeds from
any exercise of the Underwriters' over-allotment options, will be used for
general corporate purposes, including funding the expansion of its sales,
customer care and provisioning organizations, enhancement of the Company's
billing system and, potentially, future acquisitions. Pending application of
the net proceeds of the Offerings as described herein, the Company intends to
invest such proceeds in investment-grade, short-term, interest-bearing
securities.
DIVIDEND POLICY
The Company anticipates substantial net losses and negative cash flow for
the foreseeable future. It is anticipated that earnings, if any, which may 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 Indentures include significant limitations on the
Company's ability to pay dividends to the holders of Common Stock. See
"Description of Certain Indebtedness."
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<PAGE>
CAPITALIZATION
The following table sets forth the total cash and cash equivalents and
capitalization of the Company as of September 30, 1997, and as adjusted to
give effect to (i) the sale of Series A Preferred Stock on October 17, 1997
for an aggregate purchase price of $15.0 million; (ii) the conversion of all
of the outstanding shares of 9% Preferred Stock and Series A Preferred Stock
(including the shares of Series A Preferred Stock sold on October 17, 1997)
into an aggregate of 5,943,916 shares of Common Stock concurrently with the
closing of the Offerings (excluding for this purpose the effect of Common
Stock issued in connection with such conversion in respect of accrued but
unpaid dividends on the 9% Preferred Stock and Series A Preferred Stock
subsequent to September 30, 1997); (iii) the issuance of the Consent
Convertible Notes; and (iv) the sale of 8,000,000 shares of Common Stock
offered hereby (assuming an initial public offering price of $17.00 per share
and after deducting underwriting discounts and commissions and estimated
expenses of the Offerings and the receipt of the estimated net proceeds
therefrom) and pro forma to reflect the transactions described in items (i)
through (iv) above, as well as the Proposed Acquisition. This table should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the "Pro Forma Consolidated Financial
Statements" and the historical financial statements, including the notes
thereto, of the Company and the consolidated financial statements, including
the notes thereto, of Hatten Communications Holding Company, Inc. appearing
elsewhere in this Prospectus. See "Use of Proceeds" and "Description of
Capital Stock."
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1997
--------------------------------
(IN THOUSANDS EXCEPT
SHARE INFORMATION)
--------------------------------
AS
HISTORICAL ADJUSTED PRO FORMA
---------- --------- ---------
<S> <C> <C> <C>
Cash and cash equivalents..................... $ 117,944 $ 268,024 $ 211,458
========= ========= =========
Long-term debt
14 5/8% Senior Discount Notes due 2004....... $ 101,830 $ 101,830 $ 101,830
14% Senior Discount Notes due 2003........... 34,580 34,580 34,580
9% Convertible Subordinated Notes due 2004... 30,188 30,188 30,188
9% Consent Convertible Subordinated Notes due
2006........................................ -- 10,000 10,000
Notes payable and capital lease obligations.. 689 689 12,455
--------- --------- ---------
Total long-term debt...................... 167,287 177,287 189,053
Redeemable Preferred Stock
9% Preferred Stock, par value $1.00 per
share, 30,000 shares authorized; 10,920
shares issued and outstanding (actual); no
shares authorized, issued and outstanding
(as adjusted, pro forma).................... 11 -- --
9% Preferred Stock, Series A, par value $1.00
per share, 150,000 shares authorized, 30,209
shares issued and outstanding (actual); no
shares authorized, issued and outstanding
(as adjusted, pro forma) ................... 30 -- --
Accumulated unpaid dividends................. 317 -- --
Additional paid-in capital................... 40,690 -- --
--------- --------- ---------
Total redeemable preferred stock.......... 41,048 -- --
Common stockholders' equity (deficit)
Common Stock, $.01 par value, 30,000,000
shares authorized, 7,222,511 shares issued
and outstanding (actual); 100,000,000 shares
authorized, 21,166,427 shares issued and
outstanding (as adjusted, pro forma)(/1/)... 72 212 212
Common Stock held in treasury (10,000
shares)..................................... (1) (1) (1)
Additional paid-in capital................... 73,942 254,930 254,930
Accumulated deficit.......................... (132,441) (132,441) (132,441)
--------- --------- ---------
Total common stockholders' equity
(deficit)................................ (58,428) 122,700 122,700
--------- --------- ---------
Total capitalization.................... $ 149,907 $ 299,987 $ 311,753
========= ========= =========
</TABLE>
- --------
(1) Excludes (i) shares reserved for issuance upon the exercise of options;
(ii) 2,989,840 shares reserved for issuance upon exercise of outstanding
warrants; (iii) 2,936,090 shares reserved for issuance as of November 30,
1997 upon conversion of the Convertible Notes; (iv) 988,142 shares
reserved for issuance as of January 13, 1998 upon conversion of the
Consent Convertible Notes; and (v) shares issuable upon conversion of the
9% Preferred Stock and Series A Preferred Stock with respect to accrued
and unpaid dividends subsequent to September 30, 1997. As of December 31,
1997 on a pro forma basis giving effect to the Offerings, there were
3,245,540 shares reserved for issuance upon the exercise of outstanding
options, 1,526,400 of which were vested. Of the vested options, as of
December 31, 1997 on a pro forma basis giving effect to the Offerings,
options for 623,560 shares were exercisable and options for an additional
649,600 shares become exercisable 180 days after the closing of the
Offerings. The remaining vested options covering 253,240 shares become
exercisable at such time, if any, as the Convertible Notes are converted
into Common Stock.
23
<PAGE>
DILUTION
As of September 30, 1997, the net tangible deficit of the Common Stock was
$90.0 million, or approximately $12.46 per share outstanding. As of September
30, 1997, the as adjusted net tangible deficit of the Common Stock after
giving effect to (i) the sale of Series A Preferred Stock on October 17, 1997
for an aggregate purchase price of $15.0 million and (ii) the conversion of
all of the outstanding shares of 9% Preferred Stock and Series A Preferred
Stock (including the shares of Series A Preferred Stock sold on October 17,
1997) into an aggregate of 5,943,916 shares of Common Stock concurrently with
the closing of the Offerings (excluding for this purpose the effect of Common
Stock issued in connection with such conversion in respect of accrued but
unpaid dividends on the 9% Preferred Stock and Series A Preferred Stock
subsequent to September 30, 1997) was $33.9 million or approximately $2.58 per
share. As of September 30, 1997, the pro forma net tangible book value of the
Common Stock after giving effect to (i) and (ii) above, and the sale of
8,000,000 shares of Common Stock offered hereby (after deducting underwriting
discounts and commissions and estimated expenses of the Offerings) and the
receipt of the estimated net proceeds therefrom, assuming an initial public
offering price of $17.00 per share, was $91.1 million, or approximately $4.31
per share. This represents an immediate increase in net tangible book value of
$6.89 per share to existing stockholders and an immediate dilution in net
tangible book value of $12.69 per share to new investors in the Offerings. The
net tangible deficit per share of Common Stock represents the amount of the
Company's tangible assets less its liabilities divided by the number of shares
of Common Stock outstanding.
The following table illustrates this dilution in net tangible book value per
share to new investors at September 30, 1997:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $17.00
As adjusted net tangible deficit per share.................. $2.58
Increase in net tangible book value per share attributable
to the Offerings........................................... $6.89
Pro forma net tangible book value per share ................ $ 4.31
------
Dilution in net tangible book value per share to new
investors.................................................. $12.69
======
</TABLE>
The following table sets forth, at September 30, 1997 on a pro forma basis,
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
the existing holders of Common Stock and by the new investors, before
deducting estimated underwriting discounts and offering expenses payable by
the Company, at the assumed initial public offering price of $17.00 per share.
<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED(1) CONSIDERATION
------------------ -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 13,156,427 62.2% $ 97,219,134 41.7% $ 7.39
New investors........... 8,000,000 37.8 136,000,000 58.3 17.00
---------- ------ ------------ ------
Total................... 21,156,427 100.0% $233,219,134 100.0%
========== ====== ============ ======
</TABLE>
- --------
(1) Excludes (i) shares reserved for issuance upon the exercise of options;
(ii) 2,989,840 shares reserved for issuance upon exercise of outstanding
warrants; (iii) 2,936,090 shares reserved for issuance as of November 30,
1997 upon conversion of the Convertible Notes; (iv) 988,142 shares
reserved for issuance as of January 13, 1998 upon conversion of the
Consent Convertible Notes; and (v) shares issuable upon conversion of the
9% Preferred Stock and Series A Preferred Stock with respect to accrued
and unpaid dividends subsequent to September 30, 1997. As of December 31,
1997 on a pro forma basis giving effect to the Offerings, there were
3,245,540 shares reserved for issuance upon the exercise of outstanding
options, 1,526,400 of which were vested. Of the vested options, as of
December 31, 1997 on a pro forma basis giving effect to the Offerings,
options for 623,560 shares were exercisable and options for an additional
649,600 shares become exercisable 180 days after the closing of the
Offerings. The remaining vested options covering 253,240 shares become
exercisable at such time, if any, as the Convertible Notes are converted
into Common Stock.
24
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table presents selected historical consolidated financial data
for the period from inception of the Company in April 1994 to December 31,
1994 and for the fiscal years ended December 31, 1995 and 1996. The data for
the periods ending December 31, 1994, 1995 and 1996 has been derived from
consolidated financial statements (including those set forth elsewhere in this
Prospectus) which have been audited by Deloitte & Touche LLP, independent
auditors. The data presented for the Company for the nine-month periods ended
September 30, 1996 and September 30, 1997 are derived from the unaudited
financial statements of the Company appearing elsewhere herein, and in the
opinion of management include all adjustments (consisting only of normal
recurring adjustments) that the Company considers necessary for a fair
presentation of the Company's results of operations and financial condition
for those periods. The data for the nine-month period ended September 30, 1997
are not necessary indicative of results for the fiscal year ended December 31,
1997 or indicative of future periods. The selected historical consolidated
financial and operating data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the audited consolidated financial statements, including the notes thereto, of
the Company appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
INCEPTION TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, -------------------- ---------------------
ACTUAL 1994 1995 1996 1996 1997
------------ --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net service revenue.... $ 1,737 $ 7,884 $ 9,814 $ 7,599 $ 26,998
Cost of services....... 1,455 9,076 9,256 6,587 23,983
--------- --------- --------- ---------- ---------
Gross margin........... 282 (1,192) 558 1,012 3,015
Sales and marketing
expense............... 2,869 5,867 12,612 5,837 43,087
General and
administrative
expense............... 4,686 11,100 20,665 10,920 26,882
Interest expense....... 26 734 1,797 46 8,573
Interest and other
income (1)............ 152 646 9,469 8,572 1,889
Minority interest...... -- 150 -- -- --
--------- --------- --------- ---------- ---------
Net loss............... $ (7,147) $ (18,097) $ (25,047) $ (7,219) $ (73,638)
========= ========= ========= ========== =========
Accumulated preferred
dividends............. $ 707 $ 3,103 $ 3,691 $ 3,466 $ 1,012
Net loss to common
shareholder........... $ (7,854) $ (21,200) $ (28,738) $ (10,685) $ (74,650)
Net loss per common
share................. $ (6.56) $ (7.01) $ (5.63) $ (2.44) $ (10.35)
Weighted average shares
outstanding........... 1,196,780 3,025,200 5,102,330 4,384,993 7,212,511
OTHER DATA:
EBITDA (2)............. $ (7,087) $ (15,901) $ (30,390) $ (14,385) $ (64,429)
Cash flows from
operating activities.. (6,141) (14,247) (23,910) (14,092) (57,822)
Cash flows from
investing activities.. (1,708) (2,556) 7,274 7,647 (10,071)
Cash flows from
financing activities.. 13,828 24,589 63,689 64,157 125,018
Depreciation and
amortization.......... 186 2,258 2,329 1,360 2,525
Capital expenditures... 1,728 1,740 2,259 285 10,071
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------- ----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........ $ 5,979 $13,766 $60,818 $71,390 $117,944
Total assets..................... 12,747 20,471 78,052 88,083 179,157
Long-term debt (net of current
maturities)..................... 3,176 518 59,864 58,352 167,287
Redeemable preferred stock....... 15,306 44,396 10,045 9,853 41,048
Common stockholders' equity
(deficit)....................... (7,830) (28,768) (3,606) 14,022 (58,428)
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF AS OF AS OF AS OF AS OF
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1997 1997 1997 1997
------------- ------------ --------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Local access lines
sold.................. 4,630 10,283 35,397 79,321 135,172 191,069
Local access lines in
service............... 4,356 8,364 18,557 65,142 116,591 171,962
Total employees........ 225 464 641 766 868 1,071
Direct salesforce...... 81 206 256 332 321 426
</TABLE>
- -------
(1) Interest and other income for the year ended December 31, 1996 and the
nine months ended September 30, 1996 includes a gain of $8.1 million
realized on the sale of the Company's switching facilities in Ohio.
(2) EBITDA consists of operating income (loss) before depreciation and
amortization. EBITDA should not be construed as a substitute for operating
income or a better indicator of liquidity than cash flow from operating
activities, which are determined in accordance with generally accepted
accounting principles. EBITDA is a measure commonly used in the
telecommunications industry and is presented to assist in understanding
the Company's operating results and as a tool for measuring the ability of
the Company to service its debt. EBITDA is not necessarily a measure of
the Company's ability to fund its cash needs. See the Consolidated
Statements of Cash Flows of the Company and the related notes to the
Consolidated Financial Statements thereto included herein.
25
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The pro forma consolidated statements of operations for the year ended
December 31, 1996 and for the nine month periods ended September 30, 1996 and
September 30, 1997 give effect to the following transactions as if they had
been completed on January 1, 1996: (i) the sale of Series A Preferred Stock on
October 17, 1997 for an aggregate purchase price of $15.0 million; (ii) the
conversion of all the outstanding shares of 9% Preferred Stock and Series A
Preferred Stock (including the shares of Series A Preferred Stock sold on
October 17, 1997) into an aggregate of 5,943,916 shares of Common Stock
concurrently with the closing of the Offerings (excluding for this purpose the
effect of Common Stock issued in connection with such conversion in respect of
accrued but unpaid dividends on the 9% Preferred Stock and Series A Preferred
Stock subsequent to September 30, 1997); (iii) the consummation of the
Offerings and the application of the estimated net proceeds therefrom as
described in "Use of Proceeds"; and (iv) the Proposed Acquisition. The pro
forma consolidated balance sheet gives effect to items (i) through (iv) above
and the issuance of the Consent Convertible Notes as if each had been
completed as of September 30, 1997.
Due to the difference in fiscal year ends between the Company and
Connecticut Telephone, the following periods were combined for pro forma
purposes of Connecticut Telephone: (i) for the nine month periods ended
September 30, 1997 and 1996, audited statements as of April 30, 1997 and 1996
were adjusted by adding unaudited results for the five months ended September
30, 1997 and 1996 and subtracting unaudited results for the eight months ended
December 31, 1996 and 1995, respectively; and (ii) for the twelve months ended
December 31, 1996, audited statements as of April 30, 1997 were adjusted by
subtracting unaudited results for the four months ended April 30, 1997 and
adding unaudited results for the four months ended April 30, 1996.
The Company believes that the assumptions used in the pro forma consolidated
financial statements provide a reasonable basis on which to present such
statements. The pro forma consolidated financial statements are provided for
information purposes only and should not be construed to be indicative of the
Company's results of operations or financial position had the Offerings and
the other events described above been consummated on or as of the date
assumed, and are not intended to project the Company's results of operations
or its financial position for any future period or as of any future date. The
pro forma consolidated financial statements and accompanying notes should be
read in conjunction with the audited consolidated financial statements of the
Company and Hatten Communications Holding Company, Inc. and the related notes
thereto appearing elsewhere in this Prospectus.
26
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
ADJUSTMENTS
---------------------------
CONNECTICUT
CONNECTICUT TELEPHONE
COMPANY OFFERING TELEPHONE ACQUISITION
ACTUAL ADJUSTMENTS(1) AS ADJUSTED ACTUAL ADJUSTMENTS(3) PRO FORMA(4)
------------ -------------- ------------ ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net service revenue..... $ 9,814,479 $ 9,814,479 $30,316,925 $ 40,131,404
Cost of services........ 9,256,472 9,256,472 19,578,108 28,834,580
------------ ----------- ------------ ----------- ----------- ------------
Gross margin......... 558,007 558,007 10,738,817 11,296,824
Expenses:
Sales and marketing.... 12,612,172 12,612,172 4,288,866 16,901,038
General and
administrative........ 20,664,612 20,664,612 5,585,820 $ 8,519,633 (a) 34,770,065
------------ ----------- ------------ ----------- ----------- ------------
Operating income (loss). (32,718,777) (32,718,777) 864,131 (8,519,633) (40,374,279)
Other income (expense):
Interest and other
income (expense)...... 9,469,298 9,469,298 (359,651) 329,463 (b) 9,439,110 (a)
Interest expense....... (1,797,112) (1,797,112) (2,094,317) 1,020,908 (c) (2,870,521)
------------ ----------- ------------ ----------- ----------- ------------
Other income
(expense)--net...... 7,672,186 7,672,186 (2,453,968) 1,350,371 6,568,589
------------ ----------- ------------ ----------- ----------- ------------
Net loss................ $(25,046,591) $(25,046,591) $(1,589,837) $(7,169,262) $(33,805,690)
============ =========== ============ =========== =========== ============
Accumulated preferred
dividends.............. $ 3,690,976 $(3,690,976)(a) $ $ $ $
============ =========== ============ =========== =========== ============
Net loss to common
shareholders........... $(28,737,567) $(3,690,976) $(25,046,591) $(1,589,837) $(7,169,262) $(33,805,690)
============ =========== ============ =========== =========== ============
Net loss per common
share.................. $ (5.63) $ (1.32) $ (1.77)
============ ============ ============
Weighted average common
and common equivalent
shares outstanding..... 5,102,330 19,046,246 19,046,246
============ ============ ============
</TABLE>
27
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
ADJUSTMENTS
---------------------------
CONNECTICUT
CONNECTICUT TELEPHONE
COMPANY OFFERING TELEPHONE ACQUISITION
ACTUAL ADJUSTMENTS(1) AS ADJUSTED ACTUAL ADJUSTMENTS(3) PRO FORMA(4)
------------ -------------- ----------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net service revenue..... $ 7,598,705 $ 7,598,705 $22,126,220 $ 29,724,925
Cost of services........ 6,587,126 6,587,126 14,343,950 20,931,076
------------ ----------- ----------- ----------- ----------- ------------
Gross margin......... 1,011,579 1,011,579 7,782,270 8,793,849
Expenses:
Sales and marketing.... 5,837,437 5,837,437 2,977,254 8,814,691
General and
administrative........ 10,919,589 10,919,589 3,999,851 $ 6,389,725 (a) 21,309,165
------------ ----------- ----------- ----------- ----------- ------------
Operating income (loss). (15,745,447) (15,745,447) 805,165 (6,389,725) (21,330,007)
Other income (expense):
Interest and other
income (expense)...... 8,572,260 8,572,260 (225,250) 204,427(b) 8,551,437 (a)
Interest expense....... (45,957) (45,957) (1,497,502) 712,127 (c) (831,332)
------------ ----------- ----------- ----------- ----------- ------------
Other income
(expense)--net...... 8,526,303 8,526,303 (1,722,752) 916,554 7,720,105
------------ ----------- ----------- ----------- ----------- ------------
Net loss................ $ (7,219,144) $(7,219,144) $ (917,587) $(5,473,171) $(13,609,902)
============ =========== =========== =========== =========== ============
Accumulated preferred
dividends.............. $ 3,465,976 $(3,465,976)(a) $ $ $ $
============ =========== =========== =========== =========== ============
Net loss to common
shareholders........... $(10,685,120) $(3,465,976) $(7,219,144) $ (917,587) $(5,473,171) $(13,609,902)
============ =========== =========== =========== =========== ============
Net loss per common
share.................. $ (2.44) $ (0.39) $ (0.74)
============ =========== ============
Weighted average common
and common equivalent
shares outstanding..... 4,384,993 18,328,909 18,328,909
============ =========== ============
</TABLE>
28
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
ADJUSTMENTS
---------------------------
CONNECTICUT
CONNECTICUT TELEPHONE
COMPANY OFFERING AS TELEPHONE ACQUISITION
ACTUAL ADJUSTMENTS(1) ADJUSTED ACTUAL(2) ADJUSTMENTS(3) PRO FORMA(4)
------------ -------------- ------------ ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net service revenue..... $ 26,998,315 $ 26,998,315 $29,819,221 $56,817,536
Cost of services........ 23,983,125 23,983,125 18,306,549 42,289,674
------------ ----------- ------------ ----------- ----------- ------------
Gross margin......... 3,015,190 3,015,190 11,512,672 14,527,862
Expenses:
Sales and marketing.... 43,087,112 43,087,112 3,957,083 47,044,195
General and
administrative........ 26,881,801 26,881,801 6,919,281 $ 6,380,725 (a) 40,181,807
------------ ----------- ------------ ----------- ----------- ------------
Operating income (loss). (66,953,723) (66,953,723) 636,308 (6,380,725) (72,698,140)
Other income (expense):
Interest and other
income (expense)...... 1,889,247 1,889,247 (244,413) 199,214 1,844,048 (a)
Interest expense....... (8,572,952) (8,572,952) (1,265,732) 298,456 (c) (9,540,228)
------------ ----------- ------------ ----------- ----------- ------------
Other income
(expense)--net...... (6,683,705) (6,683,705) (1,510,145) 497,670 (7,696,180)
------------ ----------- ------------ ----------- ----------- ------------
Net loss................ (73,637,428) (73,637,428) (873,837) (5,883,055) (80,394,320)
============ =========== ============ =========== =========== ============
Accumulated preferred
dividends.............. $ 1,012,445 $(1,012,445)(a) $ 639,695 $ (639,695)(d) $ --
============ =========== ============ =========== =========== ============
Net loss to common
shareholders........... $(74,649,873) $(1,012,445) $(73,637,428) $(1,513,532) $(5,243,360) $(80,394,320)
============ =========== ============ =========== =========== ============
Net loss per common
share.................. $ (10.35) $ (3.48) $ (3.80)
============ ============ ============
Weighted average common
and common equivalent
shares outstanding..... 7,212,511 21,156,427 21,156,427
============ ============ ============
</TABLE>
29
<PAGE>
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
ADJUSTMENTS
---------------------------
CONNECTICUT
CONNECTICUT TELEPHONE
COMPANY OFFERING AS TELEPHONE ACQUISITION PRO
ASSETS ACTUAL ADJUSTMENTS(1) ADJUSTED ACTUAL ADJUSTMENTS(2) FORMA
------ ------------- -------------- ------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash
equivalents.............. $ 117,943,711 $150,080,000 (a) $ 268,023,711 $ 269,290 $(56,834,570)(a) $ 211,458,431
Accounts receivable, net.. 15,445,860 15,445,860 6,783,003 22,228,863
Prepaid expenses.......... 271,430 271,430 646,274 917,704
Inventory................. 881,498 881,498
Other current assets...... 338,502 338,502 425,759 (316,145)(b) 448,116
------------- ------------ ------------- ----------- ------------ -------------
Total current assets.... 133,999,503 150,080,000 284,079,503 9,005,824 (57,150,715) 235,934,612
Property and Equipment,
net....................... 12,604,307 12,604,307 1,161,379 13,765,686
Other Assets............... 32,553,221 32,553,221 6,421,682 60,124,624 (c) 99,099,527
------------- ------------ ------------- ----------- ------------ -------------
Total Assets............ $ 179,157,031 $150,080,000 $ 329,237,031 $16,588,885 $ 2,973,909 $ 348,799,825
============= ============ ============= =========== ============ =============
<CAPTION>
LIABILITIES, REDEEMABLE
PREFERRED STOCK, AND COMMON
STOCKHOLDERS' EQUITY
(DEFICIT)
- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Current Liabilities:
Accounts payable.......... $ 17,268,085 $ 17,268,085 $ 4,797,337 $ 22,065,422
Accrued expenses and
other liabilities........ 11,315,296 11,315,296 2,861,710 14,177,006
Capital lease
obligations--current..... 544,213 544,213 544,213
Current maturities on
notes payable............ 121,874 121,874 138,317 260,191
------------- ------------ ------------- ----------- ------------ -------------
Total current
liabilities............ 29,249,468 29,249,468 7,797,364 37,046,832
14 5/8% Senior Discount
Notes, net of Original
Issue Discount............ 101,830,062 101,830,062 101,830,062
14% Senior Discount Notes,
net of Original Issue
Discount.................. 34,579,844 34,579,844 34,579,844
9% Convertible Subordinated
Discount Notes, net of
Original Issue Discount... 30,188,376 30,188,376 30,188,376
9% Consent Convertible
Subordinated Discount
Notes, net of Original
Issue Discount............ $ 10,000,000 (a) 10,000,000 10,000,000
Capital Lease Obligations--
Noncurrent................ 664,421 664,421 664,421
Notes Payable.............. 24,547 24,547 13,265,430 $(1,500,000)(d) 11,789,977
------------- ------------ ------------- ----------- ------------ -------------
Total liabilities....... 196,536,718 10,000,000 206,536,718 21,062,794 (1,500,000) 226,099,512
Redeemable Preferred Stock. 41,048,623 (41,048,623)(a)(b) 4,747,641 (4,747,641)(e) --
Put Warrants............... 5,794,974 (5,794,974)(e) --
Common Stockholders' Equity
(Deficit):
Common stock.............. 72,226 139,439 (a)(c) 211,665 717 (717)(e) 211,665
Additional paid-in
capital.................. 73,941,796 180,989,184 (a)(c) 254,930,980 254,930,980
Accumulated deficit....... (132,441,255) (132,441,255) (15,017,241) 15,017,241 (c)(e) (132,441,255)
Common stock held in
Treasury: 1997--10,000
shares................... (1,077) (1,077) (1,077)
------------- ------------ ------------- ----------- ------------ -------------
Total common
stockholders' equity
(deficit).............. (58,428,310) 181,128,623 122,700,313 (15,016,524) 15,016,524 122,700,313
------------- ------------ ------------- ----------- ------------ -------------
Total Liabilities,
Redeemable Preferred
Stock, and Common
Stockholders' Equity
(Deficit)................. $ 179,157,031 $150,080,000 $ 329,237,031 $16,588,885 $ 2,973,909 $ 348,799,825
============= ============ ============= =========== ============ =============
</TABLE>
30
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(1) Adjustments to reflect the Offerings.
(a) Represents the elimination of accumulated preferred dividends as a
result of the conversion of the 9% Preferred Stock and Series A
Preferred Stock to Common Stock.
(2) Excludes extraordinary loss on early extinguishment of debt of
approximately $1.6 million, pursuant to the recapitalization of
Connecticut Telephone in May 1997.
(3) Adjustments to reflect the Proposed Acquisition.
(a) Represents the amortization of goodwill. The Company will account for
the Proposed Acquisition using the purchase method of accounting and
will allocate the purchase price to assets acquired and liabilities
assumed based on their estimated fair values. Management is in the
process of reviewing the allocation of the purchase price among certain
assets. As such, the excess purchase price over historical assets has
been allocated to goodwill which is being amortized over seven years.
These amounts may be adjusted upon completion of these analyses.
(b) Represents the elimination of losses of a subsidiary and losses from an
equity investment of Connecticut Telephone not acquired by the Company.
(c) Represents the reduction of interest expense on certain debt and other
financial instruments not assumed by the Company as part of the
Proposed Acquisition.
(d) Represents the elimination of accumulated preferred dividends,
accretion on the redeemable preferred stock and accretion on the common
stock put warrants due to the Proposed Acquisition.
(4) Pro Forma Adjusted Balances.
(a) Excludes interest that would have been earned on the net proceeds of
the Offerings, net of the acquisition costs, of approximately $3.4
million, $2.6 million and $2.6 million for the year ended, December 31,
1996, the nine-month periods ended September 30, 1996 and 1997,
respectively, as if the Offerings had occurred at the beginning of the
earliest period presented at an assumed interest rate of 5%.
31
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
(1) Adjustments to reflect (i) the sale of Series A Preferred Stock on October
17, 1997 for an aggregate purchase price of $15.0 million, (ii) the
conversion of all of the outstanding shares of 9% Preferred Stock and
Series A Preferred Stock (including the shares of Series A Preferred Stock
sold on October 17, 1997) into an aggregate of 5,943,916 shares of Common
Stock (excluding for this purpose the effect of Common Stock issued in
connection with such conversion in respect of accrued but unpaid dividends
on the 9% Preferred Stock and Series A Preferred Stock subsequent to
September 30, 1997), (iii) the issuance of the Consent Convertible Notes
and (iv) the Offerings.
(a) Represents the net proceeds of the Offerings, issuance of the Consent
Convertible Notes and issuance of Series A Preferred Stock to the
Company as follows:
<TABLE>
<S> <C>
Proceeds of Offerings..................................... $136,000,000
Fees and expenses of Offerings............................ (10,920,000)
Issuance of the Consent Convertible Notes (net of original
issue discount).......................................... 10,000,000
Issuance of Series A Preferred Stock...................... 15,000,000
------------
$150,080,000
============
</TABLE>
(b) Represents the exchange of 10,920 shares of 9% Preferred Stock and
45,526 shares of Series A Preferred Stock (including accumulated unpaid
dividends) into 5,943,916 shares of Common Stock.
(c) Represents the net increase in Common Stock and additional paid-in
capital as follows:
<TABLE>
<CAPTION>
COMMON
STOCK ADDITIONAL
PAR PAID-IN
VALUE CAPITAL
-------- ------------
<S> <C> <C>
Common Stock issued in the Offerings (8,000,000
shares; par value $.01).......................... $ 80,000 $125,000,000
Common Stock exchanged for 9% Preferred Stock and
Series A Preferred Stock (5,943,916 shares; par
value $.01)...................................... 59,439 55,989,184
-------- ------------
Total increase.................................. $139,439 $180,989,184
======== ============
</TABLE>
(2) Adjustments to reflect the Proposed Acquisition.
(a) Represents the cash purchase price of Connecticut Telephone, net of
debt assumed by the Company, and costs associated with the Proposed
Acquisition.
(b) Represents the dividend of intercompany notes receivable from an equity
investment of Connecticut Telephone not acquired by the Company to a
former owner.
(c) Represents the net increase in Other Assets as follows:
<TABLE>
<S> <C>
Goodwill in connection with the Proposed Acquisition...... $62,834,967
Elimination of intercompany notes receivable from an
equity investment of Connecticut Telephone not acquired
by the Company........................................... (464,828)
Dividend of investment in Smartlink Development, L.P. to a
former owner of Connecticut Telephone.................... (2,245,515)
-----------
Net increase in other assets.............................. $60,124,624
===========
</TABLE>
(d) Represents the repayment of a subordinated note payable to a former
owner.
(e) Represents the elimination of the redeemable preferred stock, put
warrants, common stock and accumulated deficit of Connecticut
Telephone.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
"Selected Historical Consolidated Financial and Operating Data" and the
consolidated financial statements and notes thereto included elsewhere in this
Prospectus.
OVERVIEW
Initially, the Company entered the local telecommunications market as a
facilities-based CLEC with network facilities in Ohio. Due to the high costs
associated with the initial construction, installation and expansion of each
local network facility, including right-of-way costs, franchise fees,
interconnection charges and other operating expenses and in anticipation of
the impact of the passage of the Telecommunications Act, the Company refocused
its operations. The Company sold its existing facilities in Ohio and certain
other assets in February 1996, and transferred certain liabilities with
respect to those facilities, to pursue a non-facilities-based approach to the
local telecommunications market. As part of the Company's strategy to refocus
its operations, the Company, through a newly formed wholly owned acquisition
subsidiary, Quest United, Inc. ("Quest"), acquired certain assets and assumed
certain liabilities of Quest America, L.P., a telecommunications reseller and
consulting firm, in October 1995 (the "Quest Acquisition").
The Company negotiated for the first total service resale agreement with
Ameritech for local services, which was signed in November 1995, and
negotiated with NYNEX for a similar comprehensive local resale agreement which
was signed in July 1996. The Company also consummated various other agreements
in 1996 with certain carriers for the resale of long distance and enhanced and
other value-added services. The Company commenced the marketing and
provisioning of services under those agreements during the latter half of
1996. Although management believes that its current strategy will have a
positive effect on the Company's results of operations over the long-term,
through an increase in its customer base and product offerings, this strategy
is expected to have a negative effect on the Company's results of operations
over the short-term. The Company anticipates losses and negative cash flow for
the foreseeable future, attributable in part to significant investments in
operating, sales, marketing, management information systems and general and
administrative expenses. To date, the Company's growth, including capital
expenditures, has been funded primarily by the capital contributions of the
Original Purchasers and recent sales of Series A Preferred Stock and by the
proceeds from the 1996 Private Placement (as defined) and the 1997 Private
Placement (as defined).
In August 1997, MLAM, the current holder of all of the 14% Senior Discount
Notes due 2003 (the "14% Senior Notes") and Convertible Notes consented (the
"Consent") to the amendment of the indentures with respect to the 14% Senior
Notes and the Convertible Notes to allow the Company to consummate the private
placement of units consisting of $152.7 million in aggregate principal amount
at maturity of the Company's 14 5/8% Senior Discount Notes due 2004 (the "14
5/8% Senior Notes") and warrants to purchase 2,053,900 shares of Common Stock
(the "1997 Private Placement"). In connection with the Consent, the Company
paid a consent fee to MLAM consisting of warrants to purchase 145,160 shares
of Common Stock, at an exercise price of $.01 per share. The Company also
granted to MLAM an option to purchase the Consent Convertible Notes on terms
substantially similar to the Convertible Notes for an aggregate purchase price
of $10.0 million. The Consent Convertible Notes were issued on January 13,
1998. Additionally, the Company granted to holders of the 14% Senior Notes an
option, for a specified period of time, to exchange the 14% Senior Notes for
14 5/8% Senior Notes having an accreted value equal to the accreted value of
such 14% Senior Notes at the time of such exchange.
The Company's net service revenue consists primarily of sales revenue from
telecommunications resale services net of certain adjustments, including
unbillable call records. The Company bills its customers for local and long
distance usage based on the type of local service utilized, the number, time
and duration of calls, the geographic location of the terminating phone
numbers and the applicable rate plan in effect at the time of the call.
33
<PAGE>
Cost of services includes the cost of local and long distance services
charged by carriers for recurring charges, per minute usage charges and
feature charges, as well as the cost of fixed facilities for dedicated
services and special regional calling plans.
Sales and marketing expense consists of the costs of providing sales and
other support services for customers including salaries of salesforce
personnel. General and administrative expense consists of the costs of the
billing and information systems and personnel required to support the
Company's operations and growth as well as bad debts, customer allowances and
all amortization expenses. Depreciation is allocated throughout sales,
marketing, general and administrative expense based on asset ownership.
The Company has experienced significant growth in the past and, depending on
the extent of its future growth, may experience significant strain on its
management, personnel and information systems. To accommodate this growth, the
Company will continue to implement and improve operational, financial and
management information systems. In an effort to support its growth, the
Company added several senior management positions and added over 250 employees
in 1996 and over 600 employees in 1997. Also, the Company is implementing new
information systems that will provide improved recordkeeping for customer
information and management of uncollectible accounts and fraud control. The
Company has also entered into a definitive agreement to acquire Connecticut
Telephone for approximately $68.0 million, which includes the assumption or
repayment of approximately $13.5 million of existing indebtedness. See "Risk
Factors--Proposed Acquisition of Connecticut Telephone."
The Company has to date outsourced certain billing services to two outside
vendors. The significant growth experienced by the Company over the past year
has strained the capabilities of the Company's internal billing systems and
those of the billing vendor supporting the sales pursuant to the Ameritech
resale agreements. As a result, the Company has experienced delays in
accurately billing its customers in a timely manner and instances of toll
fraud. Due to these factors, the Company recorded a charge of $2.8 million in
the third quarter of 1997. In response to these events, the Company's revenue
assurance and margin utilization systems and operating controls are being
strengthened. Gross margins will be lower than originally anticipated for 1997
and estimated bad debt provisions and customer allowances will be higher than
expected as a percent of revenue, since some billings from carriers may not be
billed to customers.
As a result of evaluating the capabilities of the Company's two billing
vendors to support the anticipated growth of the Company, a decision was made
to transition to a single vendor that has the strongest current capabilities
and the best potential to support the expansion and related increased number
of customers and access lines of the Company. The Company selected the billing
vendor that has supported its sales pursuant to the NYNEX resale agreement for
the past two years. The transition to a single vendor was completed during the
fourth quarter of 1997.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996
Net service revenue increased 255% to $27.0 million for the nine months
ended September 30, 1997 from $7.6 million for the nine months ended September
30, 1996. The number of local access lines sold in the third quarter of 1997
was 55,851 and cumulative access lines sold at September 30, 1997 were
135,172. The number of local access lines provisioned in the third quarter of
1997 was 51,449 and cumulative local access lines provisioned as of September
30, 1997 were 116,591.
Gross profit for the nine months ended September 30, 1997 increased 198% to
$3.0 million compared to $1.0 million for the nine months ended September 30,
1996. Due to the significant change in the Company's business strategy and
corresponding change in cost structure from the original facilities-based
business, the year to year gross margins are not comparable. In addition, the
Company has continued to negotiate price reductions with its carriers, the
full impact of which are not yet fully reflected in the results of operations.
34
<PAGE>
Sales and marketing expense increased $37.2 million from $5.8 million for
the nine months ended September 30, 1996 to $43.1 million for the nine months
ended September 30, 1997. The increase was due primarily to the substantial
increase in the number of sales and marketing employees from approximately 130
at September 30, 1996 to approximately 530 at September 30, 1997. The higher
head count resulted in increases to salaries and benefits of approximately
$22.6 million, recruitment, training and travel costs of approximately $5.7
million, and facility and office related expenses of approximately $3.3
million. Additionally, advertising and promotional costs increased
approximately $4.3 million due to product launches in the Company's target
markets.
General and administrative expense increased $16.0 million to $26.9 million
for the nine months ended September 30, 1997 versus $10.9 million for the nine
months ended September 30, 1996. The increase was due primarily to the
substantial increase in the number of operations and administrative employees
from approximately 90 at September 30, 1996 to over 320 at September 30, 1997.
The higher head count resulted in increases to salaries and benefits of
approximately $7.3 million, facility and office costs of approximately $1.4
million, and recruitment, training and travel costs of approximately $1.6
million. Professional fees increased approximately $1.2 million, primarily
relating to the development and expansion of the Company's customer service,
billing and administrative information systems and facilities. Billing costs
increased approximately $1.6 million due to a corresponding increase in
revenue. Additionally, as noted above, the Company recorded a charge of $2.8
million in the third quarter of 1997 for estimated additional provisions for
bad debt and customer allowances to cover instances of toll fraud and other
matters.
Interest and other income decreased to $1.9 million for the nine months
ended September 30, 1997 from $8.6 million for the nine months ended September
30, 1996 due primarily to an $8.1 million non-recurring gain on the sale of
the Company's switching facilities in Ohio in February 1996, which was
somewhat offset by additional interest income earned on the higher average
cash balance.
Interest expense increased to $8.6 million for the nine months ended
September 30, 1997 from $46,000 for the nine months ended September 30, 1996.
This increase was due primarily to interest expense attributable to the 14%
Senior Notes and Convertible Notes issued in September 1996 and the 14 5/8%
Senior Notes issued in August 1997.
As a result of the factors described above, the Company had a net loss of
$73.6 million for the nine months ended September 30, 1997 compared to a net
loss of $7.2 million for the nine months ended September 30, 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net service revenue increased to $9.8 million for the year ended December
31, 1996 from $7.9 million for the year ended December 31, 1995. The increase
in net service revenue was due primarily to a 36% increase in the customer
base in the Company's geographic markets (from approximately 1,250 customers
at the end of 1995 to approximately 1,700 customers at the end of 1996) and
the revenues attributable to the Quest Acquisition which primarily consisted
of commissions earned from carriers on telecommunications services provided to
their customers. Approximately $1.4 million in increased revenues was
attributable to the addition of new customers, primarily in Ohio, and
approximately $0.5 million was attributable to revenues gained from the Quest
Acquisition.
Gross margin of $0.6 million for the year ended December 31, 1996 improved
from the negative margin of $1.2 million for the year ended December 31, 1995
due primarily to the elimination of fixed costs upon the sale of the switching
facilities in Ohio and a $1.4 million sales and related margin adjustment for
1995 revenue purportedly not billed by NYNEX to the Company's customers under
the billing and collection agreement. In 1996, the Company recovered
approximately $0.9 million from NYNEX and is continuing to pursue additional
amounts.
Sales and marketing expense increased $6.7 million, or 114%, from $5.9
million for the year ended December 31, 1995 to $12.6 million for the year
ended December 31, 1996. The increase was due primarily to
35
<PAGE>
an increase in the number of sales and marketing employees from approximately
115 at the end of 1995 to over 300 at the end of 1996, which resulted in
increases to salaries and benefits of $3.9 million, travel, training and
entertainment costs of $1.0 million and recruitment costs of $0.8 million.
Additionally, advertising costs increased $0.9 million due to product launches
in the Company's target markets.
General and administrative expense increased $9.6 million, or 86%, to $20.7
million for the year ended December 31, 1996 versus $11.1 million for the year
ended December 31, 1995. The increase was due primarily to an increase in the
number of operations and administrative employees from approximately 90 at the
end of 1995 to approximately 160 at the end of 1996, which resulted in
increases to salaries and benefits of $2.5 million and facility costs of $1.2
million. Additionally, fees paid to consultants and other professionals
increased over $1.0 million, primarily relating to the development and
expansion of the Company's customer service, billing and administrative
information systems and facilities. Amortization expense increased $0.8
million due primarily to a full year of amortization expense related to the
Quest Acquisition in 1996 versus approximately eight months in 1995.
Additionally, $1.7 million of expense was incurred relating to the settlement
of a derivative action filed by a minority shareholder.
Interest and other income increased to $9.5 million for the year ended
December 31, 1996 from $0.6 million for the year ended December 31, 1995 due
primarily to an $8.1 million non-recurring gain on the sale of the Company's
switching facilities in Ohio in February 1996.
As a result of the factors described above, the Company's net loss increased
to $25.1 million for the year ended December 31, 1996 from $18.1 million for
the year ended December 31, 1995.
Year Ended December 31, 1995 Compared to Inception to December 31, 1994
The results for fiscal 1995 are not comparable with the results for fiscal
1994 as fiscal 1995 represents a full fiscal year and fiscal 1994 represents
approximately eight months of operations since the Company's inception in
April 1994.
Net service revenue increased to $7.9 million in fiscal 1995 from $1.7
million in fiscal 1994. This increase was due to a full year of operations and
a 34% increase in the customer base (from approximately 930 customers at
December 31, 1994 to approximately 1,250 customers at December 31, 1995).
Cost of services increased to $9.1 million in fiscal 1995 from $1.5 million
in fiscal 1994. The increase was due to the one-time installation costs and
fixed ongoing costs related to the Ohio switching facilities, as well as
increased costs associated with an increase in the number of subscribers.
Sales and marketing expense increased $3.0 million, or 103%, to $5.9 million
in fiscal 1995 from $2.9 million in fiscal 1994. Approximately $1.5 million of
the increase was due to the impact of a full year of operation in 1995 versus
approximately eight months in 1994. The inclusion of expenses related to the
operations of Quest in 1995 contributed an additional $0.8 million to the
increase.
General and administrative expense increased $6.4 million, or 136%, to $11.1
million in fiscal 1995 from $4.7 million in fiscal 1994. Approximately $2.0
million of the increase was due to the impact of a full year of operation in
1995 versus approximately eight months in 1994. An additional $2.0 million was
attributable to depreciation and amortization and other expenses related to
the Quest Acquisition. The remaining increase is a result of increased
personnel and expenses required to build the Company's customer service and
information systems and office facilities.
Interest and other income increased to $0.6 million in fiscal 1995 from $0.2
million in fiscal 1994, due to significantly higher investable cash balances
in fiscal 1995 resulting from the proceeds of the issuance of $26.3 million of
preferred and common stock, as well as fiscal 1995 being a full year.
Interest expense increased to $0.7 million in fiscal 1995 from $26,000 in
fiscal 1994. This increase was due to interest expense associated with the
capitalized leases for the Ohio switch sites which began in December 1994.
36
<PAGE>
As a result of the factors described above, the Company's net loss increased
to $18.1 million for fiscal 1995 from $7.1 million for fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its operations primarily through
cash from its investors and private placements of debt securities. As of
September 30, 1997, the Company had cash and cash equivalents of $117.9
million and working capital of $104.8 million. The Company's operating
activities utilized cash of approximately $57.8 million for the nine month
period ended September 30, 1997, versus $14.1 million for the nine month
period ended September 30, 1996.
The Company's investing activities in 1997 have consisted primarily of
property and equipment purchases of $10.1 million for the nine month period
ended September 30, 1997, primarily related to sales office expansion in
several of the Company's target markets. In 1998, the Company anticipates
spending approximately $20.0 million for capital expenditures, a substantial
portion of which has been allocated to investments in information technology
to support the growth of the customer base with more robust provisioning,
billing and customer care systems. The anticipated continued high growth in
the customer base in 1998 will require a similar level of investment in
information technology. In 1996, the Company's investing activities consisted
of $9.5 million in proceeds received in February 1996 from the December 1995
sale of facilities in Ohio, partially offset by a $1.6 million purchase of the
remaining minority interest of a subsidiary in the third quarter 1996 and
capital expenditures of $0.3 million for the nine month period ended September
30, 1996.
The Company's financing activities generated $125.0 million for the nine
months ended September 30, 1997. On August 18, 1997, the Company raised $30.2
million through the sale of its Series A Preferred Stock and $96.5 million of
net proceeds through the 1997 Private Placement. Additionally, on October 17,
1997, the Company issued and sold Series A Preferred Stock for an aggregate
purchase price of $15.0 million pursuant to agreements contemplated by a
letter of intent dated August 6, 1997.
The Company's financing activities generated $64.2 million for the nine
months ended September 30, 1996. On September 30, 1996, the Company raised
$10.0 million through the sale to the Original Purchasers of its 9% Preferred
Stock. Also on September 30, 1996, the Company raised approximately $55.0
million, net of issuance costs, through the sale to MLGAFI of (i) 48,500 Units
consisting of $48.5 million in aggregate principal amount at maturity of 14%
Senior Notes and warrants to purchase an aggregate of 790,780 shares of Common
Stock and (ii) $36.0 million in aggregate principal amount at maturity of
Convertible Notes (the "1996 Private Placement"). The aggregate purchase price
of the Units was $30.2 million, and the aggregate purchase price of the
Convertible Notes was $27.6 million. In 1995 and 1994, the Company's financing
activities consisted primarily of raising capital in the form of equity
investments from venture capital organizations. During 1995 and 1994, the
Company raised $26.3 million and $14.2 million, respectively, net of issuance
costs. In 1995, the Company also assumed notes payable to investors in the
Quest Acquisition.
The Company incurred net losses of $25.1 million, $18.1 million and $7.1
million in 1996, 1995 and 1994, respectively. Accordingly, no provision for
current Federal or state income taxes has been made to the financial
statements. At December 31, 1996, the Company and its subsidiaries had net
operating loss carry-forwards for Federal income tax purposes of approximately
$46.1 million. The ability of the Company or the Company's subsidiaries, as
the case may be, to utilize their net operating loss carry-forwards to offset
future taxable income may be subject to certain limitations contained in the
Internal Revenue Code of 1986, as amended (the "Code"). These operating losses
begin to expire in 2009 for Federal income tax purposes. Of the net operating
loss carry-forwards remaining at December 31, 1996, $12.3 million can be
applied only against future taxable income of the Company's subsidiary, USN
Communications Northeast, Inc. (formerly United Telemanagement Services,
Inc.).
Approximately $56.6 million of the net proceeds of the Offerings will be
used to finance the Proposed Acquisition, including the purchase of the
outstanding capital stock of Connecticut Telephone, the repayment
37
<PAGE>
of certain indebtedness of Connecticut Telephone and the payment of certain
fees and expenses related to the Proposed Acquisition. In the event the
Underwriters' over-allotment options are exercised, up to $10.0 million of the
net proceeds of such exercise will be used to repay indebtedness of
Connecticut Telephone. The Company believes that the remaining net proceeds of
the Offerings will be sufficient to meet planned capital expenditures and
anticipated negative operating cash flow for the foreseeable future. To the
extent that the Company has additional financing requirements, sources of
funding may include public offerings or private placements of equity and/or
debt securities and additional capital contributions from new or existing
stockholders. An additional source may include bank financing, although the
Company currently does not have available a credit facility. There can be no
assurance that additional financing will be available to the Company, or, if
available, that it can be obtained on a timely basis and on terms acceptable
to the Company and within limitations contained in the Senior Note Indentures.
Failure to obtain such financing could result in the delay or abandonment of
the Company's development and expansion plans.
INFLATION
Management believes that inflation has not had a material effect on the
Company's results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share," which
simplifies the method for computing earnings per share. Under the new
requirements, primary earnings per share will be replaced with basic earnings
per share. The statement, which will not impact the results of operations,
financial position or cash flows of the Company and does not have a material
effect on the earnings per share previously presented, is effective for
financial statements issued for periods ending after December 15, 1997 and
will be adopted by the Company in connection with its financial statements for
the fourth quarter of 1997.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" and
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The statements, which will
not impact the results of operations, financial position or cash flows of the
Company and do not have a material effect on the financial statements as
previously presented, are effective for financial statements issued for fiscal
years beginning after December 15, 1997 and will be adopted by the Company in
1998.
38
<PAGE>
INDUSTRY OVERVIEW
Prior to 1984, AT&T dominated both the local exchange and long distance
marketplace by owning the operating entities that provided both local exchange
and long distance services to most of the U.S. population. While long distance
competition began to emerge in the late 1970s, the critical event triggering
the growth of long distance competition was the breakup of AT&T and the
separation of its local and long distance businesses as mandated by the
Modified Final Judgment relating to the breakup of AT&T (the "MFJ"). To foster
competition in the long distance market, the MFJ prohibited AT&T's divested
local exchange businesses, the RBOCs, from acting as a single source provider
of telecommunications services.
The Telecommunications Act, which was enacted on February 8, 1996, is
considered to be the most comprehensive reform of the nation's
telecommunications laws and affects the development of competition for local
telecommunications services. Specifically, certain provisions of the
Telecommunications Act provide for: (i) the removal of legal barriers to entry
to the local telecommunications services market; (ii) the interconnection of
ILEC networks with competitors' networks; (iii) the establishment of
procedures and requirements to be followed by the RBOCs, including the
requirement that RBOCs offer local services for resale in order to enter into
the long distance and telecommunications equipment manufacturing markets; and
(iv) the relaxation of the regulation of certain telecommunications services
provided by LECs and others. The Company believes the Telecommunications Act
will promote significant growth in the local telecommunications market as new
market entrants, including resellers such as the Company, provide expanded
service offerings and increased levels of customer service.
Industry sources estimate that in 1996 the total revenues from local and
long distance telecommunications services were approximately $185 billion, of
which approximately $107 billion were derived from local exchange services and
approximately $78 billion from inter-LATA long distance services. According to
FCC information, aggregate revenues for local and long distance services grew
at a compounded annual rate of approximately 5.5% between 1991 and 1996.
Although the MFJ established the preconditions for competition in the market
for long distance services in 1984, the market for local exchange services has
until recently been virtually closed to competition and has largely been
dominated by regulated monopolies. Efforts to open the local exchange market
began in the late 1980s on a state-by-state basis when competitive access
providers ("CAPs") began offering dedicated private line transmission and
access services. These types of services together currently account for
approximately 12% of the total local exchange revenues. CAPs were restricted,
often by state laws, from providing the other, more frequently used services
such as basic and switched services, which today account for approximately 88%
of local exchange revenues.
The Telecommunications Act further increases the opportunities available to
competitive local providers by requiring the RBOCs and other ILECs to offer
various network elements such as switching, transport and loops (i.e., the
facilities connecting a customer's premises to a LEC central office) on an
unbundled and non-discriminatory basis. RBOCs also are required to offer their
retail services at wholesale rates for resale by other companies, including
the Company. By offering such services, the RBOCs are also meeting certain of
the requirements contained in the Telecommunications Act in order to gain FCC
approval to provide in-region long distance services. Although certain
provisions of the Telecommunications Act restricting the RBOCs' ability to
provide in-region long distance services have been held unconstitutional by a
Federal district court, the Company believes that significant parts of such
decision may be reversed and vacated on appeal, but no assurance can be made
as to the outcome of any appeals. See "Business--Competition." The Company
believes regulatory reform, together with increased demand from the large
underserved small and medium-sized business market, will provide growth
opportunities for competitive local carriers who develop integrated billing
and information systems and have significant management and operational
expertise. This new market opportunity will permit competitive providers who
can manage the operational and marketing implementation to offer a full range
of local telecommunications services, including local calling, custom calling
features and intra-LATA toll services to virtually any customer in the United
States. The Company believes that carriers such as the Company providing
competitive local exchange services have the opportunity to gain market share
in the local exchange market just as long distance competitors gained market
share from AT&T in the long distance market. In addition, competitors,
including the Company and major IXCs, will be able to take advantage of the
unbundling and resale requirements imposed on the RBOCs and other ILECs under
the Telecommunications Act, thereby accelerating entry of competitors that
previously have not invested in local distribution facilities. See "Risk
Factors--Competition."
39
<PAGE>
BUSINESS
INTRODUCTION
USN is one of the fastest growing CLECs in the United States. The Company
offers a bundled package of telecommunications products, including local and
long distance telephony, voicemail, paging, teleconferencing, Internet access
and other enhanced and value-added telecommunications services, tailored to
meet the needs of its customers. Upon the consummation of the Proposed
Acquisition, the Company will also offer wireless telephone service on a
resale basis. See "Prospectus Summary--Proposed Acquisition" and "Risk
Factors--Proposed Acquisition." The Company primarily focuses its marketing
efforts on small and medium-sized businesses with telecommunications usage of
less than $5,000 per month. The Company's strategy is to continue to increase
its customer base by being more flexible, innovative and responsive to the
needs of its target customers than the RBOCs and the first-tier IXCs, which
have historically concentrated their sales and marketing efforts on
residential and large business customers. The Company primarily differentiates
itself with a value-based marketing strategy by providing an integrated,
customized package of telecommunications services on a single bill and
responsive customer care.
The Company is presently selling service to customers in certain states in
the NYNEX region (Massachusetts, New Hampshire, New York and Rhode Island) and
the entire Ameritech region (Illinois, Indiana, Ohio, Michigan and Wisconsin)
and is currently in negotiations to expand its bundled services offering
throughout the 14-state Bell Atlantic/NYNEX region. Management anticipates
implementing service in at least two additional states by the end of 1998. In
August 1997, NYNEX merged with Bell Atlantic. The Company continues to operate
in the former NYNEX regions, which are now a part of the Bell Atlantic
territory.
During 1997, the Company increased aggregate local access lines in service
from 8,364 lines to 171,962 lines, including the provisioning of 55,371 lines
in the fourth quarter. As of December 31, 1997, the Company had sold 191,069
local access lines, including 55,897 lines which were sold in the fourth
quarter. Services are primarily marketed through an approximately 425 member
direct salesforce in 34 offices located in nine states. As part of its
customer-focused product offering, the Company provides personalized customer
service, 24 hours a day, 365 days per year, through its two regional customer
care centers.
COMPETITIVE ADVANTAGES
Providing local exchange services is a highly complex process that requires
overcoming significant barriers to entry. Since inception, the Company has
spent significant time, resources and capital to enter the local market. In
the process, it has gained substantial experience in this complicated market
segment. Consequently, the Company believes it has the following competitive
advantages:
. COMPLEMENTARY RELATIONSHIPS WITH RBOCS. The Company believes that the RBOCs'
networks will continue to be the predominant means for providing local
telecommunications services to the Company's target customers for the
foreseeable future. Accordingly, the Company has positioned itself to take
advantage of the opportunities created by the Telecommunications Act by
leveraging its complementary relationships with the RBOCs. The
Telecommunications Act requires the RBOCs to complete a number of
"checklist" items in order to qualify for long distance entry in their local
service areas. Although certain provisions of the Telecommunications Act
restricting the RBOCs' ability to provide in-region long-distance have been
held unconstitutional by a Federal district court, the Company believes that
significant parts of such decision may be reversed and vacated on appeal,
but no assurance can be made as to the outcome of any appeals. See "Risk
Factors--Competition." By moving aggressively to enter into resale
agreements and to develop electronic interfaces with the RBOCs, the Company
believes it has positioned itself to play a key role in enabling the RBOCs
to meet a number of those requirements. The Company was the first to enter
into comprehensive resale agreements with Ameritech and NYNEX, served as the
systems beta customer for Ameritech, NYNEX and Bell Atlantic and is
currently one of the largest CLECs in terms of access lines in service in
the Ameritech
and NYNEX markets. Consequently, the Company is often requested by state and
federal regulators to provide
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information on the Company's experiences. The Company believes its
complementary relationships with the
RBOCs have facilitated the Company's rapid growth in its existing markets and
enabled it to become a valuable and viable resale channel partner. The
Company further believes, based on discussions with RBOC officials and
industry experts, that the RBOCs will continue to develop strong resale
channel partners in an effort to mitigate the potential negative effects of
facilities-based competition.
. UNIQUE RESALE AGREEMENTS. The Company has executed comprehensive local
exchange resale agreements with Ameritech for the greater metropolitan
Chicago area, Ohio and Michigan, and with NYNEX for the State of New York.
In addition to the cost advantages associated with the term and volume
commitment contracts, these contracts provide "most favored nation" and
other pricing protections designed to maintain the competitiveness of rates
and position the Company to purchase capacity at rates at least as favorable
as those of other potential resellers of Ameritech and NYNEX local services.
In addition, the Company has executed an interim resale agreement with Bell
Atlantic for the State of Massachusetts. The Company is currently in
negotiations to expand its resale agreements throughout the 14-state
combined Bell Atlantic/NYNEX region and the 5-state Ameritech region. In
advance of completing these negotiations, the Company has or plans to enter
certain additional states by reselling local service pursuant to state-
mandated wholesale discounts. The Company estimates, based on data compiled
by the FCC, that the regions covered by the current comprehensive Ameritech
and Bell Atlantic/NYNEX resale agreements include access to over 10 million
business access lines. Management believes that upon expansion into the
remaining Bell Atlantic/NYNEX region and the Ameritech region, the Company
will have access to approximately 20 million business access lines. The
Company continuously evaluates opportunities to enter into agreements with
additional RBOCs, other local and long distance service providers and
enhanced and other value-added service providers in order to aggressively
build its customer base as well as to provide additional services to its
existing customers while reducing costs.
. PROPRIETARY ELECTRONIC PROVISIONING AND INTERFACE SYSTEMS. By serving as the
systems beta customer for Ameritech, NYNEX and Bell Atlantic, the Company
was among the first CLECs to develop electronic provisioning systems for
resale of RBOC services. Development of provisioning systems is critical for
carriers seeking to grow rapidly in the complex, competitive local
telecommunications market. These systems must address the numerous technical
configurations associated with local service, including correctly coding
customers into data bases for 911, 411, white pages and customer service, as
well as provisioning thousands of local services, known as USOCs. Electronic
provisioning between the Company and its RBOC vendors allows the Company to
provision a significantly greater volume of lines than would be possible if
transmitting orders by mail or facsimile. Moreover, because the proprietary
systems developed by the Company lessen manual input and reduce repetitive
data entry, the Company experiences improved efficiency and accuracy in
transmitted orders, thereby reducing costs and increasing customer
satisfaction. The Company believes it has established an industry leadership
position in the deployment of these systems, and it is committed to their
continuous improvement.
. LARGEST DIRECT SALESFORCE AMONG CLECS IN ITS MARKETS. The Company's services
are currently sold through an approximately 425 member direct salesforce,
located in 34 offices in Illinois, Indiana, Massachusetts, Michigan, Ohio,
New Hampshire, New York, Rhode Island and Wisconsin. Additionally, the
Company intends to hire approximately 75 new sales people by the end of 1998
to expand service in the Ameritech and combined Bell Atlantic/NYNEX regions.
The Company primarily recruits salespeople with experience in selling
competitive telecommunications services to businesses in the markets where
they are based. The Company's salesforce is trained in-house with a rigorous
customer-focused training program that promotes activity-based selling.
Salespeople are given an incentive through a commission structure, with a
target of 50% of a salesperson's compensation based on performance. The
Company believes its large, experienced, face-to-face salesforce has been,
and will continue to be, vital to expanding its customer base in today's
highly competitive telecommunications industry.
. STRATEGIC FLEXIBILITY. The Company believes that its business strategy
affords it more flexibility to take advantage of regulatory and industry
dynamics than its facilities-based competitors. For example, the FCC's
position on unbundled network elements has evolved to the point where
competitors are now able to purchase
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on an economic basis unbundled network elements from the RBOCs and rebundle
them into an alternative local service option. The Company expects to exploit
this opportunity by rebundling network elements, thus expanding its products
offering and improving its strategic position. In addition, the increased
construction by facilities-based CLECs has improved the value of the
Company's services by creating alternative resale partners other than RBOCs.
The Company is currently evaluating proposals from facilities-based CLECs to
provison local service.
GROWTH STRATEGY
The Company's objective is to be a leading provider of integrated local and
long distance services and other telecommunications products to small and
medium-sized businesses in its target markets. The Company expects to achieve
this goal through the successful implementation of its growth strategy which
includes the following:
. PROVIDE AN INTEGRATED TELECOMMUNICATIONS SOLUTION. A key element in building
its customer base while minimizing churn has been, and will continue to be,
the implementation of a marketing and operating strategy which emphasizes an
integrated telecommunications solution to its target market. To a large
extent, the Company's target customers have not previously been provided the
opportunity to purchase bundled services. The Company attracts and retains
customers by combining responsive customer care with a pricing package to
provide high-quality service at a cost which is usually afforded to only
large business customers. Specifically, the Company provides a single source
and bill for integrated local and long distance telephony, voicemail,
paging, teleconferencing, Internet access and other enhanced and value-added
telecommunications services, with a single point of contact for customer
service, product inquiries, repairs and billing questions. Upon consummation
of the Proposed Acquisition, the Company will also offer wireless telephone
service on a resale basis. See "Prospectus Summary--Proposed Acquisition."
Based on its experience, the Company believes that this marketing and
customer service approach has minimized customer acquisition costs and
churn.
. FOCUS ON LARGE, UNDERSERVED MARKET. The Company utilizes a direct sales
approach and primarily focuses its marketing efforts on small and medium-
sized businesses with telecommunications usage of less than $5,000 per
month. The Company believes this target market is best served by a direct
sales approach because most of these customers do not employ in-house
telecommunications specialists and in most cases obtain services from
various vendors. The Company's experience indicates that these customers
prefer a single source for all their telecommunications requirements,
including products, billing and service. The Company believes that its gross
margins on services provided to its target market are generally higher than
for larger business customers. Since the RBOCs and the first-tier IXCs
primarily concentrate their sales and marketing efforts on residential and
large business customers, the Company will continue to focus its marketing
on this underserved market to rapidly expand its customer base.
. LEVERAGE UBIQUITOUS NETWORKS. The Company believes that a key factor in its
success has been its ability to provide through the RBOC networks the
complete range of local services currently provided by RBOCs across their
entire service territories. There is currently no competing network with the
product breadth, capacity and geographic reach of the RBOC networks. By
contrast, facilities-based CLECs are currently limited primarily to
servicing customers in areas where they have network facilities.
. RAPID MARKET ENTRY. The Company believes its ability to enter a market early
and provide ubiquitous service will continue to allow it to rapidly build a
customer base across a large geographic area prior to the lifting of
regulatory restrictions on the ability of first-tier IXCs and RBOCs to offer
integrated services. Based on continuing legal challenges, the Company does
not believe that any RBOC will provide in-region long distance services on a
significant basis, prior to 1999. As a non-facilities based provider, the
Company believes it is able to build a customer base quickly and efficiently
without incurring significant costs and the developmental delays inherent in
constructing network and transmission facilities. In addition, the Company's
proprietary software interface systems facilitate its rapid customer
acquisition strategy by allowing it to provision high volumes of access
lines.
. EXPAND LOCAL SERVICES. The Company plans to expand its local services
offering, positioning it to offer a full range of local services over a
broad geographic area at a competitive cost, by: (i) entering into term and
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volume resale agreements in new territories with RBOCs; (ii) entering into
resale agreements with one or more facilities-based CLECs; (iii) rebundling
network elements from RBOCs; and (iv) reselling local service in new
territories pursuant to state-mandated wholesale discounts prior to entering
into resale agreements with RBOCs and/or facilities-based CLECS in such
territories. The Company believes, based on its experience and industry
analysts' reports, as well as recent regulatory and industry developments,
that RBOCs have an incentive to continue to negotiate wholesale agreements
with respect to small and medium-sized businesses to stabilize this revenue
base and deter migration of such customers to RBOCs' facilities-based
competitors. The Company also believes that its demonstrated sales and
provisioning expertise is attractive to facilities-based CLECs which may not
be having similar success.
SALES AND MARKETING
The Company's customers include small and medium-sized businesses which
principally have telecommunications usage of less than $5,000 per month. The
Company believes that the RBOCs and large IXCs historically have chosen not to
concentrate their sales and marketing efforts on this business segment, which
the Company believes represents a significant portion of the
telecommunications market. Through radio and newspaper advertising, as well as
various marketing programs, the Company has sought to establish itself as a
recognized brand name for its products and services emphasizing responsive
customer support, competitive product and pricing packages and a targeted
sales and marketing strategy. The Company had in excess of 17,000 customers as
of December 31, 1997.
The Company's services are currently sold through an approximately 425
member direct salesforce, located in 34 offices in Illinois, Indiana,
Massachusetts, Michigan, Ohio, New Hampshire, New York, Rhode Island and
Wisconsin. The sales personnel make direct calls to prospective and existing
customers to outline the range of services offered and discuss the benefits of
the Company's integrated service offerings, enhanced customer care and
potential savings. The Company is planning to supplement its direct sales
organization with outbound telemarketing and indirect sales efforts. The
Company believes this marketing approach will increase market coverage and
reduce marketing and customer acquisition costs.
The Company has recruited and continues to recruit a direct salesforce in
each of the markets in which it operates. The Company primarily recruits
salespeople with experience in selling competitive telecommunications services
to businesses in the markets where they are based. The Company's salesforce is
trained in-house with a rigorous customer-focused training program that
promotes activity-based selling. The salesforce makes calls to prospective
customers from potential customer modules created by acquiring business
databases sorted by target characteristics (e.g., size of business and number
of telephone lines). Salespeople are given an incentive through a commission
structure, with a target of 50% of a salesperson's compensation based on such
person's performance.
CUSTOMER CARE
The Company maintains an emphasis on customer care to differentiate itself
from its competitors and reduce churn. By providing each customer with an
account representative, the Company is able to provide ongoing personalized
contact to address the clients' needs. In addition, the Company has
established a 24-hours-per-day, 365-days-per-year, customer care center to
facilitate customer care and customer service requests. At the Company's
customer care centers, customers' calls are answered by experienced customer
care representatives, many of whom are cross-trained in the provisioning
process. The Company believes that the superior customer service, face-to-face
sales process and integrated service offering provide the Company with a
competitive advantage over the existing local service providers.
MANAGEMENT INFORMATION SYSTEMS
The Company is committed to the continued development and successful
implementation of billing and customer care systems that provide accurate and
timely information to both the Company and its customers. The
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proprietary electronic interfaces of the Company's management information
systems for the provisioning of services to the Company's customers have been
developed in cooperation with Ameritech and NYNEX. Provisioning of service to
customers is accomplished through the Company's proprietary systems, which are
designed to interface with the RBOCs' systems through a variety of delivery
mechanisms. The Company believes this method of development has been, and will
continue to be, a critical element to successfully providing local
telecommunications services and provides the Company with a competitive
advantage, as the RBOCs have an economic and strategic incentive to work with
resellers that have sophisticated information systems that can electronically
interface with the RBOCs' systems. The Company's experience in developing
these systems allows it to offer services quickly in new markets. The customer
care systems have been developed and continue to be enhanced in a
client/server environment allowing for flexibility to accommodate an expanding
customer base, efficient entry into new markets and rapid development of
additional functionality.
The Company's billing systems are designed to provide access to a broad
range of information on individual customers, including their call volume,
patterns of usage and billing history. This same information is used by the
Company to identify customer trends and will allow for proactive support of
the Company's marketing efforts.
The Company currently outsources the rating, printing and mailing of
customer bills. Since these functions require a high volume of processing in a
limited time frame, the Company has determined that currently the most
economical way to process bills is to outsource this function. The customer
usage information for billing and the tables and procedures used in the rating
of call records are maintained separately by the Company to manage the ongoing
needs of each customer. Standard management reports are generated for every
billing cycle.
VENDOR AGREEMENTS
Introduction
The Company has executed comprehensive local exchange resale agreements with
Ameritech for the greater metropolitan Chicago area, Ohio and Michigan, and
with NYNEX for the State of New York. In addition, the Company has executed
interim resale agreements with Ameritech for the State of Wisconsin and with
Bell Atlantic for the State of Massachusetts. The Company estimates, based on
data compiled by the FCC, that the regions covered by the current
comprehensive Ameritech and Bell Atlantic/NYNEX resale agreements include
access to over 10 million business access lines. Management believes that upon
expansion into the remaining Bell Atlantic/NYNEX region and the Ameritech
region, the Company will have access to approximately 20 million business
access lines. The Company continuously evaluates opportunities to enter into
agreements with additional RBOCs, other local and long distance providers and
enhanced and other value-added service providers in order to aggressively
build its customer base as well as to provide additional services to its
existing customers while reducing costs.
The Company currently has a long distance resale agreement with MCI. Such
agreement allows the Company to offer its customers integrated local and long
distance telecommunications services. In addition, such agreement has allowed
the Company to enter and establish itself as a telecommunications provider in
strategically targeted markets prior to establishing a local exchange resale
agreement.
Ameritech Resale Agreements
Pursuant to the Ameritech resale agreements, the Company purchases local
exchange services at discounted rates based on a ten-year term. These
agreements contain pricing protections designed to maintain the
competitiveness of the Company's discounted rates and position the Company to
purchase capacity at rates at least as favorable as those of competitors that
may eventually negotiate a resale agreement. The level of discounts of the
resold services provided under these agreements vary based on the state and
the nature of services resold (i.e., access lines, local calls, toll calls or
features).
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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 commission of each respective state. The Company also has an
agreement with Ameritech for the resale of certain non-tariffed services to
its customers, including inside wire maintenance.
The Ameritech resale agreements include a minimum commitment of resold
access lines per region covered. The minimum commitment in Illinois is 150,000
business access lines and in Ohio and Michigan, 100,000 business access lines
and 10,000 residential lines. The minimum commitment is not a limitation on
the Company's overall ability to sell access lines at discounted rates.
However, if the Company fails to meet its minimum commitment, the Company is
subject to an underutilization charge equal to the number of unutilized lines
multiplied by a fixed average business line rate. The measurement period of
the minimum commitment does not commence, however, until the completion of an
18-month "ramp up" period which gives the Company the ability to build its
customer base. In addition, the Ameritech resale agreements provide a
"carryforward" provision designed to minimize the potential for any liability
resulting from a failure to meet the minimum commitment by carrying forward
underutilization amounts which may be met in the future.
If the Company does not meet its minimum commitment by the end of the ten-
year term with the benefit of the carryforward provision, the Company has the
option to either pay a penalty based on the aggregate number of unutilized
lines or subscribe on a monthly basis to an equivalent number of lines during
the next three-year period. In the event the Company terminates any of the
Ameritech resale agreements prior to their expiration, the Company is subject
to a termination charge.
Bell Atlantic/NYNEX Resale Agreement
On July 9, 1996, the Company executed a resale agreement with NYNEX to
provide for the resale of local exchange services for the State of New York at
discounted rates based on a ten-year term. The New York Bell Atlantic/NYNEX
resale agreement contains pricing protections designed to maintain the
competitiveness of discounted rates provided to the Company. Under the New
York Bell Atlantic/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
Bell Atlantic a reasonable transition to similar commitments. If the Company
cannot successfully negotiate such a transition with Bell Atlantic, then the
Company may be unable to maintain the lowest rate. The level of discounts of
resold services varies based on the nature of the services. The New York Bell
Atlantic/NYNEX resale agreement contains a minimum commitment of 100,000
business access lines. In the event the Company does not satisfy the minimum
commitment after a trial period and ramp-up period, the Company is subject to
an underutilization charge. However, the New York Bell Atlantic/NYNEX resale
agreement also contains a carryforward provision designed to minimize the
potential of an underutilization charge. The Company has also executed an
interim resale agreement with Bell Atlantic for Massachusetts. This agreement
does not contain a term and volume commitment, but was designed to allow the
Company to begin reselling services in Massachusetts expeditiously in a manner
consistent with state regulatory developments. Although there can be no
assurance, it is expected that the Company and Bell Atlantic will enter into a
long-term resale agreement for Massachusetts similar to the New York Bell
Atlantic/NYNEX resale agreement.
Long Distance Agreements
The Company has an agreement with MCI pursuant to which MCI provides a wide
range of long distance telecommunications services to the Company's customers.
Services offered for resale from MCI include a variety of inbound, outbound,
calling card and international services. In addition, the Company also resells
teleconferencing, debit cards, branded operator services and private line
services.
The Company's long distance carrier agreement with MCI became effective
August 1, 1996 and contains a 33-month term. It requires the Company to
achieve certain monthly dollar targets in order to qualify for
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discounted rates on carrier services. The agreement provides for an annual
commitment for each of the final two years of the contract term. If the
Company does not meet its annual commitment during any annual period of the
term, an underutilization charge shall apply in an amount equal to 15% of the
difference between the committed amount and the actual usage. However, the
Company may carry forward up to 10% of the initial annual commitment for a
period of up to three months in the following annual period.
Enhanced and Other Value-Added Telecommunications Services
The Company has agreements to offer on a resale basis enhanced and other
value-added services such as Internet access and paging. In addition, the
Company has entered into an agreement for the exclusive rights in the United
States and Canada to distribute a "Windows"-based teleconferencing product
which allows the conference host to conduct a conference call using point and
click graphics directly from a personal computer without having to make
teleconference reservations.
COMPETITION
The Company operates in a highly competitive environment and has no
significant market share in any market in which it operates. The Company
expects that competition will continue to intensify in the future due to
regulatory changes, including the continued implementation of the
Telecommunications Act, and the increase in the size, resources and number of
market participants. In each of its markets, the Company faces competition for
local service from larger, better capitalized incumbent providers.
Additionally, the long distance market is already significantly more
competitive than the local exchange market, because the ILECs, including the
RBOCs, have historically had a monopoly position within the local exchange
market.
In the local exchange market, the Company also faces competition or
prospective competition from one or more CLECs, many of which have
significantly greater financial resources than the Company, and from other
competitive providers, including some non-facilities-based providers like the
Company. For example, AT&T, MCI and Sprint, among other carriers, have each
begun to offer local telecommunications services in major U.S. markets using
their own facilities or by resale of the ILECs' or other providers' services.
In fact, certain competitors, including AT&T, MCI and Sprint, have entered
into interconnection agreements with Ameritech with respect to the States of
Illinois, Michigan and Ohio. These competitors either have begun or in the
near future likely will begin offering local exchange service in those states,
subject to the joint marketing restrictions under the Telecommunications Act.
In addition, some of these competitors have entered into interconnection
agreements with NYNEX and either have begun or in the near future likely will
begin offering local exchange service in New York and Massachusetts, subject
to such joint marketing restrictions. In addition to these long distance
service providers, entities that currently offer or are potentially capable of
offering switched services include CLECs, cable television companies, electric
utilities, other long distance carriers, microwave carriers, wireless
telephone system operators and large customers who build private networks.
Many facilities-based CLECs and long distance carriers, for example, have
committed substantial resources to building their networks or to purchasing
CLECs or IXCs with complementary facilities. By building or purchasing a
network or entering into interconnection agreements or resale agreements with
ILECs, including RBOCs, a facilities-based provider can offer single source
local and long distance services similar to those offered by the Company. Such
additional alternatives may provide such competitors with greater flexibility
and a lower cost structure than the Company. In addition, some of these CLECs
and other facilities-based providers of local exchange service are acquiring
or being acquired by IXCs. While certain of these combined entities, such as
the entity to be formed by the proposed merger of WorldCom, Inc. and MCI, may
continue to be subject to the joint marketing restrictions in the
Telecommunications Act, others will not be subject to such restrictions. Any
of these combined entities may have resources far greater than those of the
Company. These combined entities may provide a bundled package of
telecommunications products, including local and long distance telephony, that
is in direct competition with the products offered by the Company.
With respect to wireless telephone system operators, the FCC has authorized
cellular, PCS, and other CMRS providers to offer wireless services to fixed
locations, rather than just to mobile customers, in whatever capacity such
CMRS providers choose. Previously, cellular providers could provide service to
fixed locations only on an ancillary or incidental basis. This authority to
provide fixed as well as mobile services will enable CMRS
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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 wireless telephone service. In
addition, in August 1996, the FCC promulgated regulations that classify CMRS
providers as telecommunications carriers, thus giving them the same rights to
interconnection and reciprocal compensation under the Telecommunications Act
as other non-LEC telecommunications carriers, including the Company.
The Company will also face competition from other fixed wireless services,
including MMDS, LMDS and 38 GHz wireless communications systems, WCS, FCC Part
15 unlicensed wireless radio devices, and other services that use existing
point-to-point wireless channels on other frequencies. The FCC has announced
plans to hold an auction for LMDS licenses in all markets for the provision of
high capacity, wide-area fixed wireless point-to-multipoint systems. In
addition, the FCC has adopted rules to auction geographical area wide licenses
for the operation of fixed wireless point-to-multipoint communications
services in the 38 GHz band, although many 38 GHz licenses have already been
issued nationwide. The LMDS auction is scheduled to begin in February 1998 and
the 38 GHz auction is expected to occur later in 1998. The MMDS service, also
known as "wireless cable," also currently competes for metropolitan wireless
broadband services. At present, wireless cable licenses are used primarily for
the distribution of video programming and have only a limited capability to
provide two-way communications needed for wireless broadband
telecommunications services, but there can be no assurance that this will
continue to be the case. The FCC has initiated a proceeding to determine
whether to provide wireless cable operators with greater technical flexibility
to offer two-way services. The FCC also has indicated that it plans to propose
rules for the issuance of licenses in the 24 GHz band for DEMS, which also is
designed to offer high capacity, wide area fixed point-to-multipoint service,
and many 24 GHz DEMS licenses have already been issued nationwide. Finally,
the FCC has allocated a number of spectrum blocks for use by wireless devices
that do not require site or network licensing. A number of vendors have
developed such devices that may provide competition to the Company, in
particular for certain low data-rate transmission services.
Under the Telecommunications Act and related federal and state regulatory
initiatives, barriers to local exchange competition are being removed. The
availability of broad-based local resale and introduction of facilities-based
local competition are required before the RBOCs may provide in-region
interexchange long distance services. Also, the largest long distance carriers
(AT&T, MCI, Sprint and any other carrier with 5% or more of the pre-subscribed
access lines) are prevented under the Telecommunications Act from bundling
local services resold from an RBOC in a particular state with their long
distance services until the earlier of (i) February 8, 1999 or (ii) the date
on which the RBOC whose services are being resold obtains in-region long
distance authority in that state. The RBOCs are currently allowed to offer
certain in-region "incidental" long distance services (such as cellular, audio
and visual programming and certain interactive storage and retrieval
functions) and to offer virtually all out-of-region long distance services.
Section 271 of the Telecommunications Act prohibits an RBOC from providing
long-distance service that originates (or in certain cases terminates) in one
of its in-region states until the RBOC has satisfied certain statutory
conditions in that state and has received the approval of the FCC. The FCC to
date has denied each application for such approval, including the application
of Ameritech for in-region long distance authority in Michigan. The Company
anticipates that a number of RBOCs, including Ameritech and Bell Atlantic,
will file additional applications for in-region long distance authority in
certain states in 1998. The FCC will have 90 days from the date an application
for in-region long distance authority is filed to decide whether to grant or
deny the application. Based on continuing legal challenges, the Company does
not believe that any RBOC will provide in-region long distance services on a
significant basis prior to 1999.
Once the RBOCs are allowed to offer widespread in-region long distance
services, both they and the largest IXCs will be in a position to offer
single-source local and long distance services similar to those offered by the
Company. On December 31, 1997, a United States District Court judge in Texas
held unconstitutional certain sections of the Telecommunications Act,
including Section 271. This decision would permit the three RBOCs that are
parties in the case, including Bell Atlantic, immediately to begin offering
widespread in-region long distance services. Unless stayed or overturned on
appeal, this decision could have a material adverse effect on
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the Company. The FCC and certain IXCs have filed a request for a stay and the
Company expects that the FCC and certain IXCs will file appeals of the
decision with the United States Court of Appeals for the Fifth Circuit.
Although there can be no assurance as to the outcome of this litigation, the
Company believes that significant parts of the District Court decision may be
reversed or vacated on appeal.
While new business opportunities will be made available to the Company
through the Telecommunications Act and other federal and state regulatory
initiatives, regulators are likely to provide the ILECs with an increased
degree of flexibility with regard to pricing of their services as competition
increases. Although the Ameritech and Bell Atlantic/NYNEX resale agreements
contain certain pricing protections, including adjustments in the wholesale
rates to be consistent with any changes in the Ameritech and Bell
Atlantic/NYNEX retail rates, if the ILECs elect to lower their rates and
sustain lower rates over time, this may adversely affect the revenues of the
Company and place downward pressure on the rates the Company can charge. While
the Ameritech and Bell Atlantic/NYNEX resale agreements ensure that the
Company will receive any lower rate provided to any other reseller, under the
Bell Atlantic/NYNEX resale agreement if such lower rate is provided to a
reseller committing to both a longer term and a greater volume commitment, the
Company receives the lower rate, but must negotiate with Bell Atlantic a
reasonable transition to similar commitments. If the Company cannot
successfully negotiate such a transition with Bell Atlantic, then the Company
may be unable to maintain the lowest rate. The Company believes the effect of
lower rates may be offset by the increased revenues available by offering new
products and services to its target customers, but there can be no assurance
that this will occur. In addition, if future regulatory decisions afford the
LECs excessive pricing flexibility or other regulatory relief, such decisions
could have a material adverse effect on the Company.
Competition for the Company's products and services is based on price,
quality, network reliability, service features and responsiveness to customers
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. In addition, in December 1997 the FCC
issued rules to implement the provisions of the World Trade Organization
Agreement on Basic Telecommunications, which was drafted to liberalize
restrictions on foreign ownership of domestic telecommunications companies and
foreign telecommunications companies to enter domestic markets. The new FCC
rules are presently scheduled to go into effect in February 1998 and will make
it substantially easier for many non-U.S. telecommunications companies to
enter the U.S. market, thus further increasing the number of competitors. The
new rules will also give non-U.S. individuals and corporations greater ability
to invest in U.S. telecommunications companies, thus increasing the financial
and technical resources available to the Company and its existing and
potential competitors.
GOVERNMENT REGULATION
The Company is subject to varying degrees of federal, state, local and
international regulation. In the United States, the Company's provision of
local exchange services is regulated by the states. The Company must be
separately certified in each state to offer local exchange services. No state,
however, subjects the Company to price cap or rate-of-return regulation. FCC
approval is required for the resale of international facilities and services.
The FCC has determined that nondominant carriers, such as the Company, are
required to file interstate tariffs on an ongoing basis, setting forth the
Company's rates and operating procedures. Such tariffs can currently be
modified on one day's notice. The FCC recently issued regulations to eliminate
this tariff filing requirement for all nondominant carriers, such as the
Company and all other nondominant interexchange carriers (except possibly the
RBOCs in certain circumstances), effective in late 1997. Various carriers have
filed suit to overturn the FCC regulations, and the U.S. Court of Appeals for
the D.C. Circuit has stayed the regulations pending its decision in that
appeal, which is expected in the first half of 1998. The FCC has recently
ruled that RBOCs providing out-of-region long distance service through
separate subsidiaries from their local telephone operations qualify for
nondominant treatment. Out-of-region RBOC services provided through
unseparated entities,
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however, are subject to full dominant carrier regulation, including the
requirement to submit cost support with tariffs and to file tariffs on at
least 15 to 45 days' notice, depending on various factors. The FCC has
indicated that RBOC in-region service, when authorized, will be subject to
nondominant regulatory status. See "Risk Factors--Regulation and Risks of the
Telecommunications Act."
Legislation. On February 8, 1996, President Clinton signed into law the
Telecommunications Act, comprehensive federal telecommunications legislation
affecting all aspects of the telecommunications industry. The
Telecommunications Act establishes a national policy that promotes local
exchange competition. The Telecommunications Act requires that local and state
barriers to entry into the local exchange market be removed and establishes
broad uniform standards under which the FCC and the state commissions are to
implement local competition and co-carrier arrangements in the local exchange
market. Under certain conditions and subject to reasonable exceptions, ILECs
are now required to make available for resale to new entrants all services
offered by the LEC on a retail basis. The Telecommunications Act also imposes
significant obligations on the RBOCs and other ILECs, including the obligation
to interconnect their networks with the networks of competitors. Each ILEC is
required not only to open its network but also to "unbundle" the network. The
FCC issued regulations in August 1996 defining a minimum set of elements which
must actually be unbundled, and each state may augment this list if it wishes.
States have begun and, in a number of cases, completed regulatory proceedings
to determine the pricing of these unbundled network elements and services, and
the results of these proceedings will determine whether it is economically
attractive to use these elements.
The RBOCs have an added incentive to open their local exchange networks to
facilities-based competition because Section 271 of the Telecommunications Act
provides for the removal of the current ban on RBOC provision of in-region
inter-LATA toll service and equipment manufacturing. This ban will be removed
only after the RBOC demonstrates to the FCC, which must consult with the
Department of Justice and the relevant state commissions, that the RBOC has
(1) met the requirements of the Telecommunications Act's 14-point competitive
checklist and (2) entered into an approved interconnection agreement with one
or more unaffiliated, facilities-based competitors in some portion of the
state pursuant to which such competitors provide both business and residential
service (or that by a date certain no such competitors have "requested"
interconnection as defined in the Telecommunications Act). If the FCC
determines that the RBOC's entry into in-region provision of long distance in
that state is in the public interest and that the RBOC has met the 14-point
checklist, it must authorize the RBOC to provide such services. RBOC in-region
services must be provided through a separate subsidiary for three years,
unless extended by the FCC. The FCC to date has denied each such application
filed, including the application of Ameritech, the RBOC in three states where
the Company operates, for in-region long distance authority in Michigan. The
Company anticipates that a number of RBOCs, including Ameritech and Bell
Atlantic, will file additional applications in 1998. Based on continuing legal
challenges, the Company does not believe any RBOC will provide in-region long
distance services on a significant basis prior to 1999.
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 unbundled network elements at just and reasonable
rates; non-discriminatory access to its poles, ducts, conduits, and rights-of-
way; unbundled local loop transmission, unbundled local transport, and
unbundled local switching; non-discriminatory access to 911 services;
directory assistance, operator call completion services, and white pages
directory listings for competing local carriers' customers; non-discriminatory
access to call routing databases; number portability (i.e., the ability of a
customer to keep the same telephone number when switching local telephone
service providers); dialing parity (i.e., the ability of customers of one
telephone service provider to call customers of other providers without
dialing access codes); reciprocal compensation arrangements for the
termination of calls between competing local networks; and permitting resale
of its telecommunications services.
SBC Communications Inc., the parent of RBOCs in Oklahoma and other
southwestern states, filed a lawsuit in June 1997 challenging the
constitutionality of Section 271 and seeking to have it declared void. On
December 31, 1997, a United States District Court judge in Texas held
unconstitutional certain sections of the Telecommunications Act, including
Section 271. This decision would permit the three RBOCs that are parties in
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the case, including Bell Atlantic, immediately to begin offering widespread
in-region long-distance services. Unless stayed or overturned on appeal, this
decision could have a material adverse effect on the Company. The FCC and
certain IXCs have filed a request for a stay and the Company expects that the
FCC and certain IXCs will file appeals of the decision with the United States
Court of Appeals for the Fifth Circuit. Although there can be no assurance as
to the outcome of this litigation, the Company believes that significant parts
of the District Court decision may be reversed or vacated on appeal.
The Telecommunications Act is intended to eliminate state and local
statutory and regulatory barriers to entry, thus accelerating the process of
creating a competitive environment in all markets. This preemption of state
laws barring local competition and the relaxation of regulatory restraints
should enhance the Company's ability to expand its service offerings
nationwide. At the same time, the Telecommunications Act will also
substantially increase the competition the Company will face in its various
markets.
The Telecommunications Act permits the Company, as a telecommunications
carrier with less than 5% of nationwide presubscribed access lines, to offer
single-source combined packages of local and long distance services. In
contrast, AT&T, MCI and Sprint may not bundle in an RBOC's territory their
local services resold from an RBOC and in-region long distance service until
the earlier of (i) February 8, 1999 or (ii) the date the RBOC is authorized
under Section 271 to enter the inter-LATA long distance market in that state.
Federal Regulation. The Telecommunications Act in some sections is self-
executing, but in most cases the FCC must issue regulations that identify
specific requirements before the Company and its competitors can proceed to
implement the changes the Telecommunications Act prescribes. The Company
actively monitors all pertinent FCC proceedings and has participated in some
of these proceedings. The FCC already has completed most of these rulemaking
proceedings. The outcome of these various ongoing FCC rulemaking proceedings
or judicial appeals or such proceedings could materially affect the Company's
operations.
In May 1997, the FCC issued new regulations regarding the implementation of
the universal service program and the assessment of access charges on carriers
retaining access to local exchange networks. All telecommunications carriers,
including the Company, that provide interstate services are required to
contribute, on an equitable and nondiscriminatory basis, to the preservation
and advancement of universal service pursuant to a universal funding service
mechanism established by the FCC. Both the access charge and universal service
regimes were substantially revised. As a result of these changes, the costs of
business and multiple residential telephone lines are expected to increase. In
addition, the new regulations require a reseller, such as the Company, to
begin contributing to the universal service programs for low-income consumers
and high-cost, rural and insular areas on the basis of the reseller's
interstate and international revenues. Several parties have appealed various
parts of the new FCC rules, including the revenue basis on which contributions
are determined. On December 16, 1997, the FCC revised and approved universal
service contribution factors for the first quarter of 1998. In support of
high-cost and low-income universal service programs during the first quarter
of 1998, the FCC required carriers to contribute 3.19% of half of the revenues
collected from their interstate and international services during the first
half of 1997. In support of universal service programs for schools, libraries
and rural health care institutions, the FCC required carriers to contribute
0.72% of half of the revenues collected from their intrastate, interstate and
international services during the first half of 1997.
The Telecommunications Act provides that individual state utility
commissions can, consistent with FCC regulations, prohibit resellers from
reselling a particular service to specific categories of customers to whom the
ILEC does not offer that service at retail. In August 1996, the FCC issued
detailed regulations providing that many such limitations are presumptively
unreasonable and that states may enact such prohibitions on resale only in
certain limited circumstances. In particular, the FCC concluded that while it
would be permissible to prohibit the resale of certain residential or other
subsidized services to end users that would be ineligible to receive such
services directly from the LEC, all other "cross-class" selling restrictions,
including those on volume discount and flat-rated offerings to business
customers, would be presumed unreasonable. An ILEC may rebut this presumption,
however, by demonstrating that the class restriction is reasonable and
nondiscriminatory. The FCC also rejected claims by several ILECs to provide
for several exceptions to the general resale obligation. For
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instance, it refused to create a general exception for all promotional or
discounted offerings, including contract and customer-specific offerings. The
FCC did, however, conclude that short-term promotional prices (i.e., those
offered for 90 days or less) are not "retail rates" and thus are not subject
to the wholesale rate obligation. ILECs may not offer consecutive 90-day
promotions to avoid these resale obligations.
The Telecommunications Act also provides that state commissions shall be
given an opportunity to determine the wholesale rates for local
telecommunications services (i.e., the rates charged by ILECs to resellers
such as the Company) on the basis of retail rates less "avoided costs" (i.e.,
marketing, billing, collection and other administrative costs avoided by the
ILEC when it sells at wholesale). In August 1996, the FCC issued detailed
regulations establishing an interim default discount of 17% to 25%. Although
this portion of the FCC's rules has been overturned on appeal (see below), in
practice state commissions have generally adopted discount percentages that
fall within the 17-25% default range.
In August 1996, the FCC also issued regulations that, among other things,
set minimum standards governing the terms and prices of interconnection and
access to unbundled ILEC network elements. These regulations indirectly affect
the price at which the Company's new facilities-based competitors may
ultimately provide service. The Telecommunications Act provides that state
commissions shall determine the rates charged for such unbundled elements on
the basis of cost plus a reasonable profit. The FCC declined to issue detailed
regulations governing the relationship between these two pricing standards,
leaving the interpretation and implementation of the two standards to the
states. The Company is unable to predict the final form of such state
regulation, or its potential impact on the Company or the local exchange
market in general. At the same time, the FCC imposed minimum obligations
regarding the duty of ILECs to negotiate interconnection or resale
arrangements in good faith.
A number of RBOCs, state regulatory commissions and other parties filed
requests for reconsideration by the FCC of various parts of the rules
announced by the FCC in August 1996, including those provisions (a) limiting
competitors' ability to purchase for resale certain types of service that the
RBOC is no longer marketing to new customers ("grandfathered services"), and
(b) establishing pricing methodologies and interim default rates for resold
services and unbundled network elements. The FCC is conducting a proceeding to
consider the various petitions for reconsideration, and a decision is expected
in the first half of 1998. In addition, many of the same parties and certain
other parties have filed court appeals challenging the same FCC rules. In July
1997, the Eighth Circuit Federal Court of Appeals struck down certain parts of
the rules (including the provisions establishing pricing methodologies and
default rates for resold services and unbundled network elements). In October
1997, the same court issued an order clarifying that the RBOCs were not
required to rebundle unbundled network elements that competing carriers had
purchased separately. If upheld, this ruling would make it more difficult for
the Company and its competitors, including the Company and large IXCs, to use
rebundled unbundled network elements or the "UNE Platform" to enter and
compete in the local exchange market. The FCC, numerous IXCs and various other
parties filed petitions for certiorari with the U.S. Supreme Court, which
accepted the case for review on January 26, 1998. The Supreme Court is not
expected to issue a decision before the end of 1998. Some of the same parties
and certain other parties also have asked the FCC to reconsider these and
other regulations implementing the Telecommunications Act. On January 22,
1998, the Eighth Circuit ruled that the FCC cannot apply its local competition
pricing rules in reviewing applications of the RBOCs for authorization to
provide long distance service that originates and certain long distance
services that terminate in one of their in-region states. If upheld, this
decision would make it somewhat easier for the RBOCs to enter the market for
in-region long distance services and would make it more costly for facilities-
based competitors to enter the local exchange market. The Company cannot
predict the outcome of the FCC's reconsideration or the Supreme Court
proceedings.
On December 31, 1997, a United States District Court judge in Texas held
unconstitutional certain sections of the Telecommunications Act, including
Section 271, which prohibits an RBOC from providing long distance service that
originates or terminates in one of its in-region states until the RBOC has
satisfied certain statutory conditions in that state and has received the
approval of the FCC. This decision would permit the three RBOCs
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that are parties in the case, including Bell Atlantic, immediately to begin
offering widespread in-region long distance services. Unless stayed or
overturned on appeal, this decision could have a material adverse effect on
the Company. The FCC and certain IXCs have filed a request for a stay and the
Company expects that the FCC and certain IXCs will file appeals of the
decision with the United States Court of Appeals for the Fifth Circuit.
Although there can be no assurance as to the outcome of this litigation, the
Company believes that significant parts of the District Court decision may be
reversed or vacated on appeal.
In August 1997, the FCC issued rules transferring responsibility for
administering and assigning local telephone numbers from the RBOCs and a few
other LECs to a neutral entity in each geographic region in the United States.
In August 1996, the FCC issued new numbering regulations that (a) prohibit
states from creating new area codes that could unfairly hinder LEC competitors
(including the Company) by requiring their customers to use 10 digit dialing
while existing ILEC customers use 7 digit dialing, and (b) prohibit ILECs
(which are still administering central office numbers pending selection of the
neutral administrator) from charging "code opening" fees to competitors (such
as the Company) unless they charge the same fee to all carriers including
themselves. In addition, each carrier is required to contribute to the cost of
numbering administration through a formula based on net telecommunications
revenues. In July 1996, the FCC released rules to permit both residential and
business consumers to retain their telephone numbers when switching from one
local service provider to another (known as "number portability"). RBOCs were
required to implement number portability in the top 100 markets by October 1,
1997 and are required to complete it by December 31, 1998. In smaller markets,
RBOCs must implement number portability within six months of a request
therefore commencing December 31, 1998. Other LECs were required to implement
number portability by October 31, 1997 only in those of the top 100 markets
where the feature is requested by another LEC. Non-RBOC LECs are not required
to implement number portability in additional markets until December 31, 1998
and then only in markets where the feature is requested by another LEC. The
Company already offers number portability as it provides local service
obtained from the incumbent RBOCS. This allows customers to switch to the
Company's services and still retain their existing telephone numbers.
In addition, the FCC authorized cellular and other CMRS to provide for other
wireless services to fixed locations (rather than to mobile customers),
including offering wireless local loop service, in whatever capacity such
provider determines. Previously, many CMRS providers could provide fixed
services on only an ancillary or incidental basis. In addition, in August 1996
the FCC promulgated regulations that classify CMRS providers as
telecommunications carriers, thus giving them the same rights to
interconnection and reciprocal compensation under the Telecommunications Act
as other non-LEC telecommunications carriers, including the Company.
State Regulation. Historically, certain of the Company's resold local and
long distance services have been classified as intrastate and therefore
subject to state regulation. As its local service business and product lines
has expanded, the Company has offered more intrastate service and become
increasingly subject to state regulation. The Telecommunications Act maintains
the authority of individual state utility commissions to impose their own
regulation of local exchange services except as expressly provided in the
Telecommunications Act. In all states where certification is required, the
Company's operating subsidiaries are certificated as common carriers. In all
states, the Company believes that it operates with the appropriate state
regulatory authorization. The Company currently is authorized to provide
intrastate toll or a combination of local and intrastate toll service in more
than 40 states. These authorizations vary in the scope of the intrastate
services permitted.
The Telecommunications Act provides that the Company's resale agreements
must be submitted to the applicable state utility commission for approval, and
it places strict limitations on the bases on which a state commission can
reject such an agreement. If the state commission does not act within 90 days
after the agreement is submitted for approval, then the agreement is deemed
approved. In addition, if a state commission fails to act to enforce an
agreement, the FCC can (upon request of a party) take jurisdiction over the
matter. A state commission's decisions regarding implementation and
enforcement of an agreement are appealable to the federal district court in
that state.
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PROPERTIES
The Company leases 34 facilities, principally sales facilities, in Boston,
Massachusetts, Chicago, Illinois, Detroit, Michigan, Cleveland and Columbus,
Ohio and New York City, New York, as well as in a number of areas surrounding
such cities and in other significant urban areas in Michigan, New York and
Ohio and elsewhere in the states served by the Company. The Company maintains
its corporate headquarters in Chicago, Illinois. Although the Company's
facilities are adequate at this time, the Company believes that it will be
required to lease additional facilities, particularly in new metropolitan
areas where the Company enters RBOC resale agreements.
EMPLOYEES
As of December 31, 1997, the Company employed 1,071 people. The Company's
employees are not unionized, and the Company believes its relations with its
employees are good. In connection with its marketing and sales efforts and the
conduct of its other business operations, the Company uses third-party
contractors, some of whose employees may be represented by unions or
collective bargaining agreements. The Company believes that its success will
depend in part on its ability to attract and retain highly qualified
employees.
LEGAL MATTERS
From time to time the Company is party to routine litigation and proceedings
in the ordinary course of its business. The Company and its subsidiaries are
not aware of any current or pending litigation that the Company believes would
have a material adverse effect on the Company's results of operations or
financial condition. The Company and its subsidiaries continue to participate
in regulatory proceedings before the FCC and state regulatory agencies
concerning the authorization of services and the adoption of new regulations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table provides certain information regarding the executive
officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<S> <C> <C>
J. Thomas Elliott....... 51 Chairman of the Board, President, Chief Executive Officer and Director
Dennis B. Dundon........ 53 Chief Operating Officer
Ronald W. Gavillet...... 38 Executive Vice President, Strategy & External Affairs
Gerald J. Sweas......... 50 Executive Vice President and Chief Financial Officer
Ryan Mullaney........... 41 Executive Vice President, Sales and Marketing
Steven J. Parrish....... 42 Executive Vice President, Operations
Thomas A. Monson........ 37 Vice President, General Counsel and Secretary
Thad J. Pellino......... 36 Vice President, Business Assurance and Analysis
Neil A. Bethke.......... 37 Vice President, Information Systems
Ellen C. Craig.......... 59 Vice President, Regulatory Affairs
Lane Foster............. 53 Vice President, Human Resources and Organizational Development
Richard J. Brekka....... 36 Director
Dean M. Greenwood....... 54 Director
James P. Hynes.......... 50 Director
Donald J. Hofmann, Jr... 40 Director
William A. Johnston..... 45 Director
Ian M. Kidson........... 39 Director
Paul S. Lattanzio....... 34 Director
David C. Mitchell....... 56 Director
Eugene A. Sekulow....... 66 Director
</TABLE>
Each director serves until his successor is duly elected and qualified.
Officers serve at the discretion of the Board of Directors.
J. Thomas Elliott, Chairman of the Board, President and Chief Executive
Officer, has been the Chief Executive Officer since April 1996 and Chairman of
the Board since October 1997. Mr. Elliott joined the Company in 1995 as a
result of the Company's acquisition of Quest, a company which he co-founded.
From 1991 to 1993, Mr. Elliott was Senior Vice-President of Sales and
Marketing of Wiltel Communications Systems. From 1990 to 1991, Mr. Elliott was
President and Chief Executive Officer of Call Net Inc. (Canada's first
alternative long distance company) and Lightel Inc., its affiliate fiber optic
facility provider. Subsequently, these companies were combined to form Sprint
Canada. Mr. Elliott holds B.A. and M.A. degrees in economics from the
University of Windsor and is a member of the Executive Committee of the
Association for Local Telecommunications Services.
Dennis B. Dundon, Chief Operating Officer, joined the Company in April 1997.
From 1991 to 1996, Mr. Dundon served as President and Chief Executive Officer
of EMI Communications Corp. ("EMI"), a regional telecommunications company,
until EMI was acquired by Intermedia Communications, Inc. From June 1996 to
March 1997, Mr. Dundon served as Senior Vice President of Intermedia, a CLEC.
From 1988 to 1991, Mr. Dundon was President and owner of DBD Associates, Inc.,
a consulting firm providing services to the telecommunications sector. Mr.
Dundon is a past Chairman and Director of the Competitive Telecommunications
Association. Mr. Dundon holds a B.S. degree from Clarkson University and an
M.B.A. degree from the University of Rochester.
Ronald W. Gavillet, Executive Vice President, Strategy & External Affairs,
has performed the Company's legal, regulatory and strategic functions since
1994. Prior to joining the Company, Mr. Gavillet spent more than
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four years, from 1985 to 1987 and from 1992 to 1994, with MCI in a number of
senior legal and regulatory positions. Between these periods at MCI, Mr.
Gavillet was in private law practice representing competitive carriers such as
Teleport Communication Group, Inc., Centex Telemanagement Inc., Centel Corp.,
Sprint Corp. and Telesphere Communications Inc. Mr. Gavillet holds B.A. and
B.S. degrees from Southern Illinois University, a J.D. degree from Catholic
University of America's Columbus School of Law and a Master of Management
degree from Northwestern University's Kellogg School of Management and serves
on the Telecommunications Resellers Association Local Services Council.
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. Mr. Sweas
holds a B.B.A. degree from Loyola University in Chicago, Illinois and an
M.B.A. degree from the University of Wisconsin (Madison) and is a Certified
Public Accountant.
Ryan Mullaney, Executive Vice President, Sales and Marketing, joined the
Company in October 1996. From 1995 to 1996, Mr. Mullaney served as Vice
President, Sales, USA West for Citizens Telecom, a medium-sized
telecommunications company, where he managed sales in 13 states. From 1993 to
1995, Mr. Mullaney was Director of Member Development for McLeod
Telemanagement Organization, where his duties included management of the
company's field sales and service organization. From 1991 to 1993, Mr.
Mullaney was National Sales Director of Centex Telemanagement, responsible for
developing sales in the national market. Mr. Mullaney has a B.A. degree from
the University of Nevada, Las Vegas.
Steven J. Parrish, Executive Vice President, Operations, joined the Company
in January 1996 initially as a consultant and later assumed a full-time
position. Prior to joining the Company, Mr. Parrish spent more than 12 years
with Illinois Bell in various planning and operations positions. Mr. Parrish
moved to Ameritech in 1991 where he helped start the Information Industry
Services business unit as Vice President of Business Development and Vice
President of Marketing and Sales for Network Providers. Mr. Parrish holds a
bachelor's degree in electrical engineering from the University of Illinois
and an M.B.A. degree from the Illinois Institute of Technology.
Thomas A. Monson, Vice President, General Counsel and Secretary, joined the
Company in January 1997. From 1989 to 1996, Mr. Monson was Associate General
Counsel of Envirodyne Industries, Inc., a $650 million public company, where
he performed various corporate law, securities regulation, litigation and
corporate operations support activities. Mr. Monson holds a B.S. degree from
the University of Illinois and a J.D. degree from Harvard Law School.
Thad J. Pellino, Vice President, Business Assurance and Analysis, joined the
Company in August 1995. From 1988 through 1995, Mr. Pellino was with MCI where
he held a variety of marketing and business development positions, which
included responsibility for the design of customized telecommunication
packages for mid-size and long distance carriers. Mr. Pellino received his
bachelor's degree in marketing/business administration from the University of
Illinois.
Neil A. Bethke, Vice President, Information Systems, joined the Company
initially as a consultant in 1995 and assumed a full-time position in May
1996. From 1994 to 1996 Mr. Bethke served as principal for New Resources
Corporation, a medium-sized consulting company specializing in client/server
technology development for large service-oriented companies. From 1988 to
1994, Mr. Bethke served at Quantum Chemical Corporation and Sara Lee
Corporation as Director of MIS, responsible for the reengineering of business
processes through document routing and wide area network database management.
Mr. Bethke holds a B.S. degree from the University of Wisconsin.
Ellen C. Craig, Vice President, Regulatory Affairs, joined the Company in
April 1997. From 1994 to 1997, Ms. Craig served as a consultant to investment
banking and telecommunications companies on domestic and international
utilities and telecommunications issues. From 1989 to 1994, Ms. Craig served
as Chairman and Commissioner of the Illinois Commerce Commission. She holds a
B.A. degree from Cardinal Cushing College and a J.D. degree from The John
Marshall Law School.
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Lane Foster, Vice President, Human Resources and Organizational Development,
joined the Company in May 1997. From 1991 to 1996, Mr. Foster served as
Director of Human Resources and Corporate Real Estate for Nextel
Communications, a telecommunications company. From 1980 to 1991, Mr. Foster
served as Director of Human Resources for MCI Telecommunications. Mr. Foster
attended the University of North Dakota and graduated from the University of
Southern California--Center for Telecommunications Senior Leadership Program.
Richard J. Brekka, Director, has been a director of the Company since April
1994. Mr. Brekka served as Chairman of the Board of the Company from December
1996 until October 1997. Mr. Brekka is a Managing Partner of MW&I Partners, a
merchant banking fund, and has formed Dolphin Communications, L.P. to make
communications investments in the United States. From February 1992 until May
1997, he was a Managing Director of CIBC Wood Gundy Capital ("CIBC"), the
merchant banking division of Canadian Imperial Bank of Commerce, and a
director and the President of CIBC Wood Gundy Ventures, Inc., an indirect
wholly owned subsidiary of Canadian Imperial Bank of Commerce. Currently, Mr.
Brekka serves on the board of directors of Orion Network Systems, Inc.,
Telesystem International Wireless, Inc., and Epoch Networks, Inc. Mr. Brekka
received a B.S. degree in finance from the University of Southern California,
and an M.B.A. degree from the University of Chicago.
Dean M. Greenwood, Director, was elected as a director of the Company in
February 1997. Mr. Greenwood is Vice President of Prime Management Group and
has been an officer of that company since 1992. Mr. Greenwood is also a
Managing Director of Prime New Ventures. Mr. Greenwood holds a B.B.A. degree
and a J.D. degree from the University of Texas at Austin.
Donald J. Hofmann, Jr., Director, has been a director of the Company since
April 1994. Mr. Hofmann has been a General Partner of Chase Capital Partners
(formerly known as Chemical Venture Partners) since 1992. Chase Capital
Partners is the sole general partner of Chase Venture Capital Associates, L.P.
Prior to joining Chase Capital Partners, he was head of MH Capital Partners,
Inc., the equity investment arm of Manufacturers Hanover. Mr. Hofmann holds a
B.B.A. degree from Hofstra University and an M.B.A. degree from Harvard
Business School.
James P. Hynes, Director, was elected a director of the Company in December
1997. Mr. Hynes is a Managing Director of Fidelity Capital, a division of FMR
Corp., where he directed development of, and currently serves as the Chairman
of the Board of, COLT Telecom Group plc ("COLT"), a European provider of
competitive telecommunications services. Mr. Hynes has managed Fidelity
Capital's Telecommunications and Technology Group since 1990 and has served as
Chairman of the Board of COLT since its inception in 1992. Prior to joining
Fidelity Capital, Mr. Hynes was the President of Fidelity Telecommunications.
He has also held senior telecommunications and systems positions at Chase
Manhattan Corp., Bache and Co., Inc. and Continental Corporation. In his role
at Fidelity Capital, Mr. Hynes serves on the Board of Directors of several
companies, and directed the development of, and serves as the Chairman of,
MetroRED Telecommunications S.A., a provider of competitive telecommunications
services in Latin America.
William A. Johnston, Director, was elected a director of the Company in June
1994. Mr. Johnston has been a Managing Director of HarbourVest Partners, LLC
since January 1997. HarbourVest Partners, LLC was formed by the management
team of Hancock Venture Partners, Inc., where Mr. Johnston had served in
various capacities since 1983. Currently, Mr. Johnston serves on the advisory
boards of The Centennial Funds, Austin Ventures, and Highland Capital
Partners, as well as on the board of directors of Epoch Networks, Inc., Golden
Sky Systems, Inc., The Marks Group, Inc., and MultiTechnology Corp.
Internationally, he serves on the board of directors of Esprit Telecom Group
plc. Mr. Johnston received a B.A. degree from Colgate University and an M.A.
degree from Syracuse University School of Management.
Ian M. Kidson, Director, has served as a director of the Company since April
1997. Mr. Kidson is a Managing Director of CIBC Capital Partners, the merchant
banking division of the Canadian Imperial Bank of Commerce. He joined CIBC in
1984. Currently, Mr. Kidson serves on the board of directors of JBK Arena Co.
and Interactive Media Corporation. Mr. Kidson received a B.S.C. degree and an
M.B.A. degree from McMaster University.
56
<PAGE>
Paul S. Lattanzio, Director, was appointed a director of the Company in
August 1995. Mr. Lattanzio served as a Managing Director of BT Capital
Partners, Inc., an affiliate of Bankers Trust New York Corp. until September
1997. He continues to provide consulting services to BT Capital Partners, Inc.
and acts as its representative with respect to its investment in USN. Mr.
Lattanzio was employed by BT Capital Partners, Inc. or an affiliate from 1984.
Currently, Mr. Lattanzio serves on the board of directors of Administaff,
Inc., an employee leasing company, and of Genesis Teleserve, a teleservices
company. Mr. Lattanzio received his B.S. degree in economics from the
University of Pennsylvania's Wharton School of Business.
David C. Mitchell, Director, was elected a director of the Company in
December 1997. Mr. Mitchell serves as an adviser to RCN Corporation, a single-
service, facilities-based provider of telecommunications services to the
residential market, and is a director of Commonwealth Telephone Enterprises,
Inc., a provider of telephone and related services, and of Cable Michigan,
Inc., a cable operator. RCN Corporation and Cable Michigan, Inc. were spun off
from C-TEC Corporation, where Mr. Mitchell had served as an adviser and
director since 1993, with C-TEC Corporation then changing its name to
Commonwealth Telephone Enterprises, Inc. Prior to joining C-TEC, Mr. Mitchell
was with Personal Sound Technologies and Frontier Corporation. Mr. Mitchell is
also on the board of Marine Midland Bank-Rochester, Finger Lakes Long Term
Care Insurance Co. and IBS International Corp.
Eugene A. Sekulow, Director, was elected a director of the Company in August
1995. Mr. Sekulow served as Executive Vice President of NYNEX Corporation from
December 1991 to 1993. From 1986 to 1991, he served as President of NYNEX
International Company. Since his retirement from NYNEX in 1993, Mr. Sekulow
has founded his own telecommunications consultancy where he has been retained
by European, U.S., Japanese, Southeast Asian and Canadian companies.
Currently, Mr. Sekulow serves on the board of directors of RSL Communications,
Inc. Mr. Sekulow attended the University of Stockholm and the University of
Oslo. He earned an M.A. degree in political science and economics and a Ph.D.
degree from Johns Hopkins University.
Currently, certain non-employee directors are designated by certain
stockholders pursuant to existing agreements. See "Certain Relationships and
Related Transactions." Following the consummation of the Offerings, such right
to designate directors will be terminated.
The Board has approved a plan, effective upon consummation of the Offerings,
pursuant to which the Board will be comprised of (i) current members J. Thomas
Elliott, Richard J. Brekka, Donald J. Hofmann, Jr., James P. Hynes, William A.
Johnston, Ian M. Kidson, Paul S. Lattanzio, David C. Mitchell, and Eugene A.
Sekulow; and (ii) Dennis B. Dundon, currently the Chief Operating Officer of
the Company, and Ronald W. Gavillet, currently Executive Vice President,
Strategy & External Affairs of the Company. Prior to or following consummation
of the Offerings, the Company intends to nominate an additional independent
director for election to the Board. The Board has also agreed that at the
first annual meeting of stockholders following consummation of the Offerings,
the size of the Board will be reduced to nine members, and Messrs. Hofmann,
Kidson and Lattanzio will not stand for reelection to the Board.
The Company is required by the terms of the 14% Senior Note Indenture (as
defined) to elect a disinterested director with experience in the
telecommunications industry by March 31, 1998. The identity of the independent
director has not yet been determined and may not be determined until after
completion of the Offerings.
CLASSIFIED BOARD OF DIRECTORS
The Company's Restated Certificate of Incorporation will provide for a
classified Board of Directors consisting of three classes as nearly equal in
number as possible with the directors in each class serving staggered three-
year terms. Upon the consummation of the Offerings, the Class I directors will
be Donald J. Hofmann, Jr., Ian M. Kidson, Paul S. Lattanzio; the Class II
directors will be Richard J. Brekka, Dennis B. Dundon, Ronald W. Gavillet and
Eugene A. Sekulow; and the Class III directors will be J. Thomas Elliott,
William A. Johnston, David C. Mitchell and James P. Hynes. The Company intends
to nominate an additional independent director to serve as a Class I director
prior to or following consummation of the Offerings. The terms of the Class I,
II and
57
<PAGE>
III directors will expire initially in 1998, 1999 and 2000, respectively. At
each annual meeting of the stockholders of the Company, the successors to the
class of directors whose term expires at such meeting will be elected to hold
office for a term expiring at the annual meeting of stockholders held in the
third year following the year of their election. The Board has agreed that at
the first annual meeting of stockholders following the consummation of the
Offerings the size of the Board will be reduced to nine members, and Messrs.
Hofmann, Kidson and Lattanzio will not stand for reelection to the Board. See
"Description of Capital Stock."
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has established an Audit Committee, a Finance Committee and a
Compensation Committee. Each of these committees is responsible to the full
Board of Directors, and their activities are therefore subject to approval of
the Board of Directors. The functions performed by these committees are
summarized below.
The Audit Committee consists of Messrs. Hofmann, Greenwood and Sekulow. The
Audit Committee is responsible for reviewing the internal accounting controls
of the Company, meeting and conferring with the Company's certified public
accountants and reviewing the results of the accountants' auditing engagement.
The Finance Committee consists of Messrs. Brekka, Elliott, Hofmann, Johnston
and Lattanzio. The Finance Committee is responsible for evaluating the
Company's capital requirements and overseeing the Company's efforts at meeting
its financial needs through capital markets transactions.
The Compensation Committee consists of Messrs. Brekka, Johnston and
Lattanzio. The Compensation Committee establishes compensation and benefits
for the Company's senior executives. The Committee also determines the number
and terms of stock options granted to employees, directors and consultants of
the Company under the Company's stock option plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee consists of Messrs. Brekka, Johnston
and Lattanzio, none of whom is currently an employee or officer of the
Company. No executive officer of the Company served during fiscal year 1996 as
a member of a compensation committee or as a director of any entity of which
any of the Company's directors serves as an executive officer.
DIRECTORS' COMPENSATION
The Company's directors currently do not receive any cash compensation for
service on the Board of Directors or any committees thereof, but non-employee
directors are reimbursed for certain expenses in connection with attendance
for Board and committee meetings. Following the consummation of the Offerings,
the Company's non-employee directors will receive customary compensation and
will be reimbursed for out-of pocket expenses incurred in connection with
attending meetings.
58
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information concerning the cash and
non-cash compensation during fiscal year 1996 earned by or awarded to the
Chief Executive Officer and 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
YEAR SALARY BONUS COMPENSATION
---- -------- -------- ------------
<S> <C> <C> <C> <C>
J. Thomas Elliott.................... 1997 $195,000 $ 97,500(1) --
President and Chief Executive
Officer 1996 182,500 97,500(2) --
1995(3) 139,165 -- $75,000
Ronald W. Gavillet................... 1997 185,000 92,500(1) 15,000(4)
Executive Vice President, Strategy &
External Affairs 1996 167,600 92,500(2) --
1995 135,000 50,000(5) --
Ryan Mullaney........................ 1997 125,000 120,062(6) --
Executive Vice President, Sales 1996 21,634 25,000 --
1995(7) -- -- --
Gerald J. Sweas...................... 1997 150,000 60,000(1) --
Executive Vice President & Chief
Financial Officer 1996 14,423 20,000(2) --
1995(8) -- -- --
Steven J. Parrish.................... 1997 142,200 56,000(1) --
Executive Vice President, Operations 1996 49,539 -- --
1995(9) -- -- --
</TABLE>
- --------
(1) Represents estimated bonus earned with respect to 1997 to be paid in 1998.
(2) Represents bonus earned with respect to 1996 and paid in 1997.
(3) Includes Mr. Elliott's compensation as an officer of Quest America, LP
prior to the acquisition of its business by the Company. The $75,000
included as other compensation represents the amount Mr. Elliott received
for consulting service to the Company prior to the Company's acquisition
of the business of Quest America, LP.
(4) Represents payment with respect to vacation accrued in 1996.
(5) Represents amounts paid in 1996 with respect to bonuses earned in prior
periods, primarily in 1995.
(6) $101,562 has been paid and $18,500 has been estimated.
(7) Mr. Mullaney commenced employment with the Company in October 1996.
(8) Mr. Sweas commenced employment with the Company in November 1996.
(9) Mr. Parrish commenced employment with the Company in January 1996.
59
<PAGE>
OPTION GRANTS
The following table sets forth the aggregate number of stock options granted
to each of the Named Executive Officers during the fiscal year ended December
31, 1997. Options are exercisable for Common Stock of the Company.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATE OF STOCK
NUMBER OF PERCENT OF PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM ($)(1)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME GRANTED(#) FISCAL YEAR (%) ($/SHARE) DATE 5% 10%
---- ---------- --------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
J. Thomas Elliott....... 230,000 9.91 8.80 9/4/04 3,215,400 4 ,903,600
Ronald W. Gavillet...... 230,000 9.91 8.80 9/4/04 3,215,400 4,903,600
Ryan Mullaney........... 75,000 3.23 8.80 9/4/04 1,048,500 1,599,000
Gerald J. Sweas......... 100,000 4.31 8.80 9/4/04 1,398,000 2,132,000
Steven J. Parrish....... 47,000 2.03 8.80 9/4/04 657,060 1,002,040
</TABLE>
- --------
(1) The information disclosed assumes, solely for purposes of demonstrating
potential realizable value of the options, that the per share fair market
value of the Common Stock as of December 31, 1997 equals the initial
public offering price and increases at the rate indicated, effective as of
December 31 of each subsequent full calendar year during the option term.
However, there is no established trading market for the Common Stock and
no representation is made that the rates of increase in value can or will
be achieved.
The following table sets forth certain information concerning the exercise
of stock options by the Named Executive Officers during the fiscal year ended
December 31, 1997 and the December 31, 1997 aggregate value of unexercised
options held by each of the Named Executive Officers.
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY OPTIONS
UNEXERCISED OPTIONS AT AT FISCAL
SHARES FISCAL YEAR-END (#) YEAR-END ($)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
J. Thomas Elliott....... -- -- 114,705/489,545 1,932,779/6,259,333
Ronald W. Gavillet...... -- -- 133,940/414,650 2,258,429/4,997,353
Ryan Mullaney........... -- -- 37,500/112,500 480,500/1,095,500
Gerald J. Sweas......... -- -- 55,000/155,000 707,250/1,527,250
Steven J. Parrish....... -- -- 40,250/74,000 678,213/840,350
</TABLE>
- --------
(1) The information disclosed assumes, solely for purposes of illustrating the
value of in-the-money options, that the per share fair market value of the
Common Stock as of December 31, 1997 equals the initial public offering
price. However, there is no established trading market for the Common
Stock.
BENEFIT PLANS
1994 Amended and Restated Stock Option Plan
In September 1996, the Board of Directors adopted, and the stockholders
subsequently approved, the Amended and Restated 1994 Stock Option Plan (the
"1994 Plan"), which was originally adopted by the Board of Directors and
subsequently approved by the stockholders in September 1994. A total of
1,004,520 shares of 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
60
<PAGE>
Company and its affiliates and to promote the success of the Company's
business. The 1994 Plan is administered by a committee appointed by the Board
of Directors. 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 Common Stock issued to any
person exceeds $100,000, such options must be treated as nonqualified stock
options.
Options granted under the 1994 Plan generally become exercisable six months
after the date of the grant at a rate of 25% of the shares subject to the
option and thereafter, at a rate of 25% at the end of each six month period
for a total of two years, except that certain options granted to Messrs.
Sweas, Mullaney and Monson in connection with their employment agreements
become exercisable with respect to 50% on the one-year anniversary of the date
of grant and with respect to 25% on the 18-month and 24-month anniversaries of
the date of grant. Under the 1994 Plan, the per share exercise price of the
options shall be determined by the committee administering the 1994 Plan and
may be (i) fixed at the time of grant, (ii) float in accordance with a
predetermined formula or (iii) any combination thereof. The maximum term of a
stock option under the 1994 Plan is ten years. If an optionee terminates his
or her service for reasons other than death, disability, retirement,
resignation or discharge for cause, the optionee may exercise only those
option shares vested as of the date of termination. Further, if an optionee
retires without prior Board of Directors approval or is terminated for cause,
all options previously not exercised generally expire and are forfeited. In
addition, the Company has the option to repurchase all or any part of the
shares issued or issuable upon exercise, if an optionee's employment
terminates for any reason whatsoever. Options are subject to adjustment under
certain circumstances. In the event of a "Sale" or a "Qualified Public
Offering" (as defined in the 1994 Plan), the Committee has discretion to make
outstanding options immediately exercisable. Some of the option agreements
under the 1994 Plan provide that in the event of a Change in Control (as
defined in the 1994 Plan), the options shall automatically become immediately
exercisable.
The 1994 Plan may be amended at any time by the Board of Directors, although
certain amendments require the consent of the participants of the 1994 Plan.
The 1994 Plan will terminate in September 2004, unless earlier terminated by
the Board of Directors.
1996 Option Grants Outside of the 1994 Stock Option Plan
In connection with the issuance of the 9% Preferred Stock and the
consummation of the 1996 Private Placement, Messrs. Elliott, Gavillet,
Parrish, Pellino and Bethke were granted 182,340, 119,960, 6,000, 3,120 and
3,120 additional options, respectively, and certain other employees were
granted a total of 5,070 additional options, to purchase a corresponding
number of shares of Common Stock at an exercise price of $.15 per share. Such
options are exercisable only upon conversion from time to time of the 9%
Preferred Stock, in the case of all such employees, or, as the case may be
with respect to Messrs. Elliott and Gavillet, of the Convertible Notes, into
shares of Common Stock. In connection with the consummation of the Offerings
and the conversion of the 9% Preferred Stock, options to purchase 72,410
shares of Common Stock will become immediately exercisable.
Omnibus Securities Plan
In August 1997, the Board of Directors adopted and the stockholders approved
the Omnibus Securities Plan of USN Communications, Inc. (the "Omnibus
Securities Plan"). A total of 2,750,000 shares have been reserved for issuance
under the Omnibus Securities Plan. The purpose of the Omnibus Securities Plan
is to benefit the Company's stockholders by encouraging high levels of
performance by individuals whose performance is a key element in achieving the
Company's continued success, and to enable the Company to recruit, reward,
retain and motivate employees for the benefit of the Company and its
stockholders. Under the Omnibus Securities Plan, the Company may grant
incentive or non-qualified stock options, stock appreciation rights ("SARs"),
restricted stock awards, performance awards and other stock based awards.
Employees of the Company and its subsidiaries and non-employee directors of
the Company are eligible to participate in the Omnibus Securities Plan. The
Omnibus Securities Plan is administered by the Compensation Committee, which
determines among other things, the terms and recipients of the awards. The
Omnibus Securities Plan may be amended by the Board of Directors,
61
<PAGE>
although certain amendments require the consent of the participants. The
Omnibus Securities Plan will terminate in 2007 unless earlier terminated by
the Board of Directors. In the event of a change of control (as defined in the
Omnibus Securities Plan) all options and SARs become fully vested and
exercisable and restrictions on restricted stock lapse and pro rata portions
of performance awards become payable.
In September 1997, the Compensation Committee authorized the grant of stock
options to substantially all non-executive officer employees of the Company or
its subsidiaries. These options have an exercise price of $8.80 per share,
with one-third of the options vesting on the earlier of the completion of a
qualified public offering of the Company's Common Stock or the first
anniversary of the date of grant, and with an additional one-third of the
options vesting on each of the two anniversaries following the initial vesting
date. These options initially covered a total of 958,500 shares. In addition,
in September 1997, the Compensation Committee authorized the grant of options
for a total of 1,137,000 shares of Common Stock to the Company's 11 executive
officers and a grant of options for a total of 75,000 shares of Common Stock
to the Company's then Chairman. These options also have an exercise price of
$8.80 per share.
401(k) Plan
In January 1995, the Company adopted the Employee 401(k) Profit Sharing Plan
(the "401(k) Plan") covering all of the Company's employees. Pursuant to the
401(k) Plan, employees may elect to reduce their current compensation by up to
the lesser of 15% of eligible compensation or the statutorily prescribed
annual limit ($9,500 in 1996) and have the amount of such reduction
contributed to the 401(k) Plan. The 401(k) Plan permits, but does not require,
additional contributions to the 401(k) Plan by the Company on behalf of all
participants. The Company has not made any contributions to date. The 401(k)
Plan is intended to qualify under Section 401 of the Internal Revenue Code of
1986, as amended, so that contributions by employees or by the Company to the
401(k) Plan, and income earned on plan contributions, are not taxable to
employees until withdrawn, and contributions by the Company, if any, will be
deductible by the Company when made.
EMPLOYMENT AGREEMENTS
All of the Company's executive officers have entered into employment
agreements with the Company. Each agreement provides for an initial term of
two or three years and automatic one-year renewals, and sets forth a base
salary and target annual bonus. The 1997 annual base salaries for Messrs.
Elliott, Dundon, Gavillet, Sweas, Mullaney and Parrish were $195,000,
$185,000, $185,000, $150,000, $125,000 and $140,000, respectively. Each
agreement provides that the executive shall receive certain payments in the
event his or her employment is terminated other than for cause, including but
not limited to all amounts earned, accrued and owing to the executive and
certain severance payments. In addition, each agreement contains
noncompetition and nonsolicitation provisions.
The employment agreements also provide that, in the event of a Change of
Control, the options held by the executive shall become exercisable and any
restrictions on such options shall lapse. Upon a Change of Control, the
Company shall pay to each of Messrs. Elliott, Gavillet and Sweas, within the
10-day period following such Change of Control, an amount equal to the pro
rata portion on the annual bonus that would have been payable to such
executive during such year, assuming the achievement of all performance goals.
Under each employment agreement, a "Change in Control" occurs if (i) a person
or entity becomes the beneficial owner of 35% or more of the combined voting
power of the Company's securities, (ii) the current directors, or individuals
who are approved by two-thirds of the current directors, cease to constitute a
majority of the board of the Company or (iii) certain mergers or liquidations
of the Company occur.
Mr. Elliott's and Mr. Gavillet's agreements provide for certain anti-
dilution rights with respect to their ownership of common stock, including the
right, in the event the Company sells shares of any class of stock, to
purchase a certain percentage (3.8% for Mr. Elliott and 2.5% for Mr. Gavillet)
of such shares on the same terms and conditions as the shares being sold. In
addition, their agreements provide that if the current stockholders sell any
of their shares of capital stock of the Company to a third party under certain
circumstances, each of Messrs. Elliott and Gavillet has the right to sell the
same percentage of his shares of capital stock as the percentage of shares
that the current stockholders are selling, on the same terms and for the same
consideration.
62
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On August 18, 1997, in connection with the 1997 Private Placement, the
Company sold approximately 30,200 shares of Series A Preferred Stock, for an
aggregate purchase price of $30.2 million. The new equity was purchased by
existing Company stockholders and affiliates of certain stockholders. Such
Series A Preferred Stock will be converted into Common Stock concurrently with
the closing of the Offerings. In exchange for its Consent allowing the Company
to consummate the 1997 Private Placement, the Company paid a consent fee to
MLAM consisting of, among other things, warrants to purchase 145,160 shares of
Common Stock, at an exercise price of $.01 per share, and an option to
purchase the Consent Convertible Notes. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview."
On September 30, 1996, BT Securities Corporation, Chase Securities Inc. and
CIBC Wood Gundy Securities Corp. purchased a portion of the 14% Senior Notes,
the related warrants and the Convertible Notes from the Company pursuant to
the 1996 Private Placement. All of the 14% Senior Notes, the related warrants
and the Convertible Notes were immediately resold to MLGAFI, whose adviser is
an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated, one of the
Initial Purchasers in the 1997 Private Placement and one of the U.S.
Representatives of the Underwriters. BT Securities Corporation, Chase
Securities Inc. and CIBC Wood Gundy Securities Corp. are affiliates of BT
Capital Partners, Inc., Chase Venture Capital Associates, L.P. and CIBC Wood
Gundy Ventures, Inc., respectively, which are stockholders of the Company. See
"Stock Ownership." BT Securities Corporation, Chase Securities Inc. and CIBC
Wood Gundy Securities Corp. each received commissions of approximately
$188,000 of the $1,880,053 in connection with the 1996 Private Placement.
In September 1996, in connection with the 1996 Private Placement, the
Certificate of Incorporation of the Company was amended to provide for the
authorization of two classes of common stock, Class A Common Stock and Class B
Common Stock. Each outstanding share of common stock of the Company existing
on the date of the 1996 Private Placement was converted into one share of
Class A Common Stock. Prior to the consummation of the Offerings, the Restated
Certificate of Incorporation will authorize a single class of Common Stock and
each outstanding share of Class A Common Stock will be converted into one
share of Common Stock. See "Description of Capital Stock--Common Stock."
In connection with the 1996 Private Placement and the 1997 Private
Placement, by requisite vote, the Original Purchasers waived preemptive rights
and registration rights held by them pursuant to agreements entered into with
respect to earlier investments in the Company. Concurrent with the
consummation of the Offerings, the rights of the Original Purchasers pursuant
to such agreements, other than registration rights, will be terminated. In
connection with the 1996 Private Placement the Original Purchasers also
approved, and the Company took all necessary action to effect prior to the
consummation of the 1996 Private Placement, the amendment of the terms of the
Company's Series A 10% Senior Cumulative Preferred Stock (the "10% Series A
Preferred") and Series A-2 10% Cumulative Preferred Stock (the "10% Series A-2
Preferred") to provide for and effectuate the conversion of the shares of each
such series of Preferred Stock into newly issued shares of Class A Common
Stock, which conversion was consummated on September 30, 1996.
Also in connection with the 1996 Private Placement, the Original Purchasers
purchased from the Company shares of its 9% Preferred Stock, for an aggregate
purchase price of $10 million. The 9% Preferred Stock will be converted into
Common Stock concurrently with the closing of the Offerings.
In March 1996, the Company effected a recapitalization pursuant to which the
Company issued an aggregate of 1,101,570 shares of common stock (which was
converted to Class A Common Stock in September 1996) to the Original
Purchasers for no cash consideration in order to settle a dispute relating to
the price per share of the Common Stock paid by the Original Purchasers for
Common Stock purchased in 1995. The dispute stemmed from, in part, the
Company's operating performance as compared with the operating performance
projected by the Company at the time of such investment. As part of the
recapitalization, the Company also caused its then existing 10% Series A-2
Preferred Stock to be senior to the 10% Series A Preferred Stock with respect
to redemption, dividends and liquidation in further settlement of the dispute
referred to above.
63
<PAGE>
In 1997 and in January 1998, the Company has made advances totaling $279,745
to Ryan Mullaney, Executive Vice President, Sales and Marketing. These
advances are represented by demand notes that bear interest at the prime rate
and provide that a condition of the exercise of Mr. Mullaney's options is the
satisfactory arrangement for the contemporaneous repayment of the notes. In
December 1995, Mr. J. Thomas Elliott, Chairman of the Board, President and
Chief Executive Officer of the Company, executed an interest-free promissory
note in favor of the Company in the principal amount of $75,000. Such
promissory note was originally payable by January 2, 1997, but such date has
been extended to a date as yet undetermined.
64
<PAGE>
STOCK OWNERSHIP
The following table sets forth as of November 30, 1997 the number of shares
of 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 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>
PERCENTAGE
PERCENTAGE BENEFICIALLY OWNED ON
BENEFICIALLY OWNED A FULLY DILUTED BASIS (2)
------------------- ---------------------------
NAME AND ADDRESS OF NUMBER OF SHARES PRIOR TO AFTER PRIOR TO AFTER
BENEFICIAL OWNER(1) BENEFICIALLY OWNED OFFERINGS OFFERINGS OFFERINGS OFFERINGS
- ------------------- ------------------ --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Merrill Lynch Global 3,872,030 34.93 20.29 17.34 12.77
Allocation Fund, Inc.
(3)....................
800 Scudders Mill Road
Plainsboro, New Jersey
08536
HarbourVest Partners, 3,442,373 37.82 20.13 15.42 11.35
LLC (4)................
One Financial Center,
44th Floor
Boston, Massachusetts
02111
Chase Venture Capital 2,309,717 29.05 14.48 10.35 7.62
Associates, L.P. (5)...
380 Madison Ave., 12th
Floor
New York, New York
10017-2070
CIBC Wood Gundy 2,309,717 29.05 14.48 10.35 7.62
Ventures, Inc. (5).....
425 Lexington Avenue
New York, New York
10017-3903
BT Capital Partners, 1,710,566 22.04 10.85 7.66 5.64
Inc. (5)...............
130 Liberty Street
New York, New York
10006
Fidelity Entities (6)... 1,704,300 19.11 10.07 7.63 5.62
82 Devonshire Street
Boston, Massachussetts
02109
Prime New Ventures (7).. 569,679 7.70 3.70 2.55 1.88
600 Congress Suite 3000
One American Center
Austin, Texas 78701
J. Thomas Elliott (8) .. 205,955 2.82 1.35 * *
Ronald W. Gavillet (8).. 118,565 1.62 * * *
Richard J. Brekka (8)... 75,000 1.03 * * *
Dean M. Greenwood (9)... 569,679 7.70 3.70 2.55 1.88
James P. Hynes (9)...... 1,704,300 19.11 10.07 7.63 5.62
Donald J. Hofmann, Jr. 2,309,717 29.05 14.48 10.35 7.62
(9)....................
William A. Johnston (9). 3,442,373 37.82 20.13 15.42 11.35
Ian M. Kidson (9)....... 2,309,717 29.05 14.48 10.35 7.62
Paul S. Lattanzio ...... -- * * * *
David C. Mitchell....... -- * * * *
Ryan Mullaney (8)....... 37,500 * * * *
Steven J. Parrish (8)... 30,625 * * * *
Eugene A. Sekulow....... -- * * * *
Gerald J. Sweas (8)..... 55,000 * * * *
All directors and
executive officers of
the Company as a group
(20 persons)........... 10,915,251 84.39 52.14 48.89 35.99
</TABLE>
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- --------
*Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and includes voting and investment power with respect to the
shares. As to each stockholder, the percentage ownership is calculated by
dividing (i) the sum of the number of shares of Common Stock owned by such
stockholder plus the number of shares of Common Stock that such
stockholder would receive upon the exercise of currently exercisable
options and warrants or the conversion of convertible securities held by
such stockholder (the "Conversion Shares") by (ii) the sum of the total
number of outstanding shares of Common Stock plus the total number of such
stockholder's Conversion Shares. The number of shares deemed outstanding
gives effect to the conversion into Common Stock of all outstanding shares
of 9% Preferred Stock and Series A Preferred Stock, excluding shares of
Common Stock to be issued in respect of accrued but unpaid dividends.
(2) Percentage beneficially owned on a fully diluted basis as to each
stockholder is calculated by dividing such stockholder's shares by the sum
of the total number of outstanding shares of Common Stock plus the total
number of Conversion Shares held by all stockholders.
(3) Does not include the Consent Convertible Notes issued January 13, 1998.
(4) HarbourVest Partners IV--Direct Fund L.P. beneficially owns 1,738,073
shares of Common Stock. HarbourVest Partners V--Direct Fund L.P.
beneficially owns 1,704,300 shares of Common Stock. Both entities are
under the common control of HarbourVest Partners, LLC.
(5) Chase Venture Capital Associates, L.P., CIBC Wood Gundy Ventures, Inc. and
BT Capital Partners, Inc. are affiliates of The Chase Manhattan
Corporation, Canadian Imperial Bank of Commerce, and Bankers Trust New
York Corporation, respectively.
(6) FMR Corp., a Massachusetts corporation ("FMR") is the parent of its
wholly-owned subsidiary Fidelity Communications International, Inc. the
owner of 1,136,200 shares of Common Stock. FMR Corp. is also related to
Fidelity Investors Limited Partnership ("FILP"), the owner of 568,100
shares of Common Stock, through common ownership by certain shareholders
and employees of FMR, of the general partner of FILP and of limited
partnership interests in FILP.
(7) Enterprises & Telecommunications, L.P. beneficially owns 433,921 shares of
Common Stock. Prime VIII, L.P. beneficially owns 135,758 shares of Common
Stock. Both entities are under the common control of Prime New Ventures.
(8) These shares include exercisable options.
(9) Each director disclaims beneficial ownership of any shares of Common Stock
or Preferred Stock which he does not directly own.
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DESCRIPTION OF CAPITAL STOCK
The Company's current certificate of incorporation authorizes 30,300,000
shares of capital stock, consisting of 30,050,000 shares of Common Stock, par
value $.01 per share, of which 30,000,000 shares are designated as Class A
Common Stock and 50,000 shares are designated as Class B Common Stock, and
250,000 shares of Preferred Stock, par value $1.00 per share. In connection
with the Offerings, the Company's Certificate of Incorporation will be amended
and restated (the "Restated Certificate of Incorporation") to authorize the
issuance of 110,000,000 shares of capital stock, consisting of 100,000,000
shares of Common Stock, par value $.01 per share, and 10,000,000 shares of
Preferred Stock, par value $1.00 per share. Set forth below is a description
of the capital stock of the Company.
COMMON STOCK
As of November 30, 1997, assuming the conversion of all outstanding shares
of 9% Preferred Stock and Series A Preferred Stock into Common Stock
(excluding for this purpose the effect of Common Stock issued in connection
with such conversion in respect of accrued but unpaid dividends on the 9%
Preferred Stock and Series A Preferred Stock), there were 13,120,387 shares of
Class A Common Stock issued and outstanding, held of record by 35 stockholders
and 9,206,000 shares of Class A Common Stock issuable upon the exercise of
outstanding options and warrants and the conversion of Convertible Notes. Each
outstanding share of Class A Common Stock will be converted into one share of
Common Stock concurrently with the closing of the Offerings. There are no
shares of Class B Common Stock currently outstanding.
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. Holders of Common Stock
are entitled to one vote per share on all matters submitted to a vote of the
stockholders, including the election of directors. 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 Common Stock
ratably in proportion to the number of shares held by them.
TRANSFER AGENT AND REGISTRAR OF COMMON STOCK
The transfer agent and registrar for the Common Stock is Harris Trust and
Savings Bank.
LISTING
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "USNC."
PREFERRED STOCK
Currently, the Company has 180,000 shares of Preferred Stock designated for
issuance, of which 30,000 have been designated as 9% Preferred Stock and
150,000 of which have been designated as Series A Preferred Stock. There are
currently 10,920 and 45,209 shares outstanding of 9% Preferred Stock and
Series A Preferred Stock, respectively. All outstanding shares of 9% Preferred
Stock and Series A Preferred Stock will be converted concurrently with the
closing of the Offerings for an aggregate of 5,943,916 shares of Common Stock
(excluding for this purpose the effect of Common Stock issued in connection
with such conversion in respect of accrued but unpaid dividends on the 9%
Preferred Stock and Series A Preferred Stock subsequent to September 30,
1997).
Following the closing of the Offerings and the conversion of all outstanding
shares of Preferred Stock, the Board of Directors will have the authority to
issue up to 10,000,000 shares of Preferred Stock 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.
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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.
WARRANTS
As of September 30, 1997, the Company had outstanding warrants to purchase
an aggregate of 2,989,840 shares of Common Stock (the "Warrants"). The
Warrants were issued in connection with the 1996 Private Placement, the 1997
Private Placement and the Consent and are subject to all of the terms of their
respective warrant agreements.
Each Warrant entitles the holder thereof to purchase a specified number of
shares, subject to adjustment under certain circumstances, at an exercise
price of $.01 per share. Warrants to purchase an aggregate of 790,780 shares
of Common Stock are currently exercisable and may be exercised at any time on
or prior to September 30, 2003. Warrants to purchase an aggregate of 2,199,060
shares of Common Stock will become exercisable (i) February 15, 1998 or (ii)
earlier upon the occurrence of certain circumstances, and such warrants may be
exercised at any time on or prior to August 15, 2004.
The Company has authorized and reserved for issuance 2,989,840 shares of
Common Stock issuable upon the exercise of outstanding Warrants.
REGISTRATION RIGHTS
The Company has entered into registration rights agreements with respect to
the Warrants, the shares of Common Stock issuable upon exercise of the
Warrants, the Convertible Notes and the Consent Convertible Notes and the
shares of Common Stock issuable upon conversion of the Convertible Notes and
the Consent Convertible Notes. The Company is required to file and keep a
registration statement effective with respect to such securities for a
specified period of time. Additionally, the Company has entered into an
Amended and Restated Registration Agreement, dated as of June 22, 1995, as
subsequently amended, pursuant to which the Company has agreed to grant to the
Original Purchasers certain registration rights. Subject to certain
limitations, the Original Purchasers may require the Company to register for
public resale all or part of the Common Stock held by the Original Purchasers.
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 174 of the DGCL or (iv) for any transaction from which the
director derived an improper personal benefit.
This provision is intended to afford directors additional protection and
limit their potential liability from suits alleging a breach of the duty of
care by a director. As a result of the inclusion of such a provision,
stockholders may be unable to recover monetary damages against directors for
actions taken by them that constitute negligence or gross negligence or that
are otherwise in violation of their fiduciary duty of care, although it may be
possible to obtain injunctive or other equitable relief with respect to such
actions. If equitable
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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 By-Laws provide that directors and officers of the Company shall be
indemnified against liabilities arising from their service as directors and
officers to the fullest extent provided in Section 145 of the DGCL ("Section
145"). Additionally, the Company has entered or will enter into
indemnification agreements with each of its executive officers and directors
to reimburse them for certain liabilities incurred in connection with the
performance of their fiduciary duties. As permitted by Section 145, the
Company's Restated Bylaws provide that the Company shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
the corporation) by reason of the fact that he 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.
In accordance with Section 145, the Company's Restated Bylaws also provide
that the Company shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment in its
favor by reason of the fact that such person 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 Company 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.
The Company's Restated Bylaws further provide that to the extent that a
director or officer of the Company 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 the Restated Bylaws shall not
be deemed exclusive of any other rights to which the indemnified party may be
entitled; and that the Company is empowered to purchase and maintain insurance
on behalf of a director or officer of the Company against any liability
asserted against him in any such capacity, or arising out of his status as
such, whether or not the Company would have the power to indemnify him against
such liabilities under the Restated Bylaws.
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.
CERTAIN CHARTER AND BY-LAW PROVISIONS
The Restated Certificate of Incorporation will provide for the Board of
Directors to be divided into three classes, with staggered three-year terms.
As a result, only one class of directors will be elected at each annual
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meeting of stockholders of the Company, with the other classes continuing for
the remainder of their respective terms. See "Management--Classified Board of
Directors."
The Restated Certificate of Incorporation also will provide that directors
may be removed from office only for cause and only by the affirmative vote of
the holders of at least two-thirds of the total outstanding voting stock of
the Company. Vacancies on the Board of Directors, including those resulting
from an increase in the number of directors, may be filled only by the
remaining directors, not by stockholders.
Any action required or permitted to be taken by the stockholders of the
Company may be effected only at an annual or special meeting of stockholders
and will not be permitted to be taken by written consent in lieu of a meeting.
The Restated Certificate of Incorporation and the Restated By-Laws also will
provide that special meetings of stockholders may be called by a majority of
the Board of Directors of the Company. Stockholders will not be permitted to
call a special meeting or to require that the Board of Directors call a
special meeting of stockholders.
Certain provisions contained in the Restated Certificate of Incorporation,
including those relating to the size and classification of the Board of
Directors, the removal of directors, the prohibition on action by written
consent and the calling of special meetings, may only be amended by the
affirmative vote of the holders of at least two-thirds of the total
outstanding voting stock of the Company. In addition, the Restated Certificate
of Incorporation will provide that the Restated By-Laws may only be amended by
the affirmative vote of the holders of at least two-thirds of the outstanding
voting stock of the Company or by a vote of two-thirds of the members of the
Board of Directors in office.
The Restated Certificate of Incorporation and the Restated By-Laws will
establish an advance notice procedure for nomination, other than by or at the
direction of the Board of Directors, of candidates for election as directors,
as well as for other stockholder proposals to be considered at annual meetings
of stockholders. In general, notice of intent to nominate a director or raise
business at such meeting must be received by the Company not less than 60 nor
more than 90 days prior to the scheduled annual meeting, and must contain
certain specified information concerning the person to be nominated or the
matter to be brought before the meeting.
The foregoing provisions could have the effect of discouraging, delaying or
making more difficult certain attempts to acquire the Company or to remove
incumbent directors even if a majority of the Company's stockholders were to
deem such an attempt to be in the best interests of the Company and its
stockholders.
CERTAIN STATUTORY PROVISIONS
Section 203 of the DGCL contains certain provisions that may make more
difficult the acquisition of control of the Company by means of a tender
offer, open market purchases, proxy fight or otherwise. These provisions are
designed to encourage persons seeking to acquire control of the Company to
negotiate with the Board of Directors. However, these provisions could have
the effect of discouraging a prospective acquiror from making a tender offer
or otherwise attempting to obtain control of the Company. To the extent that
these provisions discourage takeover attempts, they could deprive stockholders
of opportunities to realize takeover premiums for their shares or could
depress the market price of shares. Set forth below is a description of the
relevant provisions of Section 203 of the DGCL. The description is intended as
summary only and is qualified in its entirety by reference to Section 203 of
the DGCL.
Section 203 of the DGCL prohibits certain "business combination"
transactions between a publicly held Delaware corporation, such as the Company
after the Offerings, and any "interested stockholder" for a period of three
years after the date on which such stockholder became an interested
stockholder, unless (i) the board of directors approves, prior to such date,
either the proposed business combination or the proposed acquisition of stock
which resulted in the stockholder becoming an interested stockholder, (ii)
upon consummation of the transaction in which the stockholder becoming an
interested stockholder, the interested stockholder acquires at least 85% of
those shares of the voting stock of the corporation which are not held by the
directors, officers or
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certain employee stock plans or (iii) on or subsequent to the consummation
date, the business combination with the interested stockholder is approved by
the board of directors and also approved at a stockholders' meeting by the
affirmative vote of the holders of at least two-thirds of the outstanding
shares of the corporation's voting stock other than shares held by the
interested stockholder. For purposes of Section 203, a "business combination"
includes a merger, asset sale or other transaction resulting in a financial
benefit to the interested stockholder, and an "interested stockholder" is a
person who, together with affiliates and associates, owns (or within three
years, did own) 15% or more of the corporation's voting stock. A corporation
may, at its option, exclude itself from the coverage of Section 203 by
amending its charter or by-laws by action of its stockholders to exempt itself
from coverage, provided that such by-law or charter amendment shall not become
effective until 12 months after the date it is adopted. The Company has not
elected to opt out of Section 203 of the DGCL pursuant to its terms.
DESCRIPTION OF CERTAIN INDEBTEDNESS
SENIOR NOTES
The Company issued $48.5 million in aggregate principal amount at maturity
of 14% Senior Notes on September 30, 1996 pursuant to an indenture between the
Company and Harris Trust and Savings Bank, as trustee (the "14% Senior Note
Indenture") and $152.7 million in aggregate principal amount at maturity of 14
5/8% Senior Notes on August 18, 1997 pursuant to an indenture between the
Company and Harris Trust and Savings Bank as trustee (the "14 5/8% Senior Note
Indenture" and, together with the 14% Senior Note Indenture, the "Senior Note
Indentures"). The Senior Notes are general, unsecured obligations of the
Company and rank pari passu in right of payment with all existing and future
senior unsecured and unsubordinated indebtedness of the Company, and is senior
in right of payment to all existing and future subordinated indebtedness of
the Company. The 14% Senior Notes were issued with original issue discount
and, until March 30, 2000, accrete interest at a rate of 14% per annum,
compounded semiannually, to an aggregate principal amount of $48.5 million.
The 14 5/8% Senior Notes were also issued with original issue discount and,
until August 15, 2000, will accrete interest at a rate of 14 5/8% per annum,
compounded semiannually, to an aggregate principal amount of $152.7 million.
After March 30, 2000 and August 15, 2000, respectively, cash interest will
accrue on the 14% Senior Notes and the 14 5/8% Senior Notes, and will be
payable on March 30 and September 30 of each year, commencing September 30,
2000, with respect to the 14% Senior Notes, and February 15 and August 15 of
each year, commencing February 15, 2001, with respect to the 14 5/8% Senior
Notes.
The Senior Note Indentures contain certain covenants which, among other
things, restrict the ability of the Company and certain subsidiaries to incur
additional indebtedness, pay dividends or make distributions in respect of the
Company's capital stock or make certain other restricted payments, make
investments, sell capital stock of certain subsidiaries, engage in sale and
leaseback transactions, create restrictions on the ability of certain
subsidiaries to make distributions on their capital stock or to issue capital
stock or to issue guarantees, 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.
From September 30, 2001 to September 30, 2003, the 14% Senior Notes will be
redeemable at the Company's option, in whole or in part, at the prices set
forth in the 14% Senior Note Indenture plus accrued and unpaid interest, if
any, to the redemption date. The 14 5/8% Senior Notes will be redeemable at
the Company's option, in whole or in part, on or after August 15, 2002 at the
redemption prices set forth in the 14 5/8% Senior Note Indenture plus accrued
and unpaid interest, if any, and Special Interest (as defined in the 14 5/8%
Senior Note Indenture), if any, to the date of redemption. The Company may
also redeem the 14% Senior Notes or the 14 5/8% Senior Notes on or prior to
September 30, 1999 or August 15, 2000, respectively, out of the proceeds of
any Public Equity Offering (as defined in the Senior Note Indentures). In the
event that the Company elects to redeem the 14 5/8% Senior Notes out of the
proceeds of any Public Equity Offering on or prior to September 30, 1999, the
holders of the 14% Senior Notes shall have the right, but not the obligation,
to cause the Company to offer to repurchase the 14% Senior Notes on a pro rata
basis together with the 14 5/8% Senior Notes and to receive the same
redemption premium as the holders of the 14 5/8% Senior Notes.
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In connection with the Consent, the Company has granted to holders of the
14% Senior Notes an option, for a specified period of time, to exchange, in
whole or in part, their 14% Senior Notes for 14 5/8% Senior Notes having an
accreted value equal to the accreted value of the 14% Senior Notes at the time
of exchange.
CONVERTIBLE NOTES
The Company issued $36.0 million in aggregate principal amount at maturity
of the Convertible Notes on September 30, 1996 pursuant to an indenture
between the Company and Harris Trust and Savings Bank as trustee (the
"Convertible Note Indenture" and, together with the indenture with respect to
the Consent Convertible Notes, the "Convertible Note Indentures"). The
Convertible Notes are general unsecured obligations of the Company, are
subordinated in right of payment to the Senior Notes and rank pari passu in
right of payment with all other existing and future unsecured indebtedness of
the Company. The Convertible Notes were issued with original issue discount
and will mature on September 30, 2004. 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. After September 30,
1999, interest on the Convertible Notes will accrue at the rate of 9% per
annum and will be payable semiannually on March 30 and September 30 of each
year, commencing March 30, 2000.
The Convertible Notes are convertible into Common Stock, at the option of
the holders thereof, at any time prior to redemption or fixed maturity of the
Convertible Notes, at a conversion price of $10.436 per share (the "Conversion
Price"), subject to adjustment under certain circumstances.
From September 30, 2000 to September 30, 2002 the Company may redeem all,
but not less than all, of the Convertible Notes, if the Closing Price (as such
term is 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 set forth in the Convertible Note Indenture plus accrued and
unpaid interest and Special Interest (as such term is defined in the
Convertible Note Indenture), if any, to the redemption date. On or after
September 30, 2002, the Convertible Notes will be redeemable at the Company's
option, in whole or in part, at a redemption price equal to 100% of the
principal amount plus accrued and unpaid interest, if any, and Special
Interest (as defined in the Convertible Note Indenture), if any, to the
redemption date. Under certain circumstances as described in the Convertible
Note Indentures, holders of Convertible Notes have an option to require the
Company to repurchase all or any part of such holder's Convertible Notes.
On January 13, 1998 MLAM purchased $13.0 million aggregate principal amount
at maturity of Consent Convertible Notes for a purchase price of $10.0
million. The Consent Convertible Notes have terms substantially similar to the
Convertible Notes but with a conversion price of $10.121 per share, subject to
adjustment under certain circumstances.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offerings, there has not been any public market for the Common
Stock and there can be no assurance that a significant public market for the
Common Stock will be developed or be sustained after the Offerings. Sales of
substantial amounts of shares of Common Stock in the public market or the
perception that such sales could occur could have a material adverse effect on
the price of the Common Stock or the future ability of the Company to raise
capital through an offering of equity securities. See "Risk Factors--Shares
Eligible for Future Sale."
After the Offerings, the Company will have outstanding 21,180,387 shares of
Common Stock (22,380,387 shares if the Underwriters' over-allotment options
are exercised in full). Of these shares, the 8,000,000 shares offered hereby
will be freely tradeable in the public market without restriction under the
Securities Act, unless such shares are held by "affiliates" of the Company, as
that term is defined in Rule 144, or are subject to certain lock-up agreements
as described below.
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The remaining 13,180,387 shares of Common Stock outstanding upon completion
of the Offerings will be "restricted securities" as that term is defined in
Rule 144 (the "Restricted Shares"). The Restricted Shares were issued and sold
by the Company in private transactions in reliance upon exemptions from
registration under the Securities Act. Restricted Shares may be sold in the
public market only if they are registered or if they qualify for an exemption
from registration under the Securities Act, including an exemption under Rule
144 which is summarized below.
Pursuant to "lock-up" agreements, except for the issuance by the Company of
Common Stock pursuant to existing stock option plans or upon exercise of
currently existing warrants, the Company, the directors and executive officers
of the Company and certain existing stockholders, who collectively hold
12,156,352 of such Restricted Shares, have agreed not to, directly or
indirectly, sell, offer to sell, grant any option for sale of, or dispose of,
any capital stock of the Company or any security convertible or exchangeable
into, or exercisable for, such capital stock, or, in the case of the Company,
file any registration statement with respect to any of the foregoing pursuant
to the Securities Act without the prior written consent of Merrill Lynch,
Pierce, Fenner & Smith Incorporated on behalf of the Underwriters for a period
of 180 days following the date of this Prospectus (the "Lock-Up Period"). MLAM
has agreed to substantially similar restrictions for a period of 180 days
following the date of this Prospectus.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares of the Company
are aggregated) who has beneficially owned Restricted Shares for at least one
year (including the holding period of any prior owner who is not an affiliate
of the Company) would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of one percent of the then
outstanding shares of Common Stock (approximately 21,180,387 shares
immediately after the Offerings) or the average weekly trading volume of the
Common Stock during the four calendar weeks preceding the filing of a report
on Form 144 with respect to such sale. Sales under Rule 144 are also subject
to certain manner of sale and notice requirements and to the availability of
current public information about the Company. Under Rule 144(k), a person who
is not deemed to have been an affiliate of the Company at any time during the
90 days preceding a sale and who has beneficially owned the shares proposed to
be sold for at least two years (including the holding period of any prior
owner who is not an affiliate of the Company) is entitled to sell such shares
without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
As of November 30, 1997, the Company had outstanding warrants to purchase an
aggregate of 2,989,840 shares of Common Stock at an exercise price of $.01 per
share. The Company also has outstanding Convertible Notes that are convertible
for 2,936,090 shares of Common Stock as of November 30, 1997 and Consent
Convertible Notes that are convertible for 988,142 of Common Stock as of
January 13, 1998. The Company has filed, or will file with respect to the
Consent Convertible Notes, and has agreed to keep effective a shelf
registration statement with respect to the warrants, the shares of Common
Stock issuable upon exercise of the warrants and the shares of Common Stock
issuable upon conversion of the Convertible Notes and the Consent Convertible
Notes.
As of December 31, 1997 on a pro forma basis giving effect to the Offerings,
there were 3,245,540 shares reserved for issuance upon the exercise of
outstanding options, 1,526,400 of which were vested. Of the vested options, as
of December 31, 1997 on a pro forma basis giving effect to the Offerings,
options for 623,560 shares were exercisable and options for an additional
649,600 shares become exercisable 180 days after the closing of the Offerings.
The remaining vested options covering 253,240 shares become exercisable at
such time, if any, as the Convertible Notes are converted into Common Stock.
The Company intends to file a Registration Statement on Form S-8 to register
an aggregate of 4,074,130 shares of Common Stock reserved for issuance under
applicable stock option plans. Such Registration Statement will become
effective automatically upon filing. Shares issued under such plans, after the
filing of the Registration Statement on Form S-8, may be sold in the open
market, subject, in the case of certain holders, to the Rule 144 limitations
applicable to affiliates, the above-referenced lock-up agreements and vesting
and exercisability restrictions imposed by the Company.
73
<PAGE>
The Original Purchasers are entitled to certain rights with respect to the
registration of approximately 12,387,648 shares of Common Stock for resale
under the Securities Act. See "Description of Capital Stock--Registration
Rights."
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States Federal tax
consequences of the acquisition, ownership, and disposition of Common Stock by
a holder that, for United States Federal income tax purposes, is not a "United
States person" (a "Non-United States Holder"). This discussion is based upon
the United States Federal tax law now in effect, which is subject to change,
possibly retroactively. For purposes of this discussion, a "United States
person" means a citizen or resident of the United States; a corporation,
partnership, or other entity created or organized in the United States or
under the laws of the United States or of any political subdivision thereof;
an estate whose income is includible in gross income for United States Federal
income tax purposes regardless of its source; or a "United States Trust." A
United States Trust is (a) for taxable years beginning after December 31,
1996, or if the trustee of a trust elects to apply the following definition to
an earlier taxable year, any trust if, and only if, (i) a court within the
United States is able to exercise primary supervision over the administration
of the trust and (ii) one or more United States trustees have the authority to
control all substantial decisions of the trust, and (b) for all other taxable
years, any trust whose income is includible in gross income for United States
Federal income tax purposes regardless of its source. This discussion does not
consider any specific facts or circumstances that may apply to a particular
Non-United States Holder. Prospective investors are urged to consult their tax
advisors regarding the United States Federal tax consequences of acquiring,
holding, and disposing of Common Stock, as well as any tax consequences that
may arise under the laws of any foreign, state, local, or other taxing
jurisdiction.
DIVIDENDS
Dividends paid to a Non-United States Holder will generally be subject to
withholding of United States Federal income tax at the rate of 30% unless the
dividend is effectively connected with the conduct of a trade or business
within the United States by the Non-United States Holder (or if certain tax
treaties apply, is attributable to a United States permanent establishment
maintained by such Non-United States Holder), in which case the dividend will
be subject to the United States Federal income tax on net income on the same
basis that applies to United States persons generally. In the case of a Non-
United States Holder which is a corporation, such effectively connected income
also may be subject to the branch profits tax (which is generally imposed on a
foreign corporation on the repatriation from the United States of effectively
connected earnings and profits). Non-United States Holders should consult any
applicable income tax treaties that may provide for a lower rate of
withholding or other rules different from those described above. A Non-United
States Holder may be required to satisfy certain certification requirements in
order to claim treaty benefits or otherwise claim a reduction of or exemption
from withholding under the foregoing rules.
GAIN ON DISPOSITION
A Non-United States Holder will generally not be subject to United States
Federal income tax on gain recognized on a sale or other disposition of Common
Stock unless (i) the gain is effectively connected with the conduct of a trade
or business within the United States by the Non-United States Holder or, if
tax treaties apply, is attributable to a United States permanent establishment
maintained by the Non-United States Holder, (ii) in the case of a Non-United
States Holder who is nonresident alien individual and holds the Common Stock
as a capital asset, such holder is present in the United States for 183 or
more days in the taxable year of disposition or either such individual has a
"tax home" in the United States or the gain is attributable to an office or
other fixed place of business maintained by such individual in the United
States, (iii) the Company is or has been a "United States real property
holding corporation" for United States Federal income tax purposes (which the
Company does not believe that it is or likely to become) and the Non-United
States Holder holds or has held,
74
<PAGE>
directly or indirectly, at any time during the five-year period ending on the
date of disposition, more than 5% of the Common Stock or (iv) the Non-United
States Holder is subject to tax pursuant to the Internal Revenue Code of 1986,
as amended, provisions applicable to certain United States expatriates. Gain
that is effectively connected with the conduct of a trade or business within
the United States by the Non-United States Holder will be subject to the
United States Federal Income tax on net income on the same basis that applies
to United States persons generally (and, with respect to corporate holders,
under certain circumstances, the branch profits tax) but will not be subject
to withholding. Non-United States Holders should consult any applicable
treaties that may provide for different rules.
FEDERAL ESTATE TAXES
Common Stock owned or treated as owned by an individual who is not a citizen
or resident of the United States at the date of death will be included in such
individual's estate for United States Federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the Internal Revenue Service and to each
Non-United States Holder the amount of dividends paid to, and the tax withheld
with respect to, such holder, regardless of whether any tax was actually
withheld. This information may also be made available to the tax authorities
of a country in which the Non-United States Holder resides.
Under current United States Treasury regulations, United States information
reporting requirements and backup withholding tax at a rate of 31% will
generally apply to dividends paid on the Common Stock to a Non-United States
Holder and to payments to a Non-United States Holder by a United States office
of a broker of the proceeds of a sale of Common Stock unless the holder
certifies its Non-United States Holder status under penalties of perjury or
otherwise establishes an exemption. Information reporting requirements (but
not backup withholding) will also apply to payments of the proceeds of sales
of Common Stock by foreign offices of United States brokers, or foreign
brokers with certain types of relationships to the United States, unless the
broker has documentary evidence in its records that the holder is a Non-United
States Holder and certain other conditions are met, or the holder otherwise
establishes an exemption.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the Non-United
States Holder's United States Federal income tax liability, provided that the
required information is furnished to the Internal Revenue Service.
On October 10, 1997, final Treasury Regulations were published in the
Federal Register concerning the withholding of tax and reporting for certain
amounts paid to Non-United States Holders. These Treasury Regulations are
generally effective for payments made after December 31, 1998. Among other
things, such Treasury Regulations require a withholding agent, such as the
Company, to have documentary evidence in its records that the holder is a Non-
United States Holder eligible for treaty benefits in order to reduce the rate
of withholding pursuant to such treaty. Non-United States Holders would
generally be required to provide new certificates documenting their foreign
status by December 31, 1999 where the Company holds documentation given under
the prior Regulations. In addition, such Regulations provide for withholding
and information reporting rules where a foreign partnership, qualified
intermediary or certain other agents provide documentation (or fail to provide
documentation) on behalf of the beneficial owner of Common Stock. Prospective
investors should consult their tax advisors concerning the effect of such
Treasury Regulations on their ownership of Common Stock.
75
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"U.S. Purchase Agreement") between the Company and each of the underwriters
named below (the "U.S. Underwriters"), the Company has agreed to sell to each
of the U.S. Underwriters, and each of the U.S. Underwriters has severally
agreed to purchase from the Company, the aggregate number of shares of Common
Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITERS SHARES
----------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...........................................
Cowen & Company.................................................
Donaldson, Lufkin & Jenrette Securities Corporation.............
---------
Total...................................................... 6,400,000
=========
</TABLE>
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Cowen
& Company and Donaldson, Lufkin & Jenrette Securities Corporation are acting
as representatives (the "U.S. Representatives") of the U.S. Underwriters.
The Company has also entered into a purchase agreement (the "International
Purchase Agreement") with certain underwriters outside the United States and
Canada (the "International Managers" and, together with the U.S. Underwriters,
the "Underwriters"), for whom Merrill Lynch International, Cowen International
L.P. and Donaldson, Lufkin & Jenrette International are acting as
representatives (the "International Representatives"), providing for the
concurrent offer and sale of 1,600,000 shares of Common Stock in the
International Offering. The closings with respect to the U.S. Offering and the
International Offering are conditioned upon one another.
The U.S. Underwriters have advised the Company that they propose initially
to offer the shares of Common Stock to the public at the public offering price
set forth on the cover page of this Prospectus and to certain dealers at such
price less a concession not in excess of $ per share of Common Stock. The
U.S. Underwriters may allow, and such dealers may reallow, a discount not in
excess of $ per share of Common Stock on sales to certain other dealers.
After the initial public offering, the public offering price, concession and
discount may be changed. The public offering price, concession and discount
per share of Common Stock are identical under the U.S. Purchase Agreement and
the International Purchase Agreement.
The several U.S. Underwriters have agreed, subject to the terms and
conditions set forth in the U.S. Purchase Agreement, to purchase all of the
shares of Common Stock being sold pursuant to such agreement if any of the
shares of Common Stock being sold pursuant to such agreement are purchased.
Under certain circumstances the commitments of non-defaulting U.S.
Underwriters may be increased.
The U.S. Underwriters have advised the Company that they do not intend to
confirm sales of shares of Common Stock offered hereby to any accounts over
which they exercise discretionary authority.
The U.S. Underwriters and the International Managers have entered into an
Intersyndicate Agreement (the "Intersyndicate Agreement") that provides for
the coordination of their activities. Pursuant to the Intersyndicate
Agreement, the International Managers and any dealer to whom they sell shares
of Common Stock will not offer to sell or sell shares of Common Stock to
United States or Canadian persons, and the U.S. Underwriters and any dealer to
whom they sell shares of Common Stock will not offer to sell or sell shares of
Common Stock to non-United States or Canadian persons or to persons they
believe intend to resell to non-United States or Canadian persons, except, in
each case, for transactions pursuant to the Intersyndicate Agreement. The
Intersyndicate Agreement also provides, among other things, that sales may be
made between the U.S. Underwriters and the International Managers of such
number of shares of Common Stock as may be mutually agreed. The price of
76
<PAGE>
any shares of Common Stock so sold shall be the public offering price, less an
amount not greater than the selling concession.
The Company has granted to the U.S. Underwriters an option to purchase up to
an aggregate of 960,000 additional shares of Common Stock, exercisable in
whole or in part for 30 days after the date of this Prospectus, solely to
cover over-allotments, if any, at the public offering price, less applicable
underwriting discounts. To the extent that the U.S. Underwriters exercise this
option, the U.S. Underwriters have severally agreed, subject to certain
conditions, to purchase approximately the same percentage of shares of Common
Stock that the number of shares of Common Stock to be purchased by each of
them, as shown in the above table, bears to the total number of shares of
Common Stock initially offered hereby. The Company has granted to the
International Managers an option to purchase up to an aggregate of 240,000
additional shares of Common Stock, exercisable in whole or in part for 30 days
after the date of this Prospectus, solely to cover over-allotments, if any, on
terms similar to those granted to the U.S. Underwriters. All or a portion of
an over-allotment option in either of the Offerings may be allocated to cover
an over-allotment in the other Offering.
The Company has agreed to indemnify the U.S. Underwriters against certain
liabilities, including liabilities under the Securities Act and other
applicable securities laws, or to contribute to payments the U.S. Underwriters
may be required to make in respect thereof.
Pursuant to "lock-up" agreements, except for the issuance by the Company of
Common Stock pursuant to existing stock option plans or upon exercise of
currently existing warrants, the Company, its directors and executive officers
and certain holders of the Common Stock have agreed not to, directly or
indirectly, sell, offer to sell, grant any option for sale of, or dispose of,
any capital stock of the Company or any security convertible or exchangeable
into, or exercisable for, such capital stock, or, in the case of the Company,
file any registration statement with respect to any of the foregoing pursuant
to the Securities Act without the prior written consent of Merrill Lynch on
behalf of the Underwriters, for a period of 180 days following the date of
this Prospectus. See "Shares Eligible for Future Sale."
In connection with the Offerings, the U.S. Underwriters and the
International Managers may engage in transactions that stabilize, maintain or
otherwise affect the price of the shares of Common Stock. Specifically, the
U.S. Underwriters and the International Managers may over-allot the offering,
creating a short position. In addition, the U.S. Underwriters and the
International Managers may bid for, and purchase shares of Common Stock in the
open market to cover short sales or to stabilize the price of the shares of
Common Stock. Finally, the underwriting syndicate may reclaim selling
concessions allowed for distributing the shares of Common Stock in the
Offerings if the syndicate repurchases previously distributed shares of Common
Stock in syndicate covering transactions, stabilization transactions or
otherwise. Any of these activities may stabilize or maintain the market price
of the shares of Common Stock above independent market levels. The U.S.
Underwriters and the International Managers are not required to engage in
these activities and may end any of these activities at any time.
Prior to the Offerings, there has been no public market for the Common
Stock. The public offering price will be determined by negotiations among the
Company and the U.S. Representatives. Among the factors to be considered in
such negotiations are an assessment of the Company's recent results of
operations, the future prospects of the Company and its industry in general,
market prices of securities of companies engaged in activities similar to
those of the Company and prevailing conditions in the securities market. There
can be no assurance that an active market will develop for the Common Stock or
that the Common Stock will trade in the public market subsequent to the
Offerings at or above the public offering price.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "USNC."
At the Company's request, the U.S. Underwriters have reserved up to 800,000
shares for sale at the initial public offering price to certain of the
Company's employees, members of their immediate families and other individuals
who are business associates of the Company (including certain vendors and
consultants), in each case,
77
<PAGE>
as such parties have expressed an interest in purchasing such shares. The
number of shares available for sale to the general public will be reduced to
the extent these individuals purchase such reserved shares. Any reserved
shares not purchased will be offered by the U.S. Underwriters to the general
public on the same basis as the other shares offered hereby.
Prior to the consummation of the Offerings, MLGAFI, an affiliate of Merrill
Lynch, beneficially owned more than 10% of the Common Stock on a fully diluted
basis. Accordingly, the offering of the Common Stock will be conducted in
compliance with the requirements of Rule 2720 ("Rule 2720") of the Conduct
Rules of the National Association of Securities Dealers, Inc. ("NASD"). Under
the provisions of Rule 2720, the public offering price of the securities can
be no higher than that recommended by a "qualified independent underwriter"
meeting certain standards ("QIU"). In accordance with this requirement,
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") has assumed the
responsibilities of acting as QIU and will recommend a maximum public offering
price for the Common Stock in compliance with the requirements of Rule 2720.
In connection with the Offering, DLJ is performing due diligence
investigations and reviewing and participating in the preparation of this
Prospectus and the Registration Statement of which the Prospectus forms a
part. As compensation for the services of DLJ as QIU, the Company has agreed
to pay DLJ $5,000. The Company has agreed to indemnify DLJ in its capacity as
QIU. Pursuant to the provisions of Rule 2720, NASD members may not execute
transactions in Common Stock offered hereby to any accounts over which they
exercise discretionary authority without prior written approval of the
customer.
BT Alex Brown Incorporated, Chase Securities Inc., and CIBC Oppenheimer
Corp., which are affiliates of BT Capital Partners, Inc., Chase Venture
Capital Associates, L.P. and CIBC Wood Gundy Ventures, Inc., respectively, are
expected to be U.S. Underwriters in connection with the U.S. Offering. See
"Management," "Certain Relationships and Related Transactions" and "Stock
Ownership."
Certain of the U.S. Underwriters and their respective affiliates have
provided from time to time, and expect to provide in the future, financial
advisory and investment banking services for, and/or have normal banking
relationships with, the Company and its affiliates, for which they receive
customary compensation. In addition, Merrill Lynch and DLJ acted as initial
purchasers in connection with the 1997 Private Placement, for which they
received customary discounts.
78
<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the Offerings will be passed upon
for the Company by Skadden, Arps, Slate, Meagher & Flom (Illinois) and certain
legal matters will be passed upon for the Underwriters by Akin, Gump, Strauss,
Hauer & Feld, L.L.P., Washington, D.C.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1996
and 1995 and for the years ended December 31, 1996 and 1995 and the period
from April 20, 1994 (inception) to December 31, 1994 included in this
Prospectus have been audited by Deloitte & Touche LLP, independent auditors,
as stated in their report appearing herein, and are included in reliance upon
the report of such firm given upon their authority as experts in accounting
and auditing.
The consolidated financial statements of Hatten Communications Holding
Company, Inc. and Subsidiaries as of April 30, 1997 and 1996 and for the years
then ended, and the financial statements of Connecticut Mobilecom, Inc. as of
and for the year ended April 30, 1995, have been included in the Prospectus in
reliance upon the reports of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
The report of KPMG Peat Marwick LLP covering the April 30, 1997 consolidated
financial statements of Hatten Communications Holding Company, Inc. and
Subsidiaries contains an explanatory paragraph that states that the Company
executed a recapitalization of its stock and a refinancing of its existing
debt on May 23, 1997.
The financial statements of Connecticut Telephone and Communications
Systems, Inc. as of April 30, 1995 and for the fiscal year then ended included
in this Prospectus have been audited by Kostin, Ruffkess & Company, LLC,
independent auditors, as stated in their report appearing herein, and are
included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
79
<PAGE>
GLOSSARY
ACCESS CHARGES--The fees paid by IXCs to LECs for originating and
terminating long distance calls on their local networks.
CLEC (Competitive Local Exchange Carrier)--A company that provides its
customers with an alternative to the local telephone company for local
transport of private line, special access and interstate transport of switched
access telecommunications services.
CENTRAL OFFICES--The switching centers or central switching facilities of
the LECs.
CENTREX--Centrex is a service that offers features similar to those of what
is known as private branch exchange (PBX), except the equipment is located at
the carrier's premises and not at the premises of the customer. These features
include direct dialing within a given phone system, direct dialing of incoming
calls, and automatic identification of outbound calls. This is a value added
service that carriers can provide to a wide range of subscribers who do not
have the size or the funds to support their own on-site PBX.
CO-CARRIER STATUS--A relationship between competitive local exchange
carriers ("CLECs") that affords the same access to and rights on each other's
networks, and that provides access and services on an equal basis.
COLLOCATION--The ability of a CLEC to connect its network to the LEC's
central offices. Physical collocation occurs when a CLEC places its network
connection equipment inside the LEC's central offices. Virtual collocation is
an alternative to physical collocation pursuant to which the LEC permits a
CLEC to connect its network to the LEC's central offices at competitive
prices, even though the CLEC's network connection equipment is not physically
located inside the central offices.
DEDICATED LINES--Telecommunications lines dedicated or reserved for use
exclusively by particular customers along predetermined routes (in contrast to
telecommunications lines within the LEC's public switched network).
DEDICATED SERVICES--Special access, switched transport and private line
services.
FRAME RELAY--Frame Relay is a high-speed data packet switching service used
to transmit data between computers. Frame Relay supports data units of
variable lengths at access speeds ranging from 56kbs to 1.5 mbs. This service
is ideal for connecting LANS, but is not appropriate for voice and video
applications due to the variable delays that can occur. Frame Relay was
designed to operate at higher speeds on modern fiber optic networks.
ILECS (Incumbent Local Exchange Carriers)--Companies providing local
telephone services.
INTERCONNECTION DECISIONS--Rulings by the FCC announced in September 1992
and August 1993, which require the RBOCs and most other LECs to provide
interconnection in LEC central offices to any CLEC, long distance carrier or
end user seeking such interconnection for the provision of interstate special
access and switched access transport services.
LANS (Local Area Networks)--The interconnection of computers for the purpose
of sharing files, programs and various devices such as work stations, printers
and high-speed modems. LANs may include dedicated computers or file servers
that provide a centralized source of shared files and programs.
LATAS (Local Access and Transport Areas)--The geographically defined areas
in which LECs are authorized by the MFJ to provide local switched services.
LOCAL EXCHANGE AREAS--A geographic area determined by the appropriate state
regulatory authority in which local calls generally are transmitted without
toll charges to the calling or called party.
80
<PAGE>
LOCAL LOOP UNBUNDLING--Allows competitors to selectively gain access to ILEC
wires which connect ILEC central offices with customer premises.
POP (Point of Presence)--Location where a long distance carrier has
installed transmission equipment in a service area that serves as, or relays
calls to, a network switching center of that long distance carrier.
PRIVATE LINE--A private, dedicated telecommunications line connecting
different locations (excluding long distance carrier POPs).
PROVISIONING--The process of initiating a carrier's service to a customer.
SPECIAL ACCESS SERVICES--The lease of private, dedicated telecommunications
lines or "circuits" along the network of a LEC or a CLEC, which lines or
circuits run to or from the long distance carrier POPs. Examples of special
access services are telecommunications lines running between POPs of a single
long distance carrier, from one long distance carrier POP to the POP of
another long distance carrier or from a subscriber to its long distance
carrier POP. Special access services do not require the use of switches.
SWITCH--A sophisticated computer that accepts instructions from a caller in
the form of a telephone number. Like an address on an envelope, the numbers
tell the switch where to route the call. The switch opens or closes circuits
or selects the paths or circuits to be used for transmission of information.
Switching is a process of interconnecting circuits to form a transmission path
between users. Switches allow local telecommunications service providers to
connect calls directly to their destination, while providing advanced features
and recording connection information for future billing.
SWITCHED ACCESS SERVICES--The origination or termination of long distance
traffic between a customer premise and an IXC POP via shared local trunks
using a local switch.
SWITCHED TRANSPORT SERVICES--Transportation of switched traffic along
dedicated lines between the LEC central offices and interexchange POPs.
SWITCHED TRAFFIC--Telecommunications traffic along a switched network.
USOC (UNIVERSAL SERVICE ORDERING CODE)--Identifies a particular service or
equipment under tariff (not necessarily universal any longer).
81
<PAGE>
INDEX TO USN COMMUNICATIONS, INC. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
CONDENSED
CONSOLIDATED
FINANCIAL
STATEMENTS
(UNAUDITED)
FOR THE NINE
MONTH PERIODS
ENDING
SEPTEMBER 30,
1996 AND
SEPTEMBER 30,
1997 AND AS OF
DECEMBER 31,
1996.......... F-2
INDEPENDENT
AUDITORS'
REPORT........ F-8
CONSOLIDATED
FINANCIAL
STATEMENTS:
Consolidated
Balance
Sheets...... F-9
Consolidated
Statements
of
Operations.. F-10
Consolidated
Statements
of
Redeemable
Preferred
Stock....... F-11
Consolidated
Statements
of Common
Stockholders'
Deficit..... F-12
Consolidated
Statements
of Cash
Flows....... F-13
Notes to
Consolidated
Financial
Statements.. F-14
HATTEN COMMUNICATIONS HOLDING COMPANY, INC. AND SUBSIDIARIES
<CAPTION>
PAGE
----
<S> <C> <C>
INDEPENDENT
AUDITORS'
REPORT........ F-25
CONSOLIDATED
FINANCIAL
STATEMENTS:
Consolidated
Balance
Sheets at
April 30,
1997 and
1996........ F-26
Consolidated
Statements
of
Operations
for the
years ended
April 30,
1997 and
1996........ F-27
Consolidated
Statements
of
Stockholders'
Deficit for
the years
ended April
30, 1997 and
1996........ F-28
Consolidated
Statements
of Cash
Flows for
the years
ended April
30, 1997 and
1996........ F-29
Notes to
Consolidated
Financial
Statements.. F-30
CONNECTICUT TELEPHONE AND COMMUNICATION SYSTEMS, INC.
<CAPTION>
PAGE
----
<S> <C> <C>
INDEPENDENT
AUDITORS'
REPORT........ F-38
FINANCIAL
STATEMENTS:
Balance Sheet
at April 30,
1995........ F-39
Statement of
Income and
Deficit for
the year
ended April
30, 1995.... F-40
Statement of
Cash Flows
for the year
ended April
30, 1995.... F-41
Notes to
Financial
Statements.. F-42
CONNECTICUT MOBILECOM, INC.
<CAPTION>
PAGE
----
<S> <C> <C>
INDEPENDENT
AUDITORS'
REPORT........ F-45
FINANCIAL
STATEMENTS:
Balance Sheet
at April 30,
1995........ F-46
Statement of
Operations
for the year
ended April
30, 1995.... F-47
Statement of
Stockholders'
Deficit for
the year
ended April
30, 1995.... F-48
Statement of
Cash Flows
for the year
ended April
30, 1995.... F-49
Notes to
Financial
Statements.. F-50
</TABLE>
F-1
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER
30, DECEMBER
ASSETS 1997 31, 1996
------ ------------ -----------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents......................... $117,943,711 $60,818,478
Accounts receivable, net.......................... 15,445,860 3,004,408
Prepaid expenses.................................. 271,430 187,051
Other receivables................................. 338,502 172,567
------------ -----------
Total current assets............................ 133,999,503 64,182,504
Property and Equipment--Net......................... 12,604,307 3,507,350
Other Assets........................................ 32,553,221 10,362,438
------------ -----------
Total Assets.................................... $179,157,031 $78,052,292
============ ===========
<CAPTION>
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND COMMON STOCKHOLDERS' DEFICIT
----------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable.................................. $ 17,268,085 $ 7,907,654
Accrued expenses and other liabilities............ 11,315,296 3,176,762
Capital lease obligations--current................ 544,213 277,844
Current maturities on notes payable............... 121,874 386,522
------------ -----------
Total current liabilities....................... 29,249,468 11,748,782
14 5/8% Senior Discount Notes, net of Original Issue
Discount........................................... 101,830,062 --
14% Senior Discount Notes, net of Original Issue
Discount........................................... 34,579,844 31,242,614
9% Convertible Subordinated Discount Notes, net of
Original Issue Discount............................ 30,188,376 28,259,555
Capital Lease Obligations--Noncurrent............... 664,421 312,280
Notes Payable....................................... 24,547 49,727
------------ -----------
Total liabilities............................... 196,536,718 71,612,958
Redeemable Preferred Stock:
9% Cumulative Convertible Pay-In-Kind Preferred
stock: par value, $1; 30,000 shares authorized;
10,920 and 10,000 shares outstanding at 1997 and
1996............................................. 10,920 10,000
9% Cumulative Convertible Pay-In-Kind Preferred
Stock, Series A: par value $1; 150,000 shares
authorized; 30,209 shares outstanding at 1997.... 30,209 --
Accumulated unpaid dividends...................... 317,195 225,000
Additional paid-in capital........................ 40,690,299 9,810,185
------------ -----------
Total redeemable preferred stock................ 41,048,623 10,045,185
Common Stockholders' Deficit:
Common stock: par value, $.01; 30,000,000 shares
authorized; 7,222,511 and 7,185,260 shares issued
at 1997 and 1996................................. 72,226 71, 853
Additional paid-in capital........................ 73,941,796 54,114,755
Accumulated deficit............................... (132,441,255) (57,791,382)
Common stock held in Treasury: 1997 and 1996--
10,000 shares.................................... (1,077) (1,077)
------------ -----------
Total common stockholders' deficit.............. (58,428,310) (3,605,851)
------------ -----------
Total Liabilities, Redeemable Preferred Stock, and
Common Stockholders' Deficit....................... $179,157,031 $78,052,292
============ ===========
</TABLE>
See notes to Condensed Consolidated Financial Statements.
F-2
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
30,
----------------------------
1997 1996
-------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net service revenue.............................. $ 26,998,315 $ 7,598,705
Cost of services................................. 23,983,125 6,587,126
------------- -------------
Gross profit................................. 3,015,190 1,011,579
Expenses:
Sales and marketing............................ 43,087,112 5,837,437
General and administrative..................... 26,881,801 10,919,589
------------- -------------
Operating loss................................... (66,953,723) (15,745,447)
Other income (expense):
Interest income................................ 1,883,861 472,667
Interest expense............................... (8,572,952) (45,957)
Other income................................... 5,386 8,099,593
------------- -------------
Other income (expense)--net.................. (6,683,705) 8,526,303
------------- -------------
Net loss......................................... $ (73,637,428) $ (7,219,144)
============= =============
Accumulated preferred dividends.................. $ 1,012,445 $ 3,465,976
============= =============
Net loss to common shareholders.................. $ (74,649,873) $ (10,685,120)
============= =============
Net loss per common share........................ $ (10.35) $ (2.44)
============= =============
Weighted average common and common equivalent
shares outstanding.............................. 7,212,511 4,384,993
============= =============
</TABLE>
See notes to Condensed Consolidated Financial Statements.
F-3
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND YEAR ENDED
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SERIES A
9% PIK 9% PIK SERIES A-2 SERIES A ACCUMULATED ADDITIONAL
PREFERRED PREFERRED PREFERRED PREFERRED UNPAID PAID-IN
STOCK STOCK STOCK STOCK DIVIDENDS CAPITAL TOTAL
--------- --------- ---------- --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1996................... $26,235 $16,200 $ 3,810,000 $ 40,543,605 $ 44,396,040
Accumulated dividends
on Series A and A-2
preferred stock...... 3,465,976 3,465,976
Conversion of Series A
and A-2 preferred
stock to Class A
common stock......... (26,235) (16,200) (7,275,976) (40,543,605) (47,862,016)
Issuance of 10,000
shares of 9% PIK
preferred stock...... $10,000 9,990,000 10,000,000
Costs incurred related
to issuance of 9% PIK
preferred stock...... (179,815) (179,815)
Accumulated dividends
on 9% PIK preferred
stock................ 225,000 225,000
------- ------- ------- ------- ----------- ------------ ------------
BALANCE, DECEMBER 31,
1996................... 10,000 225,000 9,810,185 10,045,185
Issuance of 30,209
shares of Series A 9%
PIK preferred stock.. $30,209 30,178,863 30,209,072
Costs incurred related
to issuance of Series
A 9% PIK preferred
stock................ (218,079) (218,079)
Accumulated dividends
on 9% PIK preferred
stock................ 695,250 695,250
Accumulated dividends
on Series A 9% PIK
preferred stock...... 317,195 317,195
Payment of dividends
on 9% PIK preferred
stock................ 920 (920,250) 919,330 --
------- ------- ------- ------- ----------- ------------ ------------
BALANCE, SEPTEMBER 30,
1996 (UNAUDITED)....... $10,920 $30,209 $ -- $ -- $ 317,195 $ 40,690,299 $ 41,048,623
======= ======= ======= ======= =========== ============ ============
</TABLE>
See notes to Condensed Consolidated Financial Statements.
F-4
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' DEFICIT
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON
ADDITIONAL STOCK
COMMON PAID-IN ACCUMULATED HELD IN
STOCK CAPITAL DEFICIT TREASURY TOTAL
------- ----------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1996................... $31,374 $ 254,718 $ (29,053,815) $(28,767,723)
Conversion of Series A
and A-2 Preferred
Stock to Class A
Common Stock......... 26,763 47,835,253 47,862,016
Issuance of 50,000
shares of common
stock................ 500 5,000 5,500
Compensation grants of
220,000 shares of
common stock......... 2,200 30,800 33,000
Repricing of common
stock................ 11,016 (11,016)
Repurchase of 10,000
shares of common
stock................ $(1,077) (1,077)
Issuance of stock
warrants............. 6,000,000 6,000,000
Accumulated dividends
on 9% PIK preferred
stock................ (3,690,976) (3,690,976)
Net loss.............. (25,046,591) (25,046,591)
------- ----------- ------------- ------- ------------
BALANCE, DECEMBER 31,
1996................... 71,853 54,114,755 (57,791,382) (1,077) (3,605,851)
Issuance of 37,251
shares of common
stock................ 373 3,723 4,096
Issuance of stock
warrants............. 19,351,727 19,351,727
Compensation expense
on stock options..... 471,591 471,591
Accumulated dividends
on 9% PIK preferred
stock................ (695,250) (695,250)
Accumulated dividends
on Series A 9%
preferred stock...... (317,195) (317,195)
Net loss.............. (73,637,428) (73,637,428)
------- ----------- ------------- ------- ------------
BALANCE, SEPTEMBER 30,
1997 (UNAUDITED)....... $72,226 $73,941,796 $(132,441,255) $(1,077) $(58,428,310)
======= =========== ============= ======= ============
</TABLE>
See notes to Condensed Consolidated Financial Statements.
F-5
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1997 1996
------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(73,637,428) $(7,219,144)
Adjustments to reconcile net loss to net cash
flows from operating activities:
Depreciation and amortization................... 1,902,049 254,049
Amortization of organization costs and
intangibles.................................... 622,884 1,105,748
Non-cash interest on debt obligation............ 8,456,677 --
Stock compensation award expense................ 471,591 33,000
Gain on disposal of assets...................... -- (8,078,901)
Changes in:
Accounts receivable, net...................... (12,441,452) (1,469,127)
Prepaid expenses.............................. (84,379) 109,434
Other receivables............................. (165,935) (229,940)
Other assets.................................. (444,960) (18,205)
Accounts payable.............................. 9,360,431 1,440,563
Accrued expenses and other liabilities........ 8,138,534 (19,641)
------------ -----------
Net cash flows from operating activities.... (57,821,988) (14,092,164)
Cash flows from investing activities:
Purchase of property and equipment................ (10,071,051) (284,774)
Proceeds from sale of assets...................... -- 9,532,600
Purchase of Minority Interest..................... -- (1,601,207)
------------ -----------
Net cash flows from investing activities.... (10,071,051) 7,646,619
Cash flows from financing activities:
Issuance of common stock.......................... 4,096 3,300
Issuance of preferred stock....................... 30,209,072 10,000,000
Financing costs................................... (218,079) (147,389)
Repurchase of common stock........................ -- (1,077)
Proceeds from Senior Notes........................ 100,001,276 30,203,375
Proceeds from Convertible Notes................... -- 27,644,400
Debt acquisition costs............................ (4,436,579) (2,732,664)
Deposits.......................................... 57,758 (393,884)
Repayment of notes payable........................ (289,828) (335,442)
Repayment of capital lease obligations............ (309,445) (83,774)
------------ -----------
Net cash flows from financing activities.... 125,018,271 64,156,845
------------ -----------
Net increase in cash................................ 57,125,232 57,711,300
Cash and cash equivalents--Beginning of period...... 60,818,479 13,766,040
------------ -----------
Cash and cash equivalents--End of period............ $117,943,711 $71,477,340
============ ===========
Supplemental cash flow information:
Dividends Paid in Kind............................ $ 920,250 --
============ ===========
Dividends Declared................................ $ 1,012,445 $ 3,465,976
============ ===========
Issuance of Stock Warrants........................ $ 19,351,727 $ 6,000,000
============ ===========
Conversion of Series A and Series A-2 Preferred
Stock to Class A Common Stock.................... -- $47,862,016
============ ===========
Capital Lease Obligations Incurred................ $ 927,955 $ 537,478
============ ===========
Cash Paid for Interest............................ $ 91,993 $ 68,000
============ ===========
Cash Paid for Income Taxes........................ -- --
============ ===========
</TABLE>
See notes to Condensed Consolidated Financial Statements.
F-6
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE PERIOD ENDING SEPTEMBER 30, 1997
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited, condensed consolidated financial statements of USN
Communications, Inc. (the "Company") included herein have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission. The interim financial statements reflect all adjustments which
are, in the opinion of management, necessary for a fair presentation of the
results for the interim periods presented. The condensed consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included herein. The
results of operations for the interim periods should not be considered
indicative of results to be expected for the full year.
2. PRIVATE PLACEMENT OFFERING
On August 18, 1997, the Company received approximately $96.5 million in
cash, net of commissions paid, in exchange for the issuance of 152,725 units
consisting of $152.7 million aggregate principal amount at maturity of 14 5/8%
Senior Discount Notes due 2004 ("14 5/8% Senior Notes") and warrants to
purchase 2,053,900 shares of Class A Common Stock. In connection with this
offering, the Company paid a consent fee to the holders of the outstanding 14%
Senior Discount Notes due 2003 ("14% Senior Notes") and 9% Convertible
Subordinated Notes due 2004 ("9% Convertible Notes") consisting of warrants to
purchase 145,160 shares of Class A Common Stock. The Company also granted
those holders an option, which was exercised on October 24, 1997, to purchase
up to $10.0 million in aggregate proceeds to the Company of convertible notes
of the Company on terms substantially similar to the existing 9% Convertible
Notes. Additionally, the Company granted to holders of the 14% Senior Notes an
option, for a specified period of time, to exchange all of the 14% Senior
Notes for 14 5/8% Senior Notes having an accreted value equal to the accreted
value of such 14% Senior Notes at the time of such exchange.
The 14 5/8% Senior Notes were sold at a unit price, before commissions, of
$654.78 per $1,000 face amount. These notes will accrete interest at an annual
rate of 14 5/8% from August 18, 1997 to August 15, 2000. Thereafter, the notes
will bear interest at an annual rate of 14 5/8%, payable semiannually in
arrears in cash.
3. CHANGES IN EQUITY
In August 1997, the Board of Directors authorized the issuance of up to
150,000 shares of a series of $1 par value preferred stock designated as 9%
Cumulative Convertible Pay-in-Kind Preferred Stock, Series A ("Series A
Preferred Stock"). In connection with the Private Placement Offering
(described in Note 2), the Company issued 30,209 shares of its Series A
Preferred Stock to certain of its existing shareholders and their affiliates,
for an aggregate purchase price of $30.2 million.
In September 1997, the Board of Directors approved a nine-for-one stock
dividend on the Class A Common Stock. Share and per share data have been
adjusted to reflect this stock dividend.
4. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
USN Communications, Inc.
Chicago, Illinois
We have audited the accompanying consolidated balance sheets of USN
Communications, Inc. and subsidiaries (the "Company") as of December 31, 1996
and 1995, and the related consolidated statements of operations, redeemable
preferred stock, common stockholders' deficit and cash flows for the years
ended December 31, 1996 and 1995 and for the period from April 20, 1994
(Inception) to December 31, 1994. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Company as of December 31, 1996 and 1995, and the results of its operations
and its cash flows for the years ended December 31, 1996 and 1995 and for the
period from April 20, 1994 (Inception) to December 31, 1994, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 20 to the
financial statements, the Company's recurring losses from operations raise
substantial doubt about its ability to continue as a going concern.
Management's plans concerning this matter are also described in Note 20. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
DELOITTE & TOUCHE LLP
March 14, 1997 (September 4, 1997 as to Note 22)
Chicago, Illinois
F-8
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
------ ----------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................... $60,818,478 $ 13,766,040
Accounts receivable, net of allowances for doubtful
accounts of $223,000 (1996) and $193,000 (1995).... 3,004,408 1,184,453
Prepaid expenses.................................... 187,051 171,111
Notes receivable.................................... 150,000
Other receivables................................... 22,567
Net assets held for sale............................ 1,453,699
----------- ------------
Total current assets.............................. 64,182,504 16,575,303
Property and Equipment--net........................... 3,507,350 1,214,647
Other Assets.......................................... 10,362,438 2,681,255
----------- ------------
Total Assets...................................... $78,052,292 $ 20,471,205
=========== ============
<CAPTION>
LIABILITIES, REDEEMABLE PREFERRED STOCK AND COMMON
STOCKHOLDERS' DEFICIT
--------------------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable.................................... $ 7,907,654 $ 2,734,122
Accrued expenses and other liabilities.............. 3,176,762 1,106,010
Current maturities on notes payable................. 386,522 409,348
Capital lease obligations--current.................. 277,844 75,192
----------- ------------
Total current liabilities......................... 11,748,782 4,324,672
Capital Lease Obligations--Noncurrent................. 312,280 81,391
Notes Payable......................................... 49,727 436,825
14% Senior Discount Notes, net of Original Issue
Discount............................................. 31,242,614
9% Convertible Subordinated Discount Notes, net of
Original Issue Discount.............................. 28,259,555
----------- ------------
Total liabilities................................. 71,612,958 4,842,888
Redeemable Preferred Stock:
9% Cumulative Convertible Pay-In-Kind Preferred
Stock.............................................. 10,000
Series A 10% Senior Cumulative Preferred Stock...... 16,200
Series A-2 10% Senior Cumulative Preferred Stock.... 26,235
Accumulated unpaid dividends........................ 225,000 3,810,000
Additional paid-in capital.......................... 9,810,185 40,543,605
----------- ------------
Total redeemable preferred stock.................. 10,045,185 44,396,040
Common Stockholders' Deficit:
Common stock: $.01 par value;
25,000,000 and 5,000,000 authorized at 1996 and
1995;
7,185,260 and 3,137,290 shares issued at 1996 and
1995 .............................................. 71,853 31,374
Additional paid-in capital.......................... 54,114,755 254,718
Accumulated deficit................................. (57,791,382) (29,053,815)
Treasury stock, 10,000 shares at 1996............... (1,077)
----------- ------------
Total common stockholders' deficit................ (3,605,851) (28,767,723)
----------- ------------
Total Liabilities, Redeemable Preferred Stock and
Common Stockholders' Deficit..................... $78,052,292 $ 20,471,205
=========== ============
</TABLE>
See notes to Consolidated Financial Statements.
F-9
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
APRIL 20, 1994 (INCEPTION) TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Net service revenue................... $ 9,814,479 $ 7,883,890 $ 1,737,461
Cost of services...................... 9,256,472 9,075,749 1,454,882
------------ ------------ -----------
Gross margin...................... 558,007 (1,191,859) 282,579
------------ ------------ -----------
Expenses:
Sales and marketing................. 12,612,172 5,867,200 2,869,463
General and administrative.......... 20,664,612 11,100,661 4,685,894
------------ ------------ -----------
Operating loss........................ (32,718,777) (18,159,720) (7,272,778)
------------ ------------ -----------
Other income (Expense):
Interest income..................... 1,376,429 586,946 152,099
Interest expense.................... (1,797,112) (733,566) (26,110)
Gain on sale of switch-based
facilities......................... 8,078,901
Other income........................ 13,968 59,314
------------ ------------ -----------
Other income (expense)--net....... 7,672,186 (87,306) 125,989
------------ ------------ -----------
Net loss before minority interest..... (25,046,591) (18,247,026) (7,146,789)
Minority interest share in loss of
USNCN................................ 150,000
------------ ------------ -----------
Net loss.............................. $(25,046,591) $(18,097,026) $(7,146,789)
============ ============ ===========
Accumulated preferred dividends....... $ 3,690,976 $ 3,103,000 $ 707,000
============ ============ ===========
Net loss per common share............. $ (5.63) $ (7.01) $ (6.56)
============ ============ ===========
Weighted average common and common
equivalent shares outstanding........ 5,102,330 3,025,200 1,196,780
============ ============ ===========
</TABLE>
See notes to Consolidated Financial Statements.
F-10
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
APRIL 20, 1994 (INCEPTION) TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
SERIES
9% PIK SERIES A A-2 ACCUMULATED ADDITIONAL
PREFERRED PREFERRED PREFERRED UNPAID PAID-IN-
STOCK STOCK STOCK DIVIDENDS CAPITAL TOTAL
--------- --------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, April 20, 1994.
Issuance of 16,200
shares of Series A
10% Senior Cumulative
preferred stock...... $16,200 $15,212,824 $15,229,024
Costs incurred related
to issuance of stock. (630,474) (630,474)
Accumulated unpaid
preferred dividends.. $ 707,000 707,000
------- ---------- ----------- -----------
Balance, December 31,
1994................... 16,200 707,000 14,582,350 15,305,550
Issuance of 26,235
shares of Series A-2
10% Senior Cumulative
preferred stock...... $26,235 26,208,765 26,235,000
Costs incurred related
to issuance of stock. (247,510) (247,510)
Accumulated unpaid
preferred dividends.. 3,103,000 3,103,000
------- ------- ---------- ----------- -----------
Balance, December 31,
1995................... 16,200 26,235 3,810,000 40,543,605 44,396,040
Accumulated unpaid
preferred dividends.. 3,465,976 3,465,976
Conversion of Series A
and A-2 Preferred
Stock to Class A
Common Stock......... (16,200) (26,235) (7,275,976) (40,543,605) (47,862,016)
Issuance of 10,000
shares of 9% PIK
preferred stock...... $10,000 9,990,000 10,000,000
Costs incurred related
to issuance of 9% PIK
preferred stock...... (179,815) (179,815)
Accumulated unpaid
preferred dividends
on 9% PIK preferred
stock................ 225,000 225,000
------- ------- ------- ---------- ----------- -----------
Balance, December 31,
1996................... $10,000 $ 225,000 $ 9,810,185 $10,045,185
======= ======= ======= ========== =========== ===========
</TABLE>
See notes to Consolidated Financial Statements.
F-11
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE
PERIOD FROM APRIL 20, 1994 (INCEPTION) TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
ADDITIONAL COMMON
COMMON PAID-IN ACCUMULATED STOCK HELD
STOCK CAPITAL DEFICIT IN TREASURY TOTAL
------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance, April 20, 1994.
Issuance of 1,778,400
shares of common
stock................ $17,784 $ 220,655 $ $238,439
Costs incurred related
to issuance of stock. (214,860) (214,860)
Accumulated unpaid
preferred dividends.. $ (707,000) (707,000)
Net loss.............. (7,146,789) (7,146,789)
------- ----------- ------------ ------------
Balance, December 31,
1994................... 17,784 5,795 (7,853,789) (7,830,210)
Issuance of 1,358,990
shares of common
stock................ 13,590 251,413 265,003
Costs incurred related
to issuance of stock. (2,490) (2,490)
Accumulated unpaid
preferred dividends.. (3,103,000) (3,103,000)
Net loss.............. (18,097,026) (18,097,026)
------- ----------- ------------ ------------
Balance, December 31,
1995................... 31,374 254,718 (29,053,815) (28,767,723)
Conversion of Series A
and A-2 Preferred
Stock to Class A
Common Stock......... 26,763 47,835,253 47,862,016
Issuance of 50,000
shares of common
stock................ 500 5,000 5,500
Compensation grants of
220,000 shares of
common stock......... 2,200 30,800 33,000
Repricing of common
stock................ 11,016 (11,016)
Repurchase of 10,000
shares of common
stock................ $(1,077) (1,077)
Issuance of stock
warrants............. 6,000,000 6,000,000
Accumulated unpaid
preferred dividends.. (3,690,976) (3,690,976)
Net loss.............. (25,046,591) (25,046,591)
------- ----------- ------------ ------- ------------
Balance, December 31,
1996................... $71,853 $54,114,755 $(57,791,382) $(1,077) $ (3,605,851)
======= =========== ============ ======= ============
</TABLE>
See notes to Consolidated Financial Statements.
F-12
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
APRIL 20, 1994 (INCEPTION) TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................ $(25,046,591) $(18,097,026) $(7,146,789)
Adjustments to reconcile net loss to
net cash flows from operating
activities:
Depreciation and amortization..... 558,236 1,288,991 159,685
Amortization of organization costs
and intangibles.................. 1,770,936 969,271 26,376
Interest accreted on debt
obligation....................... 1,654,394
Stock compensation award expense.. 33,000
Gain on disposal of assets........ (8,078,901) (16,274)
Changes in:
Accounts receivable............. (1,819,956) (322,245) (862,208)
Prepaid expenses................ (38,468) 13,082 (37,624)
Other receivables............... (172,567)
Other assets.................... (14,948)
Account payable................. 4,819,840 1,578,757 953,465
Accrued expenses and other
liabilities.................... 2,424,642 338,412 766,532
------------ ------------ -----------
Net cash flows from operating
activities................... (23,910,383) (14,247,032) (6,140,563)
------------ ------------ -----------
Cash flows from investing activities:
Purchase of property and equipment.. (2,258,969) (1,739,542) (1,728,327)
Proceeds from sale of assets........ 9,532,600
Purchase of subsidiary.............. (892,287)
Organization costs.................. (161,702)
Cash acquired from purchase of
subsidiaries....................... 331,975
Issuance of noncurrent notes
receivable......................... (150,000)
Proceeds from note receivable....... 76,204
------------ ------------ -----------
Net cash flows from investing
activities................... 7,273,631 (2,555,625) (1,708,054)
------------ ------------ -----------
Cash flows from financing activities:
Proceeds from Senior Notes.......... 30,203,375
Proceeds from Convertible Notes..... 27,644,400
Debt acquisition costs.............. (2,920,239)
Issuance of preferred stock......... 10,000,000 26,235,000 14,850,000
Issuance of common stock............ 5,500 265,003 150,000
Costs incurred related to issuance
of stock........................... (179,815) (250,000) (845,334)
Repurchase of common stock.......... (1,077)
Deposits............................ (494,603) (20,855) (555,270)
Proceeds from borrowings............ 180,000
Payments on assumed indebtedness.... (350,412) (1,459,458)
Proceeds from notes payable......... 46,645 73,504
Repayment of notes payable.......... (59,512) (71,588) (8,330)
Repayment of capital lease
obligation......................... (158,427) (155,272) (16,731)
------------ ------------ -----------
Net cash flows from financing
activities................... 63,689,190 24,589,475 13,827,839
------------ ------------ -----------
Net increase in cash.................. 47,052,438 7,786,818 5,979,222
Cash and cash equivalents--Beginning
of year.............................. 13,766,040 5,979,222
------------ ------------ -----------
Cash and cash equivalents--End of
year................................. $ 60,818,478 $ 13,766,040 $ 5,979,222
============ ============ ===========
Supplemental cash flow information--
See Note 3
</TABLE>
See notes to Consolidated Financial Statements.
F-13
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND PERIOD FROM
APRIL 20, 1994 (INCEPTION) TO DECEMBER 31, 1994
1. ORGANIZATION AND ACQUISITIONS
USN Communications, Inc., formerly United USN, Inc. ("USN") was incorporated
under the laws of the State of Delaware on April 20, 1994 and was initially
funded in 1994 through capital contributions totaling $15 million in cash,
before financing costs. In June 1995 and September 1996, USN received
additional capital contributions of approximately $26 million and $10 million,
respectively. USN holds controlling investments in three companies: US Network
Corporation, USN Communications Northeast, Inc. (formerly United
Telemanagement Services, Inc.), and USN Communications Midwest, Inc. USN and
its subsidiaries operate in a single business segment, primarily as a reseller
of a broad range of telecommunications services in various cities in the
Midwest and the Northeast regions of the U.S.
On April 20, 1994, USN purchased US Network Corporation ("US Network") and
its 100% subsidiary, FoneNet/Ohio, Inc., in exchange for 1,350 shares of
United's preferred stock and 315,000 shares of its common stock. This
transaction was accounted for as a purchase and was valued at US Network's net
book value of approximately $467,000. The consolidated financial statements
include the results of operations of US Network since April 20, 1994.
In July 1994, USN purchased a 50.1% ownership interest in USN Communications
Northeast, Inc. ("USNCN") for approximately $2 million. USNCN provides
telecommunications services to business customers in New York and
Massachusetts. USN has had substantive control of USNCN since its inception.
Therefore, the consolidated financial statements include the results of
operations for USNCN since its commencement of operations in 1994. In December
1995, USN's ownership in USNCN increased to 83.9% as a result of additional
investments approximating $9.4 million. In July 1996, USN's ownership in USNCN
increased to 100% as a result of an additional investment of $150,000.
In June 1995, USNCN (through a newly formed subsidiary, Quest United, Inc.)
purchased specific assets and assumed certain liabilities of an independent
telephone services company Quest America, L.P. ("Quest"), for cash of $950,000
and notes payable to investors of Quest of $842,985 (the "Acquisition"). The
Acquisition has been accounted for as a purchase, and such assets and
liabilities were recorded at their then fair values (which approximated their
historical cost bases) as of the Acquisition date. The excess of the cost of
the Acquisition over the net assets acquired has been ascribed to various
intangible assets (principally customer lists, employment contracts and work
force in place). The consolidated statement of operations for the year ended
December 31, 1996 and 1995 include Quest's revenues and expenses from the
Acquisition date forward.
In January 1995, USN Communications Midwest, Inc. ("USNCM") was incorporated
as a wholly owned subsidiary of USN. USNCM began operations in July 1996 and
provides telecommunication services to business customers in Illinois, Ohio
and Michigan.
2. SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation
of the accompanying consolidated financial statements follows:
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
F-14
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of USN Communications, Inc. and its
subsidiaries (the "Company"). Significant intercompany balances and
transactions have been eliminated in consolidation.
Revenue Recognition--The Company recognizes revenues in the period in which
telephone services are provided. For the operating unit which the Company has
operated as a commission agent only, revenues are recorded at the net
commissions earned.
Cash and Cash Equivalents--Cash and cash equivalents are defined as cash in
banks, time deposits and highly liquid short-term investments with initial
maturities of three months or less.
Recourse Provisions--Until June 1996, USNCN utilized a third-party billing
and collection agency (the "Agency") to process and factor its accounts
receivable, yet retained the risk of loss on amounts that were deemed to be
uncollectible in the normal course of business. The Agency charged USNCN an
allowance for estimated bad debts on factored accounts receivable, subject to
the recourse provisions, using prior collection experience and industry
statistics. Adjustments were made between actual loss experience and estimated
bad debt expenses on a periodic basis by the Agency. At December 31, 1996,
there were no factored receivables subject to such adjustment. At December 31,
1995, factored receivables of approximately $828,000 were subject to such
adjustment.
Fair Value of Financial Instruments--The carrying values of financial
instruments included in current assets and liabilities approximate fair values
due to the short-term maturities of these instruments. The carrying values of
long-term debt and notes payable are reasonable estimates of their fair values
as the interest rates approximate rates currently available to the Company for
instruments with similar terms and remaining maturities.
Property and Equipment--Purchases of property and equipment are carried at
cost. Depreciation is provided on the straight-line basis. Furniture and
fixtures are depreciated over five years. Computer equipment is depreciated
over three years. Leasehold improvements and assets leased under capital
leases are amortized over the shorter of the related lease term or the
estimated useful life of the asset.
Intangible Assets--Costs incurred in the formation of the Company are being
amortized on a straight-line basis over five years. The intangible assets
associated with the acquisition of Quest are being amortized on a straight-
line basis over two years. Debt acquisition costs are being amortized over the
life of the related debt. The value of the warrants issued with the Senior
Notes are being amortized over the life of those notes.
Stock-based Compensation--During 1996, the Company implemented Statement of
Financial Accounting Standards No. 123 "Accounting for Stock Based
Compensation" ("SFAS No. 123"). SFAS No. 123 allows the Company to recognize
compensation under the "intrinsic value" method prescribed by Accounting
Principles Board Opinion No. 25, and requires the pro forma disclosure of net
income and earnings per share as if the fair value method had been applied.
Reclassifications--Certain prior year amounts have been reclassified to
conform to the current year presentation.
F-15
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ---------- ----------
<S> <C> <C> <C>
Capital lease obligations incurred (Notes
5
and 9).................................. $591,967 $3,398,105 $3,137,119
======== ========== ==========
Fair value of Quest America Management
L.P. noncash assets acquired in 1995.... $ 414,726
Consideration incurred in connection with
the Acquisition (including $950,000 in
cash advances) (Note 1)................. 3,104,588
----------
Liabilities assumed...................... $2,689,862
==========
Note payable incurred to finance
insurance policies (Note 11)............ $ 58,650 $ 72,000
========== ==========
Fair value of US Network's noncash assets
acquired................................ $ 623,659
Common and preferred stock issued in
connection with the acquisition (Note
1)...................................... 467,463
----------
Liabilities assumed...................... $ 156,196
==========
Note payable to UTS minority shareholder. $ 149,708
Proceeds received upon issuance of note
payable................................. (73,504)
----------
Note receivable from UTS minority
shareholder............................. $ 76,204
==========
</TABLE>
Cash paid for interest in 1996 and 1995 was approximately $32,000 and
$613,000, respectively. No cash was paid in 1994 for interest and in 1996,
1995 and 1994 for income taxes.
4. RELATED PARTY TRANSACTIONS
Notes receivable at December 31, 1996 includes a $75,000 non-interest
bearing note due to the Company from a corporate officer.
F-16
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. NET ASSETS HELD FOR SALE
On December 29, 1995, the Company entered into an agreement to sell its
switch-based facilities in Ohio for $9.5 million in cash plus the assumption
of capital and operating leases. The transaction closed on February 29, 1996
and a gain of approximately $8.1 million was realized and recorded at that
time. The Company will continue to serve its Ohio customer base as a reseller
of telecommunication services.
The net assets held at December 31, 1995 in conjunction with this sale were
as follows:
<TABLE>
<S> <C>
Switching equipment........................................... $6,233,557
Leasehold improvements........................................ 1,781,260
Outside plant and equipment................................... 423,424
Furniture and equipment....................................... 318,355
----------
8,756,596
Less accumulated depreciation................................. (1,181,587)
----------
Net property and equipment.................................... 7,575,009
Deposits...................................................... 100,532
----------
Total assets.................................................. 7,675,541
Less liabilities assumed:
Accrued liabilities......................................... 15,204
Capital lease obligations................................... 6,206,638
----------
Net assets held for sale...................................... $1,453,699
==========
</TABLE>
Additionally, approximately $2.0 million in operating leases were assumed by
the buyer. The Company remains contingently liable on capital and operating
leases assumed by the buyer until expiration.
6. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consist of:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Furniture and equipment........................... $3,940,719 $1,364,479
Leasehold improvements............................ 392,601 117,902
---------- ----------
4,333,320 1,482,381
Less accumulated depreciation..................... (825,970) (267,734)
---------- ----------
Total......................................... $3,507,350 $1,214,647
========== ==========
</TABLE>
F-17
<PAGE>
USN COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. OTHER ASSETS
Other assets at December 31 consist of:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Stock warrants (net of accumulated amortization:
1996--$214,286).................................. $ 5,785,714
Debt acquisition costs (net of accumulated
amortization: 1996--$98,064)..................... 2,822,175
Deposits.......................................... 1,044,098 $ 426,902
Goodwill (net of accumulated amortization:
1996--$2,337,015; 1995--$923,850) ............... 588,819 2,001,985
Organization costs (net of accumulated
amortization:
1996--$118,853; 1995--$73,432)................... 108,257 153,677
Other............................................. 13,375 98,691
----------- ----------
Total............................................. $10,362,438 $2,681,255
=========== ==========
</TABLE>
8. ACCRUED EXPENSES
Accrued expenses at December 31 consist of:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Payroll and benefits................................ $1,515,197 $ 548,775
Professional services............................... 814,388 163,540
Excise taxes........................................ 575,790 117,812
Rent................................................ 6,600 4,380
Interest payable.................................... 21,764
Other............................................... 264,787 249,739
---------- ----------
Total............................................... $3,176,762 $1,106,010
========== ==========
</TABLE>
9. CAPITAL LEASE OBLIGATIONS
The Company leases certain furniture and equipment under capital leases at
December 31 as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Furniture and equipment............................... $841,359 $221,855
Less accumulated amortization......................... (261,905) (73,003)
-------- --------
Total................................................. $579,454 $148,852
======== ========
</TABLE>
Future minimum lease payments at December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997.......................... $ 341,883
1998.......................... 288,865
1999.......................... 54,422
---------
Total minimum lease payments.. 685,170
Less imputed interest......... (95,046)
---------
Present value of minimum lease
payments..................... 590,124
Less current portion.......... (277,844)
---------
Long-term lease obligations... $ 312,280
=========
</TABLE>
F-18
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. OPERATING LEASES
The Company leases certain office space and equipment under operating
leases. Future minimum lease commitments under noncancelable operating leases
as of December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997......................... $ 2,113,254
1998......................... 2,206,947
1999......................... 1,737,457
2000......................... 1,530,196
Thereafter................... 2,531,822
-----------
Total.................... $10,119,676
===========
</TABLE>
Rent expense for the years ended December 31, 1996 and 1995 and the period
from April 20, 1994 to December 31, 1994 was approximately $1,024,000,
$867,000 and $214,000, respectively.
11. NOTES PAYABLE
The Company issued a note payable of $58,650 in 1995 to finance an insurance
policy. The note was payable in nine monthly installments through August 1996.
Interest was payable at 6.45%. The principal balance was paid in full at
December 31, 1996.
In 1995, the Company issued an additional note payable of $46,353 to finance
improvements to an office space. The note requires monthly principal payments
of $831 through July 2001. Interest is payable at 8%. At December 31, 1996 and
1995, the outstanding principal balances were $37,573 and $44,777,
respectively.
In connection with the acquisition of Quest, USNCN assumed notes payable to
investors of Quest. The notes bear interest at 8% and the balances outstanding
at December 31, 1996 and 1995 total $398,676 and $749,088, respectively. The
notes require quarterly principal and interest payments in 1996 and 1997 and
in the first quarter of 1998.
Maturities on notes payable are as follows:
<TABLE>
<S> <C>
1997............................ $386,522
1998............................ 27,204
1999............................ 8,474
2000............................ 9,178
2001............................ 4,871
--------
Total....................... $436,249
========
</TABLE>
12. PRIVATE PLACEMENT OFFERING
On September 30, 1996, the Company received approximately $55 million in
cash, net of commissions paid, in exchange for 48,500 units consisting of
$48.5 million aggregate principal amount at maturity of 14% Senior Discount
Notes ("Senior Notes") due 2003 and warrants to purchase 615,500 shares of
Class A Common Stock, and 36,000 units consisting of $36 million aggregate
principal amount at maturity of 9% Convertible Subordinated Notes
("Convertible Notes") due 2004.
The Senior Notes were sold at a unit price, before commissions, of $622.75
per $1,000 face amount. These notes will accrete interest at an annual rate of
14% from September 30, 1996 to March 31, 2000. Thereafter, the notes will bear
interest at an annual rate of 14%, and will be paid semiannually in arrears,
on the aggregate principal amount at maturity of $48.5 million.
F-19
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Convertible Notes were sold at a unit price, before commissions, of
$767.90 per $1,000 face amount. These notes will accrete interest at an annual
rate of 9% from September 30, 1996 to September 30, 1999. Thereafter, the
notes will bear interest at an annual rate of 9%, and will be paid
semiannually in arrears, on the aggregate principal amount at maturity of $36
million.
13. REDEEMABLE PREFERRED STOCK
The Board of Directors authorized 20,000 shares of Series A 10% Senior
Cumulative Preferred Stock ("Series A") and 30,000 shares of Series A-2 10%
Senior Cumulative Preferred Stock ("Series A-2"), with par values of $1 in
1994 and 1995, respectively. On December 31, 1995, 16,200 shares of Series A
and 26,235 shares of Series A-2 were outstanding.
In September 1996, the Board of Directors and the existing shareholders
approved the conversion of all outstanding Series A and Series A-2 Preferred
Stock to shares of Class A Common Stock. The conversion was consummated on
September 30, 1996 and 2,676,300 shares of Class A Common Stock were issued in
exchange for the outstanding Series A and Series A-2 Preferred Stock,
including dividends accrued through the conversion date.
In September 1996, the Board of Directors authorized the issuance of up to
30,000 shares of $1 par value preferred stock designated as 9% Cumulative
Convertible Pay-in-Kind Preferred Stock ("9% Preferred Stock"). In connection
with the Private Placement Offering (Note 12), the Company issued 10,000
shares of its 9% Preferred Stock to its existing shareholders, for an
aggregate purchase price of $10.0 million.
Dividends--Dividends on the 9% Preferred Stock accrue semiannually at a rate
of 9% per annum, are fully cumulative and are payable through the issuance of
additional shares of 9% Preferred Stock. No dividends have been declared or
paid on the preferred stock.
Liquidation--Upon any liquidation, dissolution or winding up of the Company,
holders of the 9% Preferred Stock will be entitled to receive their full
liquidation preference and stated value of $1,000 per share, together with
accrued and unpaid dividends, prior to the distribution of any assets of the
Company to the holders of Class A Common Stock.
Redemption--Shares of 9% Preferred Stock are not redeemable at the option of
the Company, but are subject to mandatory redemption in 2006 at the stated
value, together with all accrued and unpaid dividends to the redemption date.
Conversion--Each share of 9% Preferred Stock is convertible into 7.0623
shares of Class A Common Stock, at any time, in whole or in part, at the
option of the holders thereof.
14. COMMON STOCK
In 1996, a 1995 transaction in which Class A Common Stock was issued was
repriced, whereby the number of shares issued increased from 1,358,990 to
2,460,560 and the purchase price decreased from $0.195 to $0.1077 per share.
Dividends--The holders of Class A Common Stock are entitled to receive
dividends as dividends are declared by the Board of Directors of the Company
out of funds legally available therefor, provided that if any shares of
Preferred Stock are at the time outstanding, the payment of dividends on the
Class A Common Stock or other distributions may be subject to the declaration
and payment of full cumulative dividends on outstanding shares of Preferred
Stock.
F-20
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Liquidation--Upon any liquidation, dissolution or winding up of the affairs
of the Company, whether voluntary or involuntary, any assets remaining after
the satisfaction in full of the prior rights of creditors and the aggregate
liquidation preference of any Preferred Stock then outstanding will be
distributed to the holders of Class A Common Stock.
15. STOCK OPTION PLAN
The Company has granted options to acquire shares of common stock to certain
officers and other employees under the 1994 Stock Option Plan. These options
generally become exercisable at a rate of 25% every six months over a period
of two years after the date of grant, although with respect to certain grants
no vesting occurs until twelve months after the grant date.
In connection with the financing described in Note 12 and the issuance of
the 9% Preferred Stock described in Note 13, the Company granted 319,610
options to purchase Class A Common Stock at an exercise price of $0.15 per
share. These options were not issued under the 1994 Stock Option Plan, but
rather were issued pursuant to separate stock option agreements between the
Company and the option holders. 66,370 of these options become exercisable as
the Convertible Notes are converted to Class A Common Stock, and 253,240 of
these options become exercisable as shares of 9% Preferred Stock are converted
to Class A Common Stock.
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
PRICE PER PRICE PER PRICE PER
1996 SHARE 1995 SHARE 1994 SHARE
--------- ---------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January
1...................... 190,500 $ 0.11 213,000 $0.11
Granted................. 1,033,240 0.11-9.60 213,000 $0.11
Exercised............... (50,000) 0.11
Cancelled............... (64,750) 0.11 (22,500) 0.11
--------- ------- -------
Outstanding at December
31..................... 1,108,990 0.11-9.60 190,500 0.11 213,000 0.11
========= ======= =======
Options exercisable at
December 31............ 106,620 0.11-0.15 100,240 0.11 --
========= ======= =======
</TABLE>
For pro forma information regarding net loss and loss per common share, the
fair value for the options awarded in 1996 and 1994 was estimated as of the
date of the grant using a Black-Scholes option valuation model with the
following weighted average assumptions for 1996 and 1994, respectively: risk-
free interest rates of 4.95% and 4.97%; dividend yields of 0%; volatility of
0%; and an expected life of the option of ten years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period. Therefore, in the year
of adoption and subsequently affected years, the effect of applying SFAS 123
for providing pro forma net loss and loss per common share are not likely to
be representative of the effects on reported income in future years. The
effect on the Company's reported net loss, on a pro forma basis, was not
material for 1996, 1995 and 1994.
The Black-Scholes option valuation model used by the Company was developed
for use in estimating the fair value of fully tradable options which have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. It is management's opinion that the Company's
stock options have characteristics significantly different from those of
traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock
options.
F-21
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. EMPLOYEE BENEFIT PLAN
On January 1, 1995, the Company adopted a qualified 401(k) plan covering all
eligible employees in which the Company contributions are discretionary.
Employees are permitted to make annual contributions through salary deductions
up to 15% of their annual salary. The plan can be amended or terminated at any
time by the Board of Directors. The Company made no contributions to the plan
in 1996 or 1995.
17. INCOME TAXES
The Company incurred net losses of $25,046,591, $18,097,026 and $7,146,789
in 1996, 1995 and 1994, respectively. Accordingly, no provision for current
Federal or state income taxes has been made to the financial statements.
The Company's deferred tax asset components are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Net operating loss carry-forwards.............. $18,285,000 $9,121,000
Accrued liabilities and asset valuation
reserves...................................... 172,000 195,000
Amortization of intangibles.................... 790,000 309,000
----------- ----------
Subtotal................................... 19,247,000 9,625,000
Valuation allowance............................ (19,247,000) (9,625,000)
----------- ----------
Total...................................... $ -- $ --
=========== ==========
</TABLE>
As of December 31, 1996 and 1995 the Company had not recognized deferred
income tax assets related to deductible temporary differences and cumulative
net operating losses. The ability of the Company to fully realize deferred tax
assets in future years is contingent upon its success in generating sufficient
levels of taxable income before the statutory expiration periods for utilizing
such net operating losses lapses. After an assessment of all available
evidence, including historical and projected operating trends, the Company was
unable to conclude that realization of such deferred tax assets in the near
future was more likely than not. Accordingly, a valuation allowance was
recorded to offset the full amount of such assets.
At December 31, 1996, the Company had net operating loss carry-forwards for
income tax purposes of approximately $46,120,000. The expiration periods for
utilizing these operating losses begin in 2009 for Federal tax purposes. Of
the net operating loss carry-forwards available at December 31, 1996,
$12,286,000 can be applied only against future taxable income of USNCN. In
addition, if the Company or the Company's subsidiaries experience an
"ownership change" within the meaning of Section 382 of the Internal Revenue
Code of 1986, as amended (the "Code"), the net operating loss carry-forwards
allocable to such entity will be subject to an annual limitation in an amount
generally equal to the value of the entity immediately before the ownership
change at the long-term tax-exempt rate (the "Section 382 limitation"). Any
unused Section 382 limitation in one year is added to the limitation for the
next year. Generally, an ownership change occurs with respect to an entity if
the aggregate increase in the percentage stock ownership (by value) of such
entity by one or more of its five-percent stockholders exceeds 50 percentage
points within a testing period. The tax laws for determining whether an
ownership change of an entity has occurred are complex and subject to
differing interpretations in certain respects. It is possible that the Company
or the Company's subsidiaries have experienced an ownership change under
Section 382 of the Code and that the Company or the Company's subsidiaries may
experience an ownership change as a result of the Company's future
transactions including, but not limited to, the issuance of the Warrants and
consummation of one or more public offerings of Common Stock. In such event,
the ability of the Company or the Company's subsidiaries to utilize their
operating loss carry-forwards to offset future taxable income would be subject
to limitations as discussed above.
F-22
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18. MINORITY INTEREST IN USNCN
In September 1996, all minority shareholders interests' in USNCN were
repurchased, increasing the Company's ownership of USNCN's outstanding common
stock to 100%. Prior to this transaction , no minority interest in USNCN had
been recorded, as losses applicable to the minority interest in USNCN exceeded
the minority interest in the equity capital of USNCN, and there was no
obligation of the minority interest to make good on such losses.
19. COMMITMENTS
In 1995 and 1996 the Company entered into agreements with two independent
telecommunications companies ("TelCos") to allow the Company to resell the
TelCos local telephone service in various regional markets. The agreements
have terms of up to ten years and contain minimum purchase commitments of
local access lines, ranging from zero to 150,000 lines. These commitments are
measured by the number of lines in place on the last day of each 12-month
period. The agreements allow for ramp-up periods before any commitment levels
are required to be met. So long as the Company maintains cumulative net
shortfalls lower than established caps, no payments will be due to the TelCos
other than for normal usage. Even if no lines were sold by the Company, the
earliest required payment for any shortfall amount is in 1999.
In July 1996, the Company entered into an agreement with a third
telecommunications company to allow the Company to resell long distance
telephone service. The agreement is for a term of 33 months and contains an
annual purchase commitment of $12 million, with a minimum monthly commitment
of $600,000 to qualify for the contract rates. The agreement allows for a
ramp-up period before commitment levels are required to be met.
In 1994, USNCN executed an exclusive agreement with an independent
telecommunications company ("TelCo One"), whereby TelCo One allows USNCN to
establish a local private network on its infrastructure in which to provide
service to customers. The majority of USNCN's local service customers are
provided access to this network and, accordingly, a substantial portion of
USNCN's revenue is earned through the use of these access rights. Under this
agreement, TelCo One provides network maintenance and access to telephone
switches. The initial term of the agreement expires in 2004.
20. FUTURE OPERATING PLANS
Although the Company had working capital of approximately $52.4 million and
total redeemable preferred stock and common stockholders' deficit of
approximately $6.4 million, projected cash usage in 1997 combined with an
anticipated net loss in 1997, absent the infusion of additional capital
resources, is anticipated to fully deplete the Company's working capital prior
to December 31, 1997. Such events would raise substantial doubt about the
Company's ability to continue as a going concern. Although the Company's
management believes that the Company will be able to raise sufficient funds,
through capital contributions or additional equity or debt financings, to meet
its operating expenses and other cash requirements, there can be no assurance
that the Company would be able to complete such contributions or financing, or
that any such contributions or financing would be completed on terms
satisfactory to the Company.
21. CONTINGENCIES
Loss Contingency--In April 1995, a derivative action was filed by a minority
interest owner of USNCN against the Company and specific officers and
directors. In July 1996, the Company settled the dispute for $1.7 million.
F-23
<PAGE>
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Gain Contingency--In 1995, USNCN submitted a claim of approximately $1.4
million with TelCo One requesting that certain revenues, purportedly not
billed by TelCo One to its customers, be paid to USNCN. During 1996, USNCN has
recorded $867,000 of this claim as revenue. TelCo One is in the process of
reviewing USNCN's remaining claim and has not formally concluded on the amount
or terms of a settlement. While USNCN believes its claim has merit, it is
unable to predict, at this time, whether they will be successful in fully
resolving this matter favorably.
22. SUBSEQUENT EVENT
On September 4, 1997, the Board of Directors approved a nine-for-one stock
dividend on the Common Stock. Average shares outstanding and all per share
amounts included in the accompanying financial statements and notes are based
on the increased number of shares giving retroactive effect to the stock
dividend.
* * * * *
F-24
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
Hatten Communications Holding Company, Inc.:
We have audited the accompanying consolidated balance sheets of Hatten
Communications Holding Company, Inc. and subsidiaries as of April 30, 1997 and
1996 and the related consolidated statements of operations, stockholder's
deficit, and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As discussed in note 12, the Company executed a recapitalization of its
stock and a refinancing of its existing debt on May 23, 1997.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hatten
Communications Holding Company, Inc. and subsidiaries as of April 30, 1997 and
1996 and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Providence, Rhode Island
June 20, 1997
F-25
<PAGE>
HATTEN COMMUNICATIONS HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
ASSETS (note 8)
Current assets:
Cash and cash equivalents........................... $ 287,760 1,205,778
Accounts receivable (note 2)........................ 5,408,650 3,715,127
Inventory (note 3).................................. 927,402 637,589
Prepaid expenses and other current assets........... 703,303 496,892
Related party receivable (notes 4 and 6)............ 187,949 114,283
----------- ----------
Total current assets............................ 7,515,064 6,169,669
----------- ----------
Property and equipment (note 5)....................... 1,968,739 1,387,828
Less: accumulated depreciation...................... 918,401 679,080
----------- ----------
Property and equipment, net..................... 1,050,338 708,748
----------- ----------
Cellular lines, net of accumulated amortization of
$88,381.............................................. 3,823,124 --
Investment in and advances to Smartlink (note 6)...... 2,640,074 2,572,287
Financing fees, net of accumulated amortization of
$256,552 and $150,045 in 1997 and 1996, respectively. 298,695 228,594
Other assets.......................................... 22,114 22,051
----------- ----------
$15,349,409 9,701,349
=========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Current portion of long-term debt (note 8).......... $ 812,521 --
Note payable (note 7(a))............................ 295,944 --
Capital lease obligations (note 9(a))............... -- 16,625
Accounts payable:
Trade............................................. 1,121,863 648,399
Springwich Cellular Limited Partnership........... 1,790,225 2,173,733
Bell Atlantic Nynex Mobile........................ 1,273,905 1,409,741
Accrued expenses.................................... 760,936 616,357
Deferred revenue.................................... 675,843 463,180
Customer deposits................................... 70,853 79,474
Income taxes payable (note 10)...................... 13,000 16,011
----------- ----------
Total current liabilities....................... 6,815,090 5,423,520
----------- ----------
Subordinated note payable (note 7(b))................. 2,000,000 2,000,000
Long-term debt, excluding current portion (note 8).... 12,875,250 5,747,493
----------- ----------
Total liabilities............................... 21,690,340 13,171,013
----------- ----------
Commitments (notes 8 and 9(b))........................
Stockholder's deficit (note 8):
Common stock, $.01 par value; 11,850 shares
authorized, 8,150 shares issued and outstanding.... 82 82
Stock warrant....................................... 2,902,920 4,000,000
Accumulated deficit................................. (9,243,933) (7,469,746)
----------- ----------
Total stockholder's deficit..................... (6,340,931) (3,469,664)
----------- ----------
$15,349,409 9,701,349
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-26
<PAGE>
HATTEN COMMUNICATIONS HOLDING COMPANY, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED APRIL 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Revenues............................................... $32,712,066 24,840,061
Cost of revenues....................................... 20,603,029 16,281,470
----------- ----------
Gross profit....................................... 12,109,037 8,558,591
----------- ----------
New subscriber acquisition costs (note 1(k))........... 4,790,975 3,411,848
General and administrative expenses.................... 6,213,937 4,668,551
----------- ----------
11,004,912 8,080,399
----------- ----------
Operating profit................................... 1,104,125 478,192
Other income (expense):
Equity in loss of Smartlink (note 6)................. (408,547) (93,589)
Interest income...................................... 50,536 41,832
Interest expense (note 8)............................ (2,248,575) (826,701)
Amortization of financing fees....................... (194,888) (76,252)
Other, net........................................... (20,833) (9,988)
----------- ----------
Loss before income taxes........................... (1,718,182) (486,506)
Income tax expense (note 10)........................... 56,005 16,811
----------- ----------
Net loss........................................... $(1,774,187) (503,317)
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE>
HATTEN COMMUNICATIONS HOLDING COMPANY, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT
FOR THE YEARS ENDED APRIL 30, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED TREASURY STOCKHOLDER'S
STOCK WARRANT DEFICIT STOCK DEFICIT
------ ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
PREDECESSOR BUSINESS
(NOTE 1(A))
Balances at April 30,
1995 (Unaudited)....... $2,000 -- (2,968,347) -- (2,966,347)
Net income.............. -- -- 216,517 -- 216,517
------ ---------- ---------- ---------- ----------
Balances at January 31,
1996 (Unaudited)....... $2,000 -- (2,751,830) -- (2,749,830)
====== ========== ========== ========== ==========
SUCCESSOR BUSINESS (NOTE
1(A))
Balances at January 31,
1996................... $ 163 -- (2,749,993) -- (2,749,830)
Issuance of stock
warrant................ -- 4,000,000 -- -- 4,000,000
Purchase of treasury
shares................. -- -- -- (4,000,000) (4,000,000)
Retirement of treasury
shares................. (81) -- (3,999,919) 4,000,000 --
Net loss................ -- -- (719,834) -- (719,834)
------ ---------- ---------- ---------- ----------
Balances at April 30,
1996................... 82 4,000,000 (7,469,746) -- (3,469,664)
Issuance of stock
warrant................ -- 250,000 -- -- 250,000
Repurchase of stock
warrant................ -- (1,347,080) -- -- (1,347,080)
Net loss................ -- -- (1,774,187) -- (1,774,187)
------ ---------- ---------- ---------- ----------
Balances at April 30,
1997................... $ 82 2,902,920 (9,243,933) -- (6,340,931)
====== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-28
<PAGE>
HATTEN COMMUNICATIONS HOLDING COMPANY, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED APRIL 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................ $(1,774,187) (503,317)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Equity in loss of Smartlink....................... 408,547 93,589
Depreciation and amortization..................... 434,209 252,721
Accretion of original issue discount.............. 1,071,870 247,493
Provision for doubtful accounts................... 852,383 481,194
Increase in accounts receivable................... (2,545,906) (873,719)
Increase in inventory............................. (289,813) (54,794)
Increase in prepaid expenses and other current
assets........................................... (206,411) (137,713)
(Increase) decrease in other assets............... (63) 3,639
(Decrease) increase in accounts payable........... (45,880) 482,122
Increase in accrued expenses...................... 144,579 103,517
Increase in deferred revenue...................... 212,663 111,554
(Decrease) increase in customer deposits.......... (8,621) 23,244
Increase in income taxes payable.................. (3,011) 7,529
----------- ----------
Net cash provided by (used in) operating
activities..................................... (1,749,641) 237,059
----------- ----------
Cash flows from investing activities:
Investment in and advances to Smartlink............. (500,000) (2,117,000)
Purchase of cellular lines.......................... (3,580,755) --
Capital expenditures................................ (580,911) (341,739)
Related party receivable............................ (50,000) --
----------- ----------
Net cash used in investing activities........... (4,711,666) (2,458,739)
----------- ----------
Cash flows from financing activities:
Proceeds provided by long-term debt................. 9,086,690 5,500,000
Repayment of long-term debt......................... (3,565,362) (4,237,915)
Repayment of note payable........................... (34,806) (2,000,000)
Repayment of capital lease obligations.............. (16,625) (23,178)
Issuance of stock warrants.......................... 250,000 4,000,000
Payment of financing fees........................... (176,608) (249,048)
Write-off of financing fees......................... -- 73,720
----------- ----------
Net cash provided by financing activities....... 5,543,289 3,063,579
----------- ----------
Increase (decrease) in cash and cash equivalents...... (918,018) 841,899
Cash and cash equivalents:
Beginning of year................................... 1,205,778 363,879
----------- ----------
End of year......................................... $ 287,760 1,205,778
=========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest.......................................... $ 1,147,146 467,930
=========== ==========
Income taxes...................................... $ 59,266 8,232
=========== ==========
</TABLE>
Supplemental disclosure of non-cash transactions:
During fiscal 1997, the Company repurchased certain outstanding stock
warrants. As a result, $1,347,080 of proceeds originally recorded as issuance
of stock warrant was reallocated to long-term debt (see Note 8). Also during
1997, the Company purchased cellular lines in exchange for notes payable in
the amount of $330,750.
During fiscal 1996, the Company purchased treasury stock for $4,000,000 by
issuing a note payable in the same amount. Also during 1996, the Company
accepted a note in the amount of $870,315 from a related party in settlement
of an equal amount owed to the Company.
See accompanying notes to consolidated financial statements.
F-29
<PAGE>
HATTEN COMMUNICATIONS HOLDING COMPANY, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies:
(a) Description of Business
Hatten Communications Holding Company, Inc. (the "Company") is a holding
company for its wholly-owned investments in Connecticut Telephone and
Communications Systems, Inc. ("CTEL"), Connecticut Mobilecom, Inc.
("Mobilecom"), and Whitecap Technologies, Inc. ("Whitecap"). CTEL and
Mobilecom are resellers of cellular, long distance and paging services to
approximately 55,000 subscribers in Connecticut. Whitecap is a holding company
for its interests in Smartlink, Inc. and Smartlink Development, L.P. Smartlink
Inc. is the general partner of Smartlink Development L.P., a communications
development company.
The 1996 results of operations presented in the accompanying Consolidated
Statements of Operations includes the combined results of CTEL and Mobilecom
("Predecessor business") for the period May 1, 1995 to January 31, 1996, and
the results of the Company ("Successor business") from February 1 to April 30,
1996.
Hatten Communications Holding Company, Inc. was formed on January 31, 1996.
On that date, the shareholders of CTEL and Mobilecom assigned their interest
in the predecessor business to the Company in exchange for an equivalent
interest in the Company. The transaction was entirely between related parties
and was accounted for as if a pooling-of-interests business combination had
been consummated. The historical values of all assets and liabilities of CTEL
and Mobilecom were carried forward to the Company. Whitecap was also formed on
January 31, 1996 as a wholly-owned subsidiary of the Company. Whitecap
acquired its initial interests in Smartlink, Inc. and Smartlink Development,
L.P. on January 31, 1996. Through equity ownership in affiliated entities, the
sole shareholder of the Company effectively has a controlling voting interest
in Smartlink, Inc. and Smartlink Development, L.P. The Company's investments
in Smartlink, Inc. and Smartlink Development, L.P. are accounted for using the
equity method.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of Hatten
Communications Holding Company, Inc. and its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation.
(c) Revenue Recognition
Revenue from cellular, long distance and paging services is recognized on a
monthly basis based on services used by subscribers during that month. Revenue
from the sale of cellular and paging equipment is recognized at the point of
sale.
(d) Cash Equivalents
For financial statements purposes, the Company considers all cash
instruments with original maturities of three months or less to be cash
equivalents.
(e) Inventory
Inventory includes cellular and paging equipment and accessories and is
valued at the lower of cost or market using the first-in, first-out method.
F-30
<PAGE>
HATTEN COMMUNICATIONS HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(f) Property and Equipment
Property and equipment are stated at historical cost. Depreciation is
provided over the estimated useful lives of the respective assets using
accelerated cost recovery methods.
(g) Cellular Lines
Cellular lines represents the cost of direct acquisition of subscribers from
other cellular companies. During fiscal 1997, the Company completed two
acquisitions of cellular lines with an aggregate purchase price of $3,911,505.
The cost of cellular lines is being amortized over 48 months, the related
estimated churn period of the cellular lines. Accumulated amortization totaled
$88,381 at April 30, 1997. Amortization expense totaled $88,381 for the year
ended April 30, 1997.
(h) Financing Fees
Financing fees represent legal and other costs incurred to secure financing
for operations. The fees are being amortized over 36 months using the
straight-line method.
(i) Deferred Revenue
The Company bills access charges for cellular services to its customers one
month in advance. Deferred revenue represents the portion of access charges
billed to customers not yet earned by the Company.
(j) Income Taxes
Income taxes are accounted for under the asset and liability method. Under
the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered and
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
(k) New Subscriber Acquisition Costs
New subscriber acquisition costs include all costs associated with obtaining
new subscribers, except the cost of hardware discounts. Acquisition costs
include marketing, advertising, retail store operations, and initial hardware
installation costs. Discounts on cellular phones and other hardware are
included in "Cost of Revenues" in the accompanying Consolidated Statements of
Operations and totaled approximately $1,365,000 and $1,100,000 for the years
ended April 30, 1997 and 1996, respectively.
(l) 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-31
<PAGE>
HATTEN COMMUNICATIONS HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
1997 1996
Accounts receivable consists of the following: ---------- ---------
<S> <C> <C>
Billed accounts receivable................................ $5,256,361 3,917,527
Unbilled accounts receivable.............................. 1,172,632 654,503
---------- ---------
Gross accounts receivable............................... 6,428,993 4,572,030
Allowance for doubtful accounts............................. (1,020,343) (856,903)
---------- ---------
Net accounts receivable................................. $5,408,650 3,715,127
========== =========
</TABLE>
Unbilled accounts receivable represent charges for airtime revenue earned
but not yet billed to customers. All unbilled accounts receivable were billed
within one month after year-end.
(3) INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Cellular phones and accessories................................ $845,332 538,266
Dispatch equipment and accessories............................. 82,070 99,323
-------- -------
$927,402 637,589
======== =======
</TABLE>
(4) RELATED PARTY TRANSACTIONS
(a) Receivable
During fiscal 1997, the Company made advances of $50,000 to its Chief
Executive Officer. The advances are non-interest bearing and do not have
stated repayment terms.
(b) Leases
The Company leases certain space for its corporate offices and retail
outlets from its sole stockholder. See note 9(b).
(5) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
USEFUL LIFE 1997 1996
------------- ---------- ---------
<S> <C> <C> <C>
Store equipment.............................. 5-7 years $ 336,834 239,607
Office equipment............................. 5-7 years 879,660 619,657
Dispatch equipment........................... 5 years 88,047 82,533
Leasehold improvements....................... 31.5-39 years 450,899 331,075
Furniture and fixtures....................... 7 years 160,560 83,749
Automobiles.................................. 5 years 52,739 31,207
---------- ---------
$1,968,739 1,387,828
========== =========
</TABLE>
F-32
<PAGE>
HATTEN COMMUNICATIONS HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(6) INVESTMENT IN SMARTLINK
At April 30, 1997, the Company owned approximately 18.7% of Smartlink, Inc.
and effectively owned approximately 24.6% of Smartlink Development, L.P.
(together "Smartlink") as a result of cash investments made on January 31,
1996 and December 31, 1996. Smartlink designs, markets, and sells specialized
mobile radio technology to commercial customers. Smartlink is emerging from
the development stage, during which time it has incurred cumulative losses.
The Company has recognized its share of Smartlink's net loss through April 30,
1997. The Company's investment in Smartlink was $2,114,864 and $2,023,411 as
of April 30, 1997 and 1996, respectively. Summarized financial information of
Smartlink as of and for the year ended December 31, 1996, Smartlink's fiscal
year end, is as follows:
<TABLE>
<S> <C>
Condensed Statement of Operations:
Net sales................................................... $ 268,665
Net loss.................................................... 2,240,004
Condensed Balance Sheet:
Current assets.............................................. $ 834,701
Noncurrent assets........................................... 288,355
----------
$1,123,056
==========
Current liabilities........................................... $1,646,570
Noncurrent liabilities........................................ 427,747
Partners' equity (deficit).................................... (951,261)
----------
$1,123,056
==========
</TABLE>
The Company periodically evaluates the recoverability of its investment in
Smartlink. Through April 30, 1997, the Company has not recorded any write-down
on its investment as no impairment has occurred.
The Company (and the Predecessor business prior to January 31, 1996) made
advances to Smartlink over several years. On January 31, 1996, Smartlink
settled its receivable balance by issuing a $870,315 note to the Company. The
note accrues interest at 7% per annum. The note provides for 36 monthly
principal and interest payments of $15,000 through March 1999 with a final
payment of $483,142 due in April 1999.
During fiscal 1996, Smartlink prepaid $200,000 on the note in addition to
the regularly scheduled payments. During fiscal 1997, the Company approved the
making of interest only payments by Smartlink on the note. The note will be
repaid under its original terms in fiscal 1998 with the additional principal
deferred during fiscal 1997 paid with the final payment in April 1999. The
balance of the note was $663,159 at April 30, 1997 and 1996.
(7) NOTES PAYABLE
(a) Note Payable
In March 1997, the Company issued a note payable in the amount of $330,750
to an unaffiliated company in exchange for cellular lines purchased from that
company. The note is non-interest bearing and is payable in nine equal monthly
installments of $36,750 through December 1997.
(b) Subordinated Note Payable
During fiscal 1996, the Company repurchased and retired stock of a former
owner pursuant to a certain Assignment and Assumption of Option to Purchase
Stock dated January 31, 1996. In exchange, the Company issued a $4,000,000
subordinated note, of which $2,000,000 was payable immediately upon issuance
of the note. The note accrued interest at 7% per annum through January 1997
and 8.25% through April 1997, payable monthly. The remaining unpaid balance of
the note is payable in one installment of $2,000,000 on January 31, 1999. See
Note 12.
F-33
<PAGE>
HATTEN COMMUNICATIONS HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(8) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C>
Revolving credit note payable to bank, bearing interest
at the bank's base rate plus 1%, due on January 31,
1999, secured by substantially all assets of the
Company................................................ $ 2,612,694 --
Term loan payable to bank, bearing interest at the
bank's base rate plus 1%, due in monthly installments
of $29,762 through December 1998 with a final
installment of $1,815,474 due January 31, 1999, secured
by substantially all assets of the Company............. 2,440,476 --
Acquisition loan note payable to bank, bearing interest
at the bank's base rate plus 1%, due in monthly
installments of $44,048 through December 1998 with a
final installment of $2,863,088 due January 31, 1999,
secured by substantially all assets of the Company..... 3,700,000 --
Note payable to limited partnership, bearing interest at
10% per annum, due January 31, 1999, secured by
substantially all assets of the Company................ 4,916,443 5,747,493
Various notes payable, secured by automobiles........... 18,158 --
----------- ---------
Total long-term debt................................ 13,687,771 5,747,493
Less current portion.................................... 812,521 --
----------- ---------
Long-term portion................................... $12,875,250 5,747,493
=========== =========
</TABLE>
The Company entered into a Master Credit Agreement ("Credit Agreement") with
Bank of Boston on January 30, 1997, which provided borrowings under revolving
credit notes of up to $4,000,000 and a term loan in the amount of $2,500,000.
The proceeds from the revolving credit notes and the term loan were used to
repay existing indebtedness and to provide working capital. The Credit
Agreement was amended on April 16, 1997 to provide additional borrowings under
an acquisition loan note in the amount of $3,700,000. The proceeds of the
acquisition loan note were used to purchase additional cellular lines from an
unaffiliated Company. Borrowings under the Credit Agreement accrue interest at
the bank's base rate plus 1% (9.5% at April 30, 1997) and are due January 31,
1999. In addition, a commitment fee of 0.5% is payable monthly on the
unborrowed portion of the amount committed under the revolving credit notes.
The Credit Agreement contains certain restrictive covenants of which the
Company was in compliance at April 30, 1997.
The Company entered into a Note and Warrant Purchase Agreement ("Note
Agreement") with a limited partnership (the "Purchaser") on January 31, 1996.
Under the Agreement, the Company issued to the Purchaser senior notes in the
aggregate principal amount of $9,500,000 and a common stock purchase warrant
for 1,975 shares of the common stock of the Company. A portion of the proceeds
from the Note Agreement were used to pay notes payable outstanding at January
31, 1996. Interest on the senior note accrues at 10% per annum and is payable
quarterly. The senior note matures January 31, 1999. The common stock purchase
warrant is exercisable from January 31, 1996 through January 31, 1999, at a
price of $.01 per share.
The $9,500,000 proceeds were recorded as $5,500,000 in long-term debt with
the remaining $4,000,000 recorded as issuance of stock warrant representing
the estimated fair value of the warrant issued. The original issue discount on
the debt will accrete over the life of the loan so that the principal balance
will be $9,500,000 at maturity. The effective interest rate used to calculate
the accretion of the original issue discount is approximately 28%.
F-34
<PAGE>
HATTEN COMMUNICATIONS HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On August 8, 1996, the Company issued to the Purchaser an additional senior
note in the principal amount of $500,000. The proceeds were used to increase
the Company's investment in Smartlink. Interest on the senior note accrues at
10% per annum and is payable quarterly. The senior note matures January 31,
1999. Concurrent with the issuance of the additional senior note, the Company
issued to the Purchaser a Consolidating and Substitute Common Stock Purchase
Warrant (the "Warrant"). The Warrant effectively increased the number of
shares of common stock that can be purchased from 1,975 to 2,101 on the same
terms as noted above. The incremental number of shares, or 126 shares, were
considered granted as part of the additional senior note.
The $500,000 proceeds from the additional senior note were recorded as
$250,000 in long-term debt with the remaining $250,000 recorded as issuance of
stock warrant representing the estimated fair value of the warrant issued. The
original issue discount on the debt will accrete over the life of the loan so
that the principal balance will be $500,000 at maturity. The effective
interest rate used to calculate the accretion of the original issue discount
is approximately 28%.
Under the Note Agreement, the notes are subject to prepayment, in whole or
in part, at the option of the Company in integral multiples of $100,000 of
prepaid principal. In addition, the Company had the right to repurchase
warrants exercisable into shares of common stock, pro rata from the holders
thereof and subject to certain adjustment provisions of the agreement, at a
repurchase price of $.01 per share through January 31, 1997. In order to
exercise its repurchase right, the Company was obligated to prepay at least
$500,000 in principal in integral multiples of $500,000. On January 30, 1997,
the Company exercised its prepayment right and repaid $3,500,000 principal
amount of the notes and repurchased that portion of the common stock warrant
representing 774 shares of common stock at $.01 per share. As a result of
repurchase of the warrant, $1,347,080 of proceeds originally recorded as
issuance of stock warrant was reallocated to long-term debt.
For the year ended April 30, 1997, $1,071,870 of the original issue discount
was accreted and is included in interest expense on the accompanying 1997
Consolidated Statement of Operations. For the year ended April 30, 1996,
$247,493 was accreted and is included in interest expense on the accompanying
1996 Consolidated Statement of Operations.
The Note Agreement contains certain restrictive covenants. The Company was
not in compliance with a covenant limiting the annual amount of capital
expenditures and a covenant requiring a minimum operating cash flow to
consolidated interest expense ratio. The capital expenditures covenant limits
the aggregate annual capital expenditures to $500,000. The aggregate capital
expenditures for fiscal 1997 totaled $580,911. The operating cash flow
covenant requires that the ratio of operating cash flow to consolidated
interest expense be at least 1.15 to 1.0 for the year ended April 30, 1997.
The ratio for the period is 1.14 to 1.0. The Company received waivers of the
violations from the holder of the notes. See note 12.
Maturities of long-term debt for the next two years are as follows: 1998,
$812,521; 1999, $12,875,250.
(9) LEASE OBLIGATIONS
(a) Capital
The Company leased telephone equipment under two capital leases. The
equipment had a historical cost of $68,708 and is included in property and
equipment in the Consolidated Balance Sheets. The Company repaid its
obligations in full during fiscal 1997.
(b) Operating
The Company leases space for its corporate offices and retail outlets under
nine separate operating leases which expire at various times through August
2002. The Company also leases certain office equipment and vehicles. Total
rent expense for the years ended April 30, 1997 and 1996 was $502,173 and
$462,547,
F-35
<PAGE>
HATTEN COMMUNICATIONS HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
respectively, of which approximately $163,000 and $149,000 respectively, was
paid to the Company's sole stockholder as lessor of the related properties.
Future minimum lease payments under operating leases are as follows:
<TABLE>
<S> <C>
Year ending April 30:
1998........................................................ $ 563,099
1999........................................................ 469,565
2000........................................................ 250,422
2001........................................................ 251,587
2002........................................................ 163,255
----------
Total future minimum lease payments....................... $1,697,928
==========
</TABLE>
(10) INCOME TAXES
Income tax expense consists of the following for the years ended April 30,
1997 and 1996:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- ------
<S> <C> <C> <C>
1997
Federal......................................... $ -- -- --
State........................................... 56,005 -- 56,005
------- ----- ------
$56,005 -- 56,005
======= ===== ======
1996
Federal......................................... $ 9,039 -- 9,039
State........................................... 7,772 -- 7,772
------- ----- ------
$16,811 -- 16,811
======= ===== ======
</TABLE>
The Company has not recorded any federal income tax expense for the year
ended April 30, 1997 because the Company has a consolidated net loss for the
year and will file a consolidated federal tax return. The Company has recorded
state income tax expense for the year ended April 30, 1997 because the Company
is required to pay taxes on the stand-alone net income of CTEL despite the
consolidated net loss. In addition, the minimum state tax expense has been
recorded for each of the companies in the consolidated group which had net
losses for the year.
The Company has recorded federal and state income tax expense for the year
ended April 30, 1996 based on net income generated by Mobilecom in the period
May 1, 1995 through January 31, 1996, as part of the Predecessor business. No
federal income tax expense has been recorded for the Successor business
because the Company has a consolidated net loss for the period ended April 30,
1996 and filed a consolidated federal tax return. The minimum state tax
expense has been recorded for the Successor business for the period ended
April 30, 1996.
The net current deferred tax asset totaled $0 and $541,700 at April 30, 1997
and 1996, respectively, and consisted primarily of temporary differences for
accounts receivable, principally for allowances for uncollectible accounts and
cellular fraud; inventory, principally due to reserves for obsolescence; sales
commissions not yet deductible for tax purposes; reserve for self-insured
medical costs not yet deductible for tax purposes; and the differences in the
timing of revenue recognition for book and tax purposes.
The net noncurrent deferred tax asset totaled $541,500 and $505,200 at April
30, 1997 and 1996, respectively, and consisted of $394,440 and $444,400 of
federal and $147,060 and $60,800 of state net operating loss carryforwards
which expire at various times through fiscal 2012.
F-36
<PAGE>
HATTEN COMMUNICATIONS HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
Management has concluded that it is more likely than not that the Company
will not have sufficient taxable income of an appropriate character within the
carryback and carryforward period permitted by current tax law to allow for
the utilization of the deductible amounts generating the deferred tax assets
and, therefore, a valuation allowance of $541,500 and $1,046,900 has been
established to reduce total deferred tax assets to zero at April 30, 1997 and
1996, respectively.
(11) RETIREMENT PLAN
The Company sponsors a defined contribution retirement plan, covering
substantially all employees of the Company who are at least 21 years of age
and have completed one year of continuous service with the Company. The
Company does not make matching or discretionary contributions to the Plan.
(12) SUBSEQUENT EVENT
On May 23, 1997, the Company executed a Recapitalization Agreement and
entered into the Second Amended and Restated Master Credit Agreement with its
bank. The following transactions were consummated as part of the agreements:
The maximum borrowings available under the Master Credit Agreement was
increased to $17,000,000 and all rights under the Master Credit Agreement were
assigned to CTEL as the principal borrower. The revolving loans made under the
agreement bear interest at the bank's base rate plus 1.25%. CTEL immediately
obtained a revolving loan in the approximate amount of $11,100,000 and
advanced the money to the Company. The Company used the proceeds to repay
existing indebtedness as described below.
The Company repaid in full the revolving credit notes, term loan, and
acquisition loan note, all of which were outstanding at April 30, 1997.
The Company repaid $500,000 of the subordinated note payable to a former
owner which was outstanding at April 30, 1997.
The Company paid a dividend of $1,749,898 and a bonus payment of $220,102 to
its executive officers.
Pursuant to the Recapitalization Agreement, the Company authorized the
following classes of stock: (i) 71,650 shares of Class A Common Stock, $.01
par value, of which 71,650 shares were issued to the sole stockholder in
exchange for all of his shares of the Company; (ii) 33,350 shares of Class B
Common Stock, $.01 par value, of which no shares were issued; and (iii) 7,000
shares of Series A Cumulative Redeemable Preferred Stock, $.01 par value, of
which 7,000 shares were issued to third-party investors.
The Company exchanged its notes payable to the limited partnership which
were outstanding at April 30, 1997 for 6,000 shares of Series A Cumulative
Preferred Stock, a cash payment of $500,000, and a warrant to purchase up to
12,300 shares of Class B Common Stock. In lieu of issuing to the limited
partnership an additional warrant certificate to purchase these shares, the
limited partnership surrendered its warrant to purchase 14,000 shares which
its held at April 30, 1997 in exchange for a consolidating warrant to purchase
an aggregate of 26,300 shares of the Company's Class B Common Stock. Hatten
also issued 1,000 shares of Series A Cumulative Preferred Stock and a warrant
to purchase up to 2,050 shares of Class B Common Stock to a third-party
investor in exchange for $1,000,000.
F-37
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors
Connecticut Telephone and Communication Systems, Inc.
We have audited the accompanying balance sheet of Connecticut Telephone and
Communication Systems Inc. as of April 30, 1995, and the related statements of
income and deficit and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Connecticut Telephone and
Communication Systems, Inc. as of April 30, 1995, and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
Kostin, Ruffkess & Company, llc
West Hartford, Connecticut
May 24, 1995
F-38
<PAGE>
CONNECTICUT TELEPHONE AND COMMUNICATION SYSTEMS, INC.
BALANCE SHEET
APRIL 30, 1995
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash............................................................ $ 236,244
Trade accounts receivable (net of allowance for doubtful
accounts of $71,000)........................................... 2,542,720
Inventory....................................................... 465,314
Prepaid and other expenses...................................... 205,885
Related party receivable........................................ 311,857
-----------
Total current assets.......................................... 3,762,020
-----------
Property and equipment............................................ 964,005
Less: accumulated depreciation.................................. (455,700)
-----------
508,305
-----------
Cellular accounts................................................. 1,212,354
Less: accumulated amortization.................................. (1,212,354)
-----------
--
-----------
Other assets:
Deposits........................................................ 9,354
Financing fees (net of accumulated amortization of $94,880)..... 108,431
-----------
117,785
-----------
$ 4,388,110
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable--current portion.................................. $ 887,037
Leases payable--current portion................................. 24,504
Accounts payable: trade......................................... 598,729
SNET............................................................ 1,582,792
Accrued expenses and taxes...................................... 430,517
Income tax payable.............................................. 250
Deferred revenue................................................ 211,268
Customer deposits............................................... 54,998
-----------
Total current liabilities..................................... 3,790,095
-----------
Long-term debt:
Notes payable--net of current portion........................... 3,350,878
Leases payable--net of current portion.......................... 15,299
-----------
Total long-term debt.......................................... 3,366,177
-----------
Stockholders' deficit:
Common stock, $1 par value; 1,000 shares authorized, issued and
outstanding.................................................... 1,000
Deficit......................................................... (2,769,162)
-----------
(2,768,162)
-----------
$ 4,388,110
===========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-39
<PAGE>
CONNECTICUT TELEPHONE AND COMMUNICATION SYSTEMS, INC.
STATEMENT OF INCOME AND DEFICIT
FOR THE YEAR ENDED APRIL 30, 1995
<TABLE>
<S> <C>
Sales revenue............................................... $16,181,443
Cost of sales............................................... 11,328,221
-----------
Gross profit................................................ 4,853,222
New subscriber acquisition costs............................ 1,663,986
General and administrative expenses......................... 2,961,117
-----------
228,119
Other income (expenses):
Amortization of financing fees.............................. (177,628)
Interest income............................................. 3,230
Interest expense............................................ (403,338)
Other, net.................................................. (21,868)
Income taxes................................................ (250)
-----------
Net loss.................................................... (371,735)
Deficit, beginning of year.................................. (2,397,427)
-----------
Deficit, end of year........................................ $(2,769,162)
===========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-40
<PAGE>
CONNECTICUT TELEPHONE AND COMMUNICATION SYSTEMS , INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED APRIL 30, 1995
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.......................................................... $(371,735)
Adjustments to reconcile net income to cash provided by operating
activities:
Unrealized loss on investment................................... 23,017
Gain on sale.................................................... (278)
Amortization and depreciation................................... 280,466
(Increase) decrease in:
Accounts receivable........................................... (900,751)
Inventory..................................................... 86,209
Prepaid expenses.............................................. 54,616
Deposits...................................................... 460
Related party receivable...................................... (311,857)
Increase (decrease) in:
Accounts payable.............................................. 753,774
Accrued expenses and taxes.................................... 200,907
Customer deposits............................................. 2,121
Deferred revenue.............................................. 211,268
---------
Net cash flows provided by operating activities..................... 28,217
---------
Cash flows from investing activities:
Proceeds from sale................................................ 4,500
Purchase of equipment............................................. (120,288)
Investment........................................................ (23,017)
---------
Cash flows used in investing activities............................. (138,805)
---------
Cash flows from financing activities:
Proceeds received from long-term debt............................. 280,000
Repayment of debt................................................. (891,788)
Repayment of stockholder loan..................................... 75,000
---------
Net cash flows used in financing activities......................... (536,788)
Net decrease in cash and equivalents................................ (647,376)
Cash and equivalents, beginning of year............................. 883,620
---------
Cash and equivalents, end of year................................... $ 236,244
=========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-41
<PAGE>
CONNECTICUT TELEPHONE AND COMMUNICATION SYSTEMS, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1995
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Business
The Company provides telecommunication services to cellular phone users in
Connecticut.
Inventory
Inventory is valued at the lower of cost or market using first-in, first-out
method and represents telephone equipment and accessories.
Property and Equipment
Property and equipment are stated at cost. Depreciation expense has been
computed using accelerated methods over the useful lives of the assets.
Cellular Accounts
Cellular accounts represent lines purchased by Connecticut Telephone. These
accounts are stated at cost. Amortization has been computed using the
straight-line method over a three year term.
Finance Fees
Finance fees represent legal fees incurred to obtain bank financing. These
fees are being amortized over sixty months.
Deferred Revenue
The Company bills access charges for cellular services to its customers one
month in advance. Deferred revenue represents the portion of access charges
billed to customers not yet earned by the Company.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents. The following is supplementary cash flows
information:
<TABLE>
<S> <C>
Interest paid.................................................... $403,785
Income taxes paid................................................ 250
</TABLE>
NOTE 2--PROPERTY AND EQUIPMENT:
Equipment and furniture are summarized by major classifications as follows:
<TABLE>
<S> <C>
Store equipment................................................. $133,482
Office equipment................................................ 377,083
Other equipment................................................. 43,710
Rental equipment................................................ 56,264
Leasehold improvements.......................................... 286,735
Automobiles..................................................... 33,464
Office furniture................................................ 33,267
--------
964,005
Less: accumulated depreciation................................ 455,700
--------
$508,305
========
</TABLE>
F-42
<PAGE>
CONNECTICUT TELEPHONE AND COMMUNICATION SYSTEMS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--INVESTMENT:
The Company has an investment in a real estate limited partnership, which
has gone into bankruptcy. This investment has been written down to $1 and the
Company has recorded an unrealized loss of $23,016.
NOTE 4--NOTES PAYABLE:
Note Payable--Springwich Cellular Limited Partnership
Payable in monthly installments of $24,000 including principal and interest
through December 1996. Monthly principal and interest installments from
January through December 1997 will be $44,000 with a final payment equal to
the outstanding balance in January 1998.
Interest is charged at 1% over prime, which at April 30, 1995 was 9.0%. The
balance owed on this note at April 30, 1995 was $1,217,382.
Note Payable--Fleet Bank
Payable in monthly installments of $47,248 plus interest through November
1997 with a final payment equal to the outstanding principal balance in
December 1997.
Interest is charged at a per annum rate equal to 1% over the prime, which at
April 30, 1995 was 9.0%. The balance owed on this note at April 30, 1995 was
$2,880,533.
Both notes are secured by a first priority security interest in all Company
assets. In addition, there is a collateral assignment of $5,000,000 of life
insurance proceeds on the president of the Company. Also, the notes contain
certain restrictive covenants pertaining to financial ratios, number of
telephone lines and cash flow coverage. The Company was in violation of
certain covenants which have been waived by the bank.
Note Payable--Fleet Bank, Short-term
The Company has a revolving promissory note with a maximum borrowing of
$280,000. Interest is to be charged using a combination of the 30 and 90 day
LIBOR rates. The interest rate being charged as of April 30, 1995 was 8.8125%.
The balance owed on this note at April 30, 1995 was $140,000. Payments of
interest and principal of $70,000 are made monthly.
Total interest expense for the year ended April 30, 1995 was $411,915.
Principal payments due on notes payable are as follows:
<TABLE>
<CAPTION>
APRIL 30,
---------
<S> <C>
1996.......................... $ 887,037
1997.......................... 845,862
1998.......................... 2,505,016
</TABLE>
NOTE 5--CAPITAL LEASE:
The Company acquired a telephone system and financed the purchase through
two capital leases. The cost of this new equipment totalled $68,708, which was
capitalized into office equipment. At April 30, 1995, accumulated amortization
amounted to $26,645. These leases have been capitalized and are being
amortized over the term of the leases.
F-43
<PAGE>
CONNECTICUT TELEPHONE AND COMMUNICATION SYSTEMS, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
Minimum future lease payments under these capital leases are as follows:
<TABLE>
<CAPTION>
APRIL 30, AMOUNT
--------- -------
<S> <C>
1996............................................................. $30,370
1997............................................................. 15,957
-------
Total minimum lease payments..................................... 46,327
Less: amount representing interest............................... (6,524)
-------
Present value of net minimum lease payments...................... $39,803
=======
</TABLE>
NOTE 6--RELATED PARTY TRANSACTIONS:
The Company has an expense reimbursement agreement with a corporation which
is owned by a stockholder of Connecticut Telephone and Communication Systems,
Inc. The agreement was created to reimburse the Company for various operating
expenses paid on behalf of the affiliate. Amount due at April 30, 1995 was
$311,857, which is included in accounts receivable on the balance sheet. Total
expense reimbursements for the year ended April 30, 1995 was $1,243,768.
The Company was owed $75,000 from a majority stockholder. This note was
repaid in 1994.
Connecticut Telephone and Communication Systems, Inc. leases five of their
operating facilities from Company stockholders. Rent is paid on a month to
month basis. (See Note 8)
The related party receivable represents amounts due from a company with
common ownership for its share of allocated overhead. There are no specific
terms of repayment.
NOTE 7--INCOME TAXES:
There is no provision for income taxes due to current year operating losses.
Approximately $2,425,000 remains to reduce future Federal taxable income, if
any, through 2010. Approximately $2,423,000 remains to reduce future State
taxable income, if any, expiring in various years through 2000.
NOTE 8--LONG-TERM LEASES:
The Company leases its store buildings under operating leases. Connecticut
Telephone and Communication Systems, Inc. is responsible for its own insurance
and property taxes. Rent expense for the year ended April 30, 1995 was
$352,956, of which $289,200 was paid to Company stockholders.
Minimum future rental payments under noncancellable operating leases having
remaining terms in excess of one year are as follows:
<TABLE>
<CAPTION>
APRIL 30, AMOUNT
--------- --------
<S> <C>
1996............................................................ $ 59,500
1997............................................................ 28,000
1998............................................................ 28,000
1999............................................................ 28,000
2000............................................................ 7,002
--------
Total minimum future rental payments.......................... $150,502
========
</TABLE>
NOTE 9--ECONOMIC DEPENDENCY:
The Company obtains substantially all of its services from one source. At
April 30, 1995, the Company owed this supplier approximately $2,879,021.
NOTE 10--OFF BALANCE SHEET RISK:
During the year ended April 30, 1995, the Company had an excess of $100,000
in a single bank. Amounts over $100,000 are not insured by the Federal Deposit
Insurance Corporation.
F-44
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Connecticut Mobilecom, Inc.:
We have audited the accompanying balance sheet of Connecticut Mobilecom,
Inc. as of April 30, 1995 and the related statements of operations,
stockholders' deficit, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Connecticut Mobilecom,
Inc. as of April 30, 1995 and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Providence, Rhode Island
January 16, 1998
F-45
<PAGE>
CONNECTICUT MOBILECOM, INC.
BALANCE SHEET
APRIL 30, 1995
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
Current assets:
Cash.................................................................. $ 127,635
Accounts receivable, net of allowance for doubtful accounts of
$94,160.............................................................. 779,882
Inventory............................................................. 117,481
Prepaid expenses and other current assets............................. 153,294
----------
Total current assets.............................................. 1,178,292
----------
Property and equipment (note 2)......................................... 87,135
Less accumulated depreciation......................................... 51,962
----------
Property and equipment, net....................................... 35,173
----------
Related party receivable (note 3)....................................... 836,678
Intangible assets, net of accumulated amortization of $58,704........... 21,087
----------
Total assets...................................................... $2,071,230
==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
<S> <C>
Current liabilities:
Accounts payable:
Trade............................................................... $ 199,541
Bell Atlantic Nynex Mobile.......................................... 1,368,689
Accrued expenses...................................................... 89,697
Customer deposits..................................................... 1,232
Deferred revenue...................................................... 140,358
Income taxes payable (note 4)......................................... 858
Related party payable (note 3)........................................ 469,040
----------
Total current liabilities......................................... 2,269,415
----------
Stockholders' deficit:
Common stock, no par value, $.50 stated value, 5,000 shares
authorized, 2,000 shares issued and outstanding...................... 1,000
Accumulated deficit................................................... (199,185)
----------
Total stockholders' deficit....................................... (198,185)
----------
Total liabilities and stockholders' deficit....................... $2,071,230
==========
</TABLE>
See accompanying notes to financial statements.
F-46
<PAGE>
CONNECTICUT MOBILECOM, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED APRIL 30, 1995
<TABLE>
<S> <C>
Revenues........................................................... $4,340,364
Cost of revenues................................................... 2,545,052
----------
Gross profit................................................... 1,795,312
----------
New subscriber acquisition costs................................... 560,145
General and administrative expenses................................ 1,358,089
----------
1,918,234
----------
Operating loss................................................. (122,922)
Other income (expense):
Interest income.................................................. 19,067
Interest expense................................................. (7,606)
Amortization of intangible assets................................ (23,972)
Other, net....................................................... (87)
----------
Loss before income taxes....................................... (135,520)
Income tax expense................................................. 858
----------
Net loss....................................................... $ (136,378)
==========
</TABLE>
See accompanying notes to financial statements.
F-47
<PAGE>
CONNECTICUT MOBILECOM, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED APRIL 30, 1995
<TABLE>
<CAPTION>
TOTAL
COMMON ACCUMULATED STOCKHOLDERS'
STOCK DEFICIT DEFICIT
------ ----------- -------------
<S> <C> <C> <C>
Balances at April 30, 1994 (unaudited)......... $1,000 (62,807) (61,807)
Net loss....................................... -- (136,378) (136,378)
------ -------- --------
Balances at April 30, 1995..................... $1,000 (199,185) (198,185)
====== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-48
<PAGE>
CONNECTICUT MOBILECOM, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED APRIL 30, 1995
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.......................................................... $(136,378)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization................................... 53,151
Provision for doubtful accounts................................. 85,432
Increase in accounts receivable................................. (298,979)
Increase in inventory........................................... (23,520)
Increase in prepaid expenses and other current assets........... (31,044)
Increase in accounts payable.................................... 773,744
Increase in accrued expenses.................................... 23,341
Decrease in customer deposits................................... (8,768)
Increase in deferred revenue.................................... 40,781
Increase in income taxes payable................................ 608
---------
Net cash provided by operating activities..................... 478,368
---------
Cash flows from investing activities:
Additions to property and equipment............................... (32,657)
---------
Net cash used in investing activities......................... (32,657)
---------
Cash flows from financing activities:
Increase in advances to related entity............................ (734,177)
Change in other related party receivable/payable.................. 415,227
---------
Net cash used in financing activities......................... (318,950)
---------
Increase in cash and cash equivalents............................... 126,761
Cash and cash equivalents:
Beginning of year................................................. 874
---------
End of year....................................................... $ 127,635
=========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest........................................................ $ 7,606
=========
Income taxes.................................................... $ 250
=========
</TABLE>
See accompanying notes to financial statements.
F-49
<PAGE>
CONNECTICUT MOBILECOM, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies:
(a) Description of Business
Connecticut Mobilecom, Inc. (the "Company") is a reseller of cellular and
paging services to subscribers in Connecticut.
(b) Revenue Recognition
Revenue from cellular and paging services is recognized on a monthly basis
for services used by subscribers during that month. Revenue from the sale of
cellular and paging equipment is recognized at the point of sale.
(c) Cash Equivalents
For financial statement purposes, the Company considers all cash instruments
with original maturities of three months or less to be cash equivalents.
(d) Inventory
Inventory includes dispatch equipment and accessories and is valued at the
lower of cost or market using the first-in, first-out method.
(e) Property and Equipment
Property and equipment are stated at historical cost. Depreciation is
provided over the estimated useful lives of the respective assets using
accelerated cost recovery methods.
(f) Intangible Assets
Intangible assets includes cellular lines which represents the cost of
direct acquisition of subscribers from other cellular companies. The cost of
cellular lines is being amortized over 36 months using the straight-line
method. Amortization expense totaled $23,972 for the year ended April 30,
1995.
(g) Deferred Revenue
The Company bills access charges for cellular service to its customers one
month in advance. Deferred revenue represents the portion of access charges
billed to customers not yet earned by the Company.
(h) Income Taxes
Income taxes are accounted for under the asset and liability method. Under
the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered and
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
F-50
<PAGE>
CONNECTICUT MOBILECOM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(i) New Subscriber Acquisition Costs
New subscriber acquisition costs include all costs associated with obtaining
new subscribers, except the cost of hardware discounts. Acquisition costs
include marketing, advertising, and retail store operations costs.
(j) 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,
including estimates of useful lives of cellular lines, and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(2) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
USEFUL
LIFE
---------
<S> <C> <C>
Office equipment........................................ 5-7 years $18,155
Dispatch equipment...................................... 5 years 68,980
-------
$87,135
=======
</TABLE>
(3) RELATED PARTY TRANSACTIONS
Connecticut Mobilecom, Inc. has provided an unsecured working capital loan
to an entity which is partially owned by a stockholder of the Company.
Interest is being charged at variable rates. The balance at April 30, 1995 was
$836,678. Interest income in the amount of $11,461 was recognized on the loan
during the year ended April 30, 1995. See Note 5.
The Company has an expense reimbursement agreement with a corporation which
is owned by the stockholders of Connecticut Mobilecom, Inc. The agreement was
created to reimburse the affiliate for various operating expenses paid on
behalf of the Company. Amounts owed at April 30, 1995 were $311,857. Total
expense reimbursements for the year ended April 30, 1995 were $1,243,768.
Interest expense in the amount of $7,606 was recognized on the amounts owed
during the year ended April 30, 1995.
As of April 30, 1995, the Company owed a majority stockholder $157,183. This
loan is non-interest bearing. See Note 5.
The Company leases its operating facility from a stockholder under an
operating lease agreement scheduled to expire in December 1998. Rent is paid
on a monthly basis at $4,330 per month. Connecticut Mobilecom, Inc. is
responsible for its own insurance and property taxes. Rent expense for the
year ended April 30, 1995 was $51,960. Future minimum lease payments for the
fiscal years ended April 30 are as follows: 1996--$51,960; 1997--$51,960;
1998--$51,960; 1999--$34,640.
(4) INCOME TAXES
Federal income tax expense totaled $608 for the year ended April 30, 1995.
The minimum state tax expense of $250 has been recorded for the year ended
April 30, 1995.
F-51
<PAGE>
CONNECTICUT MOBILECOM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The net current deferred tax asset totaled $65,000 at April 30, 1995, and
consisted primarily of temporary differences for accounts receivable,
principally for allowances for uncollectible accounts, and the differences in
the timing of revenue recognition for book and tax purposes.
Management has concluded that it is more likely than not that the Company
will not have sufficient taxable income of an appropriate character within the
carryback and carryforward period permitted by current tax law to allow for
the utilization of the deductible amounts generating the deferred tax assets
and, therefore, a valuation allowance of $65,000 has been established to
reduce total deferred tax assets to zero at April 30, 1995.
(5) SUBSEQUENT EVENTS
The Company formalized its working capital loan arrangement with the related
entity on July 15, 1995 by accepting a note in the amount of $436,840 and
converting $542,000 in amounts due from the related entity into an investment
in the related entity. The total amount of $978,840 represented the amount
outstanding as of the date of the note, which amount included additional
advances made after April 30, 1995, including accrued interest thereon.
On January 31, 1996, the stockholders of the Company contributed all of the
outstanding shares of the Company to Hatten Communications Holding Company,
Inc. ("Hatten") in exchange for an equivalent interest in Hatten. At that
date, the Company became a wholly-owned subsidiary of Hatten. Subsequent to
the recapitalization, the loan due to the stockholder of the Company was
repaid.
F-52
<PAGE>
[1997 CUMULATIVE ACCESS LINES GRAPH]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTI-
TUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK
IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information...................................................... 3
Disclosure Regarding Forward-Looking Statements............................ 3
Prospectus Summary......................................................... 4
Risk Factors............................................................... 12
Use of Proceeds............................................................ 22
Dividend Policy............................................................ 22
Capitalization............................................................. 23
Dilution................................................................... 24
Selected Historical Consolidated Financial and Operating Data.............. 25
Pro Forma Consolidated Financial Statements................................ 26
Management's Discussion and Analysis
of Financial Condition and Results
of Operations............................................................. 33
Industry Overview.......................................................... 39
Business................................................................... 40
Management................................................................. 54
Certain Relationships and Related Transactions............................. 63
Stock Ownership............................................................ 65
Description of Capital Stock............................................... 67
Description of Certain Indebtedness........................................ 71
Shares Eligible for Future Sale............................................ 72
Certain United States Federal Tax Consequences
to Non-United States Holders.............................................. 74
Underwriting............................................................... 76
Legal Matters.............................................................. 79
Experts.................................................................... 79
Glossary................................................................... 80
Index to Financial Statements.............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
8,000,000 SHARES
LOGO
USN COMMUNICATIONS, INC.
COMMON STOCK
---------------
PROSPECTUS
---------------
MERRILL LYNCH & CO.
COWEN & COMPANY
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED FEBRUARY 2, 1998
PROSPECTUS
8,000,000 SHARES
USN COMMUNICATIONS, INC.
LOGO
COMMON STOCK
-----------
All of the 8,000,000 shares of Common Stock, par value $.01 per share (the
"Common Stock"), being offered hereby are being offered by USN Communications,
Inc., a Delaware corporation ("USN" or the "Company").
Of the 8,000,000 shares of Common Stock offered hereby, 1,600,000 shares are
being initially offered outside the United States and Canada by the
International Managers (the "International Offering") and 6,400,000 shares of
Common Stock are being offered in a concurrent offering in the United States
and Canada by the U.S. Underwriters (the "U.S. Offering" and, together with the
International Offering, the "Offerings"). The initial public offering price and
the aggregate underwriting discount per share will be identical for both
Offerings. See "Underwriting."
Prior to the Offerings, there has been no public market for the Common Stock.
It is currently anticipated that the initial public offering price per share of
Common Stock will be between $16.00 and $18.00 per share. See "Underwriting"
for a discussion of the factors to be considered in determining the initial
public offering price.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "USNC."
At the Company's request, the U.S. Underwriters have reserved up to 800,000
shares for sale at the initial public offering price to certain of the
Company's employees, members of their immediate families and other individuals
who are business associates of the Company (including certain vendors and
consultants), in each case, as such parties have expressed an interest in
purchasing such shares. The number of shares available for sale to the general
public will be reduced to the extent these individuals purchase such reserved
shares. Any reserved shares not purchased will be offered by the U.S.
Underwriters to the general public on the same basis as the other shares
offered hereby.
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COM- MISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPEC- TUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............ $ $ $
- ------------------------------------------------------------------------------
Total(3)............. $ $ $
- ------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses of the Offerings payable by the Company estimated
at $1,100,000.
(3) The Company has granted the U.S. Underwriters and the International
Managers options, exercisable within 30 days of the date hereof, to
purchase up to an aggregate of 960,000 and 240,000 additional shares of
Common Stock, respectively, solely to cover over-allotments, if any. If
such options are exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
-----------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, and subject to
the approval of certain legal matters by counsel for the Underwriters and
certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the shares of Common Stock will be made in New York,
New York on or about , 1998.
-----------
MERRILL LYNCH INTERNATIONAL
COWEN INTERNATIONAL L.P.
DONALDSON, LUFKIN & JENRETTE INTERNATIONAL
-----------
The date of this Prospectus is , 1998.
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"International Purchase Agreement") between the Company and each of the
underwriters named below (the "International Managers"), the Company has
agreed to sell to each of the International Managers, and each of the
International Managers has severally agreed to purchase from the Company, the
aggregate number of shares of Common Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL MANAGERS SHARES
---------------------- ---------
<S> <C>
Merrill Lynch International...........................................
Cowen International L.P...............................................
Donaldson, Lufkin & Jenrette International............................
---------
Total............................................................. 1,600,000
=========
</TABLE>
Merrill Lynch International, Cowen International L.P. and Donaldson, Lufkin
& Jenrette International are acting as representatives (the "International
Representatives") of the International Managers.
The Company has also entered into a purchase agreement (the "U.S. Purchase
Agreement") with certain United States underwriters (the "U.S. Underwriters"
and, together with the International Managers, the "Underwriters"), for whom
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Cowen & Company and
Donaldson, Lufkin & Jenrette Securities Corporation are acting as
representatives (the "U.S. Representatives"), providing for the concurrent
offer and sale of 6,400,000 shares of Common Stock in the U.S. Offering. The
closings with respect to the International Offering and the U.S. Offering are
conditioned upon one another.
The International Managers have advised the Company that they propose
initially to offer the shares of Common Stock to the public at the public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per share of
Common Stock. The International Managers may allow, and such dealers may
reallow, a discount not in excess of $ per share of Common Stock on sales
to certain other dealers. After the initial public offering, the public
offering price, concession and discount may be changed. The public offering
price, concession and discount per share of Common Stock are identical under
the International Purchase Agreement and the U.S. Purchase Agreement.
The several International Managers have agreed, subject to the terms and
conditions set forth in the International Purchase Agreement, to purchase all
of the shares of Common Stock being sold pursuant to such agreement if any of
the shares of Common Stock being sold pursuant to such agreement are
purchased. Under certain circumstances the commitments of non-defaulting
International Managers may be increased.
The International Managers have advised the Company that they do not intend
to confirm sales of shares of Common Stock offered hereby to any accounts over
which they exercise discretionary authority.
The International Managers and the U.S. Underwriters have entered into an
Intersyndicate Agreement (the "Intersyndicate Agreement") that provides for
the coordination of their activities. Pursuant to the Intersyndicate
Agreement, the U.S. Underwriters and any dealer to whom they sell shares of
Common Stock will not offer to sell or sell shares of Common Stock to non-
United States or Canadian persons or to persons they believe intend to resell
to non-United States or Canadian persons, and the International Managers and
any dealer to whom they sell shares of Common Stock will not offer to sell or
sell shares of Common Stock to United States or Canadian persons, except, in
each case, for transactions pursuant to the Intersyndicate Agreement. The
Intersyndicate Agreement also provides, among other things, that sales may be
made between the International Managers and the U.S. Underwriters of such
number of shares of Common Stock as may be mutually agreed. The price of any
shares of Common Stock so sold shall be the public offering price, less an
amount not greater than the selling concession.
76
<PAGE>
The Company has granted to the International Managers an option to purchase
up to an aggregate of 240,000 additional shares of Common Stock, exercisable
in whole or in part for 30 days after the date of this Prospectus, solely to
cover over-allotments, if any, at the public offering price, less applicable
underwriting discounts. To the extent that the International Managers exercise
this option, the International Managers have severally agreed, subject to
certain conditions, to purchase approximately the same percentage of shares of
Common Stock that the number of shares of Common Stock to be purchased by each
of them, as shown in the above table, bears to the total number of shares of
Common Stock initially offering hereby. The Company has granted to the U.S.
Underwriters an option to purchase up to an aggregate of 960,000 additional
shares of Common Stock, exercisable in whole or in part for 30 days after the
date of this Prospectus, solely to cover over-allotments, if any, on terms
similar to those granted to the International Managers. All or a portion of an
over-allotment option in either of the Offerings may be allocated to cover an
over-allotment in the other Offering.
The Company has agreed to indemnify the International Managers against
certain liabilities, including liabilities under the Securities Act and other
applicable securities laws, or to contribute to payments the International
Managers may be required to make in respect thereof.
Pursuant to "lock-up" agreements, except for the issuance by the Company of
Common Stock pursuant to existing stock option plans or upon exercise of
currently existing warrants, the Company, its directors and executive officers
and certain holders of the Common Stock have agreed not to, directly or
indirectly, sell, offer to sell, grant any option for sale of, or dispose of,
any capital stock of the Company or any security convertible or exchangeable
into, or exercisable for, such capital stock, or, in the case of the Company,
file any registration statement with respect to any of the foregoing pursuant
to the Securities Act without the prior written consent of Merrill Lynch,
Pierce, Fenner & Smith Incorporated, on behalf of the Underwriters, for a
period of 180 days following the date of this Prospectus. See "Shares Eligible
for Future Sale."
In connection with the Offerings, the International Managers and the U.S.
Underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the shares of Common Stock. Specifically, the
International Managers and the U.S. Underwriters may over-allot the offering,
creating a short position. In addition, the International Managers and the
U.S. Underwriters may bid for, and purchase shares of Common Stock in the open
market to cover short sales or to stabilize the price of the shares of Common
Stock. Finally, the underwriting syndicate may reclaim selling concessions
allowed for distributing the shares of Common Stock in the Offerings if the
syndicate repurchases previously distributed shares of Common Stock in
syndicate covering transactions, stabilization transactions or otherwise. Any
of these activities may stabilize or maintain the market price of the shares
of Common Stock above independent market levels. The International Managers
and the U.S. Underwriters are not required to engage in these activities and
may end any of these activities at any time.
Each International Manager has represented and agreed that (i) it has not
offered or sold and, prior to the date six months after the closing date of
the Offerings, will not offer and sell any shares of Common Stock to persons
in the United Kingdom, except to persons whose ordinary activities involve
them in acquiring, holding, managing or disposing of investments (as principal
or agent) for the purposes of their businesses, or otherwise in circumstances
which do not constitute an offer to the public in the United Kingdom within
the meaning of the Public Offers of Securities Regulations 1995; (ii) it has
complied and will comply with all applicable provisions of the Financial
Services Act 1986 with respect to anything done by it in relation to the
shares of Common Stock in, from or otherwise involving the United Kingdom; and
(iii) it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the issue of the
shares of Common Stock to a person who is of a kind described in Article 11(3)
of the Financial Services At 1986 (Investment Advertisements) (Exemptions)
Order 1996, or to any person to whom the document may otherwise lawfully be
issued or passed on.
Prior to the Offerings, there has been no public market for the Common
Stock. The public offering price will be determined by negotiations among the
Company and the International Representatives. Among the factors to be
considered in such negotiations are an assessment of the Company's recent
results of operations, the future
77
<PAGE>
prospects of the Company and its industry in general, market prices of
securities of companies engaged in activities similar to those of the Company
and prevailing conditions in the securities market. There can be no assurance
that an active market will develop for the Common Stock or that the Common
Stock will trade in the public market subsequent to the Offering at or above
the public offering price.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "USNC."
At the Company's request, the U.S. Underwriters have reserved up to 800,000
shares for sale at the initial public offering price to certain of the
Company's employees, members of their immediate families and other individuals
who are business associates of the Company (including certain vendors and
consultants), in each case, as such parties have expressed an interest in
purchasing such shares. The number of shares available for sale to the general
public will be reduced to the extent these individuals purchase such reserved
shares. Any reserved shares not purchased will be offered by the U.S.
Underwriters to the general public on the same basis as the other shares
offered hereby.
Prior to the consummation of the Offerings, MLGAFI, an affiliate of Merrill
Lynch, beneficially owned more than 10% of the Common Stock on a fully diluted
basis. Accordingly, the offering of the Common Stock will be conducted in
compliance with the requirements of Rule 2720 ("Rule 2720") of the Conduct
Rules of the National Association of Securities Dealers, Inc. ("NASD"). Under
the provisions of Rule 2720, the public offering price of the securities can
be no higher than that recommended by a "qualified independent underwriter"
meeting certain standards ("QIU"). In accordance with this requirement,
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") has assumed the
responsibilities of acting as QIU and will recommend a maximum public offering
price for the Common Stock in compliance with the requirements of Rule 2720.
In connection with the Offerings, DLJ is performing due diligence
investigations and reviewing and participating in the preparation of this
Prospectus and the Registration Statement of which the Prospectus forms a
part. As compensation for the services of DLJ as QIU, the Company has agreed
to pay DLJ $5,000. The Company has agreed to indemnify DLJ in its capacity as
QIU. Pursuant to the provisions of Rule 2720, NASD members may not execute
transactions in Common Stock offered hereby to any accounts over which they
exercise discretionary authority without prior written approval of the
customer.
BT Alex Brown Incorporated, Chase Securities Inc. and CIBC Oppenheimer
Corp., which are affiliates of BT Capital Partners, Inc., Chase Venture
Capital Associates, L.P. and CIBC Wood Gundy Ventures, Inc., respectively, are
expected to be U.S. Underwriters in connection with the U.S. Offering. See
"Management," "Certain Relationships and Related Transactions" and "Stock
Ownership."
Certain of the International Managers and their respective affiliates have
provided from time to time, and expect to provide in the future, financial
advisory and investment banking services for, and/or have normal banking
relationships with, the Company and its affiliates, for which they receive
customary compensation. In addition, Merrill Lynch, Pierce, Fenner & Smith
Incorporated and DLJ acted as initial purchasers in connection with the 1997
Private Placement, for which they received customary discounts.
Purchasers of the shares of Common Stock may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase in addition to the public offering price set forth on the cover page
hereof.
78
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTI-
TUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK
OFFERED HEREBY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UN-
LAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PRO-
SPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS DOCU-
MENT IS BEING DISTRIBUTED IN THE UNITED KINGDOM ONLY TO PERSONS OF A KIND DE-
SCRIBED IN ARTICLE 11(3) OF THE FINANCIAL SERVICES ACT OF 1988 (INVESTMENT AD-
VERTISEMENTS) (EXEMPTIONS) ORDER 1996 OR TO WHOM IT WOULD OTHERWISE BE LAWFUL
SO TO DO.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information...................................................... 3
Disclosure Regarding Forward-Looking Statements............................ 3
Prospectus Summary......................................................... 4
Risk Factors............................................................... 12
Use of Proceeds............................................................ 22
Dividend Policy............................................................ 22
Capitalization............................................................. 23
Dilution................................................................... 24
Selected Historical Consolidated Financial and Operating Data.............. 25
Pro Forma Consolidated Financial Statements................................ 26
Management's Discussion and Analysis
of Financial Condition and Results
of Operations............................................................. 33
Industry Overview.......................................................... 39
Business................................................................... 40
Management................................................................. 54
Certain Relationships and Related Transactions............................. 63
Stock Ownership............................................................ 65
Description of Capital Stock............................................... 67
Description of Certain Indebtedness........................................ 71
Shares Eligible for Future Sale............................................ 72
Certain United States Federal Tax Consequences
to Non-United States Holders.............................................. 74
Underwriting............................................................... 76
Legal Matters.............................................................. 79
Experts.................................................................... 79
Glossary................................................................... 80
Index to Financial Statements.............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
8,000,000 SHARES
LOGO
USN COMMUNICATIONS, INC.
COMMON STOCK
---------------
PROSPECTUS
---------------
MERRILL LYNCH INTERNATIONAL
COWEN INTERNATIONAL L.P.
DONALDSON, LUFKIN & JENRETTE
INTERNATIONAL
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses paid or payable in connection
with the offering of the Common Stock being registered hereby:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee................ $ 49,575
NASD Fees.......................................................... 17,060
Blue Sky Fees and Expenses......................................... 2,000*
Transfer Agent and Registrar Fees and Expenses..................... 5,000*
Printing and Engraving Expenses.................................... 280,000*
Legal Fees and Expenses............................................ 350,000*
NASDAQ Stock Exchange Listing Fees................................. 50,000*
Accounting Fees and Expenses....................................... 250,000*
Miscellaneous...................................................... 96,365*
----------
Total.......................................................... $1,100,000*
==========
</TABLE>
*Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("DGCL") empowers a
corporation, subject to certain limitations, to indemnify its directors and
officers against expenses (including attorneys' fees, judgments, fines and
certain settlements) actually and reasonably incurred by them in connection
with any suit or proceeding to which they are a party so long as they acted in
good faith and in a manner reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to a criminal action or
proceeding, so long as they had no reasonable cause to believe their conduct
to have been unlawful. The Registrant's Certificate of Incorporation and By-
laws provide that the Registrant shall indemnify its directors and such
officers, employees and agents as the Board of Directors may determine from
time to time, to the fullest extent permitted by Section 145 of the DGCL. The
Registrant has entered into indemnification agreements with its directors and
certain of its officers, employees and agents, which provide that the
Registrant shall indemnify such parties pursuant to Section 145 of the DGCL.
Section 102 of the DGCL permits a Delaware corporation to include in its
certificate of incorporation a provision eliminating or limiting a director's
liability to a corporation or its stockholders for monetary damages for
breaches of fiduciary duty. The enabling statute provides, however, that
liability for breaches of the duty of loyalty, acts or omissions not in good
faith or involving intentional misconduct, or knowing violation of the law,
and the unlawful purchase or redemption of stock or payment of unlawful
dividends or the receipt of improper personal benefits cannot be eliminated or
limited in this manner. The Registrant's Certificate of Incorporation and By-
Laws include a provision which eliminates, to the fullest extent permitted,
director liability for monetary damages for breaches of fiduciary duty.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(1) On June 22, 1995, Chase Capital Partners (now known as Chase Venture
Capital Associates, L.P.), CIBC Wood Gundy Securities Corp. (now known as CIBC
Wood Gundy Ventures, Inc.), Hancock Venture Capital Associates (now known as
HarbourVest Partners, LLC), Northwood Capital Partners LLC, Northwood Ventures
and BT Capital Partners, Inc. purchased from the Registrant 23,760 shares of
Series A 10% Cumulative Preferred Stock, par value $1.00 ("Series A-2
Preferred Stock"), at a price of $1,000 per share for a total purchase price
of $23,760,000 and 123,078 shares of Class A Common Stock at a price of $1.95
per share for a total purchase price of $240,000. The shares of Series A-2
Preferred Stock were not registered under the Securities Act of 1933, as
amended (the "Securities Act") on the basis that it was a transaction by an
issuer not involving any public offering in accordance with Section 4(2) under
the Securities Act.
II-1
<PAGE>
(2) On July 21, 1995, Enterprises & Transcommunications, L.P. purchased from
the Registrant 2,475 shares of Series A-2 Preferred Stock at a price of $1,000
per share for a total purchase price of $2,475,000 and 12,821 shares of Class
A Common Stock at a price of $1.95 per share for a total purchase price of
$25,000. The shares of Series A-2 Preferred Stock were not registered under
the Securities Act on the basis that it was a transaction by an issuer not
involving any public offering in accordance with Section 4(2) under the
Securities Act.
(3) Pursuant to a recapitalization, in March 1996, Chase Capital Partners
(now known as Chase Venture Capital Associates, L.P.), CIBC Wood Gundy
Securities Corp. (now known as CIBC Wood Gundy Ventures, Inc.), Hancock
Venture Capital Associates (now known as HarbourVest Partners, LLC), Northwood
Capital Partners LLC, Northwood Ventures, BT Capital Partners, Inc. and
Enterprises & Transcommunications, L.P. purchased, in the aggregate, 110,157
shares of Common Stock for no cash consideration in order to settle a dispute
relating to the price per share paid for previously purchased shares of Common
Stock. The shares of Common Stock were not registered under the Securities Act
on the basis that it was a transaction by an issuer not involving any public
offering in accordance with Section 4(2) under the Securities Act.
(4) On September 30, 1996, the Registrant caused its outstanding shares of
10% Series A Preferred Stock and Series A-2 Preferred Stock to be converted
into newly issued shares of Class A Common Stock for no cash consideration.
The shares of Common Stock were not registered under the Securities Act on the
basis that it was a transaction by an issuer not involving any public offering
in accordance with Section 4(2) under the Securities Act.
(5) On September 30, 1996, Chase Capital Partners (now known as Chase
Venture Capital Associates, L.P.), CIBC Wood Gundy Securities Corp. (now known
as CIBC Wood Gundy Ventures, Inc.), Hancock Venture Partners IV--Direct Fund
L.P., Northwood Capital Partners LLC, Northwood Ventures, BT Capital Partners,
Inc. and Enterprises & Transcommunications, L.P. purchased, in the aggregate,
10,000 shares of 9.0% Cumulative Convertible Pay-In-Kind Preferred Stock ("9%
Preferred Stock") for an aggregate purchase price of $10.0 million. The shares
of 9% Preferred Stock were not registered under the Securities Act on the
basis that it was a transaction by an issuer not involving any public offering
in accordance with Section 4(2) under the Securities Act.
(6) On September 30, 1996, the Registrant sold to Smith Barney Inc., BT
Securities Corporation, Chase Securities Inc. and CIBC Wood Gundy Securities
Corp. (a) 48,500 units, each consisting of $1,000 principal amount at maturity
14% Senior Discount Notes due 2003 (the "14% Senior Notes") and warrants to
purchase approximately 1.27 shares of Class A Common Stock (on a pre-split
basis), subject to adjustment under certain circumstances, at an exercise
price of $.01 per share and (b) $36.0 million in aggregate principal amount at
maturity of 9% Convertible Subordinated Discount Notes due 2004 (the
"Convertible Notes") for an aggregate purchase price of $57,847,775. In
connection with this sale, Smith Barney Inc. received approximately $1,316,000
in commissions, and BT Securities Corporation, Chase Securities Inc. and CIBC
Wood Gundy Securities Corp. each received approximately $188,000, resulting in
net proceeds to the Registrant of $55,967,775. These securities were
immediately resold to Merrill Lynch Global Allocation Fund, Inc. pursuant to
Rule 144A of the Securities Act.
(7) On August 18, 1997, the Registrant sold to Merrill Lynch, Pierce, Fenner
& Smith Incorporated and Donaldson Lufkin & Jenrette Securities Corporation
152,725 units (the "1997 Private Placement"), each consisting of $1,000
aggregate principal amount at maturity of 14 5/8% Senior Discount Notes due
2004 and ten warrants, each warrant entitling the holder to purchase .134484
shares of Class A Common Stock (on a pre-split basis), subject to adjustment
under certain circumstances for an aggregate purchase price of $100 million.
In connection with this sale, Merrill Lynch, Pierce, Fenner & Smith
Incorporated received $2,275,046 in commissions and Donaldson, Lufkin &
Jenrette Securities Corporation received $1,224,998 in commissions. These
securities were immediately resold to certain institutional investors pursuant
to Rule 144A of the Securities Act.
(8) On August 18, 1997, Chase Venture Capital Associates, L.P., CIBC Wood
Gundy Ventures, Inc., Northwood Capital Partners LLC, Northwood Ventures, BT
Capital Partners, Inc., Hancock Venture Partners V-
II-2
<PAGE>
Direct Fund L.P. and Prime VIII, L.P. purchased, in the aggregate, 30,209
shares of 9.0% Cumulative Convertible Pay-In-Kind Preferred Stock, Series A
(the "9% Series A Preferred Stock"), for an aggregate purchase price of $30.2
million. The shares of Series A Preferred Stock were not registered under the
Securities Act on the basis that it was a transaction by an issuer not
involving any public offering, in accordance with Section 4(2) under the
Securities Act.
(9) On August 25, 1997, the Registrant issued to Merrill Lynch Global
Association Fund, Inc. and Merrill Lynch Equity/Convertible Series
(collectively, "MLAM"), warrants to purchase an aggregate of 145,160 shares of
Class A Common Stock at an exercise price of $.01 per share for no cash
consideration. The warrants were issued in exchange for MLAM's consent, as the
holder of all of the 14% Senior Notes and the Convertible Notes, to allow the
Company to consummate the 1997 Private Placement. The shares of Common Stock
were not registered under the Securities Act on the basis that it was a
transaction not involving any public offering, in accordance with Section 4(2)
under the Securities Act.
(10) On October 17, 1997, Fidelity Communications International, Inc. and
Fidelity Investors Limited Partnership (collectively, "Fidelity") purchased,
in the aggregate, 15,000 shares of 9% Series A Preferred Stock, for an
aggregate purchase price of $15 million. The shares of 9% Series A Preferred
Stock were not registered under the Securities Act on the basis that it was a
transaction by an issuer not involving any public offering, in accordance with
Section 4(2) under the Securities Act.
(11) On January 13, 1998, MLAM purchased $13,022,600 aggregate principal at
maturity of 9% Consent Convertible Subordinated Notes due 2006 (the "Consent
Convertible Notes") for an aggregate purchase price of $10,000,000. The
Consent Convertible Notes were not registered under the Securities Act on the
basis that it was a transaction by an issuer not involving any public
offering, in accordance with Section 4(2) under the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of U.S. Purchase Agreement.
1.2 Form of International Purchase Agreement.
3.1 Form of Amended and Restated Certificate of Incorporation of the
Registrant.
3.2+++ Amended Certificate of Designations, Powers, Rights and Preferences of
9.0% Cumulative Convertible Pay-In-Kind Preferred Stock (the "9%
Preferred Stock") of the Registrant.
3.3 Form of Amended and Restated Bylaws of the Registrant.
3.4+ Certificate of Designations, Powers, Rights and Preferences of 9.0%
Cumulative Convertible Pay-In-Kind Preferred Stock, Series A of the
Registrant.
4.1+++ Indenture, dated as of August 15, 1997, by and between the Registrant
and Harris Trust and Savings Bank, as Trustee, for the Registrant's 14
5/8% Senior Discount Notes due 2004 (the "14 5/8% Senior Note
Indenture").
4.2+ Indenture, dated as of September 30, 1996, by and between the
Registrant and Harris Trust and Savings Bank, as Trustee, for the
Registrant's 9% Convertible Subordinated Discount Notes due 2004 (the
"Convertible Note Indenture").
4.3+++ Supplemental Indenture No. 1, dated as of August 12, 1997, by and
between the Registrant and the Trustee, to the Convertible Note
Indenture.
4.4+ Indenture, dated as of September 30, 1996, by and between the
Registrant and Harris Trust and Savings Bank, as Trustee, for the
Registrant's 14% Senior Discount Notes due 2003 (the "14% Senior Note
Indenture").
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4.5++ Supplemental Indenture, dated as of March 17, 1997, by and between
the Registrant and the Trustee, to the 14% Senior Note Indenture.
4.6+++ Supplemental Indenture No. 2, dated as of August 18, 1997, by and
between the Registrant and the Trustee, to the 14% Senior Note
Indenture.
4.7 Form of Common Stock Certificate.
4.8 Indenture, dated as of January 13, 1998, by and between the
Registrant and Harris Trust and Savings Bank, as Trustee, for the
Registrant's 9% Consent Convertible Subordinated Notes due 2006.
5.1 Legal Opinion of Skadden, Arps, Slate, Meagher & Flom (Illinois).
10.1+ Employment Agreement, dated as of July 18, 1996, by and between the
Registrant and J. Thomas Elliott.
10.2+ Employment Agreement, dated as of July 18, 1996, by and between the
Registrant and Ronald W. Gavillet.
10.3++ Employment Agreement, dated as of November 18, 1996, by and between
the Registrant and Gerald J. Sweas.
10.4++ Employment Agreement, dated as of October 21, 1996, by and between
the Registrant and Ryan Mullaney.
10.5+ Form of Employment Agreement between the Registrant and certain
officers of the Registrant.
10.6+++ Amended and Restated 1994 Stock Option Plan of the Registrant.
10.7+++ 1997 Omnibus Securities Plan.
10.8+ Consulting Agreement, dated January 24, 1995, by and between the
Registrant and Eugene A. Sekulow.
10.9+ Form of Indemnification Agreement between the Registrant and certain
directors and officers of the Registrant.
10.10+ Promissory Note, dated December 15, 1995, between the Registrant and
J. Thomas Elliott.
10.11+ Purchase Agreement, dated as of April 20, 1994, by and among the
Registrant, CIBC Wood Gundy Ventures, Inc. ("CIBC") and Chemical
Venture Capital Associates ("Chemical").
10.12+ First Amendment to Purchase Agreement, dated as of June 10, 1994, by
and among the Registrant, CIBC, Chemical and Hancock Venture Partners
IV--Direct Fund, L.P. ("Hancock," and together with CIBC and
Chemical, the "Initial Investors").
10.13+++ Second Amendment to Purchase Agreement, dated as of April 20, 1994,
by and among the Registrant and the Initial Investors.
10.14+ Third Amendment to Purchase Agreement, dated as of November 1, 1994,
by and among the Registrant and the Initial Investors.
10.15+ Fourth Amendment to Purchase Agreement, dated as of June 22, 1995, by
and among the Registrant and the Initial Investors.
10.16+ Stockholders Agreement, dated as of April 20, 1994, by and among the
Registrant, CIBC, Chemical and the stockholders of the Registrant
listed on a schedule attached thereto (the "Stockholders").
10.17+ First Amendment to Stockholders Agreement, dated as of June 10, 1994,
by and among the Registrant, the Initial Investors and the
Stockholders.
10.18+ Registration Rights Agreement, dated as of April 20, 1994, by and
among the Registrant, CIBC and Chemical.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.19+ First Amendment to Registration Rights Agreement, dated as of June
10, 1994, by and among the Registrant and the Initial Investors.
10.20+ Amended and Restated Stockholders Agreement, dated as of June 22,
1995, by and among the Registrant and the Investors.
10.21+++ First Amendment to Registration Rights Agreement, dated as of June
10, 1994, by and among the Registrant and the Initial Investors.
10.22+ Purchase Agreement, dated as of June 22, 1995, by and among the
Registrant, CIBC, Chemical, Hancock, BT Capital Partners, Inc.,
Northwood Capital Partners LLC and Northwood Ventures (collectively,
the "Investors").
10.23+ First Amendment to Purchase Agreement, dated as of July 21, 1995, by
and among the Registrant, the Investors and Enterprises &
Transcommunications, L.P. (collectively, the "Original Purchasers").
10.24+ Second Amendment to Purchase Agreement, dated as of March 5, 1996, by
and among the Registrant and the Original Purchasers.
10.25+++ Third Amendment to Purchase Agreement, dated as of July 21, 1995, by
and among the Registrant and the Original Purchasers.
10.26+ Amended and Restated Registration Agreement, dated as of June 22,
1995, by and among the Registrant and the Investors.
10.27+ Amended and Restated Stockholders Agreement, dated as of July 21,
1995, by and among the Registrant, the Original Purchasers and the
Stockholders.
10.28+++ Purchase Agreement, dated as of October 17, 1997, by and among the
Registrant, Fidelity International, Inc. and Fidelity Investors
Limited Partners.
10.29+ Purchase Agreement, dated as of September 25, 1996, by and among the
Registrant and the purchasers named therein, relating to the 9%
Preferred Stock.
10.30+ Asset Purchase Agreement, dated as of June 13, 1995, by and among
United Telemanagement Services, Inc. ("UTS"), Quest United, Inc.
("Quest United"), Quest America Management, Inc. ("QAM"), Edward H.
Lavin, Jr. ("Lavin"), J. Thomas Elliott ("Elliott") and Quest
America, LP ("Quest").
10.31+ Amendment No. 1 to Asset Purchase Agreement, dated as of October 27,
1995, by and among UTS, Quest United, QAM, Lavin, Elliott, and Quest.
10.32+ Resale Local Exchange Service 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.
10.33+ Resale Local Exchange Service Agreement, dated July 8, 1996, by and
between New York Telephone Company and UTS.
10.34+ Agreement for Resale Services, dated as of April 26, 1996, by and
between the Registrant and Ameritech on behalf of Ameritech Michigan.
10.35+ Local Exchange Telecommunications Services Resale Agreement, dated
May 21, 1996, by and between the Registrant and Ameritech on behalf
of The Ohio Bell Telephone Company.
10.36+ Registration Rights Agreement dated as of September 30, 1996, by and
among the Registrant and the Initial Purchasers named therein.
10.37+ Warrant Agreement, dated as of September 30, 1996, by and between the
Registrant and Harris Trust and Savings Bank, as Warrant Agent.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.38+++ Registration Rights Agreement dated as of August 15, 1997, by and
among the Registrant and the Initial Purchasers named therein.
10.39+++ Warrant Agreement, dated as of August 15, 1997, by and between the
Registrant and Harris Trust and Savings Bank, as Warrant Agent.
10.40+++ Consent Warrant Agreement dated as of August 25, 1997, by and between
the Registrant and Harris Trust and Savings Bank, as Warrant Agent.
10.41 Stock Purchase Agreement dated as of January 7, 1998, by and between
the Registrant, Mark C. Hatten, Triumph-Connecticut Limited
Partnership, Solomon Schechter Day School of Greater Hartford, Inc.,
FSC Corp. and Hatten Communications Holding Company, Inc.
11.01++ Computation of Net Loss per share of Common Stock.
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).
23.3 Consent of KPMG Peat Marwick LLP.
23.4 Consent of Kostin, Ruffkess & Company LLC
25.1** Power of Attorney.
</TABLE>
- --------
+Incorporated by reference to the Registrant's Registration Statement on
Form S-4, file number 333-16265.
++Incorporated by reference to the Registrant's Form 10-K, file number 333-
16265, filed on March 31, 1997.
+++Incorporated by reference to the Registrant's Registration Statement on
Form S-4, file number 333-37621.
**Previously filed.
(b) Financial Data Schedules
None.
All schedules are omitted because the required information is not present in
amounts sufficient to require submission of the schedule or because the
information required is included in the financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
(1) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriter to permit prompt delivery to each purchaser.
The undersigned Registrant hereby further undertakes that:
(2) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective;
(3) For the purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof; and
II-6
<PAGE>
(4) That insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
II-7
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED, IN THE CITY
OF CHICAGO, STATE OF ILLINOIS ON FEBRUARY 2, 1998.
USN COMMUNICATIONS, INC.
/s/ J. Thomas Elliott
By: _________________________________
J. Thomas Elliott
Chairman of the Board, President
and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED ON FEBRUARY 2, 1998 BY
THE FOLLOWING PERSONS ON THE DATES AND IN THE CAPACITIES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C> <C>
/s/ J. Thomas Elliott Chairman of the Board, President and Chief
___________________________________________ Executive Officer (Principal Executive
J. Thomas Elliott Officer)
Richard J. Brekka* Director
___________________________________________
Richard J. Brekka
Donald J. Hofmann, Jr.* Director
___________________________________________
Donald J. Hofmann, Jr.
Paul S. Lattanzio* Director
___________________________________________
Paul S. Lattanzio
William A. Johnston* Director
___________________________________________
William A. Johnston
Eugene A. Sekulow* Director
___________________________________________
Eugene A. Sekulow
Dean M. Greenwood* Director
___________________________________________
Dean M. Greenwood
Director
___________________________________________
James P. Hynes
Ian Kidson* Director
___________________________________________
Ian Kidson
Director
___________________________________________
David C. Mitchell
/s/ Gerald J. Sweas Executive Vice President and Chief
___________________________________________ Financial Officer (Principal Financial
Gerald J. Sweas Officer and Principal Accounting Officer)
</TABLE>
/s/ Thomas A. Monson
*By__________________________________
Thomas A. Monson
Attorney-in-fact
II-8
<PAGE>
Exhibit 1.1
________________________________________________________________________
________________________________________________________________________
USN COMMUNICATIONS, INC.
(a Delaware corporation)
6,400,000 Shares of Common Stock
U.S. PURCHASE AGREEMENT
-----------------------
Dated: February __, 1998
________________________________________________________________________
________________________________________________________________________
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
<S> <C>
SECTION 1. Representations and Warranties................................... 8
(a) Representations and Warranties by the Company.......................... 8
(b) Hatten Communications..................................................14
SECTION 2. Sale and Delivery to U.S. Underwriters; Closing..................15
(a) Initial Securities...........................Error! Bookmark not defined.
(b) Option Securities......................................................15
(c) Payment................................................................15
(d) Denominations; Registration............................................16
SECTION 3. COVENANTS OF THE COMPANY.........................................16
(a) Compliance with Securities Regulations and Commission Requests.........16
(b) Filing of Amendments...................................................17
(c) Delivery of Registration Statements....................................17
(d) Delivery of Prospectuses...............................................17
(e) Continued Compliance with Securities Laws..............................18
(f) Blue Sky Qualifications................................................18
(g) Rule 158...............................................................18
(h) Use of Proceeds........................................................18
(i) Listing................................................................19
(j) Restriction on Sale of Securities......................................19
(k) Reporting Requirements.................................................20
(l) Compliance with NASD Rules.............................................20
SECTION 4. PAYMENT OF EXPENSES..............................................20
(a) Expenses...............................................................20
(b) Termination of Agreement...............................................21
SECTION 5. CONDITIONS OF U.S. UNDERWRITERS' OBLIGATIONS.....................21
(a) Effectiveness of Registration Statement................................21
(b) Opinion of Counsel for Company.........................................22
(c) Opinion of General Counsel for Company.................................25
(d) Opinion of Counsel for U.S. Underwriters...............................27
(e) Officer's Certificate..................................................28
(f) Accountant's Comfort Letter............................................28
(g) Bring-down Comfort Letter..............................................28
</TABLE>
2
<PAGE>
<TABLE>
<S> <C> <C>
(h) Approval of Listing.....................................................28
(i) No Objection............................................................28
(j) Lock-up Agreements......................................................28
(k) Fees and Expenses of QIU................................................29
(l) Purchase of Initial International Securities............................29
(m) Conditions to Purchase of U.S. Option Securities........................29
(n) Additional Documents....................................................30
(o) Termination of Agreement................................................30
SECTION 6. INDEMNIFICATION...................................................31
(a) Indemnification of U.S. Underwriters....................................32
(b) Actions against Parties; Notification...................................33
(c) Settlement without Consent if Failure to Reimburse......................33
(d) Indemnification for Reserved Securities.................................33
SECTION 7. CONTRIBUTION......................................................33
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY....35
SECTION 9. TERMINATION OF AGREEMENT..........................................36
(a) Termination; General....................................................36
(b) Liabilities.............................................................36
SECTION 10. DEFAULT BY ONE OR MORE OF THE U.S. UNDERWRITERS..................36
SECTION 11. NOTICES..........................................................37
SECTION 12. PARTIES..........................................................37
SECTION 13. GOVERNING LAW AND TIME...........................................37
SECTION 14. EFFECT OF HEADINGS...............................................37
SCHEDULES
Schedule A - List of U.S. Underwriters
Schedule B - Pricing Information
Schedule C - List of Persons Subject to Lock-up
Schedule I - Applicable Contracts
EXHIBITS
Exhibit A - Form of Opinion of Company's Counsel to be Delivered Pursuant
to Section 5(b)
Exhibit B - Form of Opinion of General Counsel for Company to be Delivered
Pursuant to Section
5(c)
Exhibit C - Form of Lock-Up Letter Pursuant to Section 5(J)
</TABLE>
3
<PAGE>
USN COMMUNICATIONS, INC.
(a Delaware corporation)
6,400,000 Shares of Common Stock
(Par Value $.01 Per Share)
U.S. PURCHASE AGREEMENT
-----------------------
February ___, 1998
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Cowen & Company
Donaldson, Lufkin & Jenrette
Securities Corporation
as U.S. Representatives of the several U.S. Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
USN Communications, Inc., a Delaware corporation (the "Company"), confirms
its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and each of the other U.S. Underwriters named in
Schedule A hereto (collectively, the "U.S. Underwriters," which term shall also
include any underwriter substituted as hereinafter provided in Section 10
hereof), for whom Merrill Lynch, Cowen & Company and Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ") are acting as representatives (in such
capacity, the "U.S. Representatives"), with respect to the issue and sale by the
Company and the purchase by the U.S. Underwriters, acting severally and not
jointly, of the respective numbers of shares of Common Stock, par value $.01 per
share ("Common Stock"), of the Company set forth in said Schedule A, and with
respect to the grant by the Company to the U.S. Underwriters, acting severally
and not jointly, of the option described in Section 2(b) hereof to purchase all
or any part of 960,000 additional shares of Common Stock to cover over-
allotments, if any. The aforesaid 6,400,000 shares of Common Stock (the "Initial
U.S. Securities") to be
4
<PAGE>
purchased by the U.S. Underwriters and all or any part of the 960,000 shares of
Common Stock subject to the option described in Section 2(b) hereof (the "U.S.
Option Securities") are hereinafter called, collectively, the "U.S. Securities."
It is understood that the Company is concurrently entering into an
agreement dated the date hereof (the "International Purchase Agreement")
providing for the offering by the Company of an aggregate of 1,600,000 shares of
Common Stock (the "Initial International Securities") through arrangements with
certain underwriters outside the United States and Canada (the "International
Managers") for which Merrill Lynch International, Cowen International L.P. and
Donaldson, Lufkin & Jenrette International and are acting as lead managers (the
"Lead Managers") and the grant by the Company to the International Managers,
acting severally and not jointly, of an option to purchase all or any part of
the International Managers' pro rata portion of up to 240,000 additional shares
of Common Stock solely to cover over-allotments, if any (the "International
Option Securities" and, together with the U.S. Option Securities, the "Option
Securities"). The Initial International Securities and the International Option
Securities are hereinafter called the "International Securities." It is
understood that the Company is not obligated to sell, and the U.S. Underwriters
are not obligated to purchase, any Initial U.S. Securities unless all of the
Initial International Securities are contemporaneously purchased by the
International Managers.
The U.S. Underwriters and the International Managers are hereinafter
collectively called the "Underwriters," the Initial U.S. Securities and the
Initial International Securities are hereinafter collectively called the
"Initial Securities," and the U.S. Securities and the International Securities
are hereinafter collectively called the "Securities."
The Underwriters will concurrently enter into an Intersyndicate Agreement
of even date herewith (the "Intersyndicate Agreement") providing for the
coordination of certain transactions among the Underwriters under the direction
of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (in
such capacity, the "Global Coordinator").
The Company understands that the U.S. Underwriters propose to make a public
offering of the U.S. Securities as soon as the U.S. Representatives deem
advisable after this Agreement has been executed and delivered.
The Company and the Underwriters agree that up to 800,000 shares of the
Securities to be purchased by the Underwriters (the "Reserved Securities") shall
be reserved for sale by the Underwriters to certain eligible employees and
persons having business relationships with the Company, as part of the
distribution of the Securities by the Underwriters, subject to the terms of this
Agreement and the International Purchase Agreement, the applicable rules,
regulations and interpretations of the National Association of Securities
Dealers, Inc. and all other applicable laws, rules and regulations. To the
extent that such Reserved Securities are not orally confirmed for purchase by
such eligible employees and persons having business relationships with the
Company by the end of the first business day after the date of this Agreement,
such Reserved Securities may be offered to the public as part of the public
offering contemplated hereby.
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The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-38381) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). Two
forms of prospectus are to be used in connection with the offering and sale of
the Securities: one relating to the U.S. Securities (the "Form of U.S.
Prospectus") and one relating to the International Securities (the "Form of
International Prospectus"). The Form of International Prospectus is identical
to the Form of U.S. Prospectus, except for the front cover and back cover pages
and the information under the caption "Underwriting." The information included
in any such prospectus or in any such Term Sheet, as the case may be, that was
omitted from such registration statement at the time it became effective but
that is deemed to be part of such registration statement at the time it became
effective (a) pursuant to paragraph (b) of Rule 430A is referred to as "Rule
430A Information" or (b) pursuant to paragraph (d) of Rule 434 is referred to as
"Rule 434 Information." Each Form of U.S. Prospectus and Form of International
Prospectus used before such registration statement became effective, and any
prospectus that omitted, as applicable, the Rule 430A Information or the Rule
434 Information, that was used after such effectiveness and prior to the
execution and delivery of this Agreement, is herein called a "preliminary
prospectus." Such registration statement, including the exhibits thereto and
schedules thereto, at the time became effective and including the Rule 430A
Information and the Rule 434 Information, as applicable, is herein called the
"Registration Statement." Any registration statement filed pursuant to Rule
462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b)
Registration Statement," and after such filing the term "Registration Statement"
shall include the Rule 462(b) Registration Statement. The final Form of U.S.
Prospectus and the final Form of International Prospectus in the forms first
furnished to the Underwriters for use in connection with the offering of the
Securities are herein called the "U.S. Prospectus" and the "International
Prospectus," respectively, and collectively, the "Prospectuses." If Rule 434 is
relied on, the terms "U.S. Prospectus" and "International Prospectus" shall
refer to the preliminary U.S. Prospectus dated January 7, 1998 and preliminary
International Prospectus dated January 7, 1998, respectively, each together with
the applicable Term Sheet and all references in this Agreement to the date of
such Prospectuses shall mean the date of the applicable Term Sheet. The terms
"Registration Statement" and "U.S. Prospectus" shall include any supplements or
amendments thereto, including the exhibits thereto and the schedules thereto, at
the time such supplement or amendment is filed pursuant to Section 3(k) hereof.
For purposes of this Agreement, all references to the Registration Statement,
any preliminary prospectus, the U.S. Prospectus, the International Prospectus or
any Term Sheet or any amendment or supplement to any of the foregoing shall be
deemed to include the copy filed with the Commission pursuant to its Electronic
Data Gathering, Analysis and Retrieval system ("EDGAR").
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SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Company. The Company represents and
warrants to each U.S. Underwriter as of the date hereof, as of the Closing
Time referred to in Section 2(c) hereof, and as of each Date of Delivery
(if any) referred to in Section 2(b) hereof and agrees with each U.S.
Underwriter, as follows:
(i) Compliance with Registration Requirements. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement has been issued under the 1933 Act and no proceedings for that
purpose have been instituted or are pending or, to the knowledge of the
Company, are contemplated by the Commission, and any request on the part of
the Commission for additional information has been complied with.
At the respective times the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendments thereto became
effective and at the Closing Time (and, if any U.S. Option Securities are
purchased, at the Date of Delivery), the Registration Statement, the Rule 462(b)
Registration Statement and any amendments and supplements thereto, complied and
will comply in all material respects with the requirements of the 1933 Act and
the 1933 Act Regulations and did not and will not contain an untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, and the
Prospectuses, any preliminary prospectus and any amendment or supplement thereto
or prospectus wrapper prepared in connection therewith, at their respective
times of issuance and at the Closing Time (and, if any U.S. Option Securities
are purchased, at the Date of Delivery), complied and will comply in all
material respects with any applicable laws or regulations of foreign
jurisdictions in which the Prospectuses and such preliminary prospectus, as
amended or supplemented, if applicable, are distributed in connection with the
offer and sale of Reserved Securities. Neither of the Prospectuses nor any
amendments or supplements thereto, at the time the Prospectuses or any
amendments or supplements thereto (including any prospectus wrapper) were issued
and at the Closing Time (and, if any U.S. Option Securities are purchased, at
the Date of Delivery), included or will include an untrue statement of a
material fact or omitted or will omit to state a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. If Rule 434 is used, the Company will
comply with the requirements of Rule 434 and the Prospectuses shall not be
"materially different," as such term is used in Rule 434, from the prospectuses
included in the Registration Statement at the time it became effective. The
representations and warranties in this subsection shall not apply to statements
in or omissions from the Registration Statement, any Rule 462(b) Registration
Statement or any post-effective amendment thereto or the U.S. Prospectus made in
reliance upon and in conformity with information furnished to the Company in
writing by any U.S. Underwriter through the U.S. Representatives expressly for
use in the Registration Statement or the U.S. Prospectus.
Each preliminary prospectus and the prospectuses filed as part of the
Registration Statement as originally filed or as part of any amendment or
supplement thereto, or filed pursuant
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to Rule 424 under the 1933 Act, complied when so filed in all material respects
with the 1933 Act Regulations and each preliminary prospectus and the
Prospectuses delivered to the Underwriters for use in connection with this
offering was identical to the electronically transmitted copies thereof filed
with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(ii) Capitalization and Authorization of Securities. The authorized
issued and outstanding capital stock of the Company will be as of the
Closing Time as set forth in the column entitled "As Adjusted" under the
caption "Capitalization" in the Prospectuses; and the authorized capital
stock of the Company will conform as of the Closing Time in all material
respects to the description thereof contained in the Prospectuses under the
caption "Description of Capital Stock"; all the outstanding shares of
capital stock of the Company have been duly authorized and validly issued,
are fully paid and nonassessable, and are free of any preemptive or similar
rights, except as set forth in the Prospectuses, and were issued and sold
in compliance with all applicable Federal and state securities laws. The
Securities to be purchased by the U.S. Underwriters and the International
Managers from the Company have been duly authorized for issuance and sale
to the Underwriters pursuant to this Agreement and the International
Purchase Agreement, respectively, and when issued and delivered by the
Company pursuant to this Agreement and the International Purchase
Agreement, respectively, against payment of the consideration set forth in
this Agreement and the International Purchase Agreement, will be validly
issued and fully paid and non-assessable and no holder of the Securities is
or will be subject to personal liability by reason of being such holder.
(iii) Good Standing of the Company and the Subsidiaries. The Company
is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware. Each of the Company's Subsidiaries
is a corporation duly organized, validly existing and in good standing
under the laws of its jurisdiction of incorporation. The term
"Subsidiaries" as used in this Agreement shall include USN Communications
Northeast, Inc. (formerly United Telemanagement Services, Inc.), USN
Communications Long Distance, Inc. (formerly United Telecom of America,
Inc.), Quest United, Inc., USN Southwest, Inc., U.S. Network Corporation,
FoneNet/Ohio, Inc. ("FoneNet"), USN Solutions, Inc., USN Communications
Midwest, Inc. (formerly USN Communications, Inc.), USN Communications
Atlantic, Inc., USN Communications Virginia, Inc., USN Northeast, Inc. and
Quest United, Inc. Each of the Company and its Subsidiaries has full
corporate power and authority to own, lease and operate its properties and
to conduct its business as described in the Prospectuses, and is duly
registered and qualified to conduct its business and is in good standing
under the laws of each jurisdiction or place where the nature of its
properties or the conduct of its business requires such registration or
qualification, except where the failure so to register or qualify does not
have a material adverse effect and would not reasonably be expected to have
a material adverse effect upon the financial condition, business,
liabilities (contingent or otherwise) or results of operations of the
Company and its Subsidiaries, taken as a whole (a "Material Adverse
Effect").
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(iv) Authorization of Subsidiary Capital Stock. All the outstanding
shares of capital stock of each Subsidiary have been duly authorized and
validly issued, are fully paid and nonassessable, and, except as otherwise
set forth in the Prospectuses, all of the outstanding shares of capital
stock of the Subsidiaries are, and will be at the Closing Time (and, if any
U.S. Option Securities are purchased, at the Date of Delivery), owned
directly by the Company free and clear of any lien, adverse claim, security
interest or equity or other encumbrance.
(v) Absence of Proceedings. There are no legal or governmental
proceedings, complaints or investigations including, without limitation,
before the Federal Communications Commission (the "FCC") or any comparable
state regulatory agency with direct regulatory jurisdiction over
telecommunications matters in any state in which the Company or any
Subsidiary provides services (each, a "State Regulatory Agency") pending
or, to the knowledge of the Company, threatened, against the Company or any
of the Subsidiaries or to which the Company or any of the Subsidiaries, or
to which any of their respective properties, is subject, that are not
disclosed in the Prospectuses and which, individually or in the aggregate,
would be reasonably likely to cause a Material Adverse Effect or materially
affect the issuance of the Securities or the consummation of the
transactions contemplated hereby or by the International Purchase
Agreement. There are no material agreements, contracts, indentures, leases
or other instruments to which the Company or any Subsidiary is a party or
by which any of them may be bound or to which any of their respective
properties may be subject that are not described in the Prospectuses, the
failure of which to describe would constitute a material misstatement or
omission of a material fact.
(vi) Absence of Defaults and Conflicts. Neither the Company nor any
of its Subsidiaries is (A) in violation of its certificate of
incorporation, by-laws or other organizational documents, (B) in breach of,
or in default in, the performance of any obligation, agreement, covenant or
condition contained in any material bond, debenture, note or any other
evidence of indebtedness or in any agreement, indenture, lease or other
instrument to which the Company or any of its Subsidiaries is a party or by
which any of them may be bound or to which any of their respective
properties may be subject, or (C) in violation of any judgment, injunction,
order or decree applicable to the Company or any of its Subsidiaries of any
court, regulatory body (including any self-regulatory body), administrative
agency, governmental body or arbitrator having jurisdiction over the
Company or any of its Subsidiaries, and no event has occurred which, with
notice or lapse of time or both, would constitute such a violation or
default, except, in the case of clauses (B) and (C) hereof, for any such
breach, default or violation which would not have a Material Adverse
Effect. Each of the Company and its Subsidiaries is in compliance with all
applicable statutes, laws, rules, regulations and filing requirements
(including the applicable rules and regulations of self-regulatory bodies),
except where the failure to so be in compliance would not have a Material
Adverse Effect.
(vii) No Consents. Neither the issuance, offer, sale or delivery of
the Securities, compliance by the Company with the provisions hereof or of
the International
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Purchase Agreement nor consummation by the Company of the transactions
contemplated hereby or thereby (A) requires any consent, approval,
authorization or other order of, or registration or filing with, any court,
regulatory body, administrative agency or other governmental body, agency
or official, including, without limitation, the FCC or any State Regulatory
Agency, (except such as has been obtained in connection with the
registration under the 1933 Act of the Securities and except for compliance
with the securities or Blue Sky laws of various jurisdictions), (B)
conflicts or will conflict with or constitutes or will constitute a breach
of, or a default under, the certificate of incorporation, by-laws or other
organizational documents of the Company or any of the Subsidiaries or,
except where such conflict, breach or default would not have a Material
Adverse Effect, any material bond, debenture, note or other evidence of
indebtedness or any agreement, indenture, lease or other instrument to
which the Company or any of the Subsidiaries is a party or by which any of
them or any of their respective properties is or may be bound, or (C)
violates or will violate any statute, law, rule, regulation, filing
requirement, judgment, injunction, order or decree applicable to the
Company or any of the Subsidiaries or any of their respective properties,
or will result in the creation or imposition of any lien, adverse claim,
security interest or equity or other encumbrance upon any property or
assets of the Company or any of the Subsidiaries pursuant to the terms of
any agreement or instrument to which any of them is a party or by which any
of them may be bound or to which any of the property or assets of any of
them is subject, except where such violation, creation or imposition would
not have a Material Adverse Effect.
(viii) Independent Accountants. The accountants, Deloitte & Touche
LLP ("D&T") and KPMG Peat Marwick LLP ("KPMG"), who have certified or shall
certify the financial statements included as part of the Prospectuses, are
independent public accountants under Rule 101 of the AICPA's Code of
Professional Conduct, and its interpretations and rulings and within the
meaning of the 1933 Act and the Rules and Regulations promulgated
thereunder.
(ix) Financial Statements. The financial statements, together with
related schedules and notes forming part of the Prospectuses, present
fairly in all material respects the consolidated financial position,
results of operations and changes in stockholders' equity and cash flows of
the Company and the Subsidiaries on the basis stated in the Prospectuses at
the respective dates or for the respective periods to which they apply;
such statements and related schedules and notes have been prepared in
accordance with generally accepted accounting principles consistently
applied throughout the periods involved, except as otherwise noted therein;
and the other financial and statistical information and data set forth in
the Prospectuses are accurately presented and, to the extent such
information and data are derived from the financial books and records of
the Company, are prepared on a basis consistent with such financial
statements and the books and records of the Company. The pro forma
financial information of the Company and its subsidiaries and the related
notes thereto included in the Registration Statement have been prepared in
accordance with the Commission's rules and guidelines with respect to pro
forma financial statements, have been properly compiled on the bases
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described therein and, in the opinion of the Company and its subsidiaries,
the assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the transactions
and circumstances referred to therein.
(x) Authorization of Agreement. The Company has all requisite
power and authority to execute, deliver and perform its obligations under
this Agreement and the International Purchase Agreement; the execution and
delivery of, and the performance by the Company of its obligations under
this Agreement and the International Purchase Agreement have been duly and
validly authorized by the Company, and each of this Agreement and the
International Purchase Agreement has been duly executed and delivered by
the Company and constitutes the valid and binding agreements of the
Company, enforceable against the Company in accordance with their terms,
except as the enforcement hereof and thereof may be limited by bankruptcy,
fraudulent conveyance, insolvency, reorganization, moratorium and other
similar laws relating to or affecting the enforcement of creditors' rights
generally, by general equitable principles and any rights to indemnity and
contribution may be limited by Federal and state securities laws and by
public policy considerations.
(xi) No Material Adverse Change in Business. Except as disclosed in
the Prospectuses, subsequent to the date as of which such information is
given in the Prospectuses, neither the Company nor any of the Subsidiaries
has incurred any liability or obligation, direct or contingent, or entered
into any transaction, not in the ordinary course of business, that is
material to the Company and the Subsidiaries taken as a whole, and there
has not been any material change in the capital stock, or material increase
in the short-term or long-term debt, of the Company or any of the
Subsidiaries, or any material adverse change, or any development which
could reasonably be expected to have a Material Adverse Effect.
(xii) Properties. Each of the Company and the Subsidiaries has good
and marketable title to all property (real and personal) described in the
Prospectuses as being owned by it, free and clear of all liens, adverse
claims, security interests or equity or other encumbrances except such as
do not materially and adversely effect the value of such property and do
not materially interfere with the use made or proposed to be made of such
property by the Company or any Subsidiary or the conduct of the business of
the Company and the Subsidiaries, and all the property described in the
Prospectuses as being held under lease by each of the Company and the
Subsidiaries is held by it under valid, subsisting and enforceable leases,
with only such exceptions as in the aggregate are not materially burdensome
and do not interfere in any material respect with the conduct of the
business of the Company and the Subsidiaries, taken as a whole.
(xiii) Distribution of Prospectuses. Except as permitted by the 1933
Act, the Company has not distributed and, prior to the later to occur of
the Closing Time (and, if any U.S. Option Securities are purchased, at the
Date of Delivery) and completion of the distribution of the securities,
will not distribute any offering material in connection with
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the offering and sale of the Securities other than the preliminary
prospectuses and the Prospectuses.
(xiv) Possession of Licenses and Permits. Each of the Company and
the Subsidiaries owns, holds, possesses or has obtained all such
governmental agreements, licenses, permits, certificates, franchises,
consents, orders, approvals, waivers and other authorizations (A) as are
required under such Federal and state laws as specifically regulate the
operation of the Company or any Subsidiary including all Licenses (as
defined below) required by the FCC and the State Regulatory Agencies for
the provision of telecommunications services by the Company and the
Subsidiaries and (B) of the appropriate governmental or regulatory agencies
or bodies as are necessary to own, hold or lease their respective
properties and to conduct their respective businesses as described in the
Prospectuses (collectively, "Licenses"); each of such Licenses is in full
force and effect and is fairly described in the Prospectuses; the Company
and each of the Subsidiaries has fulfilled and performed in all material
respects all of their respective obligations with respect to all such
Licenses possessed by any of them; no event has occurred which allows, or
after notice or lapse of time, or both, would allow, revocation or
termination thereof or result in any other material impairment of the
rights of the holder of any such License; and neither the Company nor any
of its Subsidiaries has received any notice of proceedings relating to the
revocation or modification of, or denial of any application for, any such
License other than as described in the Prospectuses, and the Company has no
knowledge that the relevant authorities have threatened any such
proceeding.
(xv) Accounting. The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurances that (A)
material transactions are executed in accordance with management's general
or specific authorization; (B) material transactions are recorded as
necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain accountability for
assets; and (C) access to assets is permitted only in accordance with
management's general or specific authorization.
(xvi) Absence of Payments. Neither the Company nor any Subsidiary
nor, to the Company's knowledge, any employee or agent of the Company or
any Subsidiary has made any payment of funds of the Company or any
Subsidiary or received or retained any funds in violation of any statute,
law, rule, regulation, filing requirement, judgment, injunction, order or
decree, which violation would have a Material Adverse Effect.
(xvii) Tax Returns. Except as disclosed in the Prospectuses, the
Company and each Subsidiary have filed all tax returns required to be
filed, which returns are true and correct in all material respects, and
neither the Company nor any Subsidiary is in default in the payment of any
taxes which were payable pursuant to said returns or any assessments with
respect thereto, except where the failure to so file or pay would not have
a Material Adverse Effect.
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(xviii) Rights to Acquire Capital Stock. Except as described in or
contemplated by the Company's 1994 Stock Option Plan, the Omnibus
Securities Plan of USN Communications, Inc. or the Prospectuses, there are
no outstanding options, warrants or other rights calling for the issuance
of, and there are no commitments, plans or arrangements to issue, any
shares of capital stock of the Company or any security convertible into or
exchangeable or exercisable for capital stock of the Company.
(xix) Possession of Intellectual Property. The Company and the
Subsidiaries own or possess all material patents, trademarks, trademark
registrations, service marks, service mark registrations, trade names,
copyrights, licenses, inventions, trade secrets and rights described in the
Prospectuses as being owned by any of them or necessary for the conduct of
their respective businesses, and the Company is not aware of any claim to
the contrary or any challenge by any other person to the rights of the
Company and the Subsidiaries with respect to the foregoing.
(xx) ERISA. The execution and delivery of this Agreement and the
International Purchase Agreement, the sale of the U.S. Securities to the
U.S. Underwriters or by the U.S. Underwriters and the sale of the
International Securities to the International Managers or by the
International Managers will not involve any prohibited transaction within
the meaning of Section 406 of the Employee Retirement Income Security Act
of 1974 or Section 4975 of the Internal Revenue Code of 1986, as amended.
(xxi) Absence of Labor Disputes. No labor strike, job action,
dispute, disturbance, lockout, slowdown or stoppage by any group of
employees of the Company or any of its Subsidiaries currently exists and,
to the knowledge of the Company, no such action or dispute is imminent or
threatened.
(xxii) Investment Company Act. The Company is not now, and will not
be, immediately following its receipt of the proceeds of the offering
contemplated hereby, required to register as an investment company (an
"Investment Company") as defined in the Investment Company Act of 1940 (the
"Investment Company Act"). If the Company should at any time become an
Investment Company, it will comply with all applicable provisions of the
Investment Company Act and the rules and regulations thereunder.
(xxiii) Accuracy of Exhibits. There are no contracts or documents
which are required to be described in the Registration Statement or the
Prospectuses or to be filed as exhibits thereto which have not been so
described and filed as required.
(xxiv) Compliance with Cuba Act. The Company has complied with, and
is and will be in compliance with, the provisions of that certain Florida
Act relating to disclosure of doing business with Cuba, codified as Section
517.075 of the Florida statutes, and the rules and regulations thereunder
(collectively, the "Cuba Act") or is exempt therefrom.
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(xxv) Registration Rights. Except as described in the Prospectuses
under the caption "Description of Capital Stock--Registration Rights"),
there are no persons with registration rights or other similar rights to
have any securities registered pursuant to the Registration Statement or
otherwise registered by the Company under the 1933 Act.
(xxvi) Authorization of Stock Purchase Agreement. The Company has
all requisite power and authority to execute, deliver and perform its
obligations under the Stock Purchase Agreement, dated as of January 7,
1998, by and among the Company and Mark Hatten, Triumph-Connecticut Limited
Partnership, a Connecticut limited partnership, Solomon Schechter Day
School of Greater Hartford, Inc., a not-for-profit educational institution
and Hatten Communications Holding Company, Inc., a Connecticut corporation
("Hatten Communications") (collectively, the "Sellers"); the execution and
delivery of, and the performance by the Company of its obligations under
the Stock Purchase Agreement have been duly and validly authorized by the
Company and the Stock Purchase Agreement has been duly executed and
delivered by the Company and constitutes the valid and binding agreement of
the Company, enforceable against the Company in accordance with its terms,
except as the enforcement hereof may be limited by bankruptcy, fraudulent
conveyance, insolvency, reorganization, moratorium and other similar laws
relating to or affecting the enforcement of creditors' rights generally and
by general equitable principles.
(xxvii) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company of its
obligations hereunder, in connection with the offering, issuance or sale of
the Securities hereunder or the consummation of the transactions
contemplated by this Agreement, except (i) such as have been already
obtained or as may be required under the 1933 Act or the 1933 Act
Regulations or state securities laws and (ii) such as have been obtained
under the laws and regulations of jurisdictions outside the United States
in which the Reserved Securities are offered.
(b) Hatten Communications. To the Company's knowledge, since October 31,
1997, Hatten Communications has not suffered a material adverse effect on its
business, operations or financial condition.
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SECTION 2. Sale and Delivery to U.S. Underwriters; Closing.
(a) Initial Securities. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company agrees to sell to each U.S. Underwriter, severally and not
jointly, and each U.S. Underwriter, severally and not jointly, agrees to
purchase from the Company, at the price per share set forth in Schedule B, the
number of Initial U.S. Securities set forth in Schedule A opposite the name of
such U.S. Underwriter, plus any additional Initial U.S. Securities which such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 10 hereof.
(b) Option Securities. In addition, on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, the Company hereby grants an option to the U.S. Underwriters,
severally and not jointly, to purchase up to an additional 960,000 shares of
Common Stock at the price per share set forth in Schedule B, less an amount per
share equal to any dividends or distributions declared by the Company and
payable on the Initial U.S. Securities but not payable on the U.S. Option
Securities. The option hereby granted will expire 30 days after the date hereof
and may be exercised in whole or in part from time to time only for the purpose
of covering over-allotments which may be made in connection with the offering
and distribution of the Initial U.S. Securities upon notice by the Global
Coordinator to the Company setting forth the number of U.S. Option Securities as
to which the several U.S. Underwriters are then exercising the option and the
time and date of payment and delivery for such U.S. Option Securities. Any such
time and date of delivery for the U.S. Option Securities (a "Date of Delivery")
shall be determined by the Global Coordinator, but shall not be earlier than one
full business day or later than seven full business days after the exercise of
said option, nor in any event prior to the Closing Time, as hereinafter defined.
If the option is exercised as to all or any portion of the U.S. Option
Securities, each of the U.S. Underwriters, acting severally and not jointly,
will purchase that proportion of the total number of U.S. Option Securities then
being purchased which the number of Initial U.S. Securities set forth in
Schedule A opposite the name of such U.S. Underwriter bears to the total number
of Initial U.S. Securities, subject in each case to such adjustments as the
Global Coordinator in its discretion shall make to eliminate any sales or
purchases of fractional shares.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of Akin,
Gump, Strauss, Hauer & Feld, L.L.P., 590 Madison Avenue, New York, New York
10022, or at such other place as shall be agreed upon by the Global Coordinator
and the Company, at 9:00 A.M. (Eastern time) on the third (fourth, if the
pricing occurs after 4:30 P.M. (Eastern time) on any given day) business day
after the date hereof (unless postponed in accordance with the provisions of
Section 10), or such other time not later than ten business days after such date
as shall be agreed upon by the Global Coordinator and the Company (such time and
date of payment and delivery being herein called "Closing Time").
In addition, in the event that any or all of the U.S. Option Securities are
purchased by the U.S. Underwriters, payment of the purchase price for, and
delivery of certificates for, such U.S. Option Securities shall be made at the
above-mentioned offices, or at such other place as shall be
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agreed upon by the Global Coordinator and the Company, on each Date of Delivery
as specified in the notice from the Global Coordinator to the Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery to
the U.S. Representatives for the respective accounts of the U.S. Underwriters of
certificates for the U.S. Securities to be purchased by them. It is understood
that each U.S. Underwriter has authorized the U.S. Representatives, for its
account, to accept delivery of, receipt for, and make payment of the purchase
price for, the Initial U.S. Securities and the U.S. Option Securities, if any,
which it has agreed to purchase. Merrill Lynch, individually and not as
representative of the U.S. Underwriters, may (but shall not be obligated to)
make payment of the purchase price for the Initial U.S. Securities or the U.S.
Option Securities, if any, to be purchased by any U.S. Underwriter whose funds
have not been received by the Closing Time or the relevant Date of Delivery, as
the case may be, but such payment shall not relieve such U.S. Underwriter from
its obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial U.S.
Securities and the U.S. Option Securities, if any, shall be in such
denominations and registered in such names as the U.S. Representatives may
request in writing at least one full business day before the Closing Time or the
relevant Date of Delivery, as the case may be. The certificates for the Initial
U.S. Securities and the U.S. Option Securities, if any, will be made available
for examination and packaging by the U.S. Representatives in The City of New
York not later than 10:00 A.M. (Eastern time) on the business day prior to the
Closing Time or the relevant Date of Delivery, as the case may be.
(e) Appointment of Qualified Independent Underwriter. The Company hereby
confirms its engagement of DLJ as, and DLJ hereby confirms its agreement with
the Company to render services as, a "qualified independent underwriter" within
the meaning of Rule 2720 of the Conduct Rules of the National Association of
Securities Dealers, Inc. (the "NASD") with respect to the offering and sale of
the U.S. Securities. DLJ, solely in its capacity as qualified independent
underwriter and not otherwise, is referred to herein as the "Independent
Underwriter" or the "QIU." As compensation for the services of the QIU
hereunder, the Company agrees to pay the QIU $5,000 on the date of the Closing
Time. The price at which the Securities will be sold to the public shall not be
higher than the maximum price recommended by DLJ acting as QIU.
SECTION 3. Covenants of the Company. The Company covenants with each U.S.
Underwriter as follows:
(a) Compliance with Securities Regulations and Commission Requests. The
Company, subject to Section 3(b), will comply with the requirements of Rule 430A
or Rule 434, as applicable, and will notify the Global Coordinator immediately,
and confirm the notice in writing, (i) when any post-effective amendment to the
Registration Statement shall become effective, or any supplement or amendment to
the Prospectuses or any amended Prospectuses shall have been filed, (ii) of the
receipt of any comments from the Commission, (iii) of any
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request by the Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectuses or for additional information, and
(iv) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of any order preventing or
suspending the use of any preliminary prospectus, or of the suspension of the
qualification of the Securities for offering or sale in any jurisdiction, or of
the initiation or threatening of any proceedings for any of such purposes. The
Company will promptly effect the filings necessary pursuant to Rule 424(b) and
will take such steps as it deems necessary to ascertain promptly whether the
form of prospectus transmitted for filing under Rule 424(b) was received for
filing by the Commission and, in the event that it was not, it will promptly
file such prospectus. The Company will make every reasonable effort to prevent
the issuance of any stop order and, if any stop order is issued, to obtain the
lifting thereof at the earliest possible moment.
(b) Filing of Amendments. The Company will give the Global Coordinator
notice of its intention to file or prepare any amendment to the Registration
Statement (including any filing under Rule 462(b) and any filing required by
Section 3(k) hereof), any Term Sheet or any amendment, supplement or revision to
either the prospectus included in the Registration Statement at the time it
became effective or to the Prospectuses, will furnish the Global Coordinator
with copies of any such documents a reasonable amount of time prior to such
proposed filing or use, as the case may be, and will not file or use any such
document without the consent of the Global Coordinator, which consent shall not
be unreasonably withheld. Neither the consent of the Global Coordinator, nor the
delivery of any such document by any of the Underwriters shall constitute a
waiver of any of the conditions set forth in Section 5 hereof.
(c) Delivery of Registration Statements. The Company has furnished or will
deliver to the U.S. Representatives and counsel for the U.S. Underwriters,
without charge, signed copies of the Registration Statement as originally filed
and of each amendment thereto (including exhibits filed therewith or
incorporated by reference therein) and signed copies of all consents and
certificates of experts, and will also deliver to the U.S. Representatives,
without charge, a conformed copy of the Registration Statement as originally
filed and of each amendment thereto (without exhibits) for each of the U.S.
Underwriters. The copies of the Registration Statement and each amendment
thereto furnished to the U.S. Underwriters will be identical to the
electronically transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to each U.S.
Underwriter, without charge, as many copies of each preliminary prospectus as
such U.S. Underwriter reasonably requested, and the Company hereby consents to
the use of such copies for purposes permitted by the 1933 Act. The Company will
furnish to each U.S. Underwriter, without charge, during the period when the
U.S. Prospectus is required to be delivered under the 1933 Act or the Securities
Exchange Act of 1934, as amended (the "1934 Act"), such number of copies of the
U.S. Prospectus (as amended or supplemented) as such U.S. Underwriter may
reasonably request. The U.S. Prospectus and any amendments or supplements
thereto furnished to the U.S. Underwriters will be identical to the
electronically transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T.
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(e) Continued Compliance with Securities Laws . The Company will comply
with the 1933 Act and the 1933 Act Regulations so as to permit the completion of
the distribution of the Securities as contemplated in this Agreement, the
International Purchase Agreement and in the Prospectuses and to permit the U.S.
Underwriters to engage in market-making activities pursuant to Section 3(k)
hereof. If at any time when a prospectus is required by the 1933 Act or the 1934
Act to be delivered in connection with sales of the Securities, any event shall
occur or condition shall exist as a result of which it is necessary, in the
opinion of counsel for the U.S. Underwriters or for the Company, to amend the
Registration Statement or amend or supplement any Prospectus in order that the
Prospectuses will not include any untrue statements of a material fact or omit
to state a material fact necessary in order to make the statements therein not
misleading in the light of the circumstances existing at the time it is
delivered to a purchaser, or if it shall be necessary, in the opinion of such
counsel, at any such time to amend the Registration Statement or amend or
supplement any Prospectus in order to comply with the requirements of the 1933
Act or the 1933 Act Regulations, the Company will promptly prepare and file with
the Commission, subject to Section 3(b), such amendment or supplement as may be
necessary to correct such statement or omission or to make the Registration
Statement or the Prospectuses comply with such requirements, and the Company
will furnish to the U.S. Underwriters such number of copies of such amendment or
supplement as the U.S. Underwriters may reasonably request.
(f) Blue Sky Qualifications. The Company will use its reasonable best
efforts, in cooperation with the U.S. Underwriters, to qualify the Securities
for offering and sale under the applicable securities laws of such states and
other jurisdictions (domestic or foreign) as the Global Coordinator may
designate and to maintain such qualifications in effect for as long as required
for the sale of the Securities; provided, however, that the Company shall not be
obligated to file any general consent to service of process or to qualify as a
foreign corporation or as a dealer in securities in any jurisdiction in which it
is not so qualified or to subject itself to taxation in respect of doing
business in any jurisdiction in which it is not otherwise so subject.
(g) Rule 158. The Company will timely file such reports pursuant to the
1934 Act as are necessary in order to make generally available to its
securityholders as soon as practicable an earning statement for the purposes of,
and to provide the benefits contemplated by, the last paragraph of Section 11(a)
of the 1933 Act.
(h) Use of Proceeds. The Company will use the net proceeds received by it
from the sale of the Securities in the manner specified in the Prospectuses
under "Use of Proceeds."
(i) Listing. The Company will use its best efforts to effect and maintain
the quotation of the Common Stock on the Nasdaq National Market and will file
with the Nasdaq National Market all documents and notices required by the Nasdaq
National Market of companies that have securities that are traded in the over-
the-counter market and quotations for which are reported by the Nasdaq National
Market.
(j) Restriction on Sale of Securities. During a period of 180 days
following the date of the Prospectuses, the Company will not, without the prior
written consent of the Global
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Coordinator, directly or indirectly, (i) sell, offer to sell, grant any option
for sale of, or dispose of, any capital stock of the Company or any security
convertible or exchangeable into, or exerciseable for, such capital stock or
file any registration statement (other than any registration statements on Form
S-8) with respect to any of the foregoing pursuant to the 1933 Act or (ii) enter
into any swap or any other agreement or any transaction that transfers, in whole
or in part, directly or indirectly, the economic consequence of ownership of the
Common Stock, whether any such swap or transaction is to be settled by delivery
of Common Stock or other securities, in cash or otherwise. The foregoing
sentence shall not apply to (A) the Securities to be sold hereunder or under the
International Purchase Agreement or (B) any options to purchase shares of Common
Stock issued by the Company pursuant to existing stock option plans or any
shares issued upon the exercise of options or upon exercise of currently
existing warrants.
(k) Market-Making Activities. If at any time Merrill Lynch is unable to
obtain opinions from Skadden, Arps, Slate, Meagher & Flom (Illinois) and Akin,
Gump, Strauss, Hauer & Feld, L.L.P. that it is not an affiliate of the Company
for purposes of the 1933 Act, then the Company shall, at its expense, (i) use
its best efforts to amend the Registration Statement as soon as practicable to
include such disclosures as may be necessary to permit the U.S. Prospectus
contained in the Registration Statement to be used in connection with offers and
sales by the U.S. Underwriters for market-making activities of the Common Stock
and (ii) use its best efforts to keep the Registration Statement continuously
effective, supplemented and amended and to take such other actions, including,
but not limited to, filing an amendment to the Registration Statement and
related U.S. Prospectus to update such Registration Statement and U.S.
Prospectus to include all information required to be filed pursuant to Section
3(l) hereof (including, but not limited to, the Company's annual reports on Form
10-K, quarterly reports on Form 10-Q and periodic reports on Form 8-K), to the
extent necessary, in the reasonable judgment of Merrill Lynch, to ensure that it
is available for sales of Common Stock in connection with market-making
activities by the U.S. Underwriters and to ensure that it conforms with the
requirements of this Agreement, the 1933 Act and the policies, rules and
regulations of the Commission as announced from time to time, until such time as
Merrill Lynch shall receive such opinions, at the expense of the Company, from
Skadden, Arps, Slate, Meagher & Flom (Illinois) and Akin, Gump, Strauss, Hauer &
Feld, L.L.P. that Merrill Lynch is not an affiliate of the Company for purposes
of the 1933 Act. The Company agrees, at its expense, to furnish the U.S.
Underwriters with as many copies of the Registration Statement, U.S. Prospectus
and each report of the Company filed with the Commission pursuant to Section 13
or 15 of the 1934 Act attached to the most recent U.S. Prospectus as the U.S.
Underwriters shall reasonably request in connection with its market-making
activities. If at any time when the U.S. Prospectus is required by the 1933 Act
to be delivered in connection with market-making activities of the U.S.
Underwriters, any event shall occur or condition shall exist as a result of
which it is necessary, in the opinion of counsel for the U.S. Underwriters or
for the Company, to amend the Registration Statement or amend or supplement the
U.S. Prospectus in order that the U.S. Prospectus will not include any untrue
statements of a material fact or omit to state a material fact necessary in
order to make the statements therein not misleading in the light of the
circumstances existing at the time it is delivered in connection with the U.S.
Underwriters' market-making activities, or if it shall be necessary, in the
opinion of such counsel, at any such time to amend the Registration Statement
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or amend or supplement the U.S. Prospectus in order to comply with the
requirements of the 1933 Act or the 1933 Act Regulations, the Company will
promptly prepare and file with the Commission, subject to Section 3(b), such
amendment or supplement as may be necessary to correct such statement or
omission or to make the Registration Statement or the U.S. Prospectus comply
with such requirements, and the Company will furnish to the U.S. Underwriters
such number of copies of such amendment or supplement as the U.S. Underwriters
may reasonably request. The Company agrees to obtain from its independent
accountants, at its expense, on each effective date of any post-effective
amendment to the Registration Statement a letter addressed to Merrill Lynch
dated such date covering matters describe in Section 5(f) hereof, in each case,
in form and substance satisfactory to Merrill Lynch.
(l) Reporting Requirements. The Company, during the period when the
Prospectuses are required to be delivered under the 1933 Act or the 1934 Act,
will file all documents required to be filed with the Commission pursuant to the
1934 Act within the time periods required by the 1934 Act and the rules and
regulations of the Commission thereunder.
(m) Compliance with NASD Rules. The Company hereby agrees that it will
ensure that the Reserved Securities will be restricted as required by the NASD
or the NASD rules from sale, transfer, assignment, pledge or hypothecation for a
period of three months following the date of this Agreement. The U.S.
Underwriters will notify the Company as to which persons will need to be so
restricted. At the request of the U.S. Underwriters, the Company will direct the
transfer agent to place a stop transfer restriction upon such securities for
such period of time. Should the Company release, or seek to release, from such
restrictions any of the Reserved Securities, the Company agrees to reimburse the
U.S. Underwriters for any reasonable expenses (including, without limitation,
legal expenses) they incur in connection with such release.
SECTION 4. Payment of Expenses.
(a) Expenses. The Company will pay all expenses incident to the
performance of its obligations under this Agreement, including (i) the
preparation, printing and filing of the Registration Statement (including
financial statements and any schedules or exhibits and any document incorporated
therein) as originally filed and of each amendment thereto, (ii) the
preparation, printing and delivery (other than fees, expenses or disbursements
of counsel to the Underwriters) to the Underwriters of this Agreement, any
Agreement among Underwriters and such other documents as may be required in
connection with the offering, purchase, sale, issuance or delivery of the
Securities, (iii) the preparation, issuance and delivery of the certificates for
the Securities to the Underwriters, including any stock or other transfer taxes
and any stamp or other duties payable upon the sale, issuance or delivery of the
Securities to the Underwriters and the transfer of the Securities between the
U.S. Underwriters and the International Managers, (iv) the fees and
disbursements of the Company's counsel, accountants and other advisors, (v) the
qualification of the Securities under securities laws in accordance with the
provisions of Section 3(f) hereof, including filing fees and the reasonable fees
and disbursements of counsel for the Underwriters in connection therewith and in
connection with the preparation of the Blue Sky Survey and any supplement
thereto, (vi) the printing and delivery to the Underwriters of copies of each
preliminary prospectus, any Term Sheets and of the
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Prospectuses and any amendments or supplements thereto, (vii) the preparation,
printing and delivery to the Underwriters of copies of the Blue Sky Survey and
any supplement thereto, (viii) the fees and expenses of any transfer agent or
registrar for the Securities and (ix) the filing fees incident to, and the
reasonable fees and disbursements of counsel to the Underwriters in connection
with, the review by the NASD of the terms of the sale of the Securities, (x) the
fees and expenses incurred in connection with the inclusion of the Securities in
the Nasdaq National Market, (xi) all costs and expenses of the Underwriters,
including the fees and disbursements of counsel for the Underwriters, in
connection with matters related to the Reserved Securities which are designated
by the Company for sale to employees and others having a business relationship
with the Company and (xii)) the fees and expenses of the Independent
Underwriter.
(b) Termination of Agreement. If this Agreement is terminated by the U.S.
Representatives in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company shall reimburse the U.S. Underwriters for all of
their out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the U.S. Underwriters.
SECTION 5. Conditions of U.S. Underwriters' Obligations. The obligations of
the several U.S. Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company contained in Section 1 hereof or
in certificates of any officer of the Company or any of its Subsidiaries
delivered pursuant to the provisions hereof, to the performance by the Company
of its covenants and other obligations hereunder, and to the following further
conditions:
(a) Effectiveness of Registration Statement. The Registration Statement,
including any Rule 462(b) Registration Statement, has become effective and at
Closing Time no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission, and any request on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of counsel to the U.S. Underwriters. A prospectus
containing the Rule 430A Information shall have been filed with the Commission
in accordance with Rule 424(b) (or a post-effective amendment providing such
information shall have been filed and declared effective in accordance with the
requirements of Rule 430A) or, if the Company has elected to rely upon Rule 434,
a Term Sheet shall have been filed with the Commission in accordance with Rule
424(b).
(b) Opinion of Counsel for Company. The U.S. Underwriters shall have
received at the Closing Time an opinion of Skadden, Arps, Slate, Meagher & Flom
(Illinois), counsel for the Company, dated the date of the Closing Time and
addressed to the U.S. Underwriters in form and substance reasonably satisfactory
to counsel for the U.S. Underwriters to the effect set forth in Exhibit A hereto
and to such further effect as counsel to the U.S. Underwriters may reasonably
request.
(c) Opinion of General Counsel for Company. The Underwriters shall have
received at the Closing Time an opinion of Thomas A. Monson, Esq., General
Counsel of the Company, dated the date of the Closing Time and addressed to the
Underwriters in form and substance
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reasonably satisfactory to counsel for the U.S. Underwriters to the effect set
forth in Exhibit B hereto and to such further effect as counsel to the U.S.
Underwriters may reasonably request.
(d) Opinion of Counsel for U.S. Underwriters. The Underwriters shall have
received at the Closing Time an opinion of Akin, Gump, Strauss, Hauer & Feld,
L.L.P., counsel for the Underwriters, dated the date of the Closing Time, and
addressed to the Underwriters, with respect to the matters referred to in
clauses (i) (with respect to the Company only) and the last paragraph of the
foregoing paragraph (b) and such other related matters as the Underwriters may
request.
(e) Officers' Certificate. At Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information is
given in the Prospectuses, any material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, and the U.S.
Representatives shall have received a certificate of the President or a Vice
President of the Company and of the chief financial or chief accounting officer
of the Company, dated as of Closing Time, to the effect that (i) there has been
no such material adverse change, (ii) the representations and warranties in
Section 1(a) hereof are true and correct with the same force and effect as
though expressly made at and as of Closing Time, (iii) the Company has complied
with all agreements and satisfied all conditions on its part to be performed or
satisfied at or prior to Closing Time, and (iv) no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose have been instituted or, to the best knowledge of the Company,
are pending or are contemplated by the Commission.
(f) Accountant's Comfort Letter. At the time of the execution of this
Agreement, the U.S. Representatives shall have received from each of D&T and
KPMG a letter dated such date, in form and substance satisfactory to the U.S.
Representatives, together with signed or reproduced copies of such letter for
each of the other U.S. Underwriters containing statements and information of the
type ordinarily included in accountants' "comfort letters" to underwriters with
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectuses.
(g) Bring-down Comfort Letter. At Closing Time, the U.S. Representatives
shall have received from D&T a letter dated as of Closing Time, to the effect
that they reaffirm the statements made in the letter furnished pursuant to
subsection (f) of this Section, except that the specified date referred to shall
be a date not more than three business days prior to Closing Time.
(h) Approval of Listing. At Closing Time, the Securities shall have been
approved for inclusion in the Nasdaq National Market, subject only to official
notice of issuance.
(i) No Objection. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the underwriting
terms and arrangements.
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(j) Lock-up Agreements. At the date of this Agreement, the U.S.
Representatives shall have received an agreement substantially in the form of
Exhibit C hereto (each, a "Lock-up Letter") signed by the persons listed on
Schedule C hereto
(k) Fees and Expenses of QIU. At Closing Time, the QIU shall have received
its fees and expenses (including the fees and disbursements of counsel to the
QIU) as set forth herein.
(l) Purchase of Initial International Securities. Contemporaneously with
the purchase by the U.S. Underwriters of the Initial U.S. Securities under this
Agreement, the International Managers shall have purchased the Initial
International Securities under the International Purchase Agreement.
(m) Conditions to Purchase of U.S. Option Securities. In the event that
the U.S. Underwriters exercise their option provided in Section 2(b) hereof to
purchase all or any portion of the U.S. Option Securities, the representations
and warranties of the Company contained herein and the statements in any
certificates furnished by the Company or any subsidiary of the Company hereunder
shall be true and correct as of each Date of Delivery and, at the relevant Date
of Delivery, the U.S. Representatives shall have received:
(i) Officers' Certificate. A certificate, dated such Date of
Delivery, of the President or a Vice President of the Company
and of the chief financial or chief accounting officer of the
Company confirming that the certificate delivered at the
Closing Time pursuant to Section 5(e) hereof remains true and
correct as of such Date of Delivery.
(ii) Opinion of Counsel for Company. The favorable opinion of
Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel for
the Company, together with the favorable opinion of Thomas A.
Monson, Esq., general counsel for the Company, each in form and
substance reasonably satisfactory to counsel for the U.S.
Underwriters, dated such Date of Delivery, relating to the U.S.
Option Securities to be purchased on such Date of Delivery and
otherwise to the same effect as the opinion required by
Sections 5(b) and 5(c) hereof.
(iii) Opinion of Counsel for U.S. Underwriters. The favorable opinion
of Akin, Gump, Strauss, Hauer & Feld, L.L.P., counsel for the
U.S. Underwriters, dated such Date of Delivery, relating to the
U.S. Option Securities to be purchased on such Date of Delivery
and otherwise to the same effect as the opinion required by
Section 5(d) hereof.
(iv) Bring-down Comfort Letter. A letter from D&T in form and
substance satisfactory to the U.S. Representatives and dated
such Date of Delivery, substantially in the same form and
substance as the letter furnished to the U.S. Representatives
pursuant to Section 5(g) hereof, except that the
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"specified date" in the letter furnished pursuant to this
paragraph shall be a date not more than five days prior to such
Date of Delivery.
(n) Additional Documents. At Closing Time and at each Date of Delivery,
counsel for the U.S. Underwriters shall have been furnished with such documents
and opinions as they may reasonably require for the purpose of enabling them to
pass upon the issuance and sale of the Securities as herein contemplated, or in
order to evidence the accuracy of any of the representations or warranties, or
the fulfillment of any of the conditions, herein contained; provided, however,
that the only additional opinion of counsel the U.S. Underwriters shall require
is the opinion of Early, Lennon, Peters & Crocker, P.C. and all proceedings
taken by the Company in connection with the issuance and sale of the Securities
as herein contemplated shall be reasonably satisfactory in form and substance to
the U.S. Representatives and counsel for the U.S. Underwriters.
(o) Termination of Agreement. If any condition specified in this Section
shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of U.S. Option
Securities on a Date of Delivery which is after the Closing Time, the
obligations of the several U.S. Underwriters to purchase the relevant Option
Securities, may be terminated by the U.S. Representatives by notice to the
Company at any time at or prior to Closing Time or such Date of Delivery, as the
case may be, and such termination shall be without liability of any party to any
other party except as provided in Section 4 and except that Sections 1, 6 and 7
shall survive any such termination and remain in full force and effect.
SECTION 6. Indemnification.
(a) Indemnification of U.S. Underwriters. (1) The Company agrees to
indemnify and hold harmless each U.S. Underwriter and each person, if any, who
controls any U.S. Underwriter within the meaning of Section 15 of the 1933 Act
or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto, including, but not limited to, any amendment
filed pursuant to Section 3(k) hereof), including the Rule 430A Information
and the Rule 434 Information, if applicable, or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading or arising out of
any untrue statement or alleged untrue statement of a material fact
included in any preliminary prospectus or the Prospectuses (or any
amendment or supplement thereto, including, but not limited to, any
amendment or supplement filed pursuant to Section 3(k) hereof), or the
omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or
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any investigation or proceeding by any governmental agency or body,
commenced or threatened, or of any claim whatsoever based upon any such
untrue statement or omission, or any such alleged untrue statement or
omission; provided that (subject to Section 6(d) below) any such settlement
is effected with the written consent of the Company; and
(iii) to the extent provided for in Section 6(b) below, against any
and all expense whatsoever, as incurred (including the fees and
disbursements of counsel chosen by Merrill Lynch), reasonably incurred in
investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced
or threatened, or any claim whatsoever based upon any such untrue statement
or omission, or any such alleged untrue statement or omission, to the
extent that any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
U.S. Underwriter through the U.S. Representatives expressly for use in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any preliminary
prospectus or the U.S. Prospectus (or any amendment or supplement thereto);
provided, further, that the foregoing indemnity with respect to any preliminary
prospectus shall not inure to the benefit of any U.S. Underwriter (or to the
benefit of any person controlling such U.S. Underwriter) from whom the person
asserting any such losses, claims, damages or liabilities purchased Securities
if such untrue statement or omission or alleged untrue statement or omission
made in any such preliminary prospectus is eliminated or remedied in the U.S.
Prospectus (as amended or supplemented if the Company shall have furnished any
amendments or supplements thereto to such U.S. Underwriter prior to confirmation
of the sale of such Securities to such person by such U.S. Underwriter and a
copy of the U.S. Prospectus (as so amended or supplemented) shall not have been
furnished to such person at or prior to the written confirmation of the sale of
such Securities to such person, unless such failure to deliver was a result of
non-compliance by the Company with Section 3(a) or 3(b), and the claims asserted
by such person do not include allegations of other untrue statements or
omissions of material facts made in the U.S. Prospectus, which allegations are
upheld in a final judgment.
(2) In addition to and without limitation of the Company's obligation to
indemnify DLJ as an Underwriter, the Company also agrees to indemnify and hold
harmless the Independent Underwriter and each person, if any, who controls the
Independent Underwriter within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act, against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, (i) arising out of any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto, including, but not limited to, any
amendment filed pursuant to section 3(k) hereof), including the Rule 430A
Information and the Rule 434 Information, if applicable, or the omission or
alleged omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading or arising out of any
untrue statement or alleged
25
<PAGE>
untrue statement of a material fact included in any preliminary prospectus or
the Prospectuses (or any amendment or supplement thereto, including, but not
limited to, any amendment filed pursuant to section 3(k) hereof), or the
omission or alleged omission therefrom of a material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading; and (ii) incurred as a result of the Independent
Underwriter's participation as a "qualified independent underwriter" within the
meaning of Rule 2720 of the Conduct Rules of the NASD in connection with the
offering of the U.S. Securities.
(b) Indemnification of Company, Directors and Officers. Each U.S.
Underwriter severally agrees to indemnify and hold harmless the Company, its
directors, each of its officers who signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act against any and all loss, liability,
claim, damage and expense described in the indemnity contained in subsection (a)
(1) of this Section, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions, made in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary U.S. prospectus or
the U.S. Prospectus (or any amendment or supplement thereto) in reliance upon
and in conformity with written information furnished to the Company by such U.S.
Underwriter through the U.S. Representatives expressly for use in the
Registration Statement (or any amendment thereto) or such preliminary prospectus
or the U.S. Prospectus (or any amendment or supplement thereto).
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. If it so elects within a reasonable time after receipt of such
notice, an indemnifying party, severally or jointly with any other indemnifying
parties receiving such notice, may assume the defense of such action with
counsel chosen by it, subject to the terms hereof, and reasonably acceptable to
the indemnified parties defendant in such action; provided, however, that if DLJ
is sued in its capacity as QIU, it has the right to assume its own defense
without consulting with any other named parties. If an indemnifying party
assumes the defense of such action, the indemnifying parties shall not be liable
for any fees and expenses of counsel for the indemnified parties incurred
thereafter in connection with such action, provided, however, that if the
instance contemplated by clause (ii) or (iii) of the following sentence occurs
then the indemnifying party can no longer assume such defense. Notwithstanding
the indemnifying party's election to appoint counsel to represent the
indemnified party in any action, the indemnified party shall have the right to
employ separate counsel at any time, and the indemnifying party shall bear the
reasonable fees, costs and expenses of such separate counsel if (i) the
indemnifying party shall have failed to assume the defense and employ counsel,
(ii) the use of counsel chosen by the indemnifying party to represent the
indemnified party would, in the opinion of counsel to the indemnified party,
present such counsel with a conflict of interest or (iii) DLJ is sued in its
capacity as QIU. In no event shall the indemnifying parties be liable for fees
and expenses of
26
<PAGE>
more than one counsel (in addition to any local counsel and one additional
counsel for the QIU) separate from their own counsel for all indemnified parties
in connection with any one action or separate but similar or related actions in
the same jurisdiction arising out of the same general allegations or
circumstances. No indemnifying party shall, without the prior written consent of
the indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever in respect of which indemnification or contribution could be sought
under this Section 6 or Section 7 hereof (whether or not the indemnified parties
are actual or potential parties thereto), unless such settlement, compromise or
consent (i) includes an unconditional release of each indemnified party from all
liability arising out of such litigation, investigation, proceeding or claim and
(ii) does not include a statement as to or an admission of fault, culpability or
a failure to act by or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(1)(ii) effected without its written consent if (i) such settlement
is entered into more than 45 days after receipt by such indemnifying party of
the aforesaid request, (ii) such indemnifying party shall have received notice
of the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
(e) Indemnification for Reserved Securities. In connection with the offer
and sale of the Reserved Securities, the Company agrees, promptly upon a request
in writing, to indemnify and hold harmless the U.S. Underwriters from and
against any and all losses, liabilities, claims, damages and expenses incurred
by them as a result of the failure of eligible employees and other persons
having a business relationship with the Company to pay for and accept delivery
of Reserved Securities which, by the end of the first business day following the
date of this Agreement, were subject to a properly confirmed agreement to
purchase.
SECTION 7. Contribution. (a) If the indemnification provided for in
Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount of such losses, liabilities, claims, damages
and expenses incurred by such indemnified party, as incurred, (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the U.S. Underwriters on the other hand from the
offering of the Securities pursuant to this Agreement or (ii) if the allocation
provided by clause (i) is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of the Company on the one hand and of the
U.S. Underwriters on the other hand in connection with the statements or
omissions, which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
27
<PAGE>
The relative benefits received by the Company on the one hand and the U.S.
Underwriters on the other hand in connection with the offering of the U.S.
Securities pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the U.S.
Securities pursuant to this Agreement (before deducting expenses) received by
the Company and the total underwriting discount received by the U.S.
Underwriters, in each case as set forth on the cover of the U.S. Prospectus, or,
if Rule 434 is used, the corresponding location on the Term Sheet, bear to the
aggregate initial public offering price of the U.S. Securities as set forth on
such cover.
The relative fault of the Company on the one hand and the U.S. Underwriters
on the other hand shall be determined by reference to, among other things,
whether any such untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the U.S. Underwriters and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission or any violation of the nature referred to in Section
6(a)(1)(ii)(A) hereof.
The Company and the U.S. Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the U.S. Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 7 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no U.S. Underwriter shall
be required to contribute any amount in excess of the amount by which the total
price at which the U.S. Securities underwritten by it and distributed to the
public were offered to the public exceeds the amount of any damages which such
U.S. Underwriter has otherwise been required to pay by reason of any such untrue
or alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls a U.S.
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such U.S.
Underwriter, and each director of the Company, each officer of the Company who
signed the Registration Statement, and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act or Section 20 of the
1934 Act shall have the same rights to contribution as the Company. The U.S.
Underwriters' respective obligations to contribute pursuant to this Section 7
are several in proportion to the
28
<PAGE>
number of Initial U.S. Securities set forth opposite their respective names in
Schedule A hereto and not joint.
(b) If the indemnification provided for in Section 6 hereof is for any
reason unavailable to or insufficient to hold harmless the Independent
Underwriter in respect of any losses, liabilities, claims, damages or expenses
referred to therein, then the Company shall contribute to the amount paid or
payable by the Independent Underwriter as a result of such losses, liabilities,
claims, damages or expenses (i) in such proportion as is appropriate to reflect
the relative benefits received by the Company on the one hand and the
Independent Underwriter on the other hand from the offering of the Securities or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company and the Independent Underwriter in connection with the statements or
omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Independent Underwriter shall be deemed
to be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company as set forth in the table on the
cover page of the Prospectuses, and the fee received by the Independent
Underwriter pursuant to Section 2 hereof, bear to the sum of such total net
proceeds and such fee. The relative fault of the Company the Independent
Underwriter shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
or the Independent Underwriter and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission and whether the Independent Underwriter's activities as Independent
Underwriter under its engagement pursuant to Section 2 hereof involved any
willful misconduct or gross negligence on the part of the Independent
Underwriter.
The Company and the U.S. Underwriters agree that DLJ will not receive any
additional benefits hereunder for serving as the Independent Underwriter in
connection with the offering and sale of the U.S. Securities, except as provided
in Section 2 hereof.
The Company and the Independent Underwriter agree that it would not be just
and equitable if contribution pursuant to this Section 7(b) were determined by
pro rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by a Independent Underwriter as a result
of the losses, liabilities, claims, damages or judgments referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses incurred by such
Independent Underwriter in connection with investigating or defending any matter
that could have given rise to such losses, claims, damages, liabilities or
judgments. In no event shall any Independent Underwriter be required to
contributed in the aggregate an amount exceeding the fee received by DLJ
pursuant to Section 2 hereof. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the 1933 Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
29
<PAGE>
The remedies provided for in this Section 7 are not exclusive and shall not
limit any rights or remedies which may otherwise be available to any Independent
Underwriter at law or in equity.
SECTION 8. Representations, Warranties and Agreements to Survive Delivery.
All representations, warranties and agreements contained in this Agreement or in
certificates of officers of the Company submitted pursuant hereto, shall remain
operative and in full force and effect, regardless of any investigation made by
or on behalf of any U.S. Underwriter or controlling person, or by or on behalf
of the Company, and shall survive delivery of the Securities to the U.S.
Underwriters.
SECTION 9. Termination of Agreement.
(a) Termination; General. The U.S. Representatives may terminate this
Agreement, by notice to the Company, at any time at or prior to Closing Time (i)
if there has been, since the time of execution of this Agreement or since the
respective dates as of which information is given in the U.S. Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business, or (ii) if there has occurred any material adverse
change in the financial markets in the United States or the international
financial markets, any outbreak of hostilities or escalation thereof or other
calamity or crisis or any change or development involving a prospective change
in national or international political, financial or economic conditions, in
each case the effect of which is such as to make it, in the judgment of the U.S.
Representatives, impracticable to market the Securities or to enforce contracts
for the sale of the Securities, or (iii) if trading in any securities of the
Company has been suspended or limited by the Commission or the Nasdaq National
Market, or if trading generally on the American Stock Exchange or the New York
Stock Exchange or in the Nasdaq National Market has been suspended or limited,
or minimum or maximum prices for trading have been fixed, or maximum ranges for
prices have been required, by any of said exchanges or by such system or by
order of the Commission, the National Association of Securities Dealers, Inc. or
any other governmental authority, or (iv) if a banking moratorium has been
declared by either Federal, New York or Delaware authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this Section,
such termination shall be without liability of any party to any other party
except as provided in Section 4 hereof, and provided further that Sections 1, 6
and 7 shall survive such termination and remain in full force and effect.
SECTION 10. Default by One or More of the U.S. Underwriters. If one or more
of the U.S. Underwriters shall fail at Closing Time or a Date of Delivery to
purchase the Securities which it or they are obligated to purchase under this
Agreement (the "Defaulted Securities"), the U.S. Representatives shall have the
right, but not the obligation, within 24 hours thereafter, to make arrangements
for one or more of the non-defaulting U.S. Underwriters, or any other
underwriters, to purchase all, but not less than all, of the Defaulted
Securities in such amounts as
30
<PAGE>
may be agreed upon and upon the terms herein set forth; if, however, the U.S.
Representatives shall not have completed such arrangements within such 24-hour
period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the
number of U.S. Securities to be purchased on such date, each of the non-
defaulting U.S. Underwriters shall be obligated, severally and not jointly,
to purchase the full amount thereof in the proportions that their
respective underwriting obligations hereunder bear to the underwriting
obligations of all non-defaulting U.S. Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the number
of U.S. Securities to be purchased on such date, this Agreement or, with
respect to any Date of Delivery which occurs after the Closing Time, the
obligation of the U.S. Underwriters to purchase and of the Company to sell
the Option Securities to be purchased and sold on such Date of Delivery
shall terminate without liability on the part of any non-defaulting U.S.
Underwriter.
No action taken pursuant to this Section shall relieve any defaulting U.S.
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination of
this Agreement or, in the case of a Date of Delivery which is after the Closing
Time, which does not result in a termination of the obligation of the U.S.
Underwriters to purchase and the Company to sell the relevant U.S. Option
Securities, as the case may be, either the U.S. Representatives or the Company
shall have the right to postpone Closing Time or the relevant Date of Delivery,
as the case may be, for a period not exceeding seven days in order to effect any
required changes in the Registration Statement or Prospectus or in any other
documents or arrangements. As used herein, the term "U.S. Underwriter" includes
any person substituted for a U.S. Underwriter under this Section 10.
SECTION 11. Notices. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the U.S.
Underwriters shall be directed to Merrill Lynch, Pierce, Fenner & Smith
Incorporated at North Tower, World Financial Center, New York, New York 10281-
1201, attention of Steven Jones; and notices to the Company shall be directed to
it at 10 South Riverside Plaza, Suite 401, Chicago, Illinois 60606, attention of
General Counsel.
SECTION 12. Parties. This Agreement shall each inure to the benefit of and
be binding upon the U.S. Underwriters and the Company and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the U.S.
Underwriters and the Company and their respective successors and the controlling
persons and officers and directors referred to in Sections 6 and 7 and their
heirs and legal representatives, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision herein contained. This
Agreement and all conditions and provisions hereof are intended to be for the
sole and exclusive benefit of the U.S. Underwriters and the Company and their
respective successors, and said controlling persons and
31
<PAGE>
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of Securities from
any U.S. Underwriter shall be deemed to be a successor by reason merely of such
purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED TIMES
OF DAY REFER TO NEW YORK CITY TIME.
SECTION 14. Effect of Headings. The Article and Section headings herein and
the Table of Contents are for convenience only and shall not affect the
construction hereof.
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the U.S. Underwriters and the Company in accordance with its terms.
Very truly yours,
USN COMMUNICATIONS, INC.
By
------------------------
Name:
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
32
<PAGE>
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
COWEN & COMPANY
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By
--------------------------------------
Authorized Signatory
For themselves and as U.S. Representatives of the
other U.S. Underwriters named in Schedule A hereto.
33
<PAGE>
SCHEDULE A
Number of
Initial U.S.
Name of U.S. Underwriter Securities
------------------------ ----------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...............................................................
Cowen & Company.................................................................
Donaldson, Lufkin & Jenrette
Securities Corporation.....................................................
Total................................................................. 6,400,000
34
<PAGE>
SCHEDULE B
USN COMMUNICATIONS, INC.
6,400,000 Shares of Common Stock
(Par Value $.01 Per Share)
1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $__________.
2. The purchase price per share for the U.S. Securities to be paid by the
several U.S. Underwriters shall be $__________, being an amount equal to the
initial public offering price set forth above less $__________ per share;
provided that the purchase price per share for any U.S. Option Securities
purchased upon the exercise of the over-allotment option described in Section
2(b) shall be reduced by an amount per share equal to any dividends or
distributions declared by the Company and payable on the Initial U.S. Securities
but not payable on the U.S. Option Securities.
35
<PAGE>
SCHEDULE C
List of persons and entities
subject to lock-up
36
<PAGE>
SCHEDULE I
Applicable Contracts
[To include Stock Purchase Agreement]
37
<PAGE>
Exhibit 1.2
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
USN COMMUNICATIONS, INC.
(a Delaware corporation)
1,600,000 Shares of Common Stock
INTERNATIONAL PURCHASE AGREEMENT
--------------------------------
Dated: February ___, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
<S> <C>
INTERNATIONAL PURCHASE AGREEMENT...........................................................4
SECTION 1. REPRESENTATIONS AND WARRANTIES.................................................6
(a) Representations and Warranties by the Company........................................6
(b) Hatten Communications................................................................7
SECTION 2. SALE AND DELIVERY TO INTERNATIONAL MANAGERS; CLOSING...........................14
(a) Initial Securities..................................................................14
(b) Option Securities...................................................................14
(c) Payment.............................................................................15
(d) Denominations; Registration.........................................................16
SECTION 3. COVENANTS OF THE COMPANY.......................................................16
(a) Compliance with Securities Regulations and Commission Requests......................16
(b) Filing of Amendments................................................................17
(c) Delivery of Registration Statements.................................................17
(d) Delivery of Prospectuses............................................................17
(e) Continued Compliance with Securities Laws...........................................17
(f) Blue Sky Qualifications.............................................................18
(g) Rule 158............................................................................18
(h) Use of Proceeds.....................................................................18
(i) Listing.............................................................................18
(j) Restriction on Sale of Securities...................................................18
(k) Reporting Requirements..............................................................20
(l) Compliance with NASD Rules..........................................................20
SECTION 4. PAYMENT OF EXPENSES............................................................20
(a) Expenses............................................................................20
(b) Termination of Agreement............................................................21
SECTION 5. CONDITIONS OF INTERNATIONAL MANAGERS' OBLIGATIONS..............................21
(a) Effectiveness of Registration Statement.............................................21
(b) Opinion of Counsel for Company......................................................21
(c) Opinion of General Counsel for Company..............................................21
(d) Opinion of Counsel for International Managers.......................................21
(e) Officer's Certificate...............................................................22
</TABLE>
2
<PAGE>
(f) accountant's Comfort Letter.............................................22
(g) Bring-down Comfort Letter...............................................22
(h) Approval of Listing.....................................................22
(i) No Objection............................................................22
(j) Lock-up Agreements......................................................22
(k) Fees and Expenses of QIU................................................22
(l) Purchase of Initial U.S. Securities.....................................23
(m) Conditions to Purchase of International Option Securities...............23
(n) Additional Documents....................................................23
(o) Termination of Agreement................................................24
SECTION 6. INDEMNIFICATION..................................................24
(a) Indemnification of International Managers...............................24
(b) Actions against Parties; Notification...................................26
(c) Settlement without Consent if Failure to Reimburse......................27
(d) Indemnification for Reserved Securities.................................27
SECTION 7. CONTRIBUTION.....................................................27
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY...29
SECTION 9. TERMINATION OF AGREEMENT.........................................30
(a) Termination; General....................................................30
(b) Liabilities.............................................................30
SECTION 10. DEFAULT BY ONE OR MORE OF THE INTERNATIONAL MANAGERS.............30
SECTION 11. NOTICES..........................................................31
SECTION 12. PARTIES..........................................................31
SECTION 13. GOVERNING LAW AND TIME...........................................31
SECTION 14. EFFECT OF HEADINGS...............................................32
SCHEDULES
Schedule A - List of International Managers
Schedule B - Pricing Information
Schedule C - List of Persons Subject to Lock-up
Schedule I - Applicable Contracts
EXHIBITS
Exhibit A - Form of Opinion of Company's Counsel to be Delivered
Pursuant to Section 5(b)
Exhibit B - Form of Opinion of General Counsel for Company to be
Delivered Pursuant to Section 5(c)
3
<PAGE>
USN COMMUNICATIONS, INC.
(a Delaware corporation)
1,600,000 Shares of Common Stock
(Par Value $.01 Per Share)
INTERNATIONAL PURCHASE AGREEMENT
--------------------------------
February ___, 1998
Merrill Lynch International
Cowen International L.P.
Donaldson, Lufkin & Jenrette
International
as Lead Managers of the several International Managers
c/o Merrill Lynch International
20 Farringdon Road
London EC1M 3NH
Ladies and Gentlemen:
USN Communications, Inc., a Delaware corporation (the "Company"), confirms
its agreement with Merrill Lynch International ("Merrill Lynch") and each of the
other International Managers named in Schedule A hereto (collectively, the
"International Managers," which term shall also include any underwriter
substituted as hereinafter provided in Section 10 hereof), for whom Merrill
Lynch, Cowen International L.P. and Donaldson, Lufkin & Jenrette International
are acting as representatives (in such capacity, the "Lead Managers"), with
respect to the issue and sale by the Company and the purchase by the
International Managers, acting severally and not jointly, of the respective
numbers of shares of Common Stock, par value $.01 per share ("Common Stock"), of
the Company set forth in said Schedule A, and with respect to the grant by the
Company to the International Managers, acting severally and not jointly, of the
option described in Section 2(b) hereof to purchase all or any part of 240,000
additional shares of Common Stock to cover over-allotments, if any. The
aforesaid 1,600,000 shares of Common Stock (the "Initial International
Securities") to be purchased by the International Managers and all or any part
of the 240,000 shares of Common Stock subject to the option described in Section
2(b) hereof (the "International Option Securities") are hereinafter called,
collectively, the "International Securities."
4
<PAGE>
It is understood that the Company is concurrently entering into an
agreement dated the date hereof (the "U.S. Purchase Agreement") providing for
the offering by the Company of an aggregate of 6,400,000 shares of Common Stock
(the "Initial U.S. Securities") through arrangements with certain underwriters
in the United States and Canada (the "U.S. Underwriters") for which Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Cowen & Company
and Donaldson, Lufkin & Jenrette Securities Corporation are acting as
representatives (the "U.S. Representatives") and the grant by the Company to the
U.S. Underwriters, acting severally and not jointly, of an option to purchase
all or any part of the U.S. Underwriters' pro rata portion of up to 960,000
additional shares of Common Stock solely to cover over-allotments, if any (the
"U.S. Option Securities" and, together with the International Option Securities,
the "Option Securities"). The Initial U.S. Securities and the U.S. Option
Securities are hereinafter called the "U.S. Securities." It is understood that
the Company is not obligated to sell, and the International Managers are not
obligated to purchase, any Initial International Securities unless all of the
Initial U.S. Securities are contemporaneously purchased by the U.S.
Underwriters.
The International Managers and the U.S. Underwriters are hereinafter
collectively called the "Underwriters," the Initial International Securities and
the Initial U.S. Securities are hereinafter collectively called the "Initial
Securities," and the International Securities and the U.S. Securities are
hereinafter collectively called the "Securities."
The Underwriters will concurrently enter into an Intersyndicate Agreement
of even date herewith (the "Intersyndicate Agreement") providing for the
coordination of certain transactions among the Underwriters under the direction
of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (in
such capacity, the "Global Coordinator").
The Company understands that the International Managers propose to make a
public offering of the International Securities as soon as the Lead Managers
deem advisable after this Agreement has been executed and delivered.
The Company and the Underwriters agree that up to 800,000 shares of the
Securities to be purchased by the Underwriters (the "Reserved Securities") shall
be reserved for sale by the Underwriters to certain eligible employees and
persons having business relationships with the Company, as part of the
distribution of the Securities by the Underwriters, subject to the terms of this
Agreement and the U.S. Purchase Agreement, the applicable rules, regulations and
interpretations of the National Association of Securities Dealers, Inc. and all
other applicable laws, rules and regulations. To the extent that such Reserved
Securities are not orally confirmed for purchase by such eligible employees and
persons having business relationships with the Company by the end of the first
business day after the date of this Agreement, such Reserved Securities may be
offered to the public as part of the public offering contemplated hereby.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-38381) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this
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Agreement, the Company will either (i) prepare and file a prospectus in
accordance with the provisions of Rule 430A ("Rule 430A") of the rules and
regulations of the Commission under the 1933 Act (the "1933 Act Regulations")
and paragraph (b) of Rule 424 ("Rule 424(b)") of the 1933 Act Regulations or
(ii) if the Company has elected to rely upon Rule 434 ("Rule 434") of the 1933
Act Regulations, prepare and file a term sheet (a "Term Sheet") in accordance
with the provisions of Rule 434 and Rule 424(b). Two forms of prospectus are to
be used in connection with the offering and sale of the Securities: one relating
to the International Securities (the "Form of International Prospectus") and one
relating to the U.S. Securities (the "Form of U.S. Prospectus"). The Form of
U.S. Prospectus is identical to the Form of International Prospectus, except for
the front cover and back cover pages and the information under the caption
"Underwriting." The information included in any such prospectus or in any such
Term Sheet, as the case may be, that was omitted from such registration
statement at the time it became effective but that is deemed to be part of such
registration statement at the time it became effective (a) pursuant to paragraph
(b) of Rule 430A is referred to as "Rule 430A Information" or (b) pursuant to
paragraph (d) of Rule 434 is referred to as "Rule 434 Information." Each Form of
International Prospectus and Form of U.S. Prospectus used before such
registration statement became effective, and any prospectus that omitted, as
applicable, the Rule 430A Information or the Rule 434 Information, that was used
after such effectiveness and prior to the execution and delivery of this
Agreement, is herein called a "preliminary prospectus." Such registration
statement, including the exhibits thereto and schedules thereto, at the time
became effective and including the Rule 430A Information and the Rule 434
Information, as applicable, is herein called the "Registration Statement." Any
registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations
is herein referred to as the "Rule 462(b) Registration Statement," and after
such filing the term "Registration Statement" shall include the Rule 462(b)
Registration Statement. The final Form of International Prospectus and the final
Form of U.S. Prospectus in the forms first furnished to the Underwriters for use
in connection with the offering of the Securities are herein called the
"International Prospectus" and the "U.S. Prospectus," respectively, and
collectively, the "Prospectuses." If Rule 434 is relied on, the terms
"International Prospectus" and "U.S. Prospectus" shall refer to the preliminary
International Prospectus dated January 7, 1998 and preliminary U.S. Prospectus
dated January 7, 1998, respectively, each together with the applicable Term
Sheet and all references in this Agreement to the date of such Prospectuses
shall mean the date of the applicable Term Sheet. The terms "Registration
Statement" and "International Prospectus" shall include any supplements or
amendments thereto, including the exhibits thereto and the schedules thereto, at
the time such supplement or amendment is filed pursuant to Section 3(k) hereof.
For purposes of this Agreement, all references to the Registration Statement,
any preliminary prospectus, the International Prospectus, the U.S. Prospectus or
any Term Sheet or any amendment or supplement to any of the foregoing shall be
deemed to include the copy filed with the Commission pursuant to its Electronic
Data Gathering, Analysis and Retrieval system ("EDGAR").
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Company. The Company represents and
warrants to each International Manager as of the date hereof, as of the
Closing Time referred to
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in Section 2(c) hereof, and as of each Date of Delivery (if any) referred to in
Section 2(b) hereof and agrees with each International Manager, as follows:
(i) Compliance with Registration Requirements. Each of the
Registration Statement and any Rule 462(b) Registration Statement has become
effective under the 1933 Act and no stop order suspending the effectiveness of
the Registration Statement or any Rule 462(b) Registration Statement has been
issued under the 1933 Act and no proceedings for that purpose have been
instituted or are pending or, to the knowledge of the Company, are contemplated
by the Commission, and any request on the part of the Commission for additional
information has been complied with.
At the respective times the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendments thereto became
effective and at the Closing Time (and, if any International Option Securities
are purchased, at the Date of Delivery), the Registration Statement, the Rule
462(b) Registration Statement and any amendments and supplements thereto,
complied and will comply in all material respects with the requirements of the
1933 Act and the 1933 Act Regulations and did not and will not contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
the Prospectuses, any preliminary prospectus and any amendment or supplement
thereto or prospectus wrapper prepared in connection therewith, at their
respective times of issuance and at the Closing Time (and, if any International
Option Securities are purchased, at the Date of Delivery), complied and will
comply in all material respects with any applicable laws or regulations of
foreign jurisdictions in which the Prospectuses and such preliminary prospectus,
as amended or supplemented, if applicable, are distributed in connection with
the offer and sale of Reserved Securities. Neither of the Prospectuses nor any
amendments or supplements thereto, at the time the Prospectuses or any
amendments or supplements thereto (including any prospectus wrapper) were issued
and at the Closing Time (and, if any International Option Securities are
purchased, at the Date of Delivery), included or will include an untrue
statement of a material fact or omitted or will omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. If Rule 434 is used,
the Company will comply with the requirements of Rule 434 and the Prospectuses
shall not be "materially different," as such term is used in Rule 434, from the
prospectuses included in the Registration Statement at the time it became
effective. The representations and warranties in this subsection shall not apply
to statements in or omissions from the Registration Statement, any Rule 462(b)
Registration Statement or any post-effective amendment thereto or the
International Prospectus made in reliance upon and in conformity with
information furnished to the Company in writing by any International Manager
through the Lead Managers expressly for use in the Registration Statement or the
International Prospectus.
Each preliminary prospectus and the prospectuses filed as part of the
Registration Statement as originally filed or as part of any amendment or
supplement thereto, or filed pursuant to Rule 424 under the 1933 Act, complied
when so filed in all material respects with the 1933 Act Regulations and each
preliminary prospectus and the Prospectuses delivered to the Underwriters for
use in connection with this offering was identical to the electronically
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transmitted copies thereof filed with the Commission pursuant to EDGAR, except
to the extent permitted by Regulation S-T.
(ii) Capitalization and Authorization of Securities. The authorized
issued and outstanding capital stock of the Company will be as of the
Closing Time as set forth in the column entitled "As Adjusted" under the
caption "Capitalization" in the Prospectuses; and the authorized capital
stock of the Company will conform as of the Closing Time in all material
respects to the description thereof contained in the Prospectuses under the
caption "Description of Capital Stock"; all the outstanding shares of
capital stock of the Company have been duly authorized and validly issued,
are fully paid and nonassessable, and are free of any preemptive or similar
rights, except as set forth in the Prospectuses, and were issued and sold
in compliance with all applicable Federal and state securities laws. The
Securities to be purchased by the International Managers and the U.S.
Underwriters from the Company have been duly authorized for issuance and
sale to the Underwriters pursuant to this Agreement and the U.S. Purchase
Agreement, respectively, and when issued and delivered by the Company
pursuant to this Agreement and the U.S. Purchase Agreement, respectively,
against payment of the consideration set forth in this Agreement and the
U.S. Purchase Agreement, will be validly issued and fully paid and non-
assessable and no holder of the Securities is or will be subject to
personal liability by reason of being such holder.
(iii) Good Standing of the Company and the Subsidiaries. The Company
is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware. Each of the Company's Subsidiaries
is a corporation duly organized, validly existing and in good standing
under the laws of its jurisdiction of incorporation. The term
"Subsidiaries" as used in this Agreement shall include USN Communications
Northeast, Inc. (formerly United Telemanagement Services, Inc.), USN
Communications Long Distance, Inc. (formerly United Telecom of America,
Inc.), Quest United, Inc., USN Southwest, Inc., U.S. Network Corporation,
FoneNet/Ohio, Inc. ("FoneNet"), USN Solutions, Inc., USN Communications
Midwest, Inc. (formerly USN Communications, Inc.), USN Communications
Atlantic, Inc., USN Communications Virginia, Inc., USN Northeast, Inc. and
Quest United, Inc. Each of the Company and its Subsidiaries has full
corporate power and authority to own, lease and operate its properties and
to conduct its business as described in the Prospectuses, and is duly
registered and qualified to conduct its business and is in good standing
under the laws of each jurisdiction or place where the nature of its
properties or the conduct of its business requires such registration or
qualification, except where the failure so to register or qualify does not
have a material adverse effect and would not reasonably be expected to have
a material adverse effect upon the financial condition, business,
liabilities (contingent or otherwise) or results of operations of the
Company and its Subsidiaries, taken as a whole (a "Material Adverse
Effect").
(iv) Authorization of Subsidiary Capital Stock. All the outstanding
shares of capital stock of each Subsidiary have been duly authorized and
validly issued, are fully paid and nonassessable, and, except as otherwise
set forth in the Prospectuses, all of the
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outstanding shares of capital stock of the Subsidiaries are, and will be at
the Closing Time (and, if any International Option Securities are
purchased, at the Date of Delivery), owned directly by the Company free and
clear of any lien, adverse claim, security interest or equity or other
encumbrance.
(v) Absence of Proceedings. There are no legal or governmental
proceedings, complaints or investigations including, without limitation,
before the Federal Communications Commission (the "FCC") or any comparable
state regulatory agency with direct regulatory jurisdiction over
telecommunications matters in any state in which the Company or any
Subsidiary provides services (each, a "State Regulatory Agency") pending
or, to the knowledge of the Company, threatened, against the Company or any
of the Subsidiaries or to which the Company or any of the Subsidiaries, or
to which any of their respective properties, is subject, that are not
disclosed in the Prospectuses and which, individually or in the aggregate,
would be reasonably likely to cause a Material Adverse Effect or materially
affect the issuance of the Securities or the consummation of the
transactions contemplated hereby or by the U.S. Purchase Agreement. There
are no material agreements, contracts, indentures, leases or other
instruments to which the Company or any Subsidiary is a party or by which
any of them may be bound or to which any of their respective properties may
be subject that are not described in the Prospectuses, the failure of which
to describe would constitute a material misstatement or omission of a
material fact.
(vi) Absence of Defaults and Conflicts. Neither the Company nor any
of its Subsidiaries is (A) in violation of its certificate of
incorporation, by-laws or other organizational documents, (B) in breach of,
or in default in, the performance of any obligation, agreement, covenant or
condition contained in any material bond, debenture, note or any other
evidence of indebtedness or in any agreement, indenture, lease or other
instrument to which the Company or any of its Subsidiaries is a party or by
which any of them may be bound or to which any of their respective
properties may be subject, or (C) in violation of any judgment, injunction,
order or decree applicable to the Company or any of its Subsidiaries of any
court, regulatory body (including any self-regulatory body), administrative
agency, governmental body or arbitrator having jurisdiction over the
Company or any of its Subsidiaries, and no event has occurred which, with
notice or lapse of time or both, would constitute such a violation or
default, except, in the case of clauses (B) and (C) hereof, for any such
breach, default or violation which would not have a Material Adverse
Effect. Each of the Company and its Subsidiaries is in compliance with all
applicable statutes, laws, rules, regulations and filing requirements
(including the applicable rules and regulations of self-regulatory bodies),
except where the failure to so be in compliance would not have a Material
Adverse Effect.
(vii) No Consents. Neither the issuance, offer, sale or delivery of
the Securities, compliance by the Company with the provisions hereof or of
the U.S. Purchase Agreement nor consummation by the Company of the
transactions contemplated hereby or thereby (A) requires any consent,
approval, authorization or other order of, or registration or filing with,
any court, regulatory body, administrative agency
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or other governmental body, agency or official, including, without
limitation, the FCC or any State Regulatory Agency, (except such as has
been obtained in connection with the registration under the 1933 Act of the
Securities and except for compliance with the securities or Blue Sky laws
of various jurisdictions), (B) conflicts or will conflict with or
constitutes or will constitute a breach of, or a default under, the
certificate of incorporation, by-laws or other organizational documents of
the Company or any of the Subsidiaries or, except where such conflict,
breach or default would not have a Material Adverse Effect, any material
bond, debenture, note or other evidence of indebtedness or any agreement,
indenture, lease or other instrument to which the Company or any of the
Subsidiaries is a party or by which any of them or any of their respective
properties is or may be bound, or (C) violates or will violate any statute,
law, rule, regulation, filing requirement, judgment, injunction, order or
decree applicable to the Company or any of the Subsidiaries or any of their
respective properties, or will result in the creation or imposition of any
lien, adverse claim, security interest or equity or other encumbrance upon
any property or assets of the Company or any of the Subsidiaries pursuant
to the terms of any agreement or instrument to which any of them is a party
or by which any of them may be bound or to which any of the property or
assets of any of them is subject, except where such violation, creation or
imposition would not have a Material Adverse Effect.
(viii) Independent Accountants. The accountants, Deloitte & Touche
LLP ("D&T") and KPMG Peat Marwick LLP ("KPMG"), who have certified or shall
certify the financial statements included as part of the Prospectuses, are
independent public accountants under Rule 101 of the AICPA's Code of
Professional Conduct, and its interpretations and rulings and within the
meaning of the 1933 Act and the Rules and Regulations promulgated
thereunder.
(ix) Financial Statements. The financial statements, together with
related schedules and notes forming part of the Prospectuses, present
fairly in all material respects the consolidated financial position,
results of operations and changes in stockholders' equity and cash flows of
the Company and the Subsidiaries on the basis stated in the Prospectuses at
the respective dates or for the respective periods to which they apply;
such statements and related schedules and notes have been prepared in
accordance with generally accepted accounting principles consistently
applied throughout the periods involved, except as otherwise noted therein;
and the other financial and statistical information and data set forth in
the Prospectuses are accurately presented and, to the extent such
information and data are derived from the financial books and records of
the Company, are prepared on a basis consistent with such financial
statements and the books and records of the Company. The pro forma
financial information of the Company and its subsidiaries and the related
notes thereto included in the Registration Statement have been prepared in
accordance with the Commission's rules and guidelines with respect to pro
forma financial statements, have been properly compiled on the bases
described therein and, in the opinion of the Company and its subsidiaries,
the assumptions used in the preparation thereof are reasonable and the
adjustments used
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therein are appropriate to give effect to the transactions and
circumstances referred to therein.
(x) Authorization of Agreement. The Company has all requisite power
and authority to execute, deliver and perform its obligations under this
Agreement and the U.S. Purchase Agreement; the execution and delivery of,
and the performance by the Company of its obligations under this Agreement
and the U.S. Purchase Agreement have been duly and validly authorized by
the Company, and each of this Agreement and the U.S. Purchase Agreement has
been duly executed and delivered by the Company and constitutes the valid
and binding agreements of the Company, enforceable against the Company in
accordance with their terms, except as the enforcement hereof and thereof
may be limited by bankruptcy, fraudulent conveyance, insolvency,
reorganization, moratorium and other similar laws relating to or affecting
the enforcement of creditors' rights generally, by general equitable
principles and any rights to indemnity and contribution may be limited by
Federal and state securities laws and by public policy considerations.
(xi) No Material Adverse Change in Business. Except as disclosed in
the Prospectuses, subsequent to the date as of which such information is
given in the Prospectuses, neither the Company nor any of the Subsidiaries
has incurred any liability or obligation, direct or contingent, or entered
into any transaction, not in the ordinary course of business, that is
material to the Company and the Subsidiaries taken as a whole, and there
has not been any material change in the capital stock, or material increase
in the short-term or long-term debt, of the Company or any of the
Subsidiaries, or any material adverse change, or any development which
could reasonably be expected to have a Material Adverse Effect.
(xii) Properties. Each of the Company and the Subsidiaries has good
and marketable title to all property (real and personal) described in the
Prospectuses as being owned by it, free and clear of all liens, adverse
claims, security interests or equity or other encumbrances except such as
do not materially and adversely effect the value of such property and do
not materially interfere with the use made or proposed to be made of such
property by the Company or any Subsidiary or the conduct of the business of
the Company and the Subsidiaries, and all the property described in the
Prospectuses as being held under lease by each of the Company and the
Subsidiaries is held by it under valid, subsisting and enforceable leases,
with only such exceptions as in the aggregate are not materially burdensome
and do not interfere in any material respect with the conduct of the
business of the Company and the Subsidiaries, taken as a whole.
(xiii) Distribution of Prospectuses. Except as permitted by the 1933
Act, the Company has not distributed and, prior to the later to occur of
the Closing Time (and, if any International Option Securities are
purchased, at the Date of Delivery) and completion of the distribution of
the securities, will not distribute any offering material in connection
with the offering and sale of the Securities other than the preliminary
prospectuses and the Prospectuses.
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(xiv) Possession of Licenses and Permits. Each of the Company and
the Subsidiaries owns, holds, possesses or has obtained all such
governmental agreements, licenses, permits, certificates, franchises,
consents, orders, approvals, waivers and other authorizations (A) as are
required under such Federal and state laws as specifically regulate the
operation of the Company or any Subsidiary including all Licenses (as
defined below) required by the FCC and the State Regulatory Agencies for
the provision of telecommunications services by the Company and the
Subsidiaries and (B) of the appropriate governmental or regulatory agencies
or bodies as are necessary to own, hold or lease their respective
properties and to conduct their respective businesses as described in the
Prospectuses (collectively, "Licenses"); each of such Licenses is in full
force and effect and is fairly described in the Prospectuses; the Company
and each of the Subsidiaries has fulfilled and performed in all material
respects all of their respective obligations with respect to all such
Licenses possessed by any of them; no event has occurred which allows, or
after notice or lapse of time, or both, would allow, revocation or
termination thereof or result in any other material impairment of the
rights of the holder of any such License; and neither the Company nor any
of its Subsidiaries has received any notice of proceedings relating to the
revocation or modification of, or denial of any application for, any such
License other than as described in the Prospectuses, and the Company has no
knowledge that the relevant authorities have threatened any such
proceeding.
(xv) Accounting. The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurances that (A)
material transactions are executed in accordance with management's general
or specific authorization; (B) material transactions are recorded as
necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain accountability for
assets; and (C) access to assets is permitted only in accordance with
management's general or specific authorization.
(xvi) Absence of Payments. Neither the Company nor any Subsidiary
nor, to the Company's knowledge, any employee or agent of the Company or
any Subsidiary has made any payment of funds of the Company or any
Subsidiary or received or retained any funds in violation of any statute,
law, rule, regulation, filing requirement, judgment, injunction, order or
decree, which violation would have a Material Adverse Effect.
(xvii) Tax Returns. Except as disclosed in the Prospectuses, the
Company and each Subsidiary have filed all tax returns required to be
filed, which returns are true and correct in all material respects, and
neither the Company nor any Subsidiary is in default in the payment of any
taxes which were payable pursuant to said returns or any assessments with
respect thereto, except where the failure to so file or pay would not have
a Material Adverse Effect.
(xviii) Rights to Acquire Capital Stock. Except as described in or
contemplated by the Company's 1994 Stock Option Plan, the Omnibus
Securities Plan of USN
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Communications, Inc. or the Prospectuses, there are no outstanding options,
warrants or other rights calling for the issuance of, and there are no
commitments, plans or arrangements to issue, any shares of capital stock of
the Company or any security convertible into or exchangeable or exercisable
for capital stock of the Company.
(xix) Possession of Intellectual Property. The Company and the
Subsidiaries own or possess all material patents, trademarks, trademark
registrations, service marks, service mark registrations, trade names,
copyrights, licenses, inventions, trade secrets and rights described in the
Prospectuses as being owned by any of them or necessary for the conduct of
their respective businesses, and the Company is not aware of any claim to
the contrary or any challenge by any other person to the rights of the
Company and the Subsidiaries with respect to the foregoing.
(xx) ERISA. The execution and delivery of this Agreement and the
U.S. Purchase Agreement, the sale of the International Securities to the
International Managers or by the International Managers and the sale of the
U.S. Securities to the U.S. Underwriters or by the U.S. Underwriters will
not involve any prohibited transaction within the meaning of Section 406 of
the Employee Retirement Income Security Act of 1974 or Section 4975 of the
Internal Revenue Code of 1986, as amended.
(xxi) Absence of Labor Disputes. No labor strike, job action,
dispute, disturbance, lockout, slowdown or stoppage by any group of
employees of the Company or any of its Subsidiaries currently exists and,
to the knowledge of the Company, no such action or dispute is imminent or
threatened.
(xxii) Investment Company Act. The Company is not now, and will not
be, immediately following its receipt of the proceeds of the offering
contemplated hereby, required to register as an investment company (an
"Investment Company") as defined in the Investment Company Act of 1940 (the
"Investment Company Act"). If the Company should at any time become an
Investment Company, it will comply with all applicable provisions of the
Investment Company Act and the rules and regulations thereunder.
(xxiii) Accuracy of Exhibits. There are no contracts or documents
which are required to be described in the Registration Statement or the
Prospectuses or to be filed as exhibits thereto which have not been so
described and filed as required.
(xxiv) Compliance with Cuba Act. The Company has complied with, and
is and will be in compliance with, the provisions of that certain Florida
Act relating to disclosure of doing business with Cuba, codified as Section
517.075 of the Florida statutes, and the rules and regulations thereunder
(collectively, the "Cuba Act") or is exempt therefrom.
(xxv) Registration Rights. Except as described in the Prospectuses
under the caption "Description of Capital Stock--Registration Rights"),
there are no persons with
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registration rights or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise registered
by the Company under the 1933 Act.
(xxvi) Authorization of Stock Purchase Agreement. The Company has
all requisite power and authority to execute, deliver and perform its
obligations under the Stock Purchase Agreement, dated as of January 7,
1998, by and among the Company and Mark Hatten, Triumph-Connecticut Limited
Partnership, a Connecticut limited partnership, Solomon Schechter Day
School of Greater Hartford, Inc., a not-for-profit educational institution
and Hatten Communications Holding Company, Inc., a Connecticut corporation
("Hatten Communications") (collectively, the "Sellers"); the execution and
delivery of, and the performance by the Company of its obligations under
the Stock Purchase Agreement have been duly and validly authorized by the
Company and the Stock Purchase Agreement has been duly executed and
delivered by the Company and constitutes the valid and binding agreement of
the Company, enforceable against the Company in accordance with its terms,
except as the enforcement hereof may be limited by bankruptcy, fraudulent
conveyance, insolvency, reorganization, moratorium and other similar laws
relating to or affecting the enforcement of creditors' rights generally and
by general equitable principles.
(xxvii) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company of its
obligations hereunder, in connection with the offering, issuance or sale of
the Securities hereunder or the consummation of the transactions
contemplated by this Agreement, except (i) such as have been already
obtained or as may be required under the 1933 Act or the 1933 Act
Regulations or state securities laws and (ii) such as have been obtained
under the laws and regulations of jurisdictions outside the United States
in which the Reserved Securities are offered.
(b) Hatten Communications. To the Company's knowledge, since October 31,
1997, Hatten Communications has not suffered a material adverse effect on its
business, operations or financial condition.
SECTION 2. Sale and Delivery to International Managers; Closing.
(a) Initial Securities. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company agrees to sell to each International Manager, severally and
not jointly, and each International Manager, severally and not jointly, agrees
to purchase from the Company, at the price per share set forth in Schedule B,
the number of Initial International Securities set forth in Schedule A opposite
the name of such International Manager, plus any additional Initial
International Securities which such Underwriter may become obligated to purchase
pursuant to the provisions of Section 10 hereof.
(b) Option Securities. In addition, on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, the Company hereby
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grants an option to the International Managers, severally and not jointly, to
purchase up to an additional 240,000 shares of Common Stock at the price per
share set forth in Schedule B, less an amount per share equal to any dividends
or distributions declared by the Company and payable on the Initial
International Securities but not payable on the International Option Securities.
The option hereby granted will expire 30 days after the date hereof and may be
exercised in whole or in part from time to time only for the purpose of covering
over-allotments which may be made in connection with the offering and
distribution of the Initial International Securities upon notice by the Global
Coordinator to the Company setting forth the number of International Option
Securities as to which the several International Managers are then exercising
the option and the time and date of payment and delivery for such International
Option Securities. Any such time and date of delivery for the International
Option Securities (a "Date of Delivery") shall be determined by the Global
Coordinator, but shall not be earlier than one full business day or later than
seven full business days after the exercise of said option, nor in any event
prior to the Closing Time, as hereinafter defined. If the option is exercised as
to all or any portion of the International Option Securities, each of the
International Managers, acting severally and not jointly, will purchase that
proportion of the total number of International Option Securities then being
purchased which the number of Initial International Securities set forth in
Schedule A opposite the name of such International Manager bears to the total
number of Initial International Securities, subject in each case to such
adjustments as the Global Coordinator in its discretion shall make to eliminate
any sales or purchases of fractional shares.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of Akin,
Gump, Strauss, Hauer & Feld, L.L.P., 590 Madison Avenue, New York, New York
10022, or at such other place as shall be agreed upon by the Global Coordinator
and the Company, at 9:00 A.M. (Eastern time) on the third (fourth, if the
pricing occurs after 4:30 P.M. (Eastern time) on any given day) business day
after the date hereof (unless postponed in accordance with the provisions of
Section 10), or such other time not later than ten business days after such date
as shall be agreed upon by the Global Coordinator and the Company (such time and
date of payment and delivery being herein called "Closing Time").
In addition, in the event that any or all of the International Option
Securities are purchased by the International Managers, payment of the purchase
price for, and delivery of certificates for, such International Option
Securities shall be made at the above-mentioned offices, or at such other place
as shall be agreed upon by the Global Coordinator and the Company, on each Date
of Delivery as specified in the notice from the Global Coordinator to the
Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery to
the Lead Managers for the respective accounts of the International Managers of
certificates for the International Securities to be purchased by them. It is
understood that each International Manager has authorized the Lead Managers, for
its account, to accept delivery of, receipt for, and make payment of the
purchase price for, the Initial International Securities and the International
Option Securities, if any, which it has agreed to purchase. Merrill Lynch,
individually and not as representative of the
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International Managers, may (but shall not be obligated to) make payment of the
purchase price for the Initial International Securities or the International
Option Securities, if any, to be purchased by any International Manager whose
funds have not been received by the Closing Time or the relevant Date of
Delivery, as the case may be, but such payment shall not relieve such
International Manager from its obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial
International Securities and the International Option Securities, if any, shall
be in such denominations and registered in such names as the Lead Managers may
request in writing at least one full business day before the Closing Time or the
relevant Date of Delivery, as the case may be. The certificates for the Initial
International Securities and the International Option Securities, if any, will
be made available for examination and packaging by the Lead Managers in The City
of New York not later than 10:00 A.M. (Eastern time) on the business day prior
to the Closing Time or the relevant Date of Delivery, as the case may be.
(e) Appointment of Qualified Independent Underwriter. The Company hereby
confirms its engagement of Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ") as, and DLJ hereby confirms its agreement with the Company to render
services as, a "qualified independent underwriter" within the meaning of Rule
2720 of the Conduct Rules of the National Association of Securities Dealers,
Inc. (the "NASD") with respect to the offering and sale of the International
Securities. DLJ, solely in its capacity as qualified independent underwriter and
not otherwise, is referred to herein as the "Independent Underwriter" or the
"QIU." As compensation for the services of the QIU hereunder, the Company agrees
to pay the QIU $5,000 on the date of the Closing Time. The price at which the
Securities will be sold to the public shall not be higher than the maximum price
recommended by DLJ acting as QIU.
SECTION 3. Covenants of the Company. The Company covenants with each
International Manager as follows:
(a) Compliance with Securities Regulations and Commission Requests. The
Company, subject to Section 3(b), will comply with the requirements of Rule 430A
or Rule 434, as applicable, and will notify the Global Coordinator immediately,
and confirm the notice in writing, (i) when any post-effective amendment to the
Registration Statement shall become effective, or any supplement or amendment to
the Prospectuses or any amended Prospectuses shall have been filed, (ii) of the
receipt of any comments from the Commission, (iii) of any request by the
Commission for any amendment to the Registration Statement or any amendment or
supplement to the Prospectuses or for additional information, and (iv) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of any order preventing or suspending the use of any
preliminary prospectus, or of the suspension of the qualification of the
Securities for offering or sale in any jurisdiction, or of the initiation or
threatening of any proceedings for any of such purposes. The Company will
promptly effect the filings necessary pursuant to Rule 424(b) and will take such
steps as it deems necessary to ascertain promptly whether the form of prospectus
transmitted for filing under Rule 424(b) was received for filing by the
Commission and, in the event that it was not, it will promptly file such
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prospectus. The Company will make every reasonable effort to prevent the
issuance of any stop order and, if any stop order is issued, to obtain the
lifting thereof at the earliest possible moment.
(b) Filing of Amendments. The Company will give the Global Coordinator
notice of its intention to file or prepare any amendment to the Registration
Statement (including any filing under Rule 462(b) and any filing required by
Section 3(k) hereof), any Term Sheet or any amendment, supplement or revision to
either the prospectus included in the Registration Statement at the time it
became effective or to the Prospectuses, will furnish the Global Coordinator
with copies of any such documents a reasonable amount of time prior to such
proposed filing or use, as the case may be, and will not file or use any such
document without the consent of the Global Coordinator, which consent shall not
be unreasonably withheld. Neither the consent of the Global Coordinator, nor the
delivery of any such document by any of the Underwriters shall constitute a
waiver of any of the conditions set forth in Section 5 hereof.
(c) Delivery of Registration Statements. The Company has furnished or will
deliver to the Lead Managers and counsel for the International Managers, without
charge, signed copies of the Registration Statement as originally filed and of
each amendment thereto (including exhibits filed therewith or incorporated by
reference therein) and signed copies of all consents and certificates of
experts, and will also deliver to the Lead Managers, without charge, a conformed
copy of the Registration Statement as originally filed and of each amendment
thereto (without exhibits) for each of the International Managers. The copies of
the Registration Statement and each amendment thereto furnished to the
International Managers will be identical to the electronically transmitted
copies thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to each
International Manager, without charge, as many copies of each preliminary
prospectus as such International Manager reasonably requested, and the Company
hereby consents to the use of such copies for purposes permitted by the 1933
Act. The Company will furnish to each International Manager, without charge,
during the period when the International Prospectus is required to be delivered
under the 1933 Act or the Securities Exchange Act of 1934, as amended (the "1934
Act"), such number of copies of the International Prospectus (as amended or
supplemented) as such International Manager may reasonably request. The
International Prospectus and any amendments or supplements thereto furnished to
the International Managers will be identical to the electronically transmitted
copies thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will comply
with the 1933 Act and the 1933 Act Regulations so as to permit the completion of
the distribution of the Securities as contemplated in this Agreement, the U.S.
Purchase Agreement and in the Prospectuses and to permit the International
Managers to engage in market-making activities pursuant to Section 3(k) hereof.
If at any time when a prospectus is required by the 1933 Act or the 1934 Act to
be delivered in connection with sales of the Securities, any event shall occur
or condition shall exist as a result of which it is necessary, in the opinion of
counsel for the International Managers or for the Company, to amend the
Registration Statement or amend or
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supplement any Prospectus in order that the Prospectuses will not include any
untrue statements of a material fact or omit to state a material fact necessary
in order to make the statements therein not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser, or if it
shall be necessary, in the opinion of such counsel, at any such time to amend
the Registration Statement or amend or supplement any Prospectus in order to
comply with the requirements of the 1933 Act or the 1933 Act Regulations, the
Company will promptly prepare and file with the Commission, subject to Section
3(b), such amendment or supplement as may be necessary to correct such statement
or omission or to make the Registration Statement or the Prospectuses comply
with such requirements, and the Company will furnish to the International
Managers such number of copies of such amendment or supplement as the
International Managers may reasonably request.
(f) Blue Sky Qualifications. The Company will use its reasonable best
efforts, in cooperation with the International Managers, to qualify the
Securities for offering and sale under the applicable securities laws of such
states and other jurisdictions (domestic or foreign) as the Global Coordinator
may designate and to maintain such qualifications in effect for as long as
required for the sale of the Securities; provided, however, that the Company
shall not be obligated to file any general consent to service of process or to
qualify as a foreign corporation or as a dealer in securities in any
jurisdiction in which it is not so qualified or to subject itself to taxation in
respect of doing business in any jurisdiction in which it is not otherwise so
subject.
(g) Rule 158. The Company will timely file such reports pursuant to the
1934 Act as are necessary in order to make generally available to its
securityholders as soon as practicable an earning statement for the purposes of,
and to provide the benefits contemplated by, the last paragraph of Section 11(a)
of the 1933 Act.
(h) Use of Proceeds. The Company will use the net proceeds received by it
from the sale of the Securities in the manner specified in the Prospectuses
under "Use of Proceeds."
(i) Listing. The Company will use its best efforts to effect and maintain
the quotation of the Common Stock on the Nasdaq National Market and will file
with the Nasdaq National Market all documents and notices required by the Nasdaq
National Market of companies that have securities that are traded in the over-
the-counter market and quotations for which are reported by the Nasdaq National
Market.
(j) Restriction on Sale of Securities. During a period of 180 days
following the date of the Prospectuses, the Company will not, without the prior
written consent of the Global Coordinator, directly or indirectly, (i) sell,
offer to sell, grant any option for sale of, or dispose of, any capital stock of
the Company or any security convertible or exchangeable into, or exerciseable
for, such capital stock or file any registration statement (other than any
registration statements on Form S-8) with respect to any of the foregoing
pursuant to the 1933 Act or (ii) enter into any swap or any other agreement or
any transaction that transfers, in whole or in part, directly or indirectly, the
economic consequence of ownership of the Common Stock, whether any such swap or
transaction is to be settled by delivery of Common Stock or other securities, in
cash or otherwise. The foregoing sentence shall not apply to (A) the Securities
to be sold
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hereunder or under the U.S. Purchase Agreement or (B) any options to purchase
shares of Common Stock issued by the Company pursuant to existing stock option
plans or any shares issued, upon the exercise of options or upon exercise of
currently existing warrants.
(k) Market-Making Activities. If at any time Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("Merrill Lynch") is unable to obtain opinions from
Skadden, Arps, Slate, Meagher & Flom (Illinois) and Akin, Gump, Strauss, Hauer &
Feld, L.L.P. that it is not an affiliate of the Company for purposes of the 1933
Act, then the Company shall, at its expense, (i) use its best efforts to amend
the Registration Statement as soon as practicable to include such disclosures as
may be necessary to permit the U.S. Prospectus contained in the Registration
Statement to be used in connection with offers and sales by the U.S.
Underwriters for market-making activities of the Common Stock and (ii) use its
best efforts to keep the Registration Statement continuously effective,
supplemented and amended and to take such other actions, including, but not
limited to, filing an amendment to the Registration Statement and related U.S.
Prospectus to update such Registration Statement and International Prospectus to
include all information required to be filed pursuant to Section 3(l) hereof
(including, but not limited to, the Company's annual reports on Form 10-K,
quarterly reports on Form 10-Q and periodic reports on Form 8-K), to the extent
necessary, in the reasonable judgment of Merrill Lynch, to ensure that it is
available for sales of Common Stock in connection with market-making activities
by the U.S. Underwriters and to ensure that it conforms with the requirements of
this Agreement, the 1933 Act and the policies, rules and regulations of the
Commission as announced from time to time, until such time as Merrill Lynch
shall receive such opinions, at the expense of the Company, from Skadden, Arps,
Slate, Meagher & Flom (Illinois) and Akin, Gump, Strauss, Hauer & Feld, L.L.P.
that Merrill Lynch is not an affiliate of the Company for purposes of the 1933
Act. The Company agrees, at its expense, to furnish the U.S. Underwriters with
as many copies of the Registration Statement, U.S. Prospectus and each report of
the Company filed with the Commission pursuant to Section 13 or 15 of the 1934
Act attached to the most recent U.S. Prospectus as the U.S. Underwriters shall
reasonably request in connection with its market-making activities. If at any
time when the U.S. Prospectus is required by the 1933 Act to be delivered in
connection with market-making activities of the U.S. Underwriters, any event
shall occur or condition shall exist as a result of which it is necessary, in
the opinion of counsel for the U.S. Underwriters or for the Company, to amend
the Registration Statement or amend or supplement the U.S. Prospectus in order
that the U.S. Prospectus will not include any untrue statements of a material
fact or omit to state a material fact necessary in order to make the statements
therein not misleading in the light of the circumstances existing at the time it
is delivered in connection with the U.S. Underwriters' market-making activities,
or if it shall be necessary, in the opinion of such counsel, at any such time to
amend the Registration Statement or amend or supplement the U.S. Prospectus in
order to comply with the requirements of the 1933 Act or the 1933 Act
Regulations, the Company will promptly prepare and file with the Commission,
subject to Section 3(b), such amendment or supplement as may be necessary to
correct such statement or omission or to make the Registration Statement or the
U.S. Prospectus comply with such requirements, and the Company will furnish to
the U.S. Underwriters such number of copies of such amendment or supplement as
the U.S. Underwriters may reasonably request. The Company agrees to obtain from
its independent accountants, at its expense, on each effective date of any post-
effective amendment
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to the Registration Statement a letter addressed to Merrill Lynch dated such
date covering matters describe in Section 5(f) hereof, in each case, in form and
substance satisfactory to Merrill Lynch.
(l) Reporting Requirements. The Company, during the period when the
Prospectuses are required to be delivered under the 1933 Act or the 1934 Act,
will file all documents required to be filed with the Commission pursuant to the
1934 Act within the time periods required by the 1934 Act and the rules and
regulations of the Commission thereunder.
(m) Compliance with NASD Rules. The Company hereby agrees that it will
ensure that the Reserved Securities will be restricted as required by the NASD
or the NASD rules from sale, transfer, assignment, pledge or hypothecation for a
period of three months following the date of this Agreement. The U.S.
Underwriters will notify the Company as to which persons will need to be so
restricted. At the request of the U.S. Underwriters, the Company will direct the
transfer agent to place a stop transfer restriction upon such securities for
such period of time. Should the Company release, or seek to release, from such
restrictions any of the Reserved Securities, the Company agrees to reimburse the
U.S. Underwriters for any reasonable expenses (including, without limitation,
legal expenses) they incur in connection with such release.
SECTION 4. Payment of Expenses.
(a) Expenses. The Company will pay all expenses incident to the performance
of its obligations under this Agreement, including (i) the preparation, printing
and filing of the Registration Statement (including financial statements and any
schedules or exhibits and any document incorporated therein) as originally filed
and of each amendment thereto, (ii) the preparation, printing and delivery
(other than fees, expenses or disbursements of counsel to the Underwriters) to
the Underwriters of this Agreement, any Agreement among Underwriters and such
other documents as may be required in connection with the offering, purchase,
sale, issuance or delivery of the Securities, (iii) the preparation, issuance
and delivery of the certificates for the Securities to the Underwriters,
including any stock or other transfer taxes and any stamp or other duties
payable upon the sale, issuance or delivery of the Securities to the
Underwriters and the transfer of the Securities between the International
Managers and the U.S. Underwriters, (iv) the fees and disbursements of the
Company's counsel, accountants and other advisors, (v) the qualification of the
Securities under securities laws in accordance with the provisions of Section
3(f) hereof, including filing fees and the reasonable fees and disbursements of
counsel for the Underwriters in connection therewith and in connection with the
preparation of the Blue Sky Survey and any supplement thereto, (vi) the printing
and delivery to the Underwriters of copies of each preliminary prospectus, any
Term Sheets and of the Prospectuses and any amendments or supplements thereto,
(vii) the preparation, printing and delivery to the Underwriters of copies of
the Blue Sky Survey and any supplement thereto, (viii) the fees and expenses of
any transfer agent or registrar for the Securities and (ix) the filing fees
incident to, and the reasonable fees and disbursements of counsel to the
Underwriters in connection with, the review by the NASD of the terms of the sale
of the Securities, (x) the fees and expenses incurred in connection with the
inclusion of the Securities in the Nasdaq National Market, (xi) all costs and
expenses of the Underwriters, including the fees and disbursements of counsel
for the
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Underwriters, in connection with matters related to the Reserved Securities
which are designated by the Company for sale to employees and others having a
business relationship with the Company and (xii)) the fees and expenses of the
Independent Underwriter.
(b) Termination of Agreement. If this Agreement is terminated by the Lead
Managers in accordance with the provisions of Section 5 or Section 9(a)(i)
hereof, the Company shall reimburse the International Managers for all of their
out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the International Managers.
SECTION 5. Conditions of International Managers' Obligations. The
obligations of the several International Managers hereunder are subject to the
accuracy of the representations and warranties of the Company contained in
Section 1 hereof or in certificates of any officer of the Company or any of its
Subsidiaries delivered pursuant to the provisions hereof, to the performance by
the Company of its covenants and other obligations hereunder, and to the
following further conditions:
(a) Effectiveness of Registration Statement. The Registration Statement,
including any Rule 462(b) Registration Statement, has become effective and at
Closing Time no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission, and any request on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of counsel to the International Managers. A prospectus
containing the Rule 430A Information shall have been filed with the Commission
in accordance with Rule 424(b) (or a post-effective amendment providing such
information shall have been filed and declared effective in accordance with the
requirements of Rule 430A) or, if the Company has elected to rely upon Rule 434,
a Term Sheet shall have been filed with the Commission in accordance with Rule
424(b).
(b) Opinion of Counsel for Company. The International Managers shall have
received at the Closing Time an opinion of Skadden, Arps, Slate, Meagher & Flom
(Illinois), counsel for the Company, dated the date of the Closing Time and
addressed to the International Managers in form and substance reasonably
satisfactory to counsel for the International Managers to the effect set forth
in Exhibit A hereto and to such further effect as counsel to the International
Managers may reasonably request.
(c) Opinion of General Counsel for Company. The Underwriters shall have
received at the Closing Time an opinion of Thomas A. Monson, Esq., General
Counsel of the Company, dated the date of the Closing Time and addressed to the
Underwriters in form and substance reasonably satisfactory to counsel for the
International Managers to the effect set forth in Exhibit B hereto and to such
further effect as counsel to the International Managers may reasonably request.
(d) Opinion of Counsel for International Managers. The Underwriters shall
have received at the Closing Time an opinion of Akin, Gump, Strauss, Hauer &
Feld, L.L.P., counsel for the Underwriters, dated the date of the Closing Time,
and addressed to the Underwriters, with
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respect to the matters referred to in clauses (i) (with respect to the Company
only) and the last paragraph of the foregoing paragraph (b) and such other
related matters as the Underwriters may request.
(e) Officers' Certificate. At Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information is
given in the Prospectuses, any material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, and the Lead Managers
shall have received a certificate of the President or a Vice President of the
Company and of the chief financial or chief accounting officer of the Company,
dated as of Closing Time, to the effect that (i) there has been no such material
adverse change, (ii) the representations and warranties in Section 1(a) hereof
are true and correct with the same force and effect as though expressly made at
and as of Closing Time, (iii) the Company has complied with all agreements and
satisfied all conditions on its part to be performed or satisfied at or prior to
Closing Time, and (iv) no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose have
been instituted or, to the best knowledge of the Company, are pending or are
contemplated by the Commission.
(f) Accountant's Comfort Letter. At the time of the execution of this
Agreement, the Lead Managers shall have received from each of D&T and KPMG a
letter dated such date, in form and substance satisfactory to the Lead Managers,
together with signed or reproduced copies of such letter for each of the other
International Managers containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters with
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectuses.
(g) Bring-down Comfort Letter. At Closing Time, the Lead Managers shall
have received from D&T a letter dated as of Closing Time, to the effect that
they reaffirm the statements made in the letter furnished pursuant to subsection
(f) of this Section, except that the specified date referred to shall be a date
not more than three business days prior to Closing Time.
(h) Approval of Listing At Closing Time, the Securities shall have
been approved for inclusion in the Nasdaq National Market, subject only to
official notice of issuance.
(i) No Objection. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the underwriting
terms and arrangements.
(j) Lock-up Agreements. At the date of this Agreement, the U.S.
Representatives shall have received an agreement substantially in the form of
Exhibit C to the U.S. Purchase Agreement (each, a "Lock-up Letter") signed by
the persons listed on Schedule C hereto
(k) Fees and Expenses of QIU. At Closing Time, the QIU shall have
received its fees and expenses (including the fees and disbursements of counsel
to the QIU) as set forth herein.
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(l) Purchase of Initial U.S. Securities. Contemporaneously with the
purchase by the International Managers of the Initial International Securities
under this Agreement, the U.S. Underwriters shall have purchased the Initial
U.S. Securities under the U.S. Purchase Agreement.
(m) Conditions to Purchase of International Option Securities. In the event
that the International Managers exercise their option provided in Section 2(b)
hereof to purchase all or any portion of the International Option Securities,
the representations and warranties of the Company contained herein and the
statements in any certificates furnished by the Company or any subsidiary of the
Company hereunder shall be true and correct as of each Date of Delivery and, at
the relevant Date of Delivery, the Lead Managers shall have received:
(i) Officers' Certificate. A certificate, dated such Date of
Delivery, of the President or a Vice President of the Company
and of the chief financial or chief accounting officer of the
Company confirming that the certificate delivered at the
Closing Time pursuant to Section 5(e) hereof remains true and
correct as of such Date of Delivery.
(ii) Opinion of Counsel for Company. The favorable opinion of
Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel for
the Company, together with the favorable opinion of Thomas A.
Monson, Esq., general counsel for the Company, each in form and
substance reasonably satisfactory to counsel for the
International Managers, dated such Date of Delivery, relating
to the International Option Securities to be purchased on such
Date of Delivery and otherwise to the same effect as the
opinion required by Sections 5(b) and 5(c) hereof.
(iii) Opinion of Counsel for International Managers. The favorable
opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P., counsel
for the International Managers, dated such Date of Delivery,
relating to the International Option Securities to be purchased
on such Date of Delivery and otherwise to the same effect as
the opinion required by Section 5(d) hereof.
(iv) Bring-down Comfort Letter. A letter from D&T in form and
substance satisfactory to the Lead Managers and dated such Date
of Delivery, substantially in the same form and substance as
the letter furnished to the Lead Managers pursuant to Section
5(g) hereof, except that the "specified date" in the letter
furnished pursuant to this paragraph shall be a date not more
than five days prior to such Date of Delivery.
(n) Additional Documents. At Closing Time and at each Date of Delivery,
counsel for the International Managers shall have been furnished with such
documents and opinions as they may reasonably require for the purpose of
enabling them to pass upon the issuance and sale of the Securities as herein
contemplated, or in order to evidence the accuracy of any of the representations
or warranties, or the fulfillment of any of the conditions, herein contained;
provided, however, that the only additional opinion of counsel the U.S.
Underwriters shall
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require is the opinion of Early, Lennon, Peters & Crocker, P.C. and all
proceedings taken by the Company in connection with the issuance and sale of the
Securities as herein contemplated shall be reasonably satisfactory in form and
substance to the Lead Managers and counsel for the International Managers.
(o) Termination of Agreement. If any condition specified in this Section
shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of International
Option Securities on a Date of Delivery which is after the Closing Time, the
obligations of the several International Managers to purchase the relevant
Option Securities, may be terminated by the Lead Managers by notice to the
Company at any time at or prior to Closing Time or such Date of Delivery, as the
case may be, and such termination shall be without liability of any party to any
other party except as provided in Section 4 and except that Sections 1, 6 and 7
shall survive any such termination and remain in full force and effect.
SECTION 6. Indemnification.
(a) Indemnification of International Managers. (1) The Company agrees to
indemnify and hold harmless each International Manager and each person, if any,
who controls any International Manager within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto, including, but not limited to, any amendment
filed pursuant to Section 3(k) hereof), including the Rule 430A Information
and the Rule 434 Information, if applicable, or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading or arising out of
any untrue statement or alleged untrue statement of a material fact
included in any preliminary prospectus or the Prospectuses (or any
amendment or supplement thereto, including, but not limited to, any
amendment or supplement filed pursuant to Section 3(k) hereof), or the
omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission; provided that (subject to Section
6(d) below) any such settlement is effected with the written consent of the
Company; and
(iii) to the extent provided for in Section 6(b) below, against any
and all expense whatsoever, as incurred (including the fees and
disbursements of counsel chosen
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by Merrill Lynch), reasonably incurred in investigating, preparing or
defending against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission, to the extent that any such expense
is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
International Manager through the Lead Managers expressly for use in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any preliminary
prospectus or the International Prospectus (or any amendment or supplement
thereto); provided, further, that the foregoing indemnity with respect to any
preliminary prospectus shall not inure to the benefit of any International
Manager (or to the benefit of any person controlling such International Manager)
from whom the person asserting any such losses, claims, damages or liabilities
purchased Securities if such untrue statement or omission or alleged untrue
statement or omission made in any such preliminary prospectus is eliminated or
remedied in the International Prospectus (as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto to such
International Manager prior to confirmation of the sale of such Securities to
such person by such International Manager and a copy of the International
Prospectus (as so amended or supplemented) shall not have been furnished to such
person at or prior to the written confirmation of the sale of such Securities to
such person if such is required by law, unless such failure to deliver was a
result of non-compliance by the Company with Section 3(a) or 3(b), and the
claims asserted by such person do not include allegations of other untrue
statements or omissions of material facts made in the International Prospectus,
which allegations are upheld in a final judgment.
(2) In addition to and without limitation of the Company's obligation to
indemnify DLJ as an Underwriter, the Company also agrees to indemnify and hold
harmless the Independent Underwriter and each person, if any, who controls the
Independent Underwriter within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act, against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, (i) arising out of any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto, including, but not limited to, any
amendment filed pursuant to section 3(k) hereof), including the Rule 430A
Information and the Rule 434 Information, if applicable, or the omission or
alleged omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading or arising out of any
untrue statement or alleged untrue statement of a material fact included in any
preliminary prospectus or the Prospectuses (or any amendment or supplement
thereto, including, but not limited to, any amendment filed pursuant to section
3 (k) hereof), or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and (ii) incurred as a
result of the Independent Underwriter's participation as a "qualified
independent underwriter" within the meaning of Rule 2720 of the Conduct Rules of
the NASD in connection with the offering of the International Securities.
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<PAGE>
(b) Indemnification of Company, Directors and Officers. Each International
Manager severally agrees to indemnify and hold harmless the Company, its
directors, each of its officers who signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act against any and all loss, liability,
claim, damage and expense described in the indemnity contained in subsection (a)
(1) of this Section, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions, made in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary international
prospectus or the International Prospectus (or any amendment or supplement
thereto) in reliance upon and in conformity with written information furnished
to the Company by such International Manager through the Lead Managers expressly
for use in the Registration Statement (or any amendment thereto) or such
preliminary prospectus or the International Prospectus (or any amendment or
supplement thereto).
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. If it so elects within a reasonable time after receipt of such
notice, an indemnifying party, severally or jointly with any other indemnifying
parties receiving such notice, may assume the defense of such action with
counsel chosen by it, subject to the terms hereof, and reasonably acceptable to
the indemnified parties defendant in such action; provided, however, that if DLJ
is sued in its capacity as QIU, it has the right to assume its own defense
without consulting with any other named parties. If an indemnifying party
assumes the defense of such action, the indemnifying parties shall not be liable
for any fees and expenses of counsel for the indemnified parties incurred
thereafter in connection with such action, provided, however, that if the
instance contemplated by clause (ii) or (iii) of the following sentence occurs
then the indemnifying party can no longer assume such defense. Notwithstanding
the indemnifying party's election to appoint counsel to represent the
indemnified party in any action, the indemnified party shall have the right to
employ separate counsel at any time, and the indemnifying party shall bear the
reasonable fees, costs and expenses of such separate counsel if (i) the
indemnifying party shall have failed to assume the defense and employ counsel,
(ii) the use of counsel chosen by the indemnifying party to represent the
indemnified party would, in the opinion of counsel to the indemnified party,
present such counsel with a conflict of interest or (iii) DLJ is sued in its
capacity as QIU. In no event shall the indemnifying parties be liable for fees
and expenses of more than one counsel (in addition to any local counsel and one
additional counsel for the QIU) separate from their own counsel for all
indemnified parties in connection with any one action or separate but similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances. No indemnifying party shall, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any litigation, or any investigation
or proceeding by any governmental agency or body, commenced or threatened, or
any claim whatsoever in respect of which indemnification or
26
<PAGE>
contribution could be sought under this Section 6 or Section 7 hereof (whether
or not the indemnified parties are actual or potential parties thereto), unless
such settlement, compromise or consent (i) includes an unconditional release of
each indemnified party from all liability arising out of such litigation,
investigation, proceeding or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(1)(ii) effected without its written consent if (i) such settlement
is entered into more than 45 days after receipt by such indemnifying party of
the aforesaid request, (ii) such indemnifying party shall have received notice
of the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party
(e) Indemnification for Reserved Securities. In connection with the offer
and sale of the Reserved Securities, the Company agrees, promptly upon a request
in writing, to indemnify and hold harmless the U.S. Underwriters from and
against any and all losses, liabilities, claims, damages and expenses incurred
by them as a result of the failure of eligible employees and other persons
having a business relationship with the Company to pay for and accept delivery
of Reserved Securities which, by the end of the first business day following the
date of this Agreement, were subject to a properly confirmed agreement to
purchase.
SECTION 7. Contribution. (a) If the indemnification provided for in Section
6 hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the International Managers on the other hand from the offering of the
Securities pursuant to this Agreement or (ii) if the allocation provided by
clause (i) is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company on the one hand and of the
International Managers on the other hand in connection with the statements or
omissions, which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
International Managers on the other hand in connection with the offering of the
International Securities pursuant to this Agreement shall be deemed to be in the
same respective proportions as the total net proceeds from the offering of the
International Securities pursuant to this Agreement (before deducting expenses)
received by the Company and the total underwriting discount received by the
International Managers, in each case as set forth on the cover of the
International Prospectus,
27
<PAGE>
or, if Rule 434 is used, the corresponding location on the Term Sheet, bear to
the aggregate initial public offering price of the International Securities as
set forth on such cover.
The relative fault of the Company on the one hand and the International
Managers on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Company or by the International Managers and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission or any violation of the nature referred to in
Section 6(a)(1)(ii)(A) hereof.
The Company and the International Managers agree that it would not be just
and equitable if contribution pursuant to this Section 7 were determined by pro
rata allocation (even if the International Managers were treated as one entity
for such purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to above in this Section 7. The
aggregate amount of losses, liabilities, claims, damages and expenses incurred
by an indemnified party and referred to above in this Section 7 shall be deemed
to include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no International Manager
shall be required to contribute any amount in excess of the amount by which the
total price at which the International Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such International Manager has otherwise been required to pay by
reason of any such untrue or alleged untrue statement or omission or alleged
omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
International Manager within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act shall have the same rights to contribution as such
International Manager, and each director of the Company, each officer of the
Company who signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act or Section
20 of the 1934 Act shall have the same rights to contribution as the Company.
The International Managers' respective obligations to contribute pursuant to
this Section 7 are several in proportion to the number of Initial International
Securities set forth opposite their respective names in Schedule A hereto and
not joint.
(b) If the indemnification provided for in Section 6 hereof is for any
reason unavailable to or insufficient to hold harmless the Independent
Underwriter in respect of any losses, liabilities, claims, damages or expenses
referred to therein, then the Company shall
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<PAGE>
contribute to the amount paid or payable by the Independent Underwriter as a
result of such losses, liabilities, claims, damages or expenses (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Independent Underwriter on the other hand from
the offering of the Securities or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company and the Independent Underwriter in
connection with the statements or omissions which resulted in such losses,
liabilities, claims, damages or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Independent Underwriter shall be deemed to be in the same proportion as the
total net proceeds from the offering (before deducting expenses) received by the
Company as set forth in the table on the cover page of the Prospectuses, and the
fee received by the Independent Underwriter pursuant to Section 2 hereof, bear
to the sum of such total net proceeds and such fee. The relative fault of the
Company the Independent Underwriter shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company or the Independent Underwriter and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission and whether the Independent
Underwriter's activities as Independent Underwriter under its engagement
pursuant to Section 2 hereof involved any willful misconduct or gross negligence
on the part of the Independent Underwriter.
The Company and the International Managers agree that DLJ will not receive
any additional benefits hereunder for serving as the Independent Underwriter in
connection with the offering and sale of the International Securities, except as
provided in Section 2 hereof.
The Company and the Independent Underwriter agree that it would not be just
and equitable if contribution pursuant to this Section 7(b) were determined by
pro rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by a Independent Underwriter as a result
of the losses, liabilities, claims, damages or judgments referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses incurred by such
Independent Underwriter in connection with investigating or defending any matter
that could have given rise to such losses, claims, damages, liabilities or
judgments. In no event shall any Independent Underwriter be required to
contributed in the aggregate an amount exceeding the fee received by DLJ
pursuant to Section 2 hereof. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the 1933 Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
The remedies provided for in this Section 7 are not exclusive and shall not
limit any rights or remedies which may otherwise be available to any Independent
Underwriter at law or in equity.
SECTION 8. Representations, Warranties and Agreements to Survive Delivery.
All representations, warranties and agreements contained in this Agreement or in
certificates of
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<PAGE>
officers of the Company submitted pursuant hereto, shall remain operative and in
full force and effect, regardless of any investigation made by or on behalf of
any International Manager or controlling person, or by or on behalf of the
Company, and shall survive delivery of the Securities to the International
Managers.
SECTION 9. Termination of Agreement.
(a) Termination; General. The Lead Managers may terminate this Agreement,
by notice to the Company, at any time at or prior to Closing Time (i) if there
has been, since the time of execution of this Agreement or since the respective
dates as of which information is given in the International Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business, or (ii) if there has occurred any material adverse
change in the financial markets in the United States or the international
financial markets, any outbreak of hostilities or escalation thereof or other
calamity or crisis or any change or development involving a prospective change
in national or international political, financial or economic conditions, in
each case the effect of which is such as to make it, in the judgment of the Lead
Managers, impracticable to market the Securities or to enforce contracts for the
sale of the Securities, or (iii) if trading in any securities of the Company has
been suspended or limited by the Commission or the Nasdaq National Market, or if
trading generally on the American Stock Exchange or the New York Stock Exchange
or in the Nasdaq National Market has been suspended or limited, or minimum or
maximum prices for trading have been fixed, or maximum ranges for prices have
been required, by any of said exchanges or by such system or by order of the
Commission, the National Association of Securities Dealers, Inc. or any other
governmental authority, or (iv) if a banking moratorium has been declared by
either Federal, New York or Delaware authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this Section,
such termination shall be without liability of any party to any other party
except as provided in Section 4 hereof, and provided further that Sections 1, 6
and 7 shall survive such termination and remain in full force and effect.
SECTION 10. Default by One or More of the International Managers. If one or
more of the International Managers shall fail at Closing Time or a Date of
Delivery to purchase the Securities which it or they are obligated to purchase
under this Agreement (the "Defaulted Securities"), the Lead Managers shall have
the right, but not the obligation, within 24 hours thereafter, to make
arrangements for one or more of the non-defaulting International Managers, or
any other underwriters, to purchase all, but not less than all, of the Defaulted
Securities in such amounts as may be agreed upon and upon the terms herein set
forth; if, however, the Lead Managers shall not have completed such arrangements
within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the
number of International Securities to be purchased on such date, each of
the non-defaulting International Managers shall be obligated, severally and
not jointly, to purchase the full
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<PAGE>
amount thereof in the proportions that their respective underwriting
obligations hereunder bear to the underwriting obligations of all non-
defaulting International Managers, or
(b) if the number of Defaulted Securities exceeds 10% of the number of
International Securities to be purchased on such date, this Agreement or,
with respect to any Date of Delivery which occurs after the Closing Time,
the obligation of the International Managers to purchase and of the Company
to sell the Option Securities to be purchased and sold on such Date of
Delivery shall terminate without liability on the part of any non-
defaulting International Manager.
No action taken pursuant to this Section shall relieve any defaulting
International Manager from liability in respect of its default.
In the event of any such default which does not result in a termination of
this Agreement or, in the case of a Date of Delivery which is after the Closing
Time, which does not result in a termination of the obligation of the
International Managers to purchase and the Company to sell the relevant
International Option Securities, as the case may be, either the Lead Managers or
the Company shall have the right to postpone Closing Time or the relevant Date
of Delivery, as the case may be, for a period not exceeding seven days in order
to effect any required changes in the Registration Statement or Prospectus or in
any other documents or arrangements. As used herein, the term "International
Manager" includes any person substituted for an International Manager under this
Section 10.
SECTION 11. Notices. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
International Managers shall be directed to Merrill Lynch International at North
Tower, World Financial Center, New York, New York 10281-1201, attention of
Steven Jones; and notices to the Company shall be directed to it at 10 South
Riverside Plaza, Suite 401, Chicago, Illinois 60606, attention of General
Counsel.
SECTION 12. Parties. This Agreement shall each inure to the benefit of
and be binding upon the International Managers and the Company and their
respective successors. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any person, firm or corporation, other
than the International Managers and the Company and their respective successors
and the controlling persons and officers and directors referred to in Sections 6
and 7 and their heirs and legal representatives, any legal or equitable right,
remedy or claim under or in respect of this Agreement or any provision herein
contained. This Agreement and all conditions and provisions hereof are intended
to be for the sole and exclusive benefit of the International Managers and the
Company and their respective successors, and said controlling persons and
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of Securities
from any International Manager shall be deemed to be a successor by reason
merely of such purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
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STATE OF NEW YORK. SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 14. Effect of Headings. The Article and Section headings herein and
the Table of Contents are for convenience only and shall not affect the
construction hereof.
32
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the International Managers and the Company in accordance with its terms.
Very truly yours,
USN COMMUNICATIONS, INC.
By ________________________
Name:
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH INTERNATIONAL
COWEN INTERNATIONAL L.P.
DONALDSON, LUFKIN & JENRETTE
INTERNATIONAL
By: MERRILL LYNCH INTERNATIONAL
By
_______________________________________
Authorized Signatory
For themselves and as Lead Managers of the
other International Managers named in Schedule A hereto.
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<PAGE>
SCHEDULE A
Number of
Initial International
Name of International Manager Securities
- ----------------------------- ----------
Merrill Lynch International................................
Cowen International L.P. ..................................
Donaldson, Lufkin & Jenrette
International.........................................
Total...................................................... 1,600,000
34
<PAGE>
SCHEDULE B
USN COMMUNICATIONS, INC.
1,600,000 Shares of Common Stock
(Par Value $.01 Per Share)
1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $__________.
2. The purchase price per share for the International Securities to be paid
by the several International Managers shall be $__________, being an amount
equal to the initial public offering price set forth above less $__________ per
share; provided that the purchase price per share for any International Option
Securities purchased upon the exercise of the over-allotment option described in
Section 2(b) shall be reduced by an amount per share equal to any dividends or
distributions declared by the Company and payable on the Initial International
Securities but not payable on the International Option Securities.
35
<PAGE>
SCHEDULE C
List of persons and entities
subject to lock-up
36
<PAGE>
SCHEDULE I
Applicable Contracts
37
<PAGE>
EXHIBIT 3.1
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
of
USN COMMUNICATIONS, INC.
(Adopted in Accordance with the Provisions of
Sections 242 and 245 of the
General Corporation Law of the State of Delaware)
_________________________
USN COMMUNICATIONS, INC., a corporation organized and existing under
the laws of the State of Delaware (the "Corporation"), does hereby certify as
follows:
A. The Corporation's present name is USN Communications, Inc. It was
originally incorporated under the name United USN, Inc. by the filing of its
original Certificate of Incorporation in the office of the Secretary of State of
Delaware in April 1994.
B. This Second Amended and Restated Certificate of Incorporation
(the "Amended and Restated Certificate of Incorporation") was duly adopted by
the Board of Directors of the Corporation (the "Board of Directors") and by the
stockholders of the Corporation, all in accordance with and in the manner and by
the vote prescribed by Sections 242 and 245 of the General Corporation Law of
the State of Delaware (the "DGCL").
C. This Amended and Restated Certificate of Incorporation restates
and integrates and further amends the Certificate of Incorporation of the
Corporation, as heretofore amended and supplemented.
<PAGE>
D. Upon the filing (the "Effective Time") of this Amended and
Restated Certificate of Incorporation pursuant to the DGCL, each share of the
Corporation's Class A Common Stock, par value $.01 per share, issued and
outstanding immediately prior to the Effective Time shall be reclassified as and
changed into one share of validly issued, fully paid and nonassessable Common
Stock authorized by subparagraph (a) of Article FOURTH of this Amended and
Restated Certificate of Incorporation (totaling _____ shares of Common Stock),
without any action by the holder thereof.
E. The text of the Certificate of Incorporation is amended and
restated in its entirety as follows:
FIRST: Name. The name of the corporation is USN Communications, Inc.
(the "Corporation").
SECOND: Address; Registered Office and Agent. The address of the
registered office of the Corporation in the State of Delaware is 11th Floor,
Rodney Square North, 11th and Market Streets, County of New Castle, Wilmington,
Delaware 19801. The name of its registered agent at such address is Corporation
Guaranty and Trust Company.
THIRD: Purpose. The purpose of the Corporation is to engage in,
carry on and conduct any lawful act or activity for which a corporation may be
organized under the DGCL.
FOURTH: (a) Authorized Capital Stock. The total number of shares of
stock that the Corporation shall have authority to issue is 110,000,000 shares
of capital stock, consisting of 100,000,000 shares of Common Stock, par value
$.01 per share (the "Common Stock"), and 10,000,000 shares of Preferred Stock,
par value $.01 per share (the "Preferred Stock").
(b) Common Stock. The powers, preferences and rights, and the
qualifications, limitations and restrictions, of the Common Stock are as
follows:
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<PAGE>
(1) Voting. Except as otherwise expressly required by law or provided
in this Amended and Restated Certificate of Incorporation, and subject to any
voting rights provided to holders of Preferred Stock at any time outstanding,
the holders of any outstanding shares of Common Stock shall vote together as a
single class on all matters with respect to which stockholders are entitled to
vote under applicable law, this Amended and Restated Certificate of
Incorporation or the Bylaws of the Corporation, or upon which a vote of
stockholders is otherwise duly called for by the Corporation. At each annual or
special meeting of stockholders, each holder of record of shares of Common Stock
on the relevant record date shall be entitled to cast one vote in person or by
proxy for each share of the Common Stock standing in such holder's name on the
stock transfer records of the Corporation.
(2) No Cumulative Voting. The holders of shares of Common Stock shall
not have cumulative voting rights.
(3) Dividends. Subject to the rights provided to holders of Preferred
Stock at any time outstanding, and subject to any other provisions of this
Amended and Restated Certificate of Incorporation, as it may be amended from
time to time, holders of shares of Common Stock shall be entitled to receive
such dividends and other distributions in cash, stock or property of the
Corporation when, as and if declared thereon by the Board of Directors from time
to time out of assets or funds of the Corporation legally available therefor.
(4) Liquidation, Dissolution, etc. In the event of any liquidation,
dissolution or winding up (either voluntary or involuntary) of the Corporation,
the holders of shares of Common Stock shall be entitled to receive the assets
and funds of the Corporation available for distribution after payments to
creditors and to the holders of any Preferred Stock of the Corporation that may
at the time be outstanding, in proportion to the number of shares held by them.
(5) No Preemptive or Subscription Rights. No holder of shares of
Common Stock shall be entitled to preemptive or subscription rights.
(6) Power to Sell and Purchase Shares. Subject to the requirements of
applicable law, the Corporation shall have the power to issue and sell
3
<PAGE>
all or any part of any shares of any class of stock herein or hereafter
authorized to such persons, and for such consideration, as the Board of
Directors shall from time to time, in its discretion, determine, whether or not
greater consideration could be received upon the issue or sale of the same
number of shares of another class, and as otherwise permitted by law. Subject to
the requirements of applicable law, the Corporation shall have the power to
purchase any shares of any class of stock herein or hereafter authorized from
such persons, and for such consideration, as the Board of Directors shall from
time to time, in its discretion, determine, whether or not less consideration
could be paid upon the purchase of the same number of shares of another class,
and as otherwise permitted by law.
(c) Preferred Stock. The Board of Directors is hereby expressly
authorized to provide for the issuance of all or any shares of the Preferred
Stock in one or more classes or series, and to fix for each such class or series
such voting powers, full or limited, or no voting powers, and such designations,
preferences and relative, participating, optional or other special rights and
such qualifications, limitations or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions adopted by the Board of Directors
providing for the issuance of such class or series, including, without
limitation, the authority to provide that any such class or series may be (i)
subject to redemption at such time or times and at such price or prices; (ii)
entitled to receive dividends (which may be cumulative or non-cumulative) at
such rates, on such conditions, and at such times, and payable in preference to,
or in such relation to, the dividends payable on any other class or classes or
any other series; (iii) entitled to such rights upon the dissolution of, or upon
any distribution of the assets of, the Corporation; or (iv) convertible into, or
exchangeable for, shares of any other class or classes of stock, or of any other
series of the same or any other class or classes of stock, of the Corporation at
such price or prices or at such rates of exchange and with such adjustments; all
as may be stated in such resolution or resolutions.
FIFTH: Directors. The following provisions are inserted for the
management of the business and the conduct of the affairs of the Corporation,
and for further definition, limitation and regulation of the powers of the
Corporation and of its directors and stockholders:
4
<PAGE>
(a) The business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors.
(b) The number of directors of the Corporation shall be as from time
to time fixed by, or in the manner provided in, the Bylaws of the Corporation.
Election of directors need not be by written ballot unless the Bylaws so
provide.
(c) The directors shall be divided into three classes, designated
Class I, Class II and Class III. Each class shall consist, as nearly as may be
possible, of one-third of the total number of directors constituting the entire
Board of Directors. The initial division of the Board of Directors into classes
shall be made by the decision of the affirmative vote of a majority of the
entire Board of Directors. The term of the initial Class I directors shall
expire on the date of the 1998 annual meeting; the term of the initial Class II
directors shall expire on the date of the 1999 annual meeting; and the term of
the initial Class III directors shall expire on the date of the 2000 annual
meeting. At each succeeding annual meeting of stockholders beginning in 1998,
successors to the class of directors whose term expires at that annual meeting
shall be elected for a three-year term. If the number of directors is changed,
any increase or decrease shall be apportioned among the classes so as to
maintain the number of directors in each class as nearly equal as possible, and
any additional director of any class elected to fill a vacancy resulting from an
increase in such class shall hold office for a term that shall coincide with the
remaining term of that class, but in no case will a decrease in the number of
directors shorten the term of any incumbent director.
(d) A director shall hold office until the annual meeting for the
year in which his or her term expires and until his or her successor shall be
elected and shall qualify, subject, however, to prior death, resignation,
retirement, disqualification or removal from office.
(e) Subject to the terms of any one or more classes or series of
Preferred Stock, any vacancy on the Board of Directors that results from an
increase in the number of directors may be filled by a majority of the Board of
Directors then in office, provided that a quorum is present, and any other
vacancy occurring on the Board of Directors may be filled by a majority of the
Board of Directors then in
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office, even if less than a quorum, or by a sole remaining director. Any
director of any class elected to fill a vacancy resulting from an increase in
the number of directors of such class shall hold office for a term that shall
coincide with the remaining term of that class. Any director elected to fill a
vacancy not resulting from an increase in the number of directors shall have the
same remaining term as that of his predecessor. Subject to the rights, if any,
of the holders of shares of Preferred Stock then outstanding, any or all of the
directors of the Corporation may be removed from office at any time, but only
for cause and only by the affirmative vote of the holders of at least a majority
of the voting power of the Corporation's then outstanding capital stock entitled
to vote generally in the election of directors. Notwithstanding the foregoing,
whenever the holders of any one or more classes or series of Preferred Stock
issued by the Corporation shall have the right, voting separately by class or
series, to elect directors at an annual or special meeting of stockholders, the
election, term of office, filling of vacancies and other features of such
directorships shall be governed by the terms of this Amended and Restated
Certificate of Incorporation applicable thereto, and such directors so elected
shall not be divided into classes pursuant to this Article FIFTH unless
expressly provided by such terms.
(f) In addition to the powers and authority hereinbefore or by
statute expressly conferred upon them, the directors are hereby empowered to
exercise all such powers and do all such acts and things as may be exercised or
done by the Corporation, subject, nevertheless, to the provisions of the DGCL,
this Amended and Restated Certificate of Incorporation, and any Bylaws adopted
by the stockholders; provided, however, that no Bylaws hereafter adopted by the
stockholders shall invalidate any prior act of the directors which would have
been valid if such Bylaws had not been adopted.
SIXTH: Limitation of Liability. No director of the Corporation shall
be personally liable to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except to the extent such exemption
from liability or limitation thereof is not permitted under the DGCL as the same
exists or may hereinafter be amended. If the DGCL is amended hereafter to
authorize the further elimination or limitation of the liability of directors,
then the liability of a director of the Corporation shall be eliminated or
limited to the fullest extent authorized by the DGCL, as so amended. Any repeal
or modification of this Article
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SIXTH by the stockholders of the Corporation shall not adversely affect any
right or protection of a director of the Corporation existing at the time of
such repeal or modification with respect to acts or omissions occurring prior to
such repeal or modification.
SEVENTH: Indemnification. (a) The Corporation shall indemnify its
directors and officers to the fullest extent authorized or permitted by law, as
now or hereafter in effect, and such right to indemnification shall continue as
to a person who has ceased to be a director or officer of the Corporation and
shall inure to the benefit of his or her heirs, executors and personal and legal
representatives; provided, however, that, except for proceedings to enforce
rights to indemnification, the Corporation shall not be obligated to indemnify
any director or officer (or his or her heirs, executors or personal or legal
representatives) in connection with a proceeding (or part thereof) initiated by
such person unless such proceeding (or part thereof) was authorized or consented
to by the Board of Directors. The right to indemnification conferred by this
Article SEVENTH shall include the right to be paid by the Corporation the
expenses incurred in defending or otherwise participating in any proceeding in
advance of its final disposition.
(b) The Corporation may, to the extent authorized from time to time
by the Board of Directors, provide rights to indemnification and to the
advancement of expenses to employees and agents of the Corporation similar to
those conferred in this Article SEVENTH to directors and officers of the
Corporation.
(c) The rights to indemnification and to the advance of expenses
conferred in this Article SEVENTH shall not be exclusive of any other right
which any person may have or hereafter acquire under this Amended and Restated
Certificate of Incorporation, the Bylaws of the Corporation, any statute,
agreement, vote of stockholders or disinterested directors or otherwise.
(d) Any repeal or modification of this Article SEVENTH by the
stockholders of the Corporation shall not adversely affect any rights to
indemnification and to the advancement of expenses of a director or officer of
the Corporation existing at the time of such repeal or modification with respect
to any acts or omissions occurring prior to such repeal or modification.
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EIGHTH: Action by Stockholders. Any action required or permitted to be
taken by the stockholders of the Corporation must be effected at a duly called
annual or special meeting of stockholders of the Corporation, and the ability of
the stockholders to consent in writing to the taking of any action is hereby
specifically denied.
NINTH: Meetings of Stockholders. Meetings of stockholders may be held
within or without the State of Delaware, as the Bylaws may provide. The books of
the Corporation may be kept (subject to any provision contained in the DGCL)
outside the State of Delaware at such place or places as may be designated from
time to time by the Board of Directors or in the Bylaws of the Corporation.
TENTH: Amendment of Bylaws. In furtherance and not in limitation of
the powers conferred upon it by the laws of the State of Delaware, the Board of
Directors shall have the power to adopt, amend, alter or repeal the
Corporation's Bylaws. The affirmative vote of at least a majority of the entire
Board of Directors shall be required to adopt, amend, alter or repeal the
Corporation's Bylaws. The Corporation's Bylaws also may be adopted, amended,
altered or repealed by the affirmative vote of the holders of at least eighty
percent (80%) of the voting power of the shares entitled to vote at an election
of directors.
ELEVENTH: Amendment of Certificate of Incorporation. The Corporation
reserves the right to amend, alter, change or repeal any provision contained in
this Amended and Restated Certificate of Incorporation in the manner now or
hereafter prescribed in this Amended and Restated Certificate of Incorporation,
the Corporation's Bylaws or the DGCL, and all rights herein conferred upon
stockholders are granted subject to such reservation; provided, however, that,
notwithstanding any other provision of this Amended and Restated Certificate of
Incorporation (and in addition to any other vote that may be required by law),
the affirmative vote of the holders of at least eighty percent (80%) of the
voting power of the shares entitled to vote at an election of directors shall be
required to amend, alter, change or repeal, or to adopt any provision as part of
this Amended and Restated Certificate of Incorporation inconsistent with the
purpose and intent of Articles
8
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FIFTH, EIGHTH and TENTH of this Amended and Restated Certificate of
Incorporation or this Article ELEVENTH.
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IN WITNESS WHEREOF, the Corporation has caused this Amended and
Restated Certificate of Incorporation to be executed and attested to on its
behalf this __th day of ______________, 1998.
USN COMMUNICATIONS, INC.
-----------------------------
By:
Its:
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EXHIBIT 3.3
- --------------------------------------------------------------------------------
AMENDED AND RESTATED BYLAWS
OF
USN COMMUNICATIONS, INC.
- --------------------------------------------------------------------------------
ARTICLE I
Offices and Agent
-----------------
1. Principal Office. The principal office of the Corporation may be
located within or without the State of Delaware, as designated by the board of
directors. The Corporation may have other offices and places of business at such
places within or without the State of Delaware as shall be determined by the
directors.
2. Registered Office and Agent. The Corporation shall have and
maintain at all times (a) a registered office in the State of Delaware, which
office shall be located at 1209 Orange Street, Wilmington, Delaware 19801, and
(b) a registered agent located at such address whose name is The Corporation
Trust Company, until changed from time to time as provided by the General
Corporation Law of the State of Delaware ("Delaware Corporation Law").
ARTICLE II
Stockholders Meetings
---------------------
1. Annual Meetings. The annual meeting of stockholders for the
election of directors and for the transaction of such other business as may
properly be brought before the meeting shall be held on such date and at such
time as determined by resolution of the board of directors. If, at the place of
the meeting, this date shall fall upon a legal holiday, then such meeting shall
be held on the next succeeding business day at the same hour. If no annual
meeting is held in accordance with the foregoing provisions, the board of
directors shall cause the meeting to be held as soon thereafter as convenient.
If no annual meeting is held in accordance with the foregoing provisions, a
special meeting may be held in lieu
<PAGE>
of the annual meeting, and any action taken at that special meeting shall have
the same effect as if it had been taken at the annual meeting, and in such case
all references in these Bylaws to the annual meeting of stockholders shall be
deemed to refer to such special meeting.
2. Special Meetings. Special meetings of stockholders may be called
only at the direction of the board of directors by resolution adopted by the
affirmative vote of a majority of the entire board of directors. Stockholders of
the Corporation shall not have the right to (i) request or call a special
meeting of the stockholders or (ii) cause the Directors to call a special
meeting of the stockholders. Special meetings of stockholders shall not be
called or held otherwise than as herein provided.
3. Place of Meetings. All meetings of stockholders of the Corporation
shall be held within or without the State of Delaware as may be designated by
the board of directors or the president, or, if not designated, at the
registered office of the Corporation.
4. Notice of Meeting. Except as otherwise provided in these Bylaws or
Delaware Corporation Law, written notice of any meeting of stockholders stating
the place, date and hour of the meeting and, in the case of a special meeting,
the purpose for which the meeting is called, shall be delivered either
personally or by mail to each stockholder of record entitled to vote at such
meeting not less than ten (10) nor more than sixty (60) days before the date of
the meeting, by or at the direction of the board of directors, the president or
the secretary. If mailed, such notice shall be deemed to be delivered as to any
stockholder of record when deposited in the United States mail addressed to the
stockholder at his address as it appears on the stock transfer books of the
Corporation, with postage prepaid. When a meeting is adjourned to another time
and place, notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken. At
the adjourned meeting the Corporation may transact any business which might have
been transacted at the original meeting. If the adjournment is for more than
thirty (30) days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
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5. Waiver of Notice. Any stockholder, either before or after any
stockholders' meeting, may waive in writing notice of the meeting, and his
waiver shall be deemed the equivalent of giving notice. Attendance at a meeting
by a stockholder shall constitute a waiver of notice, except when the
stockholder attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened.
6. Fixing of Record Date. For the purpose of determining the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the board of directors of the Corporation may fix, in
advance, a record date which shall be not more than sixty (60) days nor less
than ten (10) days prior to the date of such meeting, nor more than sixty (60)
days prior to any other action. If no record date is fixed, the record date for
determining the stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held. The record date for
determining the stockholder entitled to express consent to corporate action in
writing without a meeting, when no prior action by the board of directors is
necessary, shall be the day on which the first written consent is expressed. The
record date for determining stockholders for any other purpose shall be at the
close of business on the day on which the board of directors adopts the
resolution relating thereto. A determination of stockholders of record entitled
to notice of or vote at a meeting of stockholders shall apply to any adjournment
of the meeting, provided, however, that the board of directors may fix a new
record date for the adjourned meeting.
7. Stockholders List. The officer who has charge of the stock ledger
of the Corporation shall prepare and make, at least ten (10) days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order and
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showing the address of each stockholder and the number of shares registered in
the name of each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten (10) days prior to the meeting, at a place
within the city where the meeting is to be held. The list shall also be produced
and kept at the time and place of the meeting during the whole time thereof and
may be inspected by any stockholder who is present.
8. Proxies. A stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him by
proxy. No proxy shall be voted or acted upon after three (3) years from its
date, unless the proxy provides for a longer period.
9. Voting Rights. Each stockholder shall have one vote for each
share of stock entitled to vote held of record by such stockholder and a
proportionate vote for each fractional share so held, unless otherwise provided
in the Certificate of Incorporation.
Persons holding stock in a fiduciary capacity shall be entitled to
vote the shares so held. Persons whose stock is pledged shall be entitled to
vote, unless in the transfer by the pledgor on the books of the Corporation he
has expressly empowered the pledgee to vote thereon, in which case only the
pledge, or his proxy, may represent such stock and vote thereon.
If shares having voting power stand of record in the names of two or
more persons, whether fiduciaries, members of a partnership, joint tenants,
tenants in common, tenants by the entirety, or otherwise, or if two or more
persons have the same fiduciary relationship respecting the same shares, unless
the secretary of the Corporation is given written notice to the contrary and is
furnished with a copy of the instrument or order appointing them or creating the
relationship wherein it is so provided, their acts with respect to voting shall
have the following effect: (i) if only one votes, his act binds all; (ii) if
more than one vote, the act of the majority so voting binds all; and (iii) if
more than one vote, but the vote is evenly split on any particular matter, each
fraction may
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<PAGE>
vote the securities in question proportionately, or any person voting the shares
or a beneficiary, if any, may apply to the Court of Chancery or any court of
competent jurisdiction in the State of Delaware to appoint an additional person
to act with the persons so voting the shares. The shares shall then be voted as
determined by a majority of such persons and the person appointed by the Court.
If a tenancy is held in unequal interests, a majority or even-split for the
purpose of this subsection shall be a majority or even-split in interest.
10. Quorum and Required Vote. Except as otherwise provided by law,
the Certificate of Incorporation or these Bylaws, the holders of a majority of
the shares entitled to vote at the meeting, present in person or by proxy, shall
constitute a quorum for the transaction of business. If a quorum is present,
the affirmative vote of a majority of the shares present or represented by proxy
at the meeting and entitled to vote on the subject matter shall be the act of
the stockholders, and, if there are two or more classes of stock entitled to
vote as separate classes, then, in the case of each such class, the affirmative
vote of a majority of the shares of that class present or represented by proxy
at the meeting shall be the vote of such class unless a different vote is
required by an express provision of law, the Certificate of Incorporation or
these Bylaws.
11. Action by Stockholders. Any action required or permitted to be
taken by the holders of the issued and outstanding stock of the Corporation may
be effected solely at an annual or special meeting of stockholders duly called
and held in accordance with the law and the Certificate of Incorporation.
Notwithstanding the foregoing, the power of stockholders to consent in writing
without a meeting to the taking of any action is hereby specifically denied.
12. Advance Notice of Business at Meeting of Stockholders. At any
meeting of stockholders held after the filing of this Certificate of
Incorporation in the office of the Secretary of State of Delaware, only such
business shall be conducted as shall have been brought before the meeting (i) by
or at the direction of the Board or (ii) by any stockholder of the Corporation
who complies with the notice procedures set forth in this Section 2.12 of these
Bylaws.
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For business to be properly brought before any meeting of the
stockholders by a stockholder, the stockholder must have given notice thereof in
writing to the Secretary of the Corporation not less than sixty (60) nor more
than ninety (90) days in advance of the anniversary of the previous year's
annual meeting; provided, however, that in the event that the annual meeting is
called for a date that is not within thirty (30) days before or after such
anniversary date, notice by the stockholder to be timely must be so given not
later than the close of business on the tenth (10th) day following the day on
which such notice of the date of the annual meeting was mailed or such public
disclosure of the date of the annual meeting was made, whichever first occurs.
A stockholder's notice to the Secretary shall set forth as to each
matter the stockholder proposes to bring before the meeting (1) a brief
description of the business desired to be brought before the meeting and the
reasons for conducting such business at the meeting, (2) the name and address,
as they appear on the Corporation's books, of the stockholder proposing such
business, (3) the class and number of shares of the Corporation that are
beneficially owned by the stockholder, (4) a description of all arrangements or
understandings between such stockholder and any other person or persons
(including their names) in connection with the proposal of such business by such
stockholder and any material interest of such stockholder in such business and
(5) a representation that such stockholder intends to appear in person or by
proxy at the annual meeting to bring such business before the meeting. In
addition, the stockholder making such proposal shall promptly provide any other
information reasonably requested by the Corporation.
Notwithstanding anything in the Bylaws to the contrary, no business
shall be conducted at any meeting of stockholders except in accordance with the
procedures set forth in this Section 2.12. The chairman of any such meeting
shall direct that any business not properly brought before the meeting shall not
be considered. Except as otherwise provided by law, at any special meeting of
stockholders only such business may be transacted as is related to the purpose
or purposes of such meeting set forth in the notice thereof given pursuant to
these Bylaws; or in any waiver of notice thereof given pursuant to these Bylaws.
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13. Advance Notice of Stockholder Nominations. Nominations for the
election of Directors to be held following the filing of the Certificate of
Incorporation in the office of the Secretary of State of Delaware may be made by
the Board or by any stockholder entitled to vote in the election of Directors;
provided, however, that a stockholder may nominate a person for election as a
Director at a meeting only if written notice of such stockholder's intent to
make such nomination has been given to the Secretary of the Corporation not less
than sixty (60) nor more than ninety (90) days in advance of the anniversary of
the previous year's annual meeting; provided, however, that in the event that
the annual meeting is called for a date that is not within thirty (30) days
before or after such anniversary date, notice by the stockholder to be timely
must be so given not later than the close of business on the tenth (10th) day
following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure of the date of the annual meeting was made,
whichever first occurs. Each such notice shall set forth: (i) the name and
address of the stockholder who intends to make the nomination and of the person
or persons to be nominated; (ii) a representation that the stockholder is a
holder of record of stock of the Corporation entitled to vote at such meeting
and intends to appear in person or by proxy at the meeting and nominate the
person or persons specified in the notice; (iii) a description of all
arrangements or understandings between the stockholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the stockholder; (iv) such other
information regarding each nominee proposed by such stockholder as would be
required to be included in a proxy statement filed pursuant to the proxy rules
of the United States Securities and Exchange Commission had the nominee been
nominated, or intended to be nominated, by the Board; and (v) the consent of
each nominee to serve as a Director of the Corporation, if so elected. In
addition, the stockholder making such nomination shall promptly provide any
other information reasonably requested by the Corporation. No person shall be
eligible for election as a Director of the Corporation unless nominated in
accordance with the procedures set forth in this Section 2.13. The chairman of
any meeting of stockholders shall direct that any nomination not made in
accordance with these procedures be disregarded.
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<PAGE>
ARTICLE III
Board of Directors
------------------
1. Number, Qualifications and Term of Office. Except as otherwise
provided in the Certificate of Incorporation or Delaware Corporation Law, the
business and affairs of the Corporation shall be managed by or under the
direction of a board of directors consisting of a minimum of five members and a
maximum of [___] members. Directors need not be stockholders of the
Corporation. The stockholders of the Corporation may establish the size of the
board of directors from time to time by increasing or decreasing the number of
directors within the minimum and maximum number of members set forth above. The
size of the board of directors shall not be established by the members of the
board of directors. [Subject to the provisions of that certain Stockholders
Agreement dated as of April 20, 1994 by and among the Corporation, CIBC Wood
Gundy Ventures, Inc., Chemical Venture Capital Associates and each of the
stockholders listed on the Schedule of UNHC Stockholders attached thereto, and
except as otherwise provided in these Bylaws, each director shall be elected at
each annual meeting of stockholders and shall hold such office until the next
annual meeting of stockholders and until his successor shall be elected and
shall qualify. No decrease in the number of directors shall have the effect of
shortening the term of any incumbent director.
2. Newly Created Directorships and Vacancies in Board of Directors.
Newly created directorships resulting from an increase in the number of
Directors and vacancies occurring in the board of directors may be filled by the
affirmative vote of a majority of the entire board of directors, although less
than a quorum, or by a sole remaining Director; except as otherwise provided in
this Certificate of Incorporation any such vacancy may not be filled by the
stockholders of the hold office until the next election of the class for which
such Director shall have been chosen and until his successor shall have been
elected and qualified.
3. Removal of Directors. Subject to the provisions of Section 141(k)
of the General Corporation Law of Delaware, Directors may only be removed for
cause and only by vote of the holders of at least two-thirds of the shares then
entitled to vote at an election of Directors.
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4. Resignation. Any director may resign by delivering his written
resignation to the Corporation at its principal office addressed to the
president or secretary. Such resignation shall be effective upon receipt unless
it is specified to be effective at some other time or upon the happening of some
other event.
5. Compensation. Directors may be paid such compensation for their
services and such reimbursements for expenses of attendance at meetings as the
board of directors may from time to time determine. No such payment shall
preclude any director from serving the Corporation in any other capacity and
receiving compensation therefor.
6. Classification. The Board shall be divided into three classes ,
Class I, Class II and Class III -- which shall be as nearly equal in number as
possible. Each Director shall serve for a term ending on the date of the third
annual meeting following the annual meeting at which such Director was elected;
provided, however, that each Director first elected to Class I shall hold office
until the annual meeting of stockholders in 1998; each Director first elected to
Class II shall hold office until the annual meeting of stockholders in 1999; and
each Director first elected to Class III shall hold office until the annual
meeting of stockholders in 2000. In the event of any increase or decrease in
the authorized number of Directors, (a) each Director then serving as such shall
nevertheless continue as a Director of the class of which he or she is a member
until the expiration of his or her current term, or his or her prior death,
retirement, resignation or removal, and (b) the newly created or eliminated
directorships resulting from such increase or decrease shall be apportioned by
the Board to such class or classes as shall, so far as possible, bring the
number of Directors in the respective classes into conformity with the
requirement that the classes be as nearly equal in number of Directors as
possible.
7. Amendment. Notwithstanding anything in the Certificate of
Incorporation or these Restated Bylaws, and notwithstanding the fact that a
lesser percentage may be permitted by law, the affirmative vote of the holders
of not less than two-thirds of the voting power of the outstanding Common Stock
and Preferred Stock of the Corporation entitled to vote generally in the
election of the Directors, voting together as a single class, shall be
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required to amend or adopt any provision inconsistent with this Article III.
ARTICLE IV
Meetings of the Board
---------------------
1. Place of Meetings. The regular or special meetings of the board
of directors or any committee designated by the board shall be held at the
principal office of the Corporation or at any other place within or without the
State of Delaware that a majority of the board of directors or any such
committee, as the case may be, may designate from time to time any resolution.
2. Regular Meetings. The board of directors shall meet (i) at least
once during each of the fiscal quarters of the Corporation and (ii) once each
year immediately after and at the same place as the annual meeting of the
stockholders for the purpose of electing officers and transacting such other
business as may come before the meeting. The board of directors or any
committee designated by the board may provide, by resolution, for the holding of
additional regular meetings within or without the State of Delaware without
notice of the time and place of such meeting other than such resolution;
provided that any director who is absent when such resolution is made shall be
given notice of said resolution.
3. Special Meetings. Special meetings of the board of directors or
any committee designated by the board may be held at any time and place, within
or without the State of Delaware, designated in a call by the chairman of the
board, if any, by the president or by any member of the board of directors or by
a majority of the members of any such committee, as the case may be. Any
special meeting of the board of directors called by a member of the board of
directors shall be held on the earliest legally permissible date under Delaware
Corporation Law.
4. Notice of Special Meetings. Except as otherwise provided in these
Bylaws or the laws of the State of Delaware, written notice of each special
meeting of the board of directors or any committee thereof setting forth the
time and place of the meeting shall be given to each director by the secretary
or by the officer or director
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calling the meeting not less than one (1) day prior to the time fixed for the
meeting. Notice of special meetings may be either given personally, personally
by telephone, or by sending a copy of the notice through the United States mail
or by telegram, telex or telecopy, charges prepaid, to the address of each
director appearing on the books of the Corporation. If mailed, such notice shall
be deemed to be delivered when deposited in the United States mail so addressed,
with postage prepaid thereon. If notice be given by telegram, such notice shall
be deemed to be delivered when the telegram, telex or telecopy, is delivered to
the telegraph, telex or telecopy operator. Neither the business to be transacted
at, nor the purpose of, any regular or special meeting of the board of directors
need be specified in the notice or waiver of notice of such meeting.
5. Waiver of Notice. A director may waive, in writing, notice of any
special meeting of the board of directors or any committee thereof, either
before, at, or after the meeting; and his waiver shall be deemed the equivalent
of giving notice. By attending or participating in a regular or special
meeting, a director waives any required notice of such meeting unless the
director, at the beginning of the meeting, objects to the holding of the meeting
or the transacting of business at the meeting.
6. Quorum and Action at Meeting. At meetings of the board of
directors or any committee designated by the board, a majority of the members of
the board of directors, or a majority of the members of any such committee, as
the case may be, shall constitute a quorum for the transaction of business. In
the event one or more of the directors shall be disqualified to vote at any
meeting, then the required quorum shall be reduced by one for each such director
so disqualified; provided, however, that in no case shall less than one-third
(1/3) of the number so fixed constitute a quorum. If a quorum is present, the
act of the majority of directors in attendance shall be the act of the board of
directors or any committee thereof, as the case may be, unless the act of a
greater number is required by these Bylaws, the Certificate of Incorporation or
Delaware Corporation Law. If a quorum shall not be present at any meeting of
the board of directors, the directors present thereat may adjourn that meeting
from time to time, without notice other than announcement at the meeting, until
a quorum shall be present.
11
<PAGE>
7. Presumption of Assent. A director who is present at a meeting of
the board of or a committee thereof when action is taken is deemed to have
assented to the action taken unless: (i) he objects at the beginning of such
meeting to the holding of the meeting or the transacting of business at the
meeting; (ii) he contemporaneously requests that his dissent from the action
taken be entered in the minutes of such meeting; or (iii) he gives written
notice of his dissent to the presiding officer of such meeting before its
adjournment or to the secretary of the Corporation immediately after adjournment
of such meeting. The right of dissent as to a specific action taken at a
meeting of a board or a committee thereof is not available to a director who
votes in favor of such action.
8. Committees. The board of directors may, by a resolution passed by
a majority of the whole board of directors, designate one or more committees,
each committee to consist of one or more of the directors of the Corporation.
The board may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee. In the absence or disqualification of a member of a committee,
the member or members of the committee present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the board of directors to act at the
meeting in the place of the absent or disqualified member. Any such committee,
to the extent provided in the resolution of the board of directors and subject
to the provisions of Delaware Corporation Law, shall have and may exercise all
the powers and authority of the board of directors in the management of the
business and affairs of the Corporation, and may authorize the seal of the
Corporation to be affixed to all such papers which may require it. Each such
committee shall keep minutes and make such reports as the board of directors may
from time to time request. Except as the board of directors may otherwise
determine, any committee may make rules for the conduct of its business, but,
unless otherwise provided by the directors or in such rules, its business shall
be conducted as nearly as possible in the same manner as is provided in these
Bylaws for the board of directors.
9. Informal Action by Directors. Except as otherwise provided in the
Certificate of Incorporation, any action required or permitted by Delaware
Corporation Law to
12
<PAGE>
be taken at any meeting of the board of directors or any committee thereof may
be taken without a meeting if all members of the board or committee, as the case
may be, consent to the action in writing, and the written consents are filed
with the minutes of proceedings of the board or committee.
10. Telephonic Meetings. Directors or any members of any committee
designated by the board may participate in a meeting of the board or committee
by means of a conference telephone or similar communications equipment by which
all persons participating in the meeting can hear each other at the same time.
Such participation shall constitute presence in person at the meeting.
ARTICLE V
Officers and Agents
-------------------
1. Enumeration, Election and Term. The officers of the Corporation
shall consist of a president, a secretary, a treasurer and such other officers
with such other titles as may be deemed necessary or desirable by the board of
directors, including one or more vice presidents, assistant treasurers and
assistant secretaries and a chairman of the board. Any number of offices may be
held by the same person and no officer need be a stockholder or a resident of
the State of Delaware. Except as otherwise provided by law, the Certificate of
Incorporation or these Bylaws, each officer shall hold office until his
successor is elected and qualified or until his earlier death, resignation or
removal. The officers of the Corporation shall be elected annually by the board
of directors at the first meeting of the board held after each annual meeting of
the stockholders.
2. General Duties. All officers and agents of the Corporation, as
between themselves and the Corporation, shall have such authority and shall
perform such duties in the management of the Corporation as may be provided in
these Bylaws or as may be determined by resolution of the board of directors not
inconsistent with these Bylaws. In all cases where the duties of any officer,
agent or employee are not prescribed by the Bylaws or by the board of directors,
such officer, agent or employee shall follow the orders and instructions of the
Chairman.
13
<PAGE>
3. Vacancies. The board of directors may fill any vacancy occurring
in any office for any reason and may, in its discretion, leave any vacancy
unfilled for such period as it may determine other than a vacancy in the office
of president or secretary. The officer so selected shall hold office until his
successor is elected and qualified or until his earlier death, resignation or
removal.
4. Compensation. The board of directors from time to time shall fix
the compensation of the officers of the Corporation. The compensation of other
agents and employees of the Corporation may be fixed by the board of directors,
or by any committee designated by the board or by an officer to whom that
function has been delegated by the board.
5. Resignation and Removal. Any officer may resign by delivering his
written resignation to the Corporation at its principal office addressed to the
president or secretary. Such resignation shall be effective upon receipt unless
it is specified to be effective at some other time or upon the happening of some
other event. Any officer or agent of the Corporation may be removed, with or
without cause, by a vote of the majority of the members of the board of
directors whenever in its judgment the best interests of the Corporation may be
served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. Election or appointment of an officer
or an agent shall not of itself create contract rights.
6. Chairman and Chief Executive Officer. The chairman and chief
executive officer shall be the chief executive officer of the corporation, shall
preside at all meetings of the board of directors and all meetings of the
stockholders and shall have such other powers and perform such duties as are
specified in these Bylaws and as may from time to time be assigned to him by the
board of directors. Whenever the president is unable to serve, by reason of
sickness, absence or otherwise, the chairman and chief executive officer shall
perform all of the duties and responsibilities and exercise all powers of the
president.
The chairman and chief executive officer shall have general and active
management of the business of the corporation and shall see that all orders and
resolutions
14
<PAGE>
of the board of directors are carried into effect. The chairman and chief
executive officer shall execute bonds, mortgagees and other contracts requiring
a seal, under the seal of the corporation, except where required or permitted by
law to be otherwise signed and executed and except where the signing and
execution thereof shall be expressly delegated by the board of directors to some
other officer or agent of the corporation. The chairman and chief executive
officer shall have general powers of supervision and shall be the final
arbitrator of all differences between officers of the corporation, and such
decision as to any matter affecting the corporation subject only to the board of
directors.
7. President and Chief Operating Officer. The president and chief
operating officer shall be the chief operating officers of the corporation,
shall in the absence of the chairman and chief executive officer perform the
duties and exercise the powers of the chief executive officer. The president and
chief operating officer shall have concurrent power with the chairman and chief
executive officer to sign bonds, mortgages, certificates for shares and other
contracts and documents requiring a seal, under the seal of the corporation,
except where required or permitted by law to be otherwise signed and executed
and except where signing and execution thereof shall be expressly delegated by
the board of directors to some other officer or agent of the corporation. In
general, the president and chief operating officer shall perform all duties
incident to the office of president and chief operating officer and such other
duties as the chairman and chief executive officer or the board of directors may
from time to time prescribe.
8. Vice President. Each vice president shall have such powers and
perform such duties as the board of directors may from time to time prescribe or
as the president may from time to time delegate to him. At the request of the
president, in the case of the president's absence or inability to act, any vice
president may temporarily act in his place. In the case of the death of the
president, or in the case of his absence or inability to act without having
designated a vice president or vice presidents to act temporarily in his place,
the board of directors, by resolution, may designate a vice president or vice
presidents to perform the duties of the president. If no such designation shall
be made, the chairman of the
15
<PAGE>
board of directors, if any, shall exercise such powers and perform such duties,
as provided in Section 7 above, but if the Corporation has no chairman of the
board of directors, or if the chairman is unable to act in place of the
president, all of the vice presidents may exercise such powers and perform such
duties.
9. Secretary. The secretary shall keep or cause to be kept in books
provided for that purpose, the minutes of the meetings of the stockholders,
executive committee, if any, and any other committees, and of the board of
directors; shall see that all notices are duly given in accordance with the
provisions of these Bylaws and as required by law; shall be custodian of the
records and of the seal of the Corporation and see that the seal is affixed to
all documents, the execution of which on behalf of the Corporation under its
seal is duly authorized and in accordance with the provisions of these Bylaws;
and, in general, shall perform all duties incident to the office of secretary
and such other duties as may, from time to time, be assigned to him by the board
of directors or by the president. In the absence of the secretary or his
inability to act, the assistant secretaries, if any, shall act with the same
powers and shall be subject to the same restrictions as are applicable to the
secretary.
10. Treasurer. The treasurer shall have custody of corporate funds
and securities. He shall keep full and accurate accounts of receipts and
disbursements and shall deposit all corporate monies and other valuable effects
in the name and to the credit of the Corporation in the depository or
depositories of the Corporation, and shall render an account of his transactions
as treasurer and of the financial condition of the Corporation to the president
and/or the board of directors upon request. Such power given to the treasurer to
deposit and disburse funds shall not, however, preclude any other officer or
employee of the Corporation from also depositing and disbursing funds when
authorized to do so by the board of directors. The treasurer shall, if required
by the board of directors, give the Corporation a bond in such amount and with
such surety or sureties as may be ordered by the board of directors for the
faithful performance of the duties of his office. The treasurer shall have such
other powers and perform such other duties as may be from time to time
prescribed by the board of directors or the president. In the absence of the
treasurer or his inability to act, the
16
<PAGE>
assistant treasurers, if any, shall act with the same authority and shall be
subject to the same restrictions as are applicable to the treasurer.
11. Delegation of Duties. Whenever an officer is absent, or whenever,
for any reason, the board of directors may deem it desirable, the board may
delegate the powers and duties of an officer to any other officer or officers or
to any director or directors.
ARTICLE VI
Indemnification of Officers, Directors and Others
-------------------------------------------------
1. Indemnification: Third Party Actions. The Corporation shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the Corporation) by reason of the fact that he or she is or was a
director, officer, employee or agent, of the Corporation, or is or was serving
at the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him or her in connection with
such action, suit or proceeding if he or she acted in good faith and in a manner
he or she reasonably believed to be in or not opposed to the best interest of
the Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
or she reasonably believed to be in or not opposed to the best interest of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his or her conduct was unlawful.
2. Indemnification: Derivative Actions. The Corporation shall
indemnify any person who was or is a party or is threatened to be made a party
to any threat-
17
<PAGE>
ened, pending or completed action or suit by or in the right of the Corporation
to procure a judgment in its favor by reason of the fact that he or she is or
was a director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees) actually and reasonably
incurred by him or her in connection with the defense or settlement of such
action or suit if he or she acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
Corporation and, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the court shall deem proper.
3. Mandatory Indemnification. To the extent that a director or
officer, employee or agent of the Corporation has been successful on the merits
or otherwise in defense of any action, suit or proceeding referred to in
Sections 1 and 2 of this Article VI or in defense of any claim, issue or matter
therein, he or she shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him or her in connection therewith.
4. Authorization for Indemnification. Any indemnification under
Sections 1 and 2 of this Article VI (unless ordered by a court) shall be made by
the Corporation only as authorized in the specified case upon a determination
that indemnification of the director, officer, employee or agent is proper in
the circumstances because he or she has met the applicable standard of conduct
set forth in Sections 1 and 2 of this Article VI. Such determination shall be
made (1) by the board of directors by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or (2) if
such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or (3) by the stockholders.
18
<PAGE>
5. Advance Payment of Expenses. Expenses incurred in defending a
civil or criminal action, suit or proceeding may be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of the director or officer to repay such
amount if it shall ultimately be determined that he or she is not entitled to be
indemnified by the Corporation as authorized in this Article VI. Such expenses
incurred by other employees and agents may be so paid upon such terms and
conditions, if any, as the board of directors deems appropriate.
6. Non-exclusive. The indemnification and advancement of expenses
provided by, or granted pursuant to, the other subsections of this Article VI
shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any bylaw,
agreement, vote of stockholders or disinterested directors or otherwise, both as
to action in his or her official capacity and as to action in another capacity
while holding such office, and shall continue, unless otherwise provided when
authorized or ratified, as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
7. Insurance. The Corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him or her and incurred by him or her in any such capacity, or
arising out of his or her status as such, whether or not the Corporation would
have the power to indemnify him or her against such liability under the
provisions of this Article VI.
8. Definitions. For purposes of this Article VI, the following terms
shall have the following meanings:
(a) references to "the Corporation" shall include, in addition
to the resulting corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or merger which, if
its separate existence had continued, would have had
19
<PAGE>
power and authority to indemnify its directors, officers, employees or agents so
that any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise shall stand in the same
position under the provisions of this Article VI with respect to the resulting
or surviving corporation as he or she would have with respect to such
constituent corporation if its separate existence had continued;
(b) references to "other enterprises" shall include employee
benefit plans;
(c) references to "fines" shall include any excise taxes
assessed on a person with respect to an employee benefit plan;
(d) references to "serving at the request of the Corporation"
shall include any service as a director, officer, employee or agent of the
Corporation which imposes duties on, or involves services by, such director,
officer, employee, or agent with respect to an employee benefit plan, its
participants, or beneficiaries; and
(e) a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the interests of the Corporation" as referred to in this Article VI.
ARTICLE VII
Capital Stock
-------------
1. Certificates of Stock. The shares of the Corporation shall be
represented by certificates, provided that the board of directors of the
Corporation may, by resolution, provide that some or all of any or all classes
or series of its stock shall be uncertificated shares. Any such resolution shall
not apply to shares represented by a certificate until such certificate is
surrendered to the Corporation. Notwithstanding the adoption of such a
resolution by the board of directors, every holder of stock
20
<PAGE>
represented by certificates and upon request every holder of uncertificated
shares shall be entitled to have a certificate signed by, or in the name of the
Corporation by the chairman or vice chairman of the board of directors, or the
president or vice president, and by the treasurer or an assistant treasurer, or
the secretary or an assistant secretary of the Corporation representing the
number of shares registered in certificate form. Any or all the signatures on
the certificate may be a facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the Corporation with the
same effect as if he were such officer, transfer agent or registrar at the date
of issue.
2. Issuance of Stock. Unless otherwise voted by the stockholders and
subject to the provisions of the Certificate of Incorporation, the whole or any
part of any unissued balance of the authorized capital stock of the Corporation
or the whole or any part of any unissued balance of the authorized capital stock
of the Corporation held in its treasury may be issued, sold, transferred or
otherwise disposed by resolution of the board of directors in such manner, for
such consideration and on such terms as the board of directors may determine.
Consideration for such shares of capital stock shall be expressed in dollars,
and shall not be less that the par value or stated value therefor, as the case
may be. The par value for shares, if any, shall be stated in the Certificate of
Incorporation, and the stated value for shares, if any, shall be fixed from time
to time by the board of directors.
3. Lost Certificates. The board of directors may direct a new
certificate to be issued in place of any previously issued certificate alleged
to have been destroyed or lost if the owner makes an affidavit or affirmation of
that fact and produces such evidence of loss or destruction as the board may
require. The board, in its discretion, may as a condition precedent to the
issuance of a new certificate require the owner to give the Corporation a bond
as indemnity against any claim that may be made against the Corporation relating
to the allegedly destroyed or lost certificate.
21
<PAGE>
4. Transfer of Shares. Subject to applicable law, shares of stock of
the Corporation may be transferred on its books upon the surrender to the
Corporation or its transfer agent of the certificates representing such shares,
if any, duly endorsed or executed and with such proof of authority or
authenticity of signature as the Corporation or its transfer agent may
reasonably require. In that event, the surrendered certificates shall be
cancelled, new certificates issued to the persons entitled to them, if any, and
the transaction recorded on the books of the Corporation.
5. Registered Stockholders. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of the other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
the laws of the State of Delaware.
6. Stock Ledger. An appropriate stock journal and ledger shall be
kept by the secretary or such registrars or transfer agents as the directors by
resolution may appoint in which all transactions in the shares of stock of the
Corporation shall be recorded.
7. Restriction on Transfer of Shares. Notice of any restriction on
the transfer of the stock of the Corporation shall be placed on each certificate
of stock issued or in the case of uncertificated shares contained in the notice
sent to the registered owner of such shares in accordance with the provisions of
the Delaware Corporation Law.
ARTICLE VIII
Fiscal Year
-----------
The fiscal year of the Corporation shall be determined by the board of
directors and set forth in the minutes of the directors. Said fiscal year may
be changed
22
<PAGE>
from time to time by the board of directors in its discretion.
ARTICLE IX
Dividends
---------
Dividends upon the capital stock of the Corporation, subject to the
provisions of the Certificate of Incorporation, if any, may be declared by the
board of directors at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property, or in shares of the capital stock,
subject to the provisions of the Certificate of Incorporation. Before payment
of any dividend, there may be set aside out of any funds of the Corporation
available for dividends such sum or sums as the directors from time to time, in
their absolute discretion, think proper as a reserve or reserves to meet
contingencies, or for equalizing dividends, or for repairing or maintaining any
property of the Corporation, or for such other purpose as the directors shall
think in the best interest of the Corporation, and the directors may modify or
abolish any such reserve in the manner in which it was created.
ARTICLE X
Amendments
----------
The board of directors may from time to time make, alter or repeal the
Bylaws by a vote of two-thirds (2/3) of the members of the board of directors in
office; provided, however, that any Bylaws adopted, amended or repealed by the
board of directors may be amended or repealed, and any Bylaws may be adopted,
amended or repealed, by the stockholders of the Corporation by vote of the
holders of not less than two-thirds (2/3) of the voting power of the outstanding
Common Stock and Preferred Stock of the Corporation entitled to vote generally
in the election of directors of the Corporation.
23
<PAGE>
ARTICLE XI
Miscellaneous
-------------
1. Gender. Whenever required by the context, the singular shall
include the plural, the plural the singular, and one gender shall include all
genders.
2. Invalid Provision. The invalidity or unenforceability of any
particular provision of these Bylaws shall not affect the other provisions
herein, and these Bylaws shall be construed in all respects as if such invalid
or unenforceable provision was omitted.
3. Governing Law. These Bylaws shall be governed by and construed in
accordance with the laws of the State of Delaware.
__________________________
___________, Secretary
24
<PAGE>
Exhibit 4.7
COMMON STOCK
NUMBER
USN
COMMUNICATIONS
COMMON STOCK
SHARES
THIS CERTIFICATE IS TRANSFERABLE IN CHICAGO, IL OR IN NEW YORK, NY
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
SEE REVERSE FOR CERTAIN DEFINITIONS AND A STATEMENT AS TO THE RIGHTS,
PREFERENCES, PRIVILEGES AND RESTRICTIONS OF SHARES
CUSIP 90336N 20 4
This Certifies that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $0.01 PER SHARE,
OF
USN COMMUNICATIONS, INC.
transferable only on the books of the Corporation by the registered holder
hereof in person or by duly authorized attorney upon surrender of this
certificate properly endorsed. This certificate is not valid unless
countersigned by the Transfer Agent and registered by the Registrar.
In Witness Whereof, the Corporation has caused this certificate to be
signed in facsimile by its authorized officers and its facsimile seal to be
hereunto affixed.
Dated:
/s/ Thomas A. Monson
SECRETARY
USN COMMUNICATIONS, INC. CORPORATE SEAL DELAWARE
/s/ J. Thomas Elliott
CHAIRMAN OF THE BOARD
COUNTERSIGNED AND REGISTERED: HARRIS TRUST AND SAVINGS BANK
(Chicago, Illinois)
TRANSFER AGENT
AND REGISTRAR
AUTHORIZED SIGNATURE
<PAGE>
USN COMMUNICATIONS, INC.
A statement of the rights, preferences, privileges and restrictions granted
to or imposed upon the respective classes or series of shares and upon the
holders thereof as established, from time to time, by the Certificate of
Incorporation of the Corporation, as amended and by any certificate of
designations, and the number of shares constituting each class and series and
the designations thereof, may be obtained by the holder hereof upon written
request and without charge from the Secretary of the Corporation at its
corporate headquarters.
- --------------------------------------------------------------------------------
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM- as tenants in common UNIF GIFT MIN ACT- ______Custodian________
(Cust) (Minor)
TEN ENT- as tenants by the
entireties
JT TEN- as joint tenants with under Uniform Gifts to Minors Act
right of survivorship
and not as tenants in common
-------------------------------------
(State)
Additional abbreviations may also be used though not in the above list.
For Value received,_________________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------
________________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the common stock represented by the within certificate, and do hereby
irrevocably constitute and appoint______________________________________________
____________________________________________________________________ Attorney to
transfer the said stock on the books of the within-named Corporation with full
power of substitution in the premises.
Dated, ________________________X_____________________________________________
X_____________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE, IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT,
OR ANY CHANGE WHATSOEVER.
SIGNATURE GUARANTEED: ____________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS,
SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS
WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE, IF IT IS LOST, STOLEN, OR DESTROYED,
THE CORPORATION MAY REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE
OF A REPLACEMENT CERTIFICATE.
<PAGE>
EXHIBIT 4.8
- --------------------------------------------------------------------------------
USN COMMUNICATIONS, INC.
$13,022,600
9% CONSENT CONVERTIBLE SUBORDINATED NOTES DUE 2006
------------------
INDENTURE
Dated as of January 13, 1998
------------------
HARRIS TRUST AND SAVINGS BANK,
Trustee
- -------------------------------------------------------------------------------
<PAGE>
CROSS-REFERENCE TABLE
Reconciliation and tie between the Trust Indenture Act of 1939, as amended, and
the Indenture, dated as of January 13, 1998
<TABLE>
<CAPTION>
Trust Indenture Indenture
Act Section Section
- ----------- -----------
<S> <C>
(S)310(a)(1)....................................................... 7.10
(a)(2)....................................................... 7.10
(a)(3)....................................................... N.A.
(a)(4)....................................................... N.A.
(a)(5)....................................................... 7.10
(b).......................................................... 7.08; 7.10
(c).......................................................... N.A.
(S)311(a).......................................................... 7.11
(b).......................................................... 7.11
(c).......................................................... N.A.
(S)312(a).......................................................... 7.06(a);
.......................................................... 7.06(b)
(b).......................................................... 7.06(c)
(c).......................................................... 7.06(d)
(S)313(a).......................................................... 7.06(e)
(b).......................................................... N.A.
(c).......................................................... 7.06(e);
.......................................................... 7.06(f)
(d).......................................................... 7.06
(S)314(a).......................................................... 4.11; 4.12
(b).......................................................... N.A
(c)(1)....................................................... 1.04; 12.03
(c)(2)....................................................... 1.04; 2.02;
....................................................... 12.03
(c)(3)....................................................... N.A.
(d).......................................................... 4.22
(e).......................................................... 12.04
(f).......................................................... 4.12
(S)315(a).......................................................... 7.01(b)
(b).......................................................... 7.05(a)
(c).......................................................... 7.01(a)
(d).......................................................... 7.01(c)
(e).......................................................... 6.10
(S)316(a).......................................................... 2.08
(a)(1)(A).................................................... 6.05
(a)(1)(B).................................................... 6.04
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Trust Indenture Indenture
Act Section Section
- ----------- ----------
<S> <C>
(a)(2)....................................................... N.A.
(b).......................................................... 6.07
(c).......................................................... 9.05
(S)317(a)(1)....................................................... 6.03
(a)(2)....................................................... 6.08
(b).......................................................... 2.04
(S)318(a).......................................................... 12.01
</TABLE>
Note: This reconciliation and tie shall not, for any purpose, be deemed
to be part of the Indenture.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
ARTICLE I
<S> <C> <C>
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION........................1
SECTION 1.1. Definitions.....................................................1
SECTION 1.2. Incorporation by Reference of Trust Indenture Act..............19
SECTION 1.3. Rules of Construction..........................................19
SECTION 1.4. Form of Documents Delivered to Trustee.........................20
SECTION 1.5. Acts of Holders................................................20
ARTICLE II
THE CONVERTIBLE NOTES.........................................................23
SECTION 2.1. Form and Dating................................................23
SECTION 2.2. Execution and Authentication...................................25
SECTION 2.3. Registrar and Paying Agent.....................................26
SECTION 2.4. Paying Agent to Hold Money in Trust............................27
SECTION 2.5. Global Convertible Notes.......................................27
SECTION 2.6. Transfer and Exchange..........................................28
SECTION 2.7. Replacement Convertible Notes..................................31
SECTION 2.8 Outstanding Convertible Notes..................................32
SECTION 2.9. Temporary Convertible Notes....................................32
SECTION 2.10. Cancellation...................................................33
SECTION 2.11. Payment of Interest; Interest Rights Preserved.................33
SECTION 2.12. Authorized Denominations.......................................34
SECTION 2.13. Computation of Interest, etc...................................34
SECTION 2.14. Persons Deemed Owners..........................................34
SECTION 2.15. CUSIP Numbers..................................................35
ARTICLE III
REDEMPTION....................................................................35
SECTION 3.1. Notice to Trustee..............................................35
SECTION 3.2. Selection of Convertible Notes to be Redeemed..................35
SECTION 3.3. Notice of Redemption...........................................36
SECTION 3.4. Effect of Notice of Redemption.................................37
SECTION 3.5. Deposit of Redemption Price....................................37
</TABLE>
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<TABLE>
<CAPTION>
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<S> <C> <C>
SECTION 3.6. Convertible Notes Redeemed in Part..................................................37
SECTION 3.7. Optional Redemption.................................................................38
ARTICLE IV
COVENANTS..........................................................................................38
SECTION 4.1. Payment of Convertible Notes........................................................38
SECTION 4.2. Maintenance of Office or Agency.....................................................38
SECTION 4.3. Money for the Convertible Note Payments to be Held in Trust.........................39
SECTION 4.4. Corporate Existence.................................................................39
SECTION 4.5. Maintenance of Property.............................................................40
SECTION 4.6. Payment of Taxes and Other Claims...................................................40
SECTION 4.7. Repurchase at the Option of Holders upon a Change of Control........................40
SECTION 4.8. Limitation on Asset Sales...........................................................42
SECTION 4.9. Limitation on Issuance of Guarantees by Restricted Subsidiaries.....................47
SECTION 4.10. Restricted and Unrestricted Subsidiaries............................................47
SECTION 4.11. Reports.............................................................................48
SECTION 4.12. Compliance Certificate; Notice of Default or Event of Default.......................48
SECTION 4.13. INTENTIONALLY OMITTED...............................................................49
SECTION 4.14. Repurchase at the Option of Holders upon a Termination of Trading...................49
SECTION 4.15. INTENTIONALLY OMITTED...............................................................50
ARTICLE V
CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER...............................................51
SECTION 5.1. Merger, Consolidation or Sale of Assets.............................................51
SECTION 5.2. Successor Corporation Substituted...................................................52
ARTICLE VI
DEFAULTS AND REMEDIES..............................................................................52
SECTION 6.1. Events of Default...................................................................52
SECTION 6.2. Acceleration........................................................................54
SECTION 6.3. Other Remedies......................................................................56
SECTION 6.4. Waiver of Existing Defaults.........................................................56
SECTION 6.5. Control by Majority.................................................................57
SECTION 6.6. Limitation on Suits.................................................................57
SECTION 6.7. Rights of Holders to Receive Payment................................................58
SECTION 6.8. Trustee May File Proofs of Claim....................................................58
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
<S> <C> <C>
SECTION 6.9. Priorities..........................................................................59
SECTION 6.10. Undertaking for Costs...............................................................59
SECTION 6.11. Waiver of Usury, Stay or Extension Laws.............................................59
SECTION 6.12. Trustee May Enforce Claims Without Possession of the Convertible
Notes.............................................................................60
SECTION 6.13. Restoration of Rights and Remedies..................................................60
SECTION 6.14. Rights and Remedies Cumulative......................................................60
SECTION 6.15. Delay or Omission Not Waiver........................................................60
ARTICLE VII
TRUSTEE............................................................................................61
SECTION 7.1. Duties of Trustee...................................................................61
SECTION 7.2. Rights of Trustee...................................................................62
SECTION 7.3. Individual Rights of Trustee........................................................63
SECTION 7.4. Trustee's Disclaimer................................................................63
SECTION 7.5. Notice of Defaults..................................................................63
SECTION 7.6. Preservation of Information; Reports by Trustee to Holders..........................63
SECTION 7.7. Compensation and Indemnity..........................................................64
SECTION 7.8. Replacement of Trustee..............................................................65
SECTION 7.9. Successor Trustee by Merger.........................................................67
SECTION 7.10. Eligibility; Disqualification.......................................................67
SECTION 7.11. Preferential Collection of Claims Against Company...................................68
ARTICLE VIII
SECTION 8.1. Company's Option to Effect Legal Defeasance or Covenant Defeasance..................69
SECTION 8.2. Legal Defeasance and Discharge......................................................69
SECTION 8.3. Covenant Defeasance.................................................................70
SECTION 8.4. Conditions to Defeasance or Covenant Defeasance.....................................70
SECTION 8.5. Deposited Money and U.S. Government Obligations to be Held in Trust;
Miscellaneous Provisions..........................................................71
SECTION 8.6. Reinstatement.......................................................................72
ARTICLE IX
AMENDMENTS.........................................................................................72
SECTION 9.1. Without Consent of Holders..........................................................72
SECTION 9.2. With Consent of Holders.............................................................73
</TABLE>
iii
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<TABLE>
<CAPTION>
Page
<S> <C> <C>
SECTION 9.3. Effect of Supplemental Indentures.........................................................74
SECTION 9.4. Compliance with Trust Indenture Act.......................................................74
SECTION 9.5. Revocation and Effect of Consents and Waivers.............................................74
SECTION 9.6. Notation on or Exchange of Convertible Notes..............................................75
SECTION 9.7. Trustee to Execute Supplemental Indentures................................................75
SECTION 9.8. Solicitation of Consents..................................................................76
ARTICLE X
CONVERTIBLE NOTE GUARANTEES..............................................................................76
SECTION 10.1. Convertible Note Guarantees...............................................................76
SECTION 10.2. Limitation of Guarantor's Liability.......................................................79
SECTION 10.3. Execution and Delivery of Convertible Note Guarantees.....................................79
SECTION 10.4. When a Guarantor May Merge, etc...........................................................79
SECTION 10.5. Release of a Guarantor....................................................................80
ARTICLE XI
SUBORDINATION OF CONVERTIBLE NOTES AND CONVERTIBLE NOTE
GUARANTEES...............................................................................................80
SECTION 11.1. Convertible Notes and Convertible Note Guarantees Subordinated to
Senior Indebtedness.....................................................................80
SECTION 11.2. Payment Over of Proceeds Upon Dissolution, etc............................................81
SECTION 11.3. Prior Payment to Senior Indebtedness upon Acceleration of Convertible
Notes...................................................................................82
SECTION 11.4. No Payment When Senior Indebtedness in Default............................................83
SECTION 11.5. Payment Permitted If No Default...........................................................83
SECTION 11.6. Subrogation to Rights of Holders of Senior Indebtedness...................................83
SECTION 11.7. Provisions Solely to Define Relative Rights...............................................84
SECTION 11.8. Trustee to Effectuate Subordination.......................................................84
SECTION 11.9. No Waiver of Subordination Provisions.....................................................84
SECTION 11.10. Notice to Trustee.........................................................................85
SECTION 11.11. Reliance on Judicial Order or Certificate of Liquidating Agent............................86
SECTION 11.12. Trustee Not Fiduciary for Holders of Senior Indebtedness..................................86
SECTION 11.13. Rights of Trustee as Holder of Senior Indebtedness; Preservation of
Trustee's Rights........................................................................86
SECTION 11.14. Article Applicable to Paying Agents.......................................................86
SECTION 11.15. Certain Conversions Deemed Payment........................................................86
</TABLE>
ARTICLE XII
iv
<PAGE>
<TABLE>
<CAPTION>
Page
<S> <C> <C>
CONVERSION OF CONVERTIBLE NOTES.....................................................................87
SECTION 12.1. Conversion Privilege and Conversion Price............................................87
SECTION 12.2. Exercise of Conversion Privileges....................................................88
SECTION 12.3. Fractions of Shares..................................................................89
SECTION 12.4. Adjustment of Conversion Price.......................................................89
SECTION 12.5. Notice of Adjustments of Conversion Price............................................97
SECTION 12.6. Notice of Certain Corporate Action...................................................97
SECTION 12.7. Company to Reserve Common Stock......................................................98
SECTION 12.8. Taxes on Conversions.................................................................99
SECTION 12.9. Covenant as to Common Stock..........................................................99
SECTION 12.10. Cancellation of Converted Convertible Notes..........................................99
SECTION 12.11. Provisions as to Consolidation, Merger or Sale of Assets.............................99
ARTICLE XIII
SATISFACTION AND DISCHARGE.........................................................................100
SECTION 13.1. Satisfaction and Discharge..........................................................100
SECTION 13.2. Application of Trust Money..........................................................101
SECTION 13.3. Repayment to the Company............................................................102
SECTION 13.4. Reinstatement.......................................................................102
ARTICLE XIV
MISCELLANEOUS......................................................................................102
SECTION 14.1. Trust Indenture Act Controls........................................................102
SECTION 14.2. Notices.............................................................................103
SECTION 14.3. Certificate and Opinion as to Conditions Precedent..................................103
SECTION 14.4. Statements Required in Certificate or Opinion.......................................103
SECTION 14.5. Communications by Holders with Other Holders........................................103
SECTION 14.6. Rules by Trustee, Paying Agent and Registrar........................................104
SECTION 14.7. Payments on Business Days...........................................................104
SECTION 14.8. Governing Law.......................................................................104
SECTION 14.9. No Recourse Against Others..........................................................104
SECTION 14.10. Successors..........................................................................104
SECTION 14.11. Counterparts........................................................................104
SECTION 14.12. Table of Contents; Headings.........................................................104
SECTION 14.13. Severability........................................................................104
SECTION 14.14. Further Instruments and Acts........................................................105
SECTION 14.15. Independent Covenants...............................................................105
</TABLE>
v
<PAGE>
EXHIBIT A FORM OF CONVERTIBLE NOTE
SCHEDULE A EXISTING AGREEMENTS OR STOCK OPTIONS INVOLVING COMMON STOCK
vi
<PAGE>
INDENTURE, dated as of January 13, 1998, between USN COMMUNICATIONS,
INC., a Delaware corporation (the "Company"), having its principal office at 10
South Riverside Plaza, Suite 401, Chicago, Illinois 60606-3709, and HARRIS TRUST
AND SAVINGS BANK, as trustee hereunder (the "Trustee"), having its Corporate
Trust Office at 311 West Monroe, Chicago, Illinois 60606.
RECITALS OF THE COMPANY
The Company has duly authorized the creation and issue of its 9%
Consent Convertible Subordinated Notes due 2006 (the "Convertible Notes") of
substantially the tenor and amount hereinafter set forth, and to provide
therefor), the Company has duly authorized the execution and delivery of this
Indenture.
All things necessary to make the Convertible Notes, when executed by
the Company and authenticated and delivered by the Trustee hereunder and duly
issued by the Company, the valid obligations of the Company and to make this
Indenture a valid instrument of the Company, in accordance with their respective
terms, have been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH, that, for and in
consideration of the premises and the purchase of the Convertible Notes by the
Holders thereof, it is mutually covenanted and agreed, for the equal and
proportionate benefit of all Holders of the Convertible Notes, as follows:
ARTICLE I
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 1.1 Definitions. For all purposes of this Indenture, except
as otherwise expressly provided or unless the context otherwise requires:
"Accreted Value" means, 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 "Semi-Annual Accrual Date"), the Accreted Value will equal the amount
set forth below for such Semi-Annual Accrual Date:
<TABLE>
<CAPTION>
Semi-Annual Accrual Date Accreted Value
------------------------ --------------
<S> <C>
July 12, 1998............................ 802.45
January 13, 1999......................... 838.56
July 12, 1999............................ 876.30
January 13, 2000......................... 915.73
July 12, 2000............................ 956.94
</TABLE>
<PAGE>
January 13, 2001........................ 1,000.00
(b) if the Specified Date occurs before the first 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 Semi-Annual
Accrual Date less the original issue price multiplied by (z) a fraction, the
numerator of which is the number of days from the Issue Date to the Specified
Date, using a 360-day year of twelve 30-day months, and the denominator of which
is the number of days elapsed from the Issue Date to the first Semi-Annual
Accrual Date, using a 360-day year of twelve 30-day months;
(c) if the Specified Date occurs between two Semi-Annual Accrual
Dates, the Accreted Value will equal the sum of (i) the Accreted Value for the
Semi-Annual Accrual Date immediately preceding such Specified Date and (ii) an
amount equal to the product of (y) the Accreted Value for the immediately
following Semi-Annual Accrual Date less the Accreted Value for the immediately
preceding Semi-Annual Accrual Date multiplied by (z) a fraction, the numerator
of which is the number of days from the immediately preceding Semi-Annual
Accrual Date to the Specified Date, using a 360-day year of twelve 30-day
months, and the denominator of which is 180; or
(d) if the Specified Date occurs after the last Semi-Annual
Accrual Date, the Accreted Value will equal $1,000.
"Acquired Indebtedness" means, with respect to any specified Person,
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Subsidiary of such specified Person, including
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a Subsidiary of such specified Person,
but excluding Indebtedness which is extinguished, retired or repaid in
connection with such Person merging with or into or becoming a Subsidiary of
such specified Person.
"Act" when used with respect to any Holder, has the meaning set forth
in Section 1.5 hereof.
"Adjusted Net Assets" of a Guarantor at any date means the amount by
which the fair value of the assets and Property of such Guarantor exceeds the
total amount of liabilities, including without limitation, contingent
liabilities (after giving effect to all other fixed and contingent liabilities
incurred or assumed on such date), but excluding liabilities under the Guarantee
of such Guarantor at such date.
"Affiliate" means, as to any Person, any other Person which directly
or indirectly controls, or is under common control with, or is controlled by,
such Person; provided that each Unrestricted Subsidiary shall be deemed to be an
Affiliate of the Company and of each other Subsidiary of the Company; provided
that any lender under a Credit Facility shall not be deemed to be an Affiliate
solely as the result of the Credit Facility; and provided, further, that neither
the Company nor any of its Wholly-Owned Restricted Subsidiaries shall be deemed
to be Affiliates of each other. For purposes of this definition, "control"
(including, with correlative meanings, the terms
2
<PAGE>
"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.
"Agent Member" has the meaning set forth in Section 2.5(a) hereof.
"Asset Sale" means, with respect to any Person, any transfer,
conveyance, sale, lease or other disposition (including, without limitation,
dispositions pursuant to any consolidation or merger) by such Person or any of
its Restricted Subsidiaries to any Person other than to such Person or a
Restricted Subsidiary of such Person, in one transaction or a series of related
transactions (each hereinafter referred to as a "Disposition"), of (a) Capital
Stock of or other equity interests in any Restricted Subsidiary (other than
director's qualifying shares) except as provided in clause (iv) of this
definition, (b) all or substantially all of the assets of any division or line
of business of such Person or of any of 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
that constitutes a Restricted Payment permitted under Section 4.13 of the 14%
Senior Note Indenture and/or the 14 5/8% Senior Note Indenture as in effect on
the Issue Date, (iv) a Disposition of no more than 10 percent of the Capital
Stock of USN Solutions on a fully diluted basis pursuant to the exercise of the
USN Solutions Option, (v) a Disposition by the Company in connection with a
transaction permitted under Article V hereof and (vi) contribution of assets to
any Unrestricted Subsidiary constituting an Investment otherwise permitted under
the Senior Note Indentures as in effect on the Issue Date.
"Asset Sale Offer" has the meaning set forth in Section 4.8(c) hereof.
"Asset Sale Payment Date" has the meaning set forth in Section
4.8(d)(ii) hereof.
"Asset Sale Purchase Price" has the meaning set forth in Section
4.8(c) hereof.
"Board of Directors" means, with respect to any Person, the Board of
Directors (or similar governing body) of such Person or any committee of the
Board of Directors (or similar governing body) duly authorized to act on behalf
of such Board of Directors (or similar governing body).
"Board Resolution" means a duly adopted resolution of the Board of
Directors of a Person in full force and effect at the time of determination and
certified as such by the Secretary or an Assistant Secretary of such Person.
"BT" means BT Capital Partners, Inc.
3
<PAGE>
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday that is not a day on which banking institutions in The City of New York
or the City of Chicago are authorized or obligated by law, executive order or
regulation to close.
"Capital Lease Obligation" of any Person means the obligation to pay
rent or other payment amounts under a lease of (or other Indebtedness
arrangement conveying the right to use) real or personal property of such Person
which is required to be classified and accounted for as a capital lease or a
liability on the face of a balance sheet of such Person prepared in accordance
with GAAP and the Stated Maturity thereof shall be the date of the last payment
of rent or any amount due under such lease prior to the first date upon which
such lease may be terminated by the lessee without payment of a penalty.
"Capital Stock" in any Person means any and all shares, interests,
participations or other equivalents in the equity interest (however designated)
in such Person and any rights (other than Indebtedness convertible into an
equity interest), warrants or options to acquire an equity interest in such
Person.
"Cash Proceeds" means, with respect to any Asset Sale or issuance or
sale of Capital Stock by any Person, the aggregate consideration received in
respect of such sale or issuance by such Person in the form of cash and Eligible
Cash Equivalents; provided that with regard to an Asset Sale, any liabilities
(as shown on the Company's or such Restricted Subsidiary's most recent balance
sheet or in the notes thereto) of the Company or any Restricted Subsidiary
(other than liabilities that are by their terms subordinated to the Convertible
Notes or Convertible Note Guarantees, if any) which are assumed by the
transferee of any such assets and from which the Company and such Restricted
Subsidiary are completely released shall be deemed Cash Proceeds.
"Certificated Convertible Notes" has the meaning set forth in Section
2.1(c).
"Change of Control" shall be deemed to occur if (i) the sale,
conveyance, transfer or lease (other than to the Company or any Wholly-Owned
Restricted Subsidiary of the Company), whether direct or indirect, of all or
substantially all of the assets of the Company or of the Company and its
Restricted Subsidiaries taken as a whole to any "person" or "group" (within the
meaning of Sections 13(d)(3) and 14(d)(2) of the Exchange Act or any successor
provision to either of the foregoing, including any group acting for the purpose
of acquiring, holding or disposing of securities within the meaning of Rule 13d-
5(b)(i) under the Exchange Act) shall have occurred; or (ii) any "person" or
"group" (within the meaning of Sections 13(d)(3) and 14(d)(2) of the Exchange
Act or any successor provision to either of the foregoing, including any group
acting for the purpose of acquiring, holding or disposing of securities within
the meaning of Rule 13d-5(b)(i) under the Exchange Act), other than any
Permitted Holder or Permitted Holders, becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) of more than 35 percent of the
total voting power of all classes of the Voting Stock of the Company (including
any warrants, options or rights to acquire such Voting Stock), calculated on a
fully diluted basis, and such voting power percentage is greater than or equal
to the total voting power percentage then beneficially owned by
4
<PAGE>
the Permitted Holders in the aggregate; or (iii) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the Board of Directors of the Company (together with any new directors whose
election or appointment by such board or whose nomination for election by the
stockholders of the Company was approved by a vote of a majority of the
directors then still in office who were either directors at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of
Directors of the Company then in office.
"Change of Control Offer" has the meaning set forth in Section 4.7(a)
hereof.
"Change of Control Payment Date" has the meaning set forth in Section
4.7(b)(ii) hereof.
"Change of Control Purchase Price" has the meaning set forth in
Section 4.7(a) hereof.
"Chase" means Chase Venture Capital Associates, L.P.
"CIBC" means CIBC Wood Gundy Ventures, Inc.
"Class A Common Stock" means the Class A Common Stock, par value $0.01
per share, of the Company.
"clearing agency" has the meaning set forth in Section 3(a)(23) of the
Exchange Act.
"Closing Price" on any Trading Day with respect to the per share price
of any shares of Capital Stock means the last reported sale price regular way
or, in case no such reported sale takes place on such day, the average of the
reported closing bid and asked prices regular way, in either case on the New
York Stock Exchange or, if such shares of Capital Stock are not listed or
admitted to trading on such exchange, on the principal national securities
exchange on which such shares are listed or admitted to trading or, if not
listed or admitted to trading on any national securities exchange, on The Nasdaq
National Market or, if such shares are not listed or admitted to trading on any
national securities exchange or quoted on such automated quotation system but
the issuer is a Foreign Issuer (as defined in Rule 3b-4(b) under the Exchange
Act) and the principal securities exchange on which such shares are listed or
admitted to trading is a Designated Offshore Securities Market (as defined in
Rule 902(a) under the Securities Act), the average of the reported closing bid
and asked prices regular way on such principal exchange, or, if such shares are
not listed or admitted to trading on any national securities exchange or quoted
on such automated quotation system and the issuer and principal securities
exchange do not meet such requirements, the average of the closing bid and asked
prices in the over-the-counter market as furnished by any New York Stock
Exchange member firm that is selected from time to time by the Company for that
purpose and is reasonably acceptable to the Trustee.
5
<PAGE>
"Commission" means the United States Securities and Exchange
Commission, as from time to time constituted, created under the Exchange Act,
or, if at any time after the execution of this Indenture such commission is not
existing and performing the duties now assigned to it under the Trust Indenture
Act, the body performing such duties at such time.
"Common Stock" means any stock of any class of any Person which has no
preference in respect of dividends or of amounts payable in the event of any
voluntary or involuntary liquidation, dissolution or winding up of such Person
and which is not subject to redemption by such Person, including, without
limitation, the Company's Class A Common Stock, $.01 par value. However,
subject to the provisions of Section 12.11, shares issuable on conversion of the
Convertible Notes shall include only shares of the class designated as Class A
Common Stock of the Company at the date of this Indenture or shares of any class
or classes resulting from any reclassification or reclassifications thereof and
which have no preference in respect of dividends or of amounts payable in the
event of any voluntary or involuntary liquidation, dissolution or winding-up of
the Company and which are not subject to redemption by the Company; provided
that if at any time there shall be more than one such resulting class, the
shares of each such class then so issuable shall be substantially in the
proportion which the total number of shares of such class resulting from all
such reclassifications bears to the total number of shares of all such classes
resulting from all such reclassifications.
"Company" means the party named as such in the preamble to this
Indenture until a successor replaces it pursuant to the applicable provisions
hereof and, thereafter, means such successor.
"Company Order" means a written order signed in the name of the
Company by (i) its Chairman of the Board, its President, its Chief Executive
Officer, its Chief Operating Officer, a Vice Chairman or a Vice President, and
(ii) its Chief Financial Officer, its Treasurer, an Assistant Treasurer, its
Secretary or an Assistant Secretary.
"Consent Warrant Agreement" means the Warrant Agreement, dated as of
August 25, 1997, between the Company and Harris Trust and Savings Bank, as
warrant agent thereunder.
"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.
"Constituent Person" has the meaning set forth in Section 12.11
hereof.
"Conversion Price" has the meaning set forth in Section 12.1 hereof.
"Conversion Reset" has the meaning set forth in Section 12.1 hereof.
"Conversion Reset Price" has the meaning set forth in Section 12.1
hereof.
6
<PAGE>
"Convertible Note Guarantee" means a guarantee of the payment of the
Convertible Notes in the form of a supplemental indenture to this Indenture to
be executed and delivered by a Restricted Subsidiary, if and as required by and
pursuant to Section 4.10 hereof.
"Convertible Notes" has the meaning set forth in the Recitals of the
Company and more particularly means any of the Convertible Notes authenticated
and delivered under this Indenture.
"Corporate Trust Office" means the principal office of the Trustee at
which at any particular time its corporate trust business shall be principally
administered, which office is, at the date of execution of this Indenture,
located at 311 West Monroe, Chicago, Illinois 60606.
"Covenant Defeasance" has the meaning set forth in Section 8.3 hereof.
"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,
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.
"Current Market Price" has the meaning set forth in Section 12.4(h)
hereof.
"Default" means any event, act or condition, the occurrence of which
is, or after notice or the passage of time or both would be, an Event of
Default.
"Default Amount" has the meaning set forth in Section 6.2 hereof.
"Defaulted Interest" has the meaning set forth in Section 2.11 hereof.
"Defeasance" has the meaning set forth in Section 8.2 hereof.
"Depositary" means The Depository Trust Company, its nominees, and
their respective successors.
"Disposition" has the meaning set forth in the definition of "Asset
Sale" in this Section 1.1.
"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 Stated
Maturity of the Convertible Notes.
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"Eligible Cash Equivalents" means (i) securities issued or directly
and fully guaranteed or insured by the United States of America or any agency or
instrumentality thereof, provided that the full faith and credit of the United
States of America is pledged in support thereof; (ii) time deposits,
certificates of deposit or Eurodollar deposits of any commercial bank organized
in the United States having capital and surplus in excess of $500,000,000, with
a maturity date not more than one year from the date of acquisition; (iii)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clause (i) above entered into with any bank
meeting the qualifications specified in clause (ii) above; (iv) direct
obligations issued by any state of the United States of America or any political
subdivision of any such state or any public instrumentality thereof maturing, or
subject to tender at the option of the holder thereof, within 90 calendar days
after the date of acquisition thereof and, at the time of acquisition, having a
rating of A or better from Standard & Poor's or A-2 or better from Moody's; (v)
commercial paper issued by the parent corporation of any commercial bank
organized in the United States having capital and surplus in excess of
$500,000,000 and commercial paper issued by others having one of the two highest
ratings obtainable from either of Standard & Poor's or Moody's and in each case
maturing within 270 days after the date of acquisition; (vi) overnight bank
deposits and bankers' acceptances at any commercial bank organized in the United
States having capital and surplus in excess of $500,000,000; (vii) deposits
available for withdrawal on demand with a commercial bank organized in the
United States having capital and surplus in excess of $500,000,000, and (viii)
investments in money market funds substantially all of whose assets comprise
securities of the types described in clauses (i) through (vi).
"Enterprises" means Enterprises & Transcommunications, L.P. and Prime
VIII, L.P.
"Event of Default" has the meaning set forth in Section 6.1 hereof.
"'ex' date," (i) when used with respect to any issuance or
distribution, means the first date on which the Common Stock trades regular way
on the relevant exchange or in the relevant market from which the Closing Prices
were obtained without the right to receive such issuance or distribution, (ii)
when used with respect to any subdivision or combination of shares of Common
Stock, means the first date on which the Common Stock trades regular way on such
exchange or in such market after the time at which such subdivision or
construction becomes effective, and (iii) when used with respect to any tender
or exchange offer, means the first date on which the Common Stock trades regular
way on such exchange or in such market with the last time that tenders or
exchanges may be made pursuant to such tender or exchange offer (as it shall
have been amended).
"Excess Proceeds" has the meaning set forth in Section 4.8 hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
"Exchange Rate Obligation" means, with respect to any Person, any
currency swap agreements, forward exchange rate agreements, foreign currency
futures or options, exchange rate
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collar agreements, exchange rate insurance or other agreements or arrangements,
or combination thereof, designed to provide protection against fluctuations in
currency exchange rates.
"Fair Market Value" means, with respect to any asset or Property, the
sale value that could be obtained in an arms-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.
"14% Senior Note Indenture" means the Indenture, dated as of September
30, 1996, between the Company and Harris Trust and Savings Bank as trustee
thereunder with respect to the 14% Senior Notes, as amended and supplemented
from time to time.
"14 5/8% Senior Note Indenture" means the Indenture, dated as of
August 15, 1997, between the Company and Harris Trust and Savings Bank as
trustee thereunder with respect to the 14 5/8% Senior Notes, as amended and
supplemented from time to time.
"14% Senior Notes" means the Company's 14% Senior Discount Notes due
2003 issued pursuant to the 14% Senior Note Indenture.
"14 5/8% Senior Notes" means the Company's 14 5/8% Senior Discount
Notes due 2004 issued pursuant to the 14 5/8% Senior Note Indenture.
"GAAP" means United States generally accepted accounting principles,
consistently applied, as set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board, or in such other statements by such other entity as may be
approved by a significant segment of the accounting profession of the United
States, that are applicable to the circumstances as of the date of
determination; provided that, except as otherwise specifically provided herein,
all calculations made for purposes of determining compliance with this Indenture
shall utilize GAAP as in effect on the Issue Date.
"Global Convertible Note" has the meaning set forth in Section 2.1(c)
hereof.
"Guarantee" means any direct or indirect obligation, contingent or
otherwise, of a Person guaranteeing or having the economic effect of
guaranteeing any Indebtedness of any other Person in any manner. The terms
"guaranteed," "guaranteeing" and guarantor" shall have correlative meanings.
"Guaranteed Indebtedness" has the meaning set forth in Section 4.10(a)
hereof.
"Guarantor" means a Restricted Subsidiary that hereafter becomes a
Guarantor pursuant to Section 4.10 hereof and executes and delivers a
supplemental indenture to this Indenture relating to its Convertible Note
Guarantee.
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"Hancock" means Hancock Venture Partners IV - Direct Fund L.P. and
Hancock Venture Partners V - Direct Fund L.P.
"Holder" means (i) in the case of any Certificated Convertible Note,
the Person in whose name such Certificated Note is registered in the Security
Register and (ii) in the case of any Global Convertible Note, the Depositary.
"Indebtedness" means at any time (without duplication), with respect
to any Person, whether recourse is to all or a portion of the assets of such
Person, and whether or not contingent, (i) any obligation of such Person for
money borrowed, (ii) any obligation of such Person evidenced by bonds,
debentures, notes, guarantees or other similar instruments, including, without
limitation, any such obligations incurred in connection with the acquisition of
Property, assets or businesses, excluding trade accounts payable made in the
ordinary course of business which are not more than 90 days overdue or which are
being contested in good faith and by appropriate proceedings, (iii) any
reimbursement obligation of such Person with respect to letters of credit,
bankers' acceptances or similar facilities issued for the account of such
Person, (iv) any obligation of such Person issued or assumed as the deferred
purchase price of Property, assets or services (but excluding trade accounts
payable or accrued liabilities arising in the ordinary course of business, which
in either case are not more than 90 days overdue or which are being contested in
good faith and by appropriate proceedings, and for which adequate reserves are
being maintained on the books of the Company in accordance with GAAP), (v) any
Capital Lease Obligation of such Person, (vi) the maximum fixed redemption or
repurchase price of Disqualified Stock of such Person and, to the extent held by
other Persons, the maximum fixed redemption or repurchase price of Disqualified
Stock of such Person's Restricted Subsidiaries, at the time of determination,
(vii) the notional amount of any Interest Hedging Obligations or Exchange Rate
Obligations of such Person at the time of determination and (viii) any
obligation of the type referred to in clauses (i) through (vii) 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.
"Indenture" means this instrument as originally executed or as it may
from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof,
including, for all purposes of this instrument and any such supplemental
indenture, the provisions of the Trust Indenture Act that are deemed to be a
part of and govern this instrument, and any such supplemental indenture,
respectively.
"Independent Financial Expert" has the meaning set forth in Section
12.4(g) hereof.
"Interest Hedging Obligation" means, with respect to any Person, an
obligation of such Person pursuant to any interest rate swap agreement, interest
rate cap, collar or floor agreement or other similar agreement or arrangement
designed to protect against or manage such Person's or any of its Restricted
Subsidiaries' exposure to fluctuations in interest rates.
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"Interest Payment Date" means the Stated Maturity of an installment of
interest on the Convertible Notes.
"Investment" in any Person means any direct, indirect or contingent
(i) advance or loan to, guarantee of any Indebtedness of, extension of credit or
capital contribution to, such Person, (ii) acquisition of any shares of Capital
Stock, bonds, notes, debentures or other securities of such Person, or (iii)
acquisition, by purchase or otherwise, of all or substantially all of the
business, assets or stock or other evidence of beneficial ownership of such
Person; provided that Investments shall exclude accounts receivable and other
extensions of trade credit on commercially reasonable terms in accordance with
normal trade practices. The amount of an Investment shall be the original cost
of such Investment, plus the cost of all additions thereto and minus the amount
of any portion of such Investment repaid to such Person in cash as a repayment
of principal or a return of capital, as the case may be, but without any other
adjustments for increases or decreases in value, or write-ups, write-downs or
write-offs with respect to such Investment. In determining the amount of any
Investment involving a transfer of any Property or other assets other than cash,
such Property or other assets shall be valued at its Fair Market Value at the
time of such transfer.
"Issue Date" means the date on which the Convertible Notes are first
authenticated and delivered under this Indenture.
"Joint Venture" means a Telecommunications Company of which less than
50 percent of the Voting Stock is held by the Company; provided that the
management and operations of such Person are controlled by a Strategic Investor
or by the Company pursuant to (i) the charter documents of such Person, or (ii)
an agreement among the holders of the Voting Stock of such Person, or (iii) a
management agreement between the Company and such Person.
"junior securities" has the meaning set forth in Section 11.15 hereof.
"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 Convertible Note, the
date on which the principal of such Convertible Note becomes due and payable as
provided therein or in this Indenture, whether on the date specified in such
Convertible Note as the fixed date on which the principal of such Convertible
Note is due and payable, on the Change of Control Payment Date or Asset Sale
Payment Date or upon 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.
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"Moody's" means Moody's Investors Service, Inc., or, if Moody's
Investors Service, Inc. shall cease rating the specified debt securities and
such ratings business with respect thereto shall have been transferred to a
successor Person, such successor Person; provided that if Moody's Investors
Service, Inc. ceases rating the specified debt securities and its rating
business with respect thereto shall not have been transferred to any successor
Person or such successor Person is Standard & Poor's, then "Moody's" shall mean
any other nationally recognized rating agency (other than Standard & Poor's)
that rates the specified debt securities selected by the Trustee.
"NASD" means the National Association of Securities Dealers, Inc.
"Net Cash Proceeds" means, with respect to the sale of any Property or
assets by any Person or any of its Restricted Subsidiaries, Cash Proceeds
received net of (i) all reasonable out-of-pocket expenses of such Person or such
Restricted Subsidiary incurred in connection with such a sale, including,
without limitation, all legal, title and recording tax expenses, commissions and
other fees and expenses incurred (but excluding any finder's fee or broker's fee
payable to any Affiliate of such Person) and all federal, state, foreign and
local taxes arising in connection with such sale that are paid or required to be
accrued as a liability under GAAP by such Person or its Restricted Subsidiaries,
(ii) all payments made or required to be made by such Person or its Restricted
Subsidiaries on any Indebtedness which is secured by such Properties or assets
in accordance with the terms of any Lien upon or with respect to such Properties
or assets or which must, by the terms of such Lien, or in order to obtain a
necessary consent to such transaction or by applicable law, be repaid in
connection with such sale and (iii) all contractually required distributions and
other payments made to minority interest holders (but excluding distributions
and payments to Affiliates of such Person) in Restricted Subsidiaries of such
Person as a result of such transaction; provided that, in the event that any
consideration for a transaction (which would otherwise constitute Net Cash
Proceeds) is required to be held in escrow pending determination of whether a
purchase price adjustment will be made, such consideration (or any portion
thereof) shall become Net Cash Proceeds only at such time as it is released to
such Person or its Restricted Subsidiaries from escrow; provided, further, that
any non-cash consideration received in connection with any transaction, which is
subsequently converted to cash, shall be deemed to be Net Cash Proceeds at such
time, and shall thereafter be applied in accordance with the applicable
provisions of this Indenture.
"1996 Warrant Agreement" means the Warrant Agreement, dated as of
September 30, 1996, between the Company and Harris Trust and Savings Bank, as
warrant agent thereunder.
"1997 Warrant Agreement" means the Warrant Agreement, dated as of
August 15, 1997, between the Company and Harris Trust and Savings Bank, as
warrant agent thereunder.
"nonelecting share" has the meaning set forth in Section 12.11 hereof.
"Northwood Entities" means Northwood Capital Partners LLC and
Northwood Ventures.
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"Obligor" means the Company and the Guarantors, if any; "Obligors
means any of the Obligors, singly.
"Officer" means the Chairman of the Board of Directors, a Vice
Chairman of the Board of Directors, the President, the Chief Executive Officer,
the Chief Operating Officer, a Vice President, the Chief Financial Officer, the
Chief Accounting Officer, the Treasurer, an Assistant Treasurer, the Secretary
or an Assistant Secretary.
"Officers' Certificate" means a certificate signed by (i) the Chairman
of the Board of Directors, a Vice Chairman of the Board of Directors, the
President, the Chief Executive Officer, the Chief Operating Officer or a Vice
President, and (ii) the Chief Financial Officer, the Chief Accounting Officer,
the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary
of the Company or a Restricted Subsidiary and delivered to the Trustee, which
certificate shall comply with the provisions of Sections 1.4, 14.3 and 14.4
hereof.
"Old Convertible Note Asset Sale Offer" means an "Asset Sale Offer" as
defined in and made pursuant to the provisions of the Old Convertible Note
Indenture.
"Old Convertible Note Contingent Warrants" means the Warrants to be
issued to the holders of Old Convertible Notes pursuant to the 1996 Warrant
Agreement and Section 4.15 of the Old Convertible Note Indenture.
"Old Convertible Note Indenture" means the Indenture, dated as of
September 30, 1996, between the Company and Harris Trust and Savings Bank, as
trustee thereunder, relating to the Old Convertible Notes, as amended and
supplemented from time to time.
"Old Convertible Notes" means the Company's 9% Convertible
Subordinated Notes due 2004, issued pursuant to the Old Convertible Note
Indenture.
"Opinion of Counsel" means a written opinion from legal counsel (who
may be counsel to the Company or the Trustee) who is acceptable to the Trustee,
which opinion shall comply with the provisions of Sections 1.4, 14.3 and 14.4
hereof; provided that any Opinion of Counsel delivered pursuant to Section 8.4
hereof shall not be rendered by an employee of the Company or any of its
Subsidiaries.
"Paying Agent" means any Person authorized by the Company to make
payments of principal, premium or interest with respect to the Convertible Notes
on behalf of the Company.
"Pari Passu Indebtedness" means any Indebtedness (secured or
unsecured) of the Company or any Guarantor that ranks pari passu in the right of
payment with the Senior Notes or the Senior Note Guarantees, as applicable.
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"Permitted Holders" means J. Thomas Elliott and Ronald W. Gavillet and
Chase, CIBC, Hancock, BT, the Northwood Entities, Enterprises, and Merrill Lynch
Global Allocation Fund, Inc. and any of their respective Subsidiaries (or a
wholly-owned Subsidiary of the sole stockholder of any of the foregoing
Persons).
"Permitted Merger" has the meaning set forth in Section 5.1 hereof.
"Person" means any individual, corporation, partnership, joint
venture, limited liability company, trust, unincorporated organization or
government or any agency or political subdivision thereof or any other entity or
similar person.
"Preferred Stock" means any Capital Stock of a Person, however
designated, which entitles the holder thereof to a preference with respect to
dividends, distributions or liquidation proceeds of such Person over the holders
of other Capital Stock issued by such Person.
"Private Placement Legend" means the legend in the form set forth in
Section 2.1(d)(i) hereof.
"Property" means, with respect to any Person, any interest of such
Person in any kind of property or asset, whether real, personal or mixed,
tangible or intangible, excluding Capital Stock in any other Person.
"Public Equity Offering" means an underwritten public offering of
Capital Stock (other than Disqualified Stock) of the Company pursuant to an
effective registration statement filed under the Securities Act.
"Purchase Agreement" means the Purchase Agreement relating to the
Units and the Convertible Notes, dated September 23, 1996, among the Company and
the Initial Purchasers.
"Qualified Public Offering" means a Public Equity Offering resulting
in net proceeds to the Company of at least $35,000,000.
"Qualified Stock" of any Person means a class of Capital Stock other
than Disqualified Stock.
"Record Date" means, for the interest payable on any Interest Payment
Date, the date specified in Section 2.11 hereof.
"Record Expiration Date" has the meaning set forth in Section 1.5
hereof.
"Redemption Date" means, when used with respect to any Convertible
Note or part thereof to be redeemed hereunder, the date fixed for redemption of
such Convertible Notes pursuant to the terms of the Convertible Notes and this
Indenture.
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"Redemption Price" means, when used with respect to any Convertible
Note or part thereof to be redeemed hereunder, the price fixed for redemption of
such Convertible Note pursuant to the terms of the Convertible Notes and this
Indenture, plus accrued and unpaid interest thereon, if any, to the Redemption
Date.
"Registrar" has the meaning set forth in Section 2.3 hereof.
"Repurchase Date" has the meaning set forth in Section 4.14(a) hereof.
"Repurchase Price" has the meaning set forth in Section 4.14(a)
hereof.
"Required Filing Date" has the meaning set forth in Section 4.11
hereof.
"Reset Date" has the meaning set forth in Section 12.1 hereof.
"Reset Event" has the meaning set forth in Section 12.1 hereof.
"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, any Subsidiary of the Company that has not been
classified as an Unrestricted Subsidiary.
"Rule 144" means Rule 144 under the Securities Act (including any
successor regulation thereto), as it may be amended from time to time.
"Rule 144A" means Rule 144A under the Securities Act (including any
successor regulation thereto), as it may be amended from time to time.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Security Register" has the meaning set forth in Section 2.3 hereof.
"Senior Indebtedness" means all obligations of the Company under the
Senior Notes, the Senior Note Indentures and the Senior Note Guarantees
contained in the Senior Note Indentures, if any.
"Senior Note Asset Sale Offer" means an "Asset Sale Offer" as defined
in and made pursuant to the provisions of the Senior Note Indentures.
"Senior Note Contingent Warrants" means the Warrants to be issued to
the holders of 14% Senior Notes pursuant to the 1996 Warrant Agreement and
Section 4.20 of the 14% Senior Note Indenture and to the holders of the 14 5/8%
Senior Notes pursuant to the 1997 Warrant Agreement and Section 4.20 of the
14 5/8% Senior Note Indenture.
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"Senior Note Guarantees" means a guarantee of payment of the Senior
Notes in the form of a supplemental indenture to the 14% Senior Note Indenture
and the 14 5/8% Senior Note Indenture to be executed and delivered pursuant to
Section 4.10 of the applicable Indenture.
"Senior Note Indentures" means (i) the 14% Senior Note Indenture and
(ii) the 14 5/8% Senior Note Indenture.
"Senior Notes" means the 14% Senior Notes and the 14 5/8% Senior
Notes.
"Significant Restricted Subsidiary" means a Restricted Subsidiary that
is a "significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X under
the Securities Act and the Exchange Act.
"Special Record Date" means a date fixed by the Trustee pursuant to
Section 2.11 for the payment of Defaulted Interest.
Standard & Poor's" means Standard & Poor's Ratings Group, a division
of McGraw-Hill, Inc., or, if Standard & Poor's Ratings Group shall cease rating
the specified debt securities and such ratings business with respect thereto
shall have been transferred to a successor Person, such successor Person;
provided that if Standard & Poor's Ratings Group ceases rating the specified
debt securities and its ratings business with respect thereto shall not have
been transferred to any successor Person or such successor Person is Moody's,
then "Standard & Poor's" shall mean any other nationally recognized rating
agency (other than Moody's) that rates the specified debt securities selected by
the Trustee.
"Stated Maturity" means, with respect to any security, the date
specified in such security as the fixed date on which the payment of principal
of such security is due and payable, including pursuant to any mandatory
redemption provision (but excluding any provision providing for the repurchase
of such security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred), and, when used with respect
to any installment of interest on such security, the fixed date on which such
installment of interest is due and payable.
"Strategic Investor" means, with respect to any relevant transaction,
a Telecommuni cations 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 the closing of such transaction, has, or whose
parent has, an equity market capitalization, a net asset value or annual
revenues of at least $2,000,000,000 on a consolidated basis. For purposes of
this definition, the term "parent" means any Person of which the relevant
Strategic Investor is a Subsidiary.
"Subsidiary" means, with respect to any Person, (i) any corporation
more than 50 percent of the outstanding shares of Voting Stock of which is
owned, directly or indirectly, by such Person, or by one of more other
Subsidiaries of such Person, or by such Person and one or more other
Subsidiaries of such Person, (ii) any general partnership, joint venture or
similar entity, more
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than 50 percent of the outstanding partnership or similar interests of which are
owned, directly or indirectly, by such Person, or by one or more other
Subsidiaries of such Person, or by such Person and one or more other
Subsidiaries of such Person and (iii) any limited partnership of which such
Person or any Subsidiary of such Person is a general partner.
"Surviving Entity" has the meaning set forth in Section 5.1(a) hereof.
"Telecommunications Assets" means, with respect to any Person, assets
(including, without limitation, rights of way, trademarks and licenses to use
copyrighted material) that are utilized by such Person, directly or indirectly,
for the design, development, construction, installation, integration, operation,
management or provision of telecommunications systems and/or services, including
without limitation, any businesses or services in which the Company is currently
engaged and including any computer systems used in a Telecommunications
Business. Telecommunications Assets shall also include stock, joint venture or
partnership interests in another Person, provided that substantially all of the
assets of such other Person consist of Telecommunications Assets, and provided,
further, that if such stock, joint venture or partnership interests are held by
the Company or a Restricted Subsidiary, such other Person either is, or
immediately following the relevant transaction shall become, a Restricted
Subsidiary of the Company unless such Person is a Joint Venture. The
determination of what constitutes Telecommunication Assets shall be made by the
Board of Directors and evidenced by a Board Resolution delivered to the Trustee.
"Telecommunications Business" means the business of (i) transmitting,
or providing services relating to the transmission of, voice, video or data
through owned or leased transmission facilities, (ii) creating, developing or
marketing communications related network equipment, software and other devices
for use in (i) above or (iii) evaluating, participating or pursuing any other
activity or opportunity that is related to those specified in (i) or (ii) above
and includes, without limitation, any business in which the Company and its
Restricted Subsidiaries are currently engaged on the Issue Date.
"Telecommunications Company" means any Person substantially all of the
assets of which consist of Telecommunications Assets.
"Temporary Convertible Notes" has the meaning set forth in Section 2.9
hereof.
"Termination of Trading" means that the Class A 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 over-the-counter trading market in the United States
and such Capital Stock thereafter becomes neither so listed nor so approved.
"Trading Day" means, with respect to a securities exchange or
automated quotation system, a day on which such exchange or system is open for a
full day of trading.
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"Trigger Event" shall have the meaning set forth in Section 12.4(e)
hereof.
"Trust Indenture Act" means the Trust Indenture Act of 1939 (15 U.S.C.
(S)(S) 77aaa-77bbbb) as in effect on the date of this Indenture except as
required by Section 9.4 hereof, provided that in the event the Trust Indenture
Act of 1939 is amended after such date, "Trust Indenture Act" means, to the
extent required by any such amendment, the Trust Indenture Act of 1939, as so
amended.
"Trust Officer" means any officer or assistant officer of the Trustee
assigned by the Trustee to administer this Indenture.
"Trustee" means the party named as such in this Indenture until a
successor replaces it in accordance with the provisions of this Indenture and,
thereafter, means such successor.
"U.S. Government Obligations" means (i) securities that are (a) direct
obligations of the United States of America for the payment of which the full
faith and credit of the United States of America is pledged or (b) obligations
of a Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the United
States of America, which, in either case, are not callable or redeemable at the
option of the issuer thereof, and (ii) depository receipts issued by a bank (as
defined in Section 3(a)(2) of the Securities Act) as custodian with respect to
any U.S. Government Obligation which is specified in clause (i) above and held
by such bank for the account of the holder of such depository receipt, or with
respect to any specific payment of principal or interest on any U.S. Government
Obligation which is so specified and held, provided that (except as required by
law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received by the
custodian in respect of the U.S. Government Obligation or the specific payment
of principal or interest of the U.S. Government Obligation evidenced by such
depository receipt.
"Unrestricted Subsidiary" means any Subsidiary of the Company that the
Company has classified as an "Unrestricted Subsidiary" and that has not been
reclassified as a Restricted Subsidiary, pursuant to Section 4.10 hereof.
"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.
Section 1.2 Incorporation by Reference of Trust Indenture Act.
Whenever this Indenture refers to a provision of the Trust Indenture
Act, the provision is incorporated by reference in and made a part of this
Indenture. The following Trust Indenture Act terms incorporated by reference in
this Indenture have the following meanings:
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"indenture securities" means the Convertible Notes.
"indenture security holder" means a Holder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Trustee.
"obligor" on the indenture securities means the Company or other
obligor on the Convertible Notes, if any.
All other Trust Indenture Act terms used or incorporated by reference
in this Indenture that are defined by the Trust Indenture Act, defined by Trust
Indenture Act reference to another statute or defined by Commission rule have
the meanings assigned to them therein.
Section 1.3 Rules of Construction. Unless the context otherwise
requires:
(a) the terms defined in this Article have the meanings assigned to
them in this Article, and include the plural as well as the singular;
(b) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with GAAP;
(c) the words "herein," "hereof" and hereunder," and other words of
similar import, refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision;
(d) "or" is not exclusive;
(e) "including" means including without limitation;
(f) words in the singular include the plural, and words in the plural
include the singular;
(g) when used with respect to the Senior Notes, the Old Convertible
Notes or the Convertible Notes, the term "principal amount" shall mean the
principal amount thereof at the Stated Maturity of such principal amount; and
(h) unless otherwise expressly provided herein, the principal amount
of any Preferred Stock shall be the greater of (i) the maximum liquidation value
of such Preferred Stock or (ii) the maximum mandatory redemption or mandatory
repurchase price with respect to such Preferred Stock.
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Section 1.4 Form of Documents Delivered to Trustee. In any case
where several matters are required to be certified by, or covered by an opinion
of, any specified Person, it is not necessary that all such matters be certified
by, or covered by the opinion of, only one such Person or that they be so
certified or covered by only one document, but one such Person may certify or
give an opinion with respect to some matters and one or more other such Persons
as to other matters, and any such Person may certify or give an opinion as to
such matters in one or several documents.
Any certificate or opinion of an officer of the Company or a Guarantor
may be based, insofar as it relates to legal matters, upon a certificate or
opinion of, or representations by, counsel, unless such officer knows, or in the
exercise of reasonable care should know, that the certificate or opinion or
representations with respect to the matters, upon which his certificate or
opinion is based are erroneous. Any such certificate or opinion of counsel may
be based, insofar as it relates to factual matters, upon a certificate or
opinion of, or representations by, an officer or officers of the Company or a
Guarantor stating that the information with respect to such factual matters is
in the possession of the Company or such Guarantor, unless such counsel knows,
or in the exercise of reasonable care should know, that the certificate or
opinion or representations with respect to such matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
Section 1.5 Acts of Holders. Any request, demand, authorization,
direction, notice, consent, waiver or other action provided by this Indenture to
be given or taken by Holders may be embodied in and evidenced by one or more
instruments, of substantially similar tenor signed by such Holders in person or
by an agent duly appointed in writing; and, except as herein otherwise expressly
provided, such action shall become effective when such instrument or instruments
are received by the Trustee and, where it is hereby expressly required, to the
Company and the Guarantors, if any. Such instrument or instruments (and the
action embodied therein and evidenced thereby) are herein sometimes referred to
as the "Act" of the Holders signing such instrument or instruments. Proof of
execution of any such instrument or of a writing appointing any such agent shall
be sufficient for any purpose of this Indenture and (subject to Section 7.1)
conclusive in favor of the Trustee and the Company and the Guarantors, if any,
if made in the manner provided in this Section.
The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by an acknowledgment of notary public or other officer authorized
by law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Where such
execution is by a signer acting in a capacity other than such signer's
individual capacity, such certificate or affidavit shall also constitute
sufficient proof of the signer's authority. The fact and date of the execution
of any such instrument or writing, or the authority of the person executing the
same, may also be proved in any other manner which the Trustee deems sufficient.
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The ownership of Convertible Notes shall be proved by the Security
Register.
Any request, demand, authorization, direction, notice, consent, waiver
or other Act of the Holder shall bind every future Holder of the same
Convertible Note and the Holder of every Convertible Note issued upon the
registration of transfer thereof or in exchange therefor or in lieu thereof in
respect of anything done, omitted or suffered to be done by the Trustee or the
Company or the Guarantors, if any, in reliance thereon, whether or not notation
of such action is made upon such Convertible Note.
The Company may set any day as a record date for the purpose of
determining the Holders of outstanding Convertible Notes entitled to give or
take any request, demand, authorization, direction, notice, consent, waiver or
other action provided or permitted by this Indenture to be given or taken by
Holders of Convertible Notes, provided that the Company may not set a record
date for, and the provisions of this paragraph shall not apply with respect to,
the giving or making of any notice, declaration, request or direction referred
to in the next paragraph. If any record date is set pursuant to this paragraph,
the Holders of outstanding Convertible Notes on such record date, and no other
Holders, shall be entitled to take the relevant actions whether or not such
Holders remain Holders after such record date; provided that no such action
shall be effective hereunder unless taken on or prior to the applicable Record
Expiration Date by Holders of the requisite principal amount of outstanding
Convertible Notes on such record date; and provided, further, that for the
purpose of determining whether Holders of the requisite principal amount of such
Convertible Notes have taken such action, no Convertible Note shall be deemed to
have been outstanding on such record date unless it is also outstanding on the
date such action is to become effective. Nothing in this paragraph shall
prevent the Company from setting a new record date for any action for which a
record date has previously been set pursuant to this paragraph (whereupon the
record date previously set shall automatically and with no action by any Person
be cancelled and of no effect), nor shall anything in this paragraph be
construed to render ineffective any action taken by Holders of the requisite
principal among of outstanding Convertible Notes on the date such action is
taken. Promptly after any record date is set pursuant to this paragraph, the
Company at its own expense, shall cause notice of such record date, the proposed
action by Holders and the applicable Record Expiration Date to be given to the
Trustee in writing and to each Holder of Convertible Notes in the manner set
forth in Section 14.2 hereof.
The Trustee may set any day as a record date for the purpose of
determining the Holders of outstanding Convertible Notes entitled to join in the
giving or making of (i) any notice of Default under Section 6.1(d) hereof, (ii)
any declaration of acceleration referred to in Section 6.2 hereof, (iii) any
request to institute proceedings referred to in Section 6.6 hereof or (iv) any
direction referred to in Section 6.5 hereof. If any record date is set pursuant
to this paragraph, the Holders of outstanding Convertible Notes on such record
date, and no other Holders, shall be entitled to join in such notice,
declaration, request or direction, whether or not such Holders remain Holders
after such record date; provided that no such action shall be effective
hereunder unless taken on or prior to the applicable Record Expiration Date by
Holders of the requisite principal amount of outstanding Convertible Notes on
such record date; and provided, further, that for the purpose of determining
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whether Holders of the requisite principal amount of such Convertible Notes have
taken such action, no Convertible Note shall be deemed to have been outstanding
on such record date unless it is also outstanding on the date such action is to
become effective. Nothing in this paragraph shall be construed to prevent the
Trustee from setting a new record date for any action (whereupon the record date
previously set shall automatically and without any action by any Person be
cancelled and of no effect), nor shall anything in this paragraph be construed
to render ineffective any action taken by Holders of the requisite principal
amount of outstanding Convertible Notes on the date such action is taken.
Promptly after any record date is set pursuant to this paragraph, the Trustee,
at the Company's expense, shall cause notice of such record date, the matter(s)
to be submitted for potential action by Holders and the applicable Record
Expiration Date to be given to the Company in writing and to each Holder of
Convertible Notes in the manner set forth in Section 14.2 hereof.
With respect to any record date set pursuant to this Section 1.5, the
party hereto that sets such record date may designate any day as the "Record
Expiration Date" and from time to time may change the Record Expiration Date to
any earlier or later day, provided that no such change shall be effective unless
notice of the proposed new Record Expiration Date is given to the other party
hereto in writing, and to each Holder of Convertible Notes in the manner set
forth in Section 14.2 hereof, on or before the existing Record Expiration Date.
If a Record Expiration Date is not designated with respect to any record date
set pursuant to this Section 1.5, the party hereto that set such record date
shall be deemed to have initially designated the 180th day after such record
date as the Record Expiration Date with respect thereto, subject to its right to
change the Record Expiration Date as provided in this paragraph.
Notwithstanding the foregoing, no Record Expiration Date shall be later than the
180th day after the applicable record date.
Without limiting the foregoing, a Holder entitled hereunder to take
any action hereunder with regard to any particular Convertible Note may do so
with regard to all or any part of the principal amount of such Convertible Note
or by one or more duly appointed agents each of which may do so pursuant to such
appointment with regard to all or any part of such principal amount.
ARTICLE II
THE CONVERTIBLE NOTES
Section 2.1 Form and Dating. (a) The Convertible Notes and the
certificate of authentication of the Trustee thereon shall be substantially in
the form of Exhibit A hereto, which is hereby incorporated in and expressly made
a part of this Indenture.
(b) The Convertible Notes may have such letters, numbers or other
marks of identification and such legends and endorsements, stamped, printed,
lithographed or engraved thereto, (i) as the Company may deem appropriate and as
are not inconsistent with the provisions of this Indenture, (ii) such as may be
required to comply with this Indenture, any law or any rule of any securities
exchange on which the Convertible Notes may be listed and (iii) such as may be
necessary
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to conform to customary usage. Each Note shall be dated the date of its
authentication by the Convertible Trustee.
(c) The Convertible Notes shall be issued initially in the form of one
or more permanent, global notes in definitive, fully registered form, without
coupons (each a "Global Convertible Note") or one or more permanent,
certificated notes in definitive, fully-registered form, without coupons (each a
"Certificated Convertible Note"). Upon issuance, each Global Convertible Note
shall be duly executed by the Company and authenticated by the Trustee as
hereinafter provided and deposited with the Trustee as custodian for the
Depositary. Upon issuance, any such Certificated Convertible Note shall be duly
executed by the Company and authenticated by the Trustee as hereinafter
provided.
(d) The following legends shall appear on each Global Convertible
Note and each Certificated Convertible Note as indicated below:
(i) Except as provided in Section 2.6(a)(iii) hereof, each
Global Convertible Note and Certificated Convertible Note shall bear the
following legend on the face thereof:
THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN
A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED
STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE
SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED
IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM.
EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE
SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF
THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE
SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A)
SUCH SECURITY MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED,
ONLY (1)(a) TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED
INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION
MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE
THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT, (d) TO AN INSTITUTIONAL
ACCREDITED INVESTOR WITHIN THE MEANING OF RULE 501 (A)(1), (2), (3) OR (7)
UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN
ACCOUNT, OR FOR THE ACCOUNT OF ONE OR MORE OTHER
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INSTITUTIONAL ACCREDITED INVESTORS, IN EACH CASE, HAVING A MINIMUM PURCHASE
PRICE OF AT LEAST $100,000, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO
OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF
THE SECURITIES ACT, OR (e) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED IN THE CASE OF
(d) UPON DELIVERY OF A TRANS FEREE LETTER OF REPRESENTATION AND IN THE CASE
OF (b), (c), (d) OR (e), UPON AN OPINION OF COUNSEL IF THE COMPANY OR
TRUSTEE SO REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE
SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE
JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS
REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY
OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE
(ii) Each Global Convertible Note shall bear the
following legend on the face thereof:
UNLESS THIS CONVERTIBLE NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY TO USN COMMUNICATIONS, INC. OR ITS AGENT
FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT AND ANY CONVERTIBLE NOTE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR TO SUCH OTHER ENTITY AS
IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY OR SUCH OTHER REPRESENTATIVE OF THE DEPOSITORY OR SUCH OTHER NAME
AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER
ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY
TRUST COMPANY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL
CONVERTIBLE NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART,
TO NOMINEES OF THE DEPOSITORY TRUST COMPANY OR TO A SUCCESSOR THEREOF OR
SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS CONVERTIBLE
GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE
RESTRICTIONS SET FORTH IN SECTION 2.6 OF THE INDENTURE, DATED AS OF JANUARY
13, 1998, BETWEEN USN COMMUNICATIONS, INC. AND THE TRUSTEE NAMED THEREIN,
PURSUANT TO WHICH THIS CONVERTIBLE NOTE WAS ISSUED.
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(e) Definitive Convertible Notes shall be typed, printed,
lithographed or engraved or produced by any combination of such methods or
produced in any other manner permitted by the rules of any securities exchange
on which such Convertible Notes may be listed, all as determined by the Officers
of the Company executing such Convertible Notes, as evidenced by their execution
of such Convertible Notes.
Section 2.2 Execution and Authentication. The aggregate principal
amount at Stated Maturity of Convertible Notes outstanding at any time shall not
exceed $13,022,600 except as provided in Section 2.7 hereof. The Convertible
Notes shall be executed on behalf of the Company by its Chief Executive Officer,
its Chief Operating Officer, its President or any Vice President, under its
corporate seal reproduced or imprinted on the Convertible Notes by facsimile or
otherwise, and shall be attested by the Company's Secretary or one of its
Assistant Secretaries, in each case by manual or facsimile signature.
In case any Officer of the Company whose signature shall have been
placed upon any of the Convertible Notes shall cease to be such Officer of the
Company before authentication of such Convertible Notes by the Trustee and the
issuance and delivery thereof, such Convertible Notes may, nevertheless, be
authenticated by the Trustee and issued and delivered with the same force and
effect as though such Person had not ceased to be such Officer of the Company.
Notwithstanding any other provision hereof, the Trustee shall
authenticate and deliver Convertible Notes only upon receipt by the Trustee of
an Officers' Certificate and Opinion of Counsel complying with Section 14.4
hereof with respect to satisfaction of all conditions precedent contained in
this Indenture to authentication and delivery of such Convertible Notes.
Upon compliance by the Company with the provisions of the previous
paragraph, the Trustee shall, upon receipt of a Company Order requesting such
action, authenticate Convertible Notes for original issuance in an aggregate
principal amount at Stated Maturity not to exceed $13,022,600 in the form of one
or more Global Convertible Notes or Certificated Convertible Notes. Such Company
Order shall specify the amount of Convertible Notes to be authenticated, whether
such Convertible Notes will be Global Convertible Notes or Certificated
Convertible Notes, and the date on which the Convertible Notes are to be
authenticated and shall further provide instructions concerning registration,
amounts for each Holder and delivery.
Upon the occurrence of any event specified in Section 2.6(b) hereof
and compliance by the Company with the provisions of the paragraph preceding the
immediately preceding paragraph, the Company shall execute and the Trustee shall
authenticate and deliver to each beneficial owner identified by the Depositary,
in exchange for such beneficial owner's interest in a Global Convertible Note,
Certificated Convertible Notes representing Convertible Notes theretofore
represented by the Global Convertible Note.
A Convertible Note shall not be valid or entitled to any benefit under
this Indenture or obligatory for any purpose unless executed by the Company and
authenticated by the manual
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signature of the Trustee as provided herein. The signature of an authorized
officer of the Trustee shall be conclusive evidence, and the only evidence, that
such Convertible Note has been authenticated and delivered under this Indenture.
The Trustee may appoint an authenticating agent reasonably acceptable
to the Company to authenticate the Convertible Notes. Unless limited by the
status of such appointment, an authenticating agent may authenticate Convertible
Notes whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent. Any
authenticating agent of the Trustee shall have the same rights hereunder as any
Registrar or Paying Agent.
Section 2.3 Registrar and Paying Agent. The Company shall maintain,
pursuant to Section 4.2 hereof, an office or agency where the Convertible Notes
may be presented for registration of transfer or for exchange. The Company
shall cause to be kept at such office a register (the register maintained in
such office being herein sometimes referred to as the "Security Register") in
which, subject to such reasonable regulations as it may prescribe, the Company
shall provide for the registration of Convertible Notes and of transfers of
Convertible Notes entitled to be registered or transferred as provided herein.
The Trustee, at its Corporate Trust Office, is initially appointed "Registrar"
for the purpose of registering Convertible Notes and transfers of Convertible
Notes as herein provided and as "Paying Agent" for the payment of principal of
(and premium, if any), and interest on, the Convertible Notes. The Company may,
upon written notice to the Trustee, change the designation of the Trustee as
Registrar or Paying Agent and appoint another Person to act as Registrar or
Paying Agent for purposes of this Indenture, except that for the purposes of
Article III, Article XIII and Sections 4.7, 4.8 and 4.14, none of the Company,
any Guarantor, any Restricted Subsidiary and any Affiliate shall act as Paying
Agent. If any Person other than the Trustee acts as Registrar, the Trustee
shall have the right at any time, upon reasonable notice, to inspect or examine
the Security Register and to make such inquiries of the Registrar as the Trustee
shall in its discretion deem necessary or desirable in performing its duties
hereunder.
The Company shall enter into an appropriate agency agreement with any
Person designated by the Company as Registrar or Paying Agent that is not a
party to this Indenture, which agreement shall incorporate the provisions of the
Trust Indenture Act and shall implement the provisions of this Indenture that
relate to such Registrar or Paying Agent. Prior to the designation of any such
Person, the Company shall, by written notice (which notice shall include the
name and address of such Person), inform the Trustee of such designation. If the
Company fails to maintain a Registrar or Paying Agent, the Trustee shall act as
such.
Upon surrender for registration of transfer of any Convertible Note at
an office or agency of the Company designated for such purpose, the Company
shall execute, and the Trustee shall authenticate and deliver, in the name of
the designated transferee or transferees, one or more new Convertible Notes of
any authorized denomination or denominations, of like tenor and aggregate
principal amount at Stated Maturity, all as requested by the transferor.
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Every Convertible Note presented or surrendered for registration of
transfer or for exchange shall (if so required by the Company, the Trustee or
the Registrar) be duly endorsed, or be accompanied by a duly executed instrument
of transfer in form satisfactory to the Company, the Trustee and the Registrar,
by the Holder thereof or such Holder's attorney duly authorized in writing.
Section 2.4 Paying Agent to Hold Money in Trust. On or prior to each
due date of the principal, premium, or any payment of interest with respect to
any Convertible Note, the Company shall deposit with the Paying Agent a sum
sufficient to pay such principal, premium or interest when so becoming due.
The Company shall require each Paying Agent (other than the Trustee)
to agree in writing that such Paying Agent shall hold in trust for the benefit
of Holders or the Trustee all money held by such Paying Agent for the payment of
principal, premium, and interest with respect to the Convertible Notes, shall
notify the Trustee of any default by the Company in making any such payment and
at any time during the continuance of any such default, upon the written request
of the Trustee, shall forthwith pay to the Trustee sums held in trust by such
Paying Agent.
The Company at any time may require a Paying Agent to pay all money
held by it to the Trustee and to account for any funds disbursed by such Paying
Agent. Upon complying with this Section 2.4, the Paying Agent shall have no
further liability for the money delivered to the Trustee.
Section 2.5 Global Convertible Notes. (a) So long as a Global
Convertible Note is registered in the name of the Depositary or its nominee,
members of, or participants in, the Depositary ("Agent Members") shall have no
rights under this Indenture with respect to the Global Convertible Note held on
their behalf by the Depositary or the Trustee as its custodian, and the
Depositary may be treated by the Company, the Trustee and any agent of the
Company or the Trustee as the absolute owner of such Global Convertible Note for
all purposes. Notwithstanding the foregoing, nothing herein shall (i) prevent
the Company, the Trustee or any agent of the Company or the Trustee, from giving
effect to any written certification, proxy or other authorization furnished by
the Depositary or (ii) impair, as between the Depositary and its Agent Members,
the operation of customary practices governing the exercise of the rights of a
Holder of Convertible Notes.
(b) The Holder of a Global Convertible Note may grant proxies
and otherwise authorize any Person, including Agent Members and Persons that may
hold interests in such Global Convertible Note through Agent Members, to take
any action which a Holder of Convertible Notes is entitled to take under this
Indenture or the Convertible Notes.
(c) Whenever, as a result of an optional redemption of
Convertible Notes by the Company, a Change of Control Offer, an Asset Sale
Offer, a repurchase upon a Termination of Trading pursuant to Section 4.14
hereof, or an exchange pursuant to the second sentence of Section 2.6(b) hereof,
a Global Convertible Note is redeemed, repurchased or exchanged in part, such
Global Convertible Note shall be surrendered by the Holder thereof to the
Trustee who shall cause an adjustment to be made to Schedule A thereof so that
the principal amount of such Global
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Convertible Note will be equal to the portion of such Global Convertible Note
not redeemed, repurchased or exchanged and shall thereafter return such Global
Convertible Note to such Holder, provided that each such Global Convertible Note
shall be in a principal amount at Stated Maturity of $1,000 or an integral
multiple thereof.
Section 2.6 Transfer and Exchange. (a) With respect to the
Convertible Notes:
(i) By its acceptance of any Convertible Note represented
by a certificate bearing the Private Placement Legend, each Holder of, and
beneficial owner of an interest in, such Convertible Note acknowledges the
restrictions on transfer of such Convertible Note set forth in the Private
Placement Legend hereto and agrees that it will transfer such Convertible
Note only in accordance with the Private Placement Legend.
(ii) In connection with any transfer of a Convertible Note
bearing the Private Placement Legend, each Holder agrees to deliver to the
Company, such satisfactory evidence, which may include an opinion of
independent counsel licensed to practice law in the State of New York, as
reasonably may be requested by the Company to confirm that such transfer is
being made in accordance with the limitations set forth in the Private
Placement Legend. In the event the Company determines that any such
transfer is not in accordance with the Private Placement Legend, the
Company shall so inform the Registrar who shall not register such transfer;
provided that the Registrar shall not be required to determine (but may
rely on a determination made by the Company with respect to) the
sufficiency of any such evidence.
(iii) Upon the registration of transfer, exchange or
replacement of a Convertible Note not bearing the Private Placement
Legend, the Trustee shall deliver a Convertible Note or Convertible Notes
that do not bear the Private Placement Legend. Upon the transfer, exchange
or replacement of a Convertible Note bearing the Private Placement Legend,
the Trustee shall deliver a Convertible Note or Convertible Notes bearing
the Private Placement Legend, unless such legend may be removed from such
Convertible Note as provided in the next sentence. The Private Placement
Legend may be removed from a Convertible Note if there is delivered to the
Company such satisfactory evidence, which may include an opinion of
independent counsel licensed to practice law in the State of New York, as
reasonably may be requested by the Company to confirm that neither such
legend nor the restrictions on transfer set forth therein are required to
ensure that transfers of such Convertible Note will not violate the
registration and prospectus delivery requirements of the Securities Act;
provided that the Trustee shall not be required to determine (but may rely
on a determination made by the Company with respect to) the sufficiency of
any such evidence. Upon provision of such evidence, the Trustee shall
authenticate and deliver in exchange for such Convertible Note, a
Convertible
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Note or Convertible Notes (representing the same aggregate principal amount
at Stated Maturity of the Convertible Note being exchanged) without such
legend. If the Private Placement Legend has been removed from a Convertible
Note, as provided above, no other Convertible Note issued in exchange for
all or any part of such Convertible Note shall bear such legend unless the
Company has reasonable cause to believe that such other Convertible Note
represents a "restricted security" within the meaning of Rule 144 and
instructs the Trustee in writing to cause a legend to appear thereon.
(iv) The Company shall deliver to the Trustee, and the
Trustee shall retain for two years, copies of all documents received
pursuant to this Section 2.6(a). The Company shall have the right to
inspect and make copies of all such documents at any reasonable time upon
the giving of reasonable written notice to the Trustee.
(b) Any Global Convertible Note shall be exchanged by the
Company for one or more Certificated Convertible Notes if (a) the Depositary (i)
has notified the Company that it is unwilling or unable to continue as, or
ceases to be, a clearing agency registered under Section 17A of the Exchange Act
and (ii) a successor to the Depositary registered as a clearing agency under
Section 17A of the Exchange Act is not able to be appointed by the Company
within 90 days or (b) the Company, in its sole discretion, notifies the Trustee
in writing that it elects to cause the issuance of Certificated Convertible
Notes. If an Event of Default occurs and is continuing, the Company shall, at
the request of the Holder thereof, exchange all or part of a Global Convertible
Note for one or more Certificated Convertible Notes; provided that such Global
Convertible Note, after such exchange, shall be $1,000 or an integral multiple
thereof. Whenever a Global Convertible Note is exchanged as a whole for one or
more Certificated Convertible Notes, it shall be surrendered by the Holder
thereof to the Trustee for cancellation. Whenever a Global Convertible Note is
exchanged in part for one or more Certificated Convertible Notes, it shall be
surrendered by the Holder thereof to the Trustee and the Trustee shall make the
appropriate notations thereon pursuant to Section 2.5(c) hereof. All
Certificated Convertible Notes issued in exchange for a Global Convertible Note
or any portion thereof shall be registered in such names, and delivered, as the
Depositary shall instruct the Trustee. Any Certificated Convertible Notes issued
pursuant to this Section 2.6(b) shall include the Private Placement Legend,
except as set forth in Section 2.6(a)(iii) hereof.
(c) A Holder may transfer a Convertible Note only upon the
surrender of such Convertible Note for registration of transfer. No such
transfer shall be effected until, and the transferee shall succeed to the rights
of a Holder only upon, final acceptance and registration of the transfer in the
Security Register by the Registrar. When Convertible Notes are presented to the
Registrar with a request to register the transfer of, or to exchange, such
Convertible Notes, the Registrar shall register the transfer or make such
exchange as requested if its requirements for such transactions and any
applicable requirements hereunder are satisfied. To permit registrations of
transfers and exchanges, the Company shall execute and the Trustee shall
authenticate Certificated Convertible Notes at the Registrar's request.
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(d) The Company shall not be required to make and the Registrar
need not register transfers or exchanges of Certificated Convertible Notes
selected for redemption (except, in the case of Certificated Convertible Notes
to be redeemed in part, the portion thereof not to be redeemed) for a period of
15 days before a selection of Certificated Convertible Notes to be redeemed.
(e) No service charge shall be made for any registration of
transfer or exchange of Convertible Notes, but the Company may require payment
of a sum sufficient to cover any tax or other governmental charge that may be
imposed in connection with any registration of transfer of Convertible Notes
(other than in respect of exchanges and transfers pursuant to Sections 2.9, 3.6,
4.7, 4.8, 4.14 and 9.6 hereof).
(f) All Convertible Notes issued upon any registration of
transfer or exchange pursuant to the terms of this Indenture will evidence the
same debt and will be entitled to the same benefits under this Indenture as the
Convertible Notes surrendered for such registration of transfer or exchange.
(g) Prior to the effectiveness under the Securities Act of a
registration statement with respect to the Convertible Notes, or at any time
during the suspension or following the termination thereof, Holders of
Convertible Notes (or holders of interests therein) and prospective purchasers
designated by such Holders of Convertible Notes (or such holders of interests
therein) shall have the right to obtain from the Company upon request by such
Holders (or such holders of interests) or prospective purchasers, during any
period in which the Company is not subject to Section 13 or Section 15(d) of the
Exchange Act, or is exempt from reporting pursuant to 12g3-2(b) under the
Exchange Act, the information required by paragraph (d)(4)(i) of Rule 144A in
connection with any transfer or proposed transfer of such Convertible Notes or
interests.
(h) Any Holder of a Global Convertible Note shall, by acceptance
of such Global Convertible Note, agree that transfers of beneficial interests in
such Global Convertible Note may be effected only through a book entry system
maintained by the Holder of such Global Convertible Note (or its agent), and
that ownership of a beneficial interest in the Convertible Notes represented
thereby shall be required to be reflected in book entry form. Transfers of a
Global Convertible Note shall be limited to transfers in whole and not in part,
to the Depositary, its successors, and their respective nominees. Interests of
beneficial owners in Global Convertible Note may be transferred in accordance
with the rules and procedures of the Depositary (or its successors).
Section 2.7 Replacement Convertible Notes. If any mutilated
Convertible Note is surrendered to the Trustee, the Company shall execute and
upon its written request the Trustee shall authenticate and deliver, in exchange
for any such mutilated Convertible Note, a new Convertible Note containing
identical provisions and of like principal amount, bearing a number not
contemporaneously outstanding.
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If there shall be delivered to the Company and the Trustee (i)
evidence to their satisfaction of the destruction, loss or theft of any
Convertible Note and (ii) such security or indemnity as may be required by them
to save either of them and any agent of each of them harmless, then, in the
absence of notice to the Company or the Trustee that such Convertible Note has
been acquired by a bona fide purchaser, the Company shall execute and upon its
request the Trustee shall authenticate and deliver, in lieu of any such
destroyed, lost or stolen Convertible Note, a new Convertible Note containing
identical provisions and of like principal amount, bearing a number not
contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Convertible Note
has become or is about to become due and payable, the Company in its discretion
may, instead of issuing a new Convertible Note, pay such Convertible Note.
Upon the issuance of any new Convertible Note under this Section 2.7,
the Company may require the payment by the Holder of a sum sufficient to cover
any tax or other governmental charge that may be imposed in relation thereto and
any other expenses (including the fees and expenses of the Trustee) connected
therewith.
Every new Convertible Note issued pursuant to this Section 2.7 in lieu
of any destroyed, lost or stolen Convertible Note shall constitute an original
additional contractual obligation of the Company, whether or not the destroyed,
lost or stolen Convertible Note shall be at any time enforceable by anyone, and
shall be entitled to all the benefits of this Indenture equally and
proportionately with any and all other Convertible Notes duly issued hereunder.
The provisions of this Section 2.7 are exclusive and shall preclude
(to the extent lawful) all other rights and remedies with respect to the
replacement or payment of mutilated, destroyed lost or stolen Convertible Notes.
Section 2.8 Outstanding Convertible Notes. Convertible Notes
outstanding at any time are all Convertible Notes authenticated by the Trustee
except for those canceled by it, those delivered to it for cancellation and
those described in this Section 2.8 as not outstanding. A Convertible Note does
not cease to be outstanding because the Company or an Affiliate of the Company
holds such Convertible Note.
If a Convertible Note is replaced pursuant to Section 2.7 hereof, it
ceases to be outstanding unless the Trustee and the Company receive proof
satisfactory to them that such replaced Convertible Note is held by a bona fide
purchaser.
If the Paying Agent (other than the Company, a Guarantor or an
Affiliate of the Company or Guarantor) accrues interest or segregates and holds
in trust, in accordance with this Indenture, on a Redemption Date or Maturity
date money sufficient to pay all principal, premium, if any, and interest
payable on that date with respect to the Convertible Notes (or portions thereof)
to be redeemed or maturing, as the case may be, then on and after that date such
Convertible Notes (or
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such portions thereof) shall cease to be outstanding and interest on them shall
cease to accrete in value or accrue interest, as the case may be.
In determining whether the Holders of the required principal amount of
Convertible Notes have concurred in any direction, waiver or consent or any
amendment, modification or other change to this Indenture, Convertible Notes
held or beneficially owned by the Company or a Restricted Subsidiary of the
Company or by an Affiliate of the Company or a Restricted Subsidiary of the
Company or by agents of any of the foregoing shall be disregarded, except that
for the purposes of determining whether the Trustee shall be protected in
relying on any such direction, waiver or consent or any amendment, modification
or other change to this Indenture, only Convertible Notes which a Trust Officer
has actual knowledge to be so owned shall be so disregarded. Convertible Notes
so owned which have been pledged in good faith shall not be disregarded if the
pledgee establishes to the satisfaction of the Trustee such pledgee's right so
to act with respect to the Convertible Notes and that the pledgee is not the
Company or an Affiliate of the Company or any of their agents.
Section 2.9 Temporary Convertible Notes. Pending the preparation of
definitive Convertible Notes, the Company may execute, and the Trustee shall
authenticate, temporary notes ("Temporary Convertible Notes") which are printed,
lithographed, or otherwise produced, substantially of the tenor of the
definitive Convertible Notes in lieu of which they are issued and with such
appropriate insertions, omissions, substitutions and other variations.
If Temporary Convertible Notes are issued, the Company shall cause
definitive Convertible Notes to be prepared without unreasonable delay. After
the preparation of definitive Convertible Notes, the Temporary Convertible Notes
shall be exchangeable for definitive Convertible Notes upon surrender of the
Temporary Convertible Notes to the Trustee, without charge to the Holder. Until
so exchanged, Temporary Convertible Notes will evidence the same debt and will
be entitled to the same benefits under this Indenture as the definitive
Convertible Notes in lieu of which they have been issued.
Section 2.10 Cancellation. The Company at any time may deliver
Convertible Notes to the Trustee for cancellation. The Registrar and the Paying
Agent shall forward to the Trustee any Convertible Notes surrendered to them for
registration of transfer, exchange, purchase, payment or conversion. The Trustee
shall cancel all Convertible Notes surrendered for registration of transfer,
exchange, purchase, payment, cancellation or conversion and shall destroy such
canceled Convertible Notes unless the Company shall by Company Order otherwise
direct. The Company may not issue new Convertible Notes to replace Convertible
Notes it has redeemed or paid or that have been delivered to the Trustee for
cancellation.
Section 2.11 Payment of Interest; Interest Rights Preserved.
Interest on any Convertible Note which is payable, and is punctually paid or
duly provided for, on any Interest Payment Date, which shall be January 13 or
July 12, commencing July 12, 2002 shall be paid to the Person in whose name such
Convertible Note is registered at the close of business on the Record
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Date for such interest payment, which shall be the December 31 or June 30
(whether or not a Business Day) immediately preceding such Interest Payment
Date.
Any interest on any Convertible Note which is payable, but is not
punctually paid or duly provided for, on any Interest Payment Date (herein
called "Defaulted Interest") shall forthwith cease to be payable to the
registered Holder on the relevant Record Date, and, except as hereafter
provided, such Defaulted Interest, and any interest payable on such Defaulted
Interest, may be paid by the Company, at its election, as provided in clause (a)
or (b) below:
(a) The Company may elect to make payment of any Defaulted Interest,
and any interest payable on such Defaulted Interest, to the Persons in whose
names the Convertible Notes are registered at the close of business on a Special
Record Date for the payment of such Defaulted Interest, which shall be fixed in
the following manner. The Company shall notify the Trustee in writing of the
amount of Defaulted Interest proposed to be paid on the Convertible Notes and
the date of the proposed payment, and at the same time the Company shall deposit
with the Trustee an amount of money equal to the aggregate amount proposed to be
paid in respect of such Defaulted Interest or shall make arrangements
satisfactory to the Trustee for such deposit prior to the date of the proposed
payment, such money when deposited to be held in trust for the benefit of the
Persons entitled to such Defaulted Interest as provided in this Clause.
Thereupon the Trustee shall fix a Special Record Date for the payment of such
Defaulted Interest which shall be not more than 15 days and not less than 10
days prior to the date of the proposed payment and not less than 10 days after
the receipt by the Trustee of the notice of the proposed payment. The Trustee
shall promptly notify the Company of such Special Record Date and, in the name
and at the expense of the Company, shall cause notice of the proposed payment of
such Defaulted Interest and the Special Record Date therefor to be sent, first
class mail, postage prepaid, to each Holder at such Holder's address as it
appears in the Security Register, not less than 10 days prior to such Special
Record Date. Notice of the proposed payment of such Defaulted Interest and the
Special Record Date therefor having been mailed as aforesaid, such Defaulted
Interest shall be paid to the Persons in whose names the Convertible Notes are
registered at the close of business on such Special Record Date and shall no
longer be payable pursuant to the following clause (b).
(b) The Company may make payment of any Defaulted Interest, and any
interest payable on such Defaulted Interest, on the Convertible Notes in any
other lawful manner not inconsistent with the requirements of any securities
exchange on which the Convertible Notes may be listed, and upon such notice as
may be required by such exchange, if, after notice given by the Company to the
Trustee of the proposed payment pursuant to this clause, such manner of payment
shall be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section 2.11, each
Convertible Note delivered under this Indenture upon registration of transfer
of, or in exchange for, or in lieu of, any other Convertible Note, shall carry
the rights to interest accrued and unpaid, and to accrue, which were carried by
such other Convertible Note.
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Section 2.12 Authorized Denominations. The Convertible Notes shall be
issuable in denominations of $1,000 and any integral multiple thereof.
Section 2.13 Computation of Interest, etc. The Convertible Notes that
will be issued on the Issue Date will be issued at a discounted aggregate
principal amount of $10,000,000 and will accrete in value from the date of
original issuance thereof at a rate of 9% per annum, compounded semi-annually in
the manner specified in the definition of "Accreted Value" contained in Section
1.1 hereof, to an aggregate principal amount of $13,022,600 by January 13, 2001.
Thereafter, interest will accrue at a rate of 9% per annum. Interest on the
Convertible Notes shall be computed on the basis of a 360-day year of twelve 30-
day months. Notwithstanding any other term of this Indenture, the Company shall
not be obliged to pay any interest or other amounts under or in connection with
this Indenture in excess of the amount or rate permitted under or consistent
with applicable law.
Section 2.14 Persons Deemed Owners. Prior to the due presentation for
registration of transfer of any Convertible Note, the Company, the Trustee, the
Paying Agent, the Registrar or any co-Registrar may deem and treat the person in
whose name a Convertible Note is registered as the absolute owner of such
Convertible Note for the purpose of receiving payment of principal of, premium,
if any, and interest on such Convertible Note and for all other purposes
whatsoever, whether or not such Convertible Note is overdue, and none of the
Company, the Trustee, the Paying Agent, the Registrar or any co-Registrar shall
be affected by notice to the contrary.
Section 2.15 CUSIP Numbers. The Company, in issuing the Convertible
Notes, may use a "CUSIP" number for each series of Convertible Notes and, if so,
the Trustee shall use the relevant CUSIP number in any notices to Holders as a
convenience to such Holders; provided that any such notice may state that no
representation is made as to the correctness or accuracy of the CUSIP number
printed in the notice or on the Convertible Notes and that reliance may be
placed only on the other identification numbers printed on the Convertible
Notes. The Company shall promptly notify the Trustee of any change in any CUSIP
number used.
ARTICLE III
REDEMPTION
Section 3.1 Notice to Trustee. If the Company elects to redeem
Convertible Notes pursuant to the optional redemption provisions of Section 3.7
and the Convertible Notes, it shall furnish an Officers' Certificate to the
Trustee setting forth the Redemption Date, the principal amount of Convertible
Notes to be redeemed and the Redemption Price. The Company shall give each such
notice to the Trustee at least 60 days prior to the Redemption Date unless the
Trustee consents to a shorter period. Such notice shall be accompanied by an
Officers' Certificate and an Opinion of Counsel from the Company to the effect
that such redemption will comply with any conditions to such redemption set
forth herein and in the Convertible Notes.
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Section 3.2 Selection of Convertible Notes to be Redeemed. If less
than all the Convertible Notes are to be redeemed at any time, the Trustee shall
select the Convertible Notes to be redeemed on a pro rata basis, or by any other
method which the Trustee deems to be fair and appropriate and which complies
with any securities exchange or other applicable requirements, provided that the
Trustee may select for redemption in part only Convertible Notes in
denominations larger than $1,000. In selecting Convertible Notes to be redeemed
pursuant to this Section 3.2, the Trustee shall make such adjustments,
reallocations and eliminations as it shall deem proper so that the principal
amount of each Convertible Note to be redeemed shall be $1,000 or an integral
multiple thereof, by increasing, decreasing or eliminating any amount less than
$1,000 which would be allocable to any Holder. If the Convertible Notes to be
redeemed are Certificated Convertible Notes, the Certificated Convertible Notes
to be redeemed shall be selected by the Trustee by prorating, as nearly as may
be, or by any other method which the Trustee deems to be fair and appropriate
and which complies with any securities exchange or other applicable requirements
the principal amount of Certificated Convertible Notes to be redeemed among the
Holders of Certificated Convertible Notes registered in their respective names.
The Trustee in its discretion may determine the particular Convertible Notes (if
there are more than one) registered in the name of any Holder which are to be
redeemed, in whole or in part. Provisions of this Indenture that apply to
Convertible Notes called for redemption also apply to portions of Convertible
Notes called for redemption. The Trustee shall notify the Company promptly of
the Convertible Notes or portions of Convertible Notes to be redeemed.
Section 3.3 Notice of Redemption. At least 30 days but not more than
60 days before a Redemption Date, the Company shall send a notice of redemption,
first class mail, postage prepaid, to Holders of Convertible Notes to be
redeemed at the addresses of such Holders as they appear in the Security
Register.
The notice shall identify the Convertible Notes to be redeemed and
shall state:
(a) the Redemption Date;
(b) the Redemption Price (and shall specify the portion of such
Redemption Price that constitutes the amount of accrued and unpaid interest to
be paid, if any);
(c) the name and address of the Paying Agent;
(d) that the Convertible Notes called for redemption must be
surrendered to the Paying Agent to collect the Redemption Price;
(e) if any Global Convertible Note is being redeemed in part,
the portion of the principal amount of such Convertible Note to be redeemed and
that, after the Redemption Date, the Global Convertible Note, with a notation on
Schedule A thereof adjusting the principal amount thereof to be equal to the
unredeemed portion, will be returned to the Holder thereof;
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(f) if any Certificated Convertible Note is being redeemed in part,
the portion of the principal amount of such Convertible Note to be redeemed and
that, after the Redemption Date, a new Certificated Convertible Note or
Certificated Convertible Notes in principal amount at Stated Maturity equal to
the unredeemed portion will be issued;
(g) if fewer than all the outstanding Convertible Notes are to be
redeemed, the identification and principal amounts of the particular Convertible
Notes to be redeemed;
(h) the conversion price, the date on which the right to convert the
Convertible Notes will terminate and the place or places where such Convertible
Notes may be surrendered for conversion;
(i) that, unless the Company defaults in making the redemption
payment, payment of interest on, or the accretion of the value of, the
Convertible Notes (or portions thereof) called for redemption shall cease and
such Convertible Notes (or portions thereof) shall cease to accrete in value or
cease to accrue interest, as the case may be, on and after the Redemption Date;
(j) the paragraph of the Convertible Notes and the Section of this
Indenture pursuant to which the Convertible Notes are being called for
redemption; and
(k) any other information necessary to enable Holders to comply with
the notice of redemption.
At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at the Company's expense. In such event,
the Company shall provide the Trustee with the information required by this
Section 3.3 in a timely manner; provided that the Company shall give the Trustee
not less than 60 days' notice unless the Trustee consents to a shorter period.
Section 3.4 Effect of Notice of Redemption. Once notice of redemption
is mailed, Convertible Notes called for redemption shall become due and payable
on the Redemption Date and at the Redemption Price stated in such notice, plus
interest, if any, accrued and unpaid on the Redemption Date; provided that if
the Redemption Date is after a regular Record Date and on or prior to the
Interest Payment Date, the accrued interest shall be payable to the Holder of
the redeemed Note on the relevant Record Date; and provided, further, that if a
Redemption Date is not a Business Day, payment shall be made on that next
succeeding Business Day and no interest shall accrue for the period from such
Redemption Date to such succeeding Business Day. Upon surrender to the Paying
Agent, such Convertible Notes shall be paid at the Redemption Price stated in
such notice. Failure to give notice or any defect in the notice to any Holder
shall not affect the validity of the notice to any other Holder.
Section 3.5 Deposit of Redemption Price. On or prior to 10:00 a.m.,
New York City time, on each Redemption Date, the Company shall deposit with the
Paying Agent (or, if the Company, one of its Subsidiaries or any of their
Affiliates is the Paying Agent, the Paying Agent shall segregate and hold in
trust for the benefit of the Holders) money, in federal or other immediately
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available funds, sufficient to pay the Redemption Price on all Convertible Notes
to be redeemed on that date other than Convertible Notes or portions of
Convertible Notes called for redemption on such date which have been delivered
by the Company to the Trustee for cancellation and other than any Convertible
Notes or portions of Convertible Notes called for redemption on such date which
have been converted prior to such date.
So long as the Company complies with the preceding paragraph and the
other provisions of this Article III, interest on the Convertible Notes to be
redeemed on the applicable Redemption Date shall cease to accrue, or such
Convertible Notes shall cease to accrete in value, as the case may be, from and
after such date and such Convertible Notes or portions thereof shall be deemed
not to be entitled to any benefit under this Indenture except to receive payment
on the Redemption Date of the Redemption Price plus interest, if any, accrued
and unpaid on the Redemption Date. If any Convertible Note called for redemption
shall not be so paid upon surrender for redemption, then, from the Redemption
Date until such principal is paid, interest shall be paid on the unpaid
principal and, to the extent permitted by law, on any accrued but unpaid
interest thereon, in each case at the rate prescribed therefor by such
Convertible Notes.
Section 3.6 Convertible Notes Redeemed in Part. Upon surrender and
cancellation of a Certificated Convertible Note that is redeemed in part, the
Company shall issue and the Trustee shall authenticate and deliver to the
surrendering Holder (at the Company's expense) a new Certificated Convertible
Note equal in principal amount to the unredeemed portion of the Certificated
Convertible Note surrendered and canceled, provided that each such Certificated
Note shall be in a principal amount of $1,000 or an integral multiple thereof.
Upon surrender of a Global Convertible Note that is redeemed in part, the Paying
Agent shall forward such Global Convertible Note to the Trustee who shall make a
notation on Schedule A thereof to reduce the principal amount of such Global
Convertible Note to an amount equal to the unredeemed portion of such Global
Convertible Note, as provided in Section 2.5(c) hereof.
Section 3.7 Optional Redemption. The Convertible Notes will not be
redeemable at the option of the Company prior to January 13, 2002. During the
period from January 13, 2002 to January 13, 2004, the Convertible Notes will be
subject to redemption at the option of the Company, in whole but not in part,
upon not less than 30 nor more than 60 days' notice, if the Closing Price of the
Common Stock is at least 150 percent of the Conversion Price for thirty
consecutive days, at a Redemption Price equal to 100 percent of the principal
amount at Stated Maturity thereof plus accrued and unpaid interest (if any) to
the date of redemption; provided, that if the Common Stock is not traded on a
U.S. national securities exchange or approved for trading on an established
automated over-the-counter trading market in the United States and not quoted on
a consolidated transaction reporting tape, the Convertible Notes will not be
redeemable during such period. On or after January 13, 2004, 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 than 60 days' notice at a Redemption Price
equal to 100 percent of the principal amount at Stated Maturity thereof, plus
accrued and unpaid interest, if any, to the Redemption Date.
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ARTICLE IV
COVENANTS
Section 4.1 Payment of Convertible Notes. The Company shall promptly
pay the principal of, premium, if any, and interest on, the Convertible Notes on
the dates and in the manner provided in the Convertible Notes and in this
Indenture. Principal, premium and interest shall be considered paid on the date
due if, on such date, the Trustee or the Paying Agent holds in accordance with
this Indenture money sufficient to pay all principal, premium and interest then
due.
To the extent lawful, the Company shall pay interest on (i) any
overdue principal of (and premium, if any, on) the Convertible Notes, at the
interest rate borne on the Convertible Notes, plus 1% per annum, and (ii)
Defaulted Interest (without regard to any applicable grace period), and (iii)
any Reset Penalty that has not been paid when due, at the same rate. The
Company's obligation pursuant to the previous sentence shall apply whether such
overdue amount is due at its Stated Maturity, as a result of the Company's
obligations pursuant to Section 3.5, Section 4.7, Section 4.8 or Section 4.14
hereof, or otherwise.
Section 4.2 Maintenance of Office or Agency. The Company shall
maintain in the Borough of Manhattan, The City of New York, an office or agency
where Convertible Notes may be presented or surrendered for payment or
conversion, where Convertible Notes may be surrendered for registration of
transfer or exchange and where notices and demands to or upon the Company in
respect of the Convertible Notes and this Indenture may be served. The Company
shall give prompt written notice to the Trustee of the location, and any change
in the location, of such office or agency. As of the date hereof, the address of
such agency is: Harris Trust and Savings Bank, c/o Harris Trust Company of New
York, 77 Water Street, 4th Floor, New York, New York 10005. If at any time the
Company shall fail to maintain any such required office or agency or shall fail
to furnish the Trustee with the address thereof, such presentations, surrenders,
notices and demands may be made or served at the Corporate Trust Office of the
Trustee, and the Company hereby appoints the Trustee its agent to receive all
presentations, surrenders, notices and demands.
The Company may also from time to time designate one or more other
offices or agencies (in or outside of The City of New York) where the
Convertible Notes may be presented or surrendered for any or all of such
purposes, and may from time to time rescind such designations; provided that no
such designation or rescission shall in any manner relieve the Company of its
obligation to maintain an office or agency in The City of New York, for such
purposes. The Company shall give prompt written notice to the Trustee of any
such designation and any change in the location of any such other office or
agency.
Section 4.3 Money for the Convertible Note Payments to be Held in
Trust. If the Company, any Restricted Subsidiary of the Company or any of their
respective Affiliates shall at any time act as Paying Agent with respect to the
Convertible Notes, such Paying Agent shall, on or before each due date of the
principal of (and premium, if any) or interest on any of the Convertible Notes,
segregate and hold in trust for the benefit of the Persons entitled thereto
money sufficient to pay the
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principal (and premium, if any) and interest, so becoming due until such money
shall be paid to such Persons or otherwise disposed of as herein provided, and
shall promptly notify the Trustee of its action or failure so to act.
Whenever the Company shall have one or more Paying Agents with respect
to the Convertible Notes, it shall, prior to or on each due date of the
principal of (and premium, if any) or interest on any of the Convertible Notes,
deposit with a Paying Agent a sum sufficient to pay the principal (and premium,
if any) and interest, so becoming due, such sum to be held in trust for the
benefit of the Persons entitled to such principal, premium and interest, and
(unless such Paying Agent is the Trustee) the Paying Agent shall promptly notify
the Trustee of the Company's action or failure so to act.
Section 4.4 Corporate Existence. Subject to the provisions of Article
V hereof, the Company shall do or cause to be done all things necessary to
preserve and keep in full force and effect the corporate existence, rights
(charter and statutory) and franchises of the Company and each of its Restricted
Subsidiaries; provided that the Company and any such Restricted Subsidiary shall
not be required to preserve the corporate existence of any such Restricted
Subsidiary or any such right or franchise if the Board of Directors shall
determine that the preservation thereof is no longer desirable in the conduct of
the business of the Company and that the loss thereof is not disadvantageous in
any material respect to the Holders of Convertible Notes.
Section 4.5 Maintenance of Property. The Company shall cause all
Property used or useful in the conduct of its business or the business of any of
its Restricted Subsidiaries to be maintained and kept in good condition, repair
and working order and supplied with all necessary equipment and shall cause to
be made all necessary repairs, renewals, replacements, betterments and
improvements thereof, all as, in the judgment of the Company, may be necessary
so that the business carried on in connection therewith may be properly and
advantageously conducted at all times; provided that nothing in this Section 4.5
shall prevent the Company from discontinuing the operation or maintenance of any
of such Property if such discontinuance is, in the judgment of the Company,
desirable in the conduct of its business or the business of any of its
Restricted Subsidiaries and not disadvantageous in any material respect to the
Holders of Convertible Notes.
Section 4.6 Payment of Taxes and Other Claims. The Company shall pay
or discharge or cause to be paid or discharged, before the same shall become
delinquent, (a) all taxes, assessments and governmental charges levied or
imposed upon the Company or any of its Restricted Subsidiaries or upon the
income, profits or Property of the Company or any of its Restricted Subsidiaries
and (b) all lawful claims for labor, material and supplies which, if unpaid,
might by law become a Lien upon the Property of the Company or any of its
Restricted Subsidiaries; provided that the Company shall not be required to pay
or discharge or cause to be paid or discharged any such tax, assessment, charge
or claim whose amount, applicability or validity is being contested in good
faith by appropriate proceedings upon stay of execution or the enforcement
thereof and for which adequate reserves in accordance with GAAP or other
appropriate provision has been made.
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Section 4.7 Repurchase at the Option of Holders upon a Change of
Control. (a) Upon the occurrence of a Change of Control, each Holder of
Convertible Notes shall have the right to require the Company to purchase such
Holder's Convertible Notes, in whole or in part in a principal amount that is an
integral multiple of $1,000, pursuant to an irrevocable and unconditional offer
described in Section 4.7(b) hereof (the "Change of Control Offer"), at a
purchase price (the "Change of Control Purchase Price") in cash equal to 101
percent of the Accreted Value of such Convertible Notes (or portions thereof) on
any Change of Control Payment Date occurring prior to January 13, 2001, plus
accrued and unpaid interest, if any, thereon to such Change of Control Payment
Date, or 101 percent of the principal amount at Stated Maturity of such
Convertible Notes (or portions thereof) on any Change of Control Payment Date
occurring on or after January 13, 2001, plus accrued and unpaid interest, if
any, to such Change of Control Payment Date.
(b) Within 30 days of the date of any Change of Control, the
Company, or the Trustee at the request and expense of the Company, shall send to
each Holder by first class mail, postage prepaid, a notice prepared by the
Company stating:
(i) that a Change of Control has occurred and a Change of
Control Offer is being made pursuant to this Section 4.7, and that all
Convertible Notes that are properly tendered will be accepted for payment;
(ii) the Change of Control Purchase Price, and the date
Convertible Notes are to be purchased pursuant to the Change of Control
Offer (the "Change of Control Payment Date"), which date shall be a date
occurring no earlier than 30 days nor later than 60 days subsequent to the
date such notice is mailed;
(iii) that any Convertible Notes or portions thereof not
properly tendered will continue to accrete in value or accrue interest, as
applicable, and will continue to have conversion rights;
(iv) that, unless the Company defaults in the payment of
the Change of Control Purchase Price with respect thereto, all Convertible
Notes or portions thereof accepted for payment pursuant to the Change of
Control Offer shall cease to accrete in value or accrue interest, as the
case may be, from and after the Change of Control Payment Date and will
cease to have conversion rights;
(v) that Holders electing to have any Convertible Notes
or portions thereof purchased pursuant to a Change of Control Offer will be
required to surrender such Convertible Notes, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of such Convertible
Notes completed, to the Paying Agent at the address specified in the
notice, prior to the close of business on the third Business Day preceding
the Change of Control Payment Date;
(vi) that Holders shall be entitled to withdraw such
election if the Paying Agent receives, not later than the close of business
on the second Business Day preceding the Change of Control Payment Date, a
telegram,
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telex, facsimile transmission or letter setting forth the name of the
Holder, the principal amount of Convertible Notes delivered for purchase,
and a statement that such Holder is withdrawing such Holder's election to
have such Convertible Notes or portions thereof purchased pursuant to the
Change of Control Offer;
(vii) that Holders electing to have Convertible Notes
purchased pursuant to the Change of Control Offer must specify the
principal amount that is being tendered for purchase, which principal
amount must be $1,000 or an integral multiple thereof;
(viii) that any Holder of Certificated Convertible Notes
whose Certificated Convertible Notes are being purchased only in part will
be issued new Certificated Convertible Notes equal in principal amount to
the unpurchased portion of the Certificated Convertible Note or Convertible
Notes surrendered, which unpurchased portion will be equal in principal
amount to $1,000 or an integral multiple thereof;
(ix) that the Trustee will return to the Holder of a
Global Convertible Note that is being purchased in part, such Global
Convertible Note with a notation on Schedule A thereof adjusting the
principal amount thereof to be equal to the unpurchased portion of such
Global Convertible Note; and
(x) the instructions and any other information necessary
to enable any Holder to accept a Change of Control Offer or effect
withdrawal of such acceptance.
(c) On the Change of Control Payment Date, the Company shall (i)
accept for payment any Convertible Notes or portions thereof properly tendered
pursuant to the Change of Control Offer; (ii) irrevocably deposit with the
Paying Agent, by 10:00 a.m., New York City time, on such date, in immediately
available funds, an amount equal to the Change of Control Purchase Price in
respect of all Convertible Notes or portions thereof so tendered, including
accrued and unpaid interest to such Change of Control Payment Date; and (iii)
deliver, or cause to be delivered, to the Trustee the Convertible Notes so
tendered together with an Officers' Certificate listing the Convertible Notes or
portions thereof tendered to the Company and accepted for payment. The Paying
Agent shall promptly send by first class mail, postage prepaid, to each Holder
of Convertible Notes or portions thereof so accepted for payment, payment in an
amount equal to the Change of Control Purchase Price for such Convertible Notes
or portions thereof, including accrued and unpaid interest, to such Change of
Control Payment Date. The Company shall publicly announce the results of the
Change of Control Offer on or as soon as practicable after the Change of Control
Payment Date. For purposes of this Section 4.7, the Trustee shall act as the
Paying Agent.
(d) Upon surrender and cancellation of a Certificated
Convertible Note that is purchased in part pursuant to the Change of Control
Offer, the Company shall promptly issue and the Trustee shall authenticate and
deliver to the surrendering Holder of such Certificated Convertible
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Note, a new Certificated Convertible Note equal in principal amount to the
unpurchased portion of such surrendered Certificated Convertible Note; provided
that each such new Certificated Convertible Note shall be in a principal amount
of $1,000 or an integral multiple thereof.
Upon surrender of a Global Convertible Note that is purchased in part
pursuant to a Change of Control Offer, the Paying Agent shall forward such
Global Convertible Note to the Trustee who shall make a notation on Schedule A
thereof to reduce the principal amount of such Global Convertible Note to an
amount equal to the unpurchased portion of such Global Convertible Note, as
provided in Section 2.5(c) hereof.
(e) The Company shall comply with the requirements of Section
14(e) under the Exchange Act and any other securities laws or regulations, to
the extent such laws and regulations are applicable, in connection with the
repurchase of Convertible Notes pursuant to a Change of Control Offer.
Section 4.8 Limitation on Asset Sales. (a) The Company shall not,
and shall not permit any of its Restricted Subsidiaries, directly or indirectly,
to, consummate an Asset Sale, unless:
(i) no Event of Default shall have occurred and be
continuing or shall occur as a consequence thereof;
(ii) the Company or such Restricted Subsidiary, as the
case may be, receives net consideration at the time of such Asset Sale at
least equal to the Fair Market Value (as evidenced by a Board Resolution of
the Company delivered to the Trustee) of the Property or assets sold or
otherwise disposed of;
(iii) at least 75 percent of the consideration received in
respect of such Asset Sale by the Company or such Restricted Subsidiary, as
the case may be, for such Property or assets consists of Cash Proceeds;
provided, however, that in connection with an Asset Sale of receivables,
100 percent of the consideration received in respect of such Asset Sale by
the Company or such Restricted Subsidiary, as the case may be, for such
receivables shall consist of Cash Proceeds; and
(iv) the Company or such Restricted Subsidiary, as the
case may be, uses the Net Cash Proceeds from such Asset Sale in the manner
set forth in Section 4.8(b) hereof.
(b) Within 270 days after the closing of any Asset Sale, the
Company or such Restricted Subsidiary, as the case may be, may, at its option:
(i) reinvest an amount equal to the Net Cash Proceeds, or
any portion thereof, from such Asset Sale in Telecommunications Assets;
and/or
(ii) apply an amount equal to such Net Cash Proceeds, or
remaining Net Cash Proceeds, (A) to the permanent reduction of Indebtedness
of
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the Company (other than Indebtedness to a Restricted Subsidiary of the
Company) that is pari passu in right of payment with the Senior Notes, the
Old Convertible Notes and the Convertible Notes; provided, however, that in
connection with any such permanent reduction of Indebtedness of the
Company, the Company shall apply, pro rata, a portion of such Net Cash
Proceeds or remaining Net Cash Proceeds to the permanent reduction of the
aggregate amount of Senior Notes, the Old Convertible Notes and Convertible
Notes outstanding, or (B) to the permanent reduction of Indebtedness of any
Restricted Subsidiary of the Company that is pari passu in right of payment
with such Restricted Subsidiary's Senior Note Guarantees, Old Convertible
Note Guarantee and Convertible Note Guarantee, if applicable (other than
Indebtedness to the Company or another Restricted Subsidiary of the
Company).
Net Cash Proceeds from any Asset Sale that are not applied pursuant to
clause (i) or (ii) above shall constitute "Excess Proceeds."
(c) If at any time the aggregate amount of Excess Proceeds
calculated as of such date exceeds $5,000,000, the Company shall, within 30 days
of the date on which such Excess Proceeds exceed $5,000,000, use such Excess
Proceeds to make an offer, as described in Section 4.8(d) hereof (an "Asset Sale
Offer"), to purchase on a pro rata basis from all Holders of the Convertible
Notes and holders of Old Convertible Notes in an aggregate principal amount
equal to the maximum principal amount that may be purchased out of the then-
existing Excess Proceeds, at a purchase price (the "Asset Sale Purchase Price")
in cash equal to 100 percent of the Accreted Value of such Convertible Notes and
Old Convertible Notes on any Asset Sale Payment Date occurring prior to January
13, 2001, plus accrued and unpaid interest, if any, to such Asset Sale Payment
Date, or 100 percent of the principal amount at Stated Maturity of such
Convertible Notes or Old Convertible Notes on any Asset Sale Payment Date
occurring on or after January 13, 2001, plus accrued and unpaid interest, if
any, to such Asset Sale Payment Date; provided that, if any Senior Notes are
outstanding and the Senior Note Indentures have not been satisfied or
discharged, the Company shall be required to apply the Excess Proceeds first to
a 14% Senior Note Asset Sale Offer (as described in the 14% Senior Note
Indenture) and a 14 5/8% Senior Note Asset Sale Offer (as described in the
14 5/8% Senior Note Indenture), on a pro rata basis, and to the substantially
concurrent repayment or redemption of Pari Passu Indebtedness (if any) if
required by the instruments relating to such Pari Passu Indebtedness (which
repayment or redemption, in the case of a revolving credit arrangement or
multiple advance arrangement, reduces the commitment thereunder) in the manner
permitted by the Senior Note Indentures and to the extent that the aggregate
amount paid pursuant to the 14% Senior Note Asset Sale Offer and the 14 5/8%
Senior Note Asset Sale Offer and, if applicable, the repayment of Indebtedness
as permitted by the Senior Note Indentures is less than such Excess Proceeds,
the Company shall then make an Asset Sale Offer for such remaining portion of
such Excess Proceeds within 100 days of the date on which such Excess Proceeds
exceeded $5,000,000.
(d) Within 30 days (or 100 days if any Senior Notes are
outstanding and the Senior Note Indentures have not been satisfied or
discharged) of the date on which the amount of Excess Proceeds exceeds
$5,000,000 (but subject to the proviso of clause (c) of this Section 4.8),
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the Company, or the Trustee at the request and expense of the Company, shall
send to each Holder by first class mail, postage prepaid, a notice prepared by
the Company stating:
(i) that an Asset Sale Offer is being made pursuant to this Section
4.8, and that all Convertible Notes that are properly tendered will be
accepted for payment, subject to proration in the event the amount of
Excess Proceeds is less than the aggregate Asset Sale Purchase Price of all
Convertible Notes and Old Convertible Notes promptly tendered pursuant to
the Asset Sale Offer and the Old Convertible Note Asset Sale Offer, as
applicable;
(ii) the Asset Sale Purchase Price, the amount of Excess Proceeds
that are available to be applied to purchase tendered Convertible Notes,
and the date Convertible Notes are to be purchased pursuant to the Asset
Sale Offer (the "Asset Sale Payment Date"), which date shall be a date no
earlier than 30 days nor later than 40 days subsequent to the date such
notice is mailed;
(iii) that any Convertible Notes or portions thereof not properly
tendered will continue to accrete in value or accrue interest, as the case
may be, and will continue to have conversion rights;
(iv) that, unless the Company defaults in the payment of the Asset
Sale Purchase Price with respect thereto, all Convertible Notes or portions
thereof accepted for payment pursuant to the Asset Sale Offer shall cease
to accrete in value or accrue interest, as the case may be, from and after
the Asset Sale Payment Date and will cease to have conversion rights;
(v) that any Holder electing to have any Convertible Notes or
portions thereof purchased pursuant to the Asset Sale Offer will be
required to surrender such Convertible Notes, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of such Convertible
Notes completed, to the Paying Agent at the address specified in the
notice, prior to the close of business on the third Business Day preceding
the Asset Sale Payment Date;
(vi) that any Holder shall be entitled to withdraw such election if
the Paying Agent receives, not later than the close of business on the
second Business Day preceding the Asset Sale Payment Date, a telegram,
telex, facsimile transmission or letter, setting forth the name of the
Holder, the principal amount of Convertible Notes delivered for purchase,
and a statement that such Holder is withdrawing such Holder's election to
have such Convertible Notes or portions thereof purchased pursuant to the
Asset Sale Offer;
(vii) that any Holder electing to have Convertible Notes purchased
pursuant to the Asset Sale Offer must specify the principal amount that is
being tendered for purchase, which principal amount must be $1,000 or an
integral multiple thereof;
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(viii) that any Holder of Certificated Convertible
Notes whose Certificated Convertible Notes are being purchased only in part
will be issued new Certificated Convertible Notes equal in principal amount
to the unpurchased portion of the Certificated Convertible Note or
Convertible Notes surrendered, which unpurchased portion will be equal in
principal amount to $1,000 or an integral multiple thereof;
(ix) that the Trustee will return to the Holder of a
Global Convertible Note that is being purchased in part, such Global
Convertible Note with a notation on Schedule A thereof adjusting the
principal amount thereof to be equal to the unpurchased portion of such
Global Convertible Note; and
(x) the instructions and any other information
necessary to enable any Holder to accept an Asset Sale Offer, to tender
Convertible Notes and to have such Convertible Notes purchased, or to
effect withdrawal of such acceptance, pursuant to this Section 4.8.
(e) If the aggregate Asset Sale Purchase Price of the
Convertible Notes surrendered by Holders exceeds the amount of Excess Proceeds
as indicated in the notice required by Section 4.8(d) hereof, the Trustee shall
select the Convertible Notes to be purchased on a pro rata basis based on the
Accreted Value, as of the Asset Sale Payment Date if such Asset Sale Payment
Date is prior to January 13, 2001, or the principal amount at Stated Maturity,
if such Asset Sale Payment Date is on or after January 13, 2001, of the
Convertible Notes tendered, with such adjustments as may be deemed appropriate
by the Trustee and may be needed to comply with any securities exchange and
other applicable requirements, so that only Convertible Notes in denominations
of $1,000 or integral multiples thereof shall be purchased.
(f) On or before the Asset Sale Payment Date, the Company shall
(i) accept for payment any Convertible Notes or portions thereof properly
tendered and selected for purchase pursuant to the Asset Sale Offer and Section
4.8(e) hereof; (ii) irrevocably deposit with the Paying Agent, by 10:00 a.m.,
New York City time, on such date, in immediately available funds, an amount
equal to the Asset Sale Purchase Price in respect of all Convertible Notes or
portions thereof so accepted; and (iii) deliver, or cause to be delivered, to
the Trustee the Convertible Notes so accepted together with an Officers'
Certificate listing the Convertible Notes or portions thereof tendered to the
Company and accepted for payment. The Paying Agent shall promptly send by first
class mail, postage prepaid, to each Holder of Convertible Notes or portions
thereof so accepted for payment, payment in an amount equal to the Asset Sale
Purchase Price for such Convertible Notes or portions thereof. The Company shall
publicly announce the results of the Asset Sale Offer on or as soon as
practicable after the Asset Sale Payment Date. For purposes of this Section 4.8,
the Trustee shall act as the Paying Agent.
(g) Upon surrender and cancellation of a Certificated
Convertible Note that is purchased in part, the Company shall promptly issue and
the Trustee shall authenticate and deliver to the surrendering Holder of such
Certificated Convertible Note a new Certificated Convertible Note
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equal in principal amount to the unpurchased portion of such surrendered
Certificated Convertible Note; provided that each such new Certificated
Convertible Note shall be in a principal amount of $1,000 or an integral
multiple thereof.
Upon surrender of a Global Convertible Note that is purchased in part
pursuant to an Asset Sale Offer, the Paying Agent shall forward such Global
Convertible Note to the Trustee who shall make a notation on Schedule A thereof
to reduce the principal amount of such Global Convertible Note to an amount
equal to the unpurchased portion of such Global Convertible Note, as provided in
Section 2.5(c) hereof.
(h) Upon completion of an Asset Sale Offer (including payment of the
Asset Sale Purchase Price for accepted Convertible Notes), any surplus Excess
Proceeds that were the subject of such offer shall cease to be Excess Proceeds,
and the Company may then use such amounts for general corporate purposes.
(i) The Company shall comply with the requirements of Section 14(e)
under the Exchange Act and any other securities laws or regulations, to the
extent such laws and regulations are applicable, in connection with the
repurchase of Convertible Notes pursuant to an Asset Sale Offer.
Section 4.9 Limitation on Issuance of Guarantees by Restricted
Subsidiaries. (a) The Company shall not permit any of its Restricted
Subsidiaries, directly or indirectly, to guarantee any Indebtedness of the
Company ("Guaranteed Indebtedness") other than the Convertible Notes, unless (i)
such Restricted Subsidiary simultaneously executes and delivers a supplemental
indenture to this Indenture providing for a Convertible Note Guarantee (a
"Convertible Note Guarantee") of payment of the Convertible Notes by such
Restricted Subsidiary and (ii) such Restricted Subsidiary waives and will not in
any manner whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against the Company
or any other Restricted Subsidiary of the Company as a result of any payment by
such Restricted Subsidiary under its Convertible Note Guarantee, provided that
any Restricted Subsidiary may guarantee any Credit Facility so long as such
Restricted Subsidiary enters into a Convertible Note Guarantee ranking pari
passu with its guarantee under such Credit Facility. If the Guaranteed
Indebtedness is pari passu with the Convertible Notes, then the guarantee of
such Guaranteed Indebtedness shall be pari passu with or subordinated to the
Convertible Note Guarantee; and if the Guaranteed Indebtedness is subordinated
to the Convertible Notes, then the guarantee of such Guaranteed Indebtedness
shall be subordinated to the Convertible Note Guarantee at least to the extent
that the Guaranteed Indebtedness is subordinated to the Convertible Notes.
(b) Notwithstanding the provisions of Section 4.10(a) hereof, any
Convertible Note 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 Convertible Note Guarantee, except a discharge or
release by, or as a result of, payment under such guarantee.
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Section 4.10 Restricted and Unrestricted Subsidiaries. (a) The
Company may designate a Subsidiary (including a newly formed or newly acquired
Subsidiary) of the Company or any of its Restricted Subsidiaries as an
Unrestricted Subsidiary, provided that so long as the Senior Notes remain
outstanding and the Senior Note Indentures have not been satisfied or
discharged, (i) immediately after giving effect to the transaction, the Company
could incur $1.00 of additional Indebtedness pursuant to Section 4.9(a) of each
of the Senior Note Indentures and (ii) such designation is at the time permitted
under Section 4.13(a) of each of the Senior Note Indentures. Notwithstanding any
provision of this Section 4.10(a), all Subsidiaries of an Unrestricted
Subsidiary will be Unrestricted Subsidiaries.
(b) An Unrestricted Subsidiary may be redesignated as a Restricted
Subsidiary. The designation of a Subsidiary of the Company as an Unrestricted
Subsidiary or the designation of an Unrestricted Subsidiary of the Company as a
Restricted Subsidiary shall be made by the Board of Directors as evidenced by a
Board Resolution delivered to the Trustee and shall be effective as of the date
specified in such Board Resolution, which shall not be prior to the date such
Board Resolution is delivered to the Trustee.
Section 4.11 Reports. Whether or not the Company is subject to
Section 13(a) or Section 15(d) of the Exchange Act, or any successor provision
thereto, the Company shall file with the Commission the annual reports,
quarterly reports and other documents which the Company would have been required
to file with the Commission pursuant to Section 13(a) or Section 15(d) of the
Exchange Act or any successor provision thereto if the Company were subject
thereto, such documents to be filed with the Commission on or prior to the
respective dates (the "Required Filing Dates") by which the Company would have
been required to file them. The Company shall also (whether or not it is
required to file reports with the Commission), within 30 days of each Required
Filing Date, (i) transmit by mail to all Holders of Convertible Notes, as their
names and addresses appear in the Security Register without cost to such Holders
or Persons, and (ii) file with the Trustee, copies of the annual reports,
quarterly reports and other documents (without exhibits) which the Company has
filed or would have filed with the Commission pursuant to Section 13(a) or
Section 15(d) of the Exchange Act, any successor provisions thereto or this
Section 4.11. The Company shall not be required to file any report with the
Commission if the Commission does not permit such filing.
Section 4.12 Compliance Certificate; Notice of Default or Event of
Default. (a) The Company shall deliver to the Trustee within 120 calendar days
after the end of each fiscal year of the Company ending after the date hereof,
an Officers' Certificate (which shall be signed by Officers satisfying the
requirements of Section 314 of the Trust Indenture Act), stating whether or not,
to the best knowledge of such Officers the Company has complied with all
conditions and covenants under this Indenture, and, if the Company shall be in
Default, specifying all such Defaults and the nature thereof of which such
Officer may have knowledge.
(b) So long as (and to the extent) not contrary to the then current
recommendations of the American Institute of Certified Public Accountants, the
year-end financial statements delivered pursuant to Section 4.11 above shall be
accompanied by a written statement of the Company's independent public
accountants (who shall be a firm of established national reputation)
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that in making the examination necessary for certification of such financial
statements, nothing has come to their attention which would lead them to believe
that the Company has violated any provision of Article IV or Article V of this
Indenture (or if any violation has occurred, specifying the nature and existence
thereof), it being understood that such accountants shall not be liable directly
or indirectly to any Person for any failure to obtain knowledge of such
violation.
(c) The Company shall deliver written notice to the Trustee
within 5 Business Days after becoming aware of (i) any Default or Event of
Default, (ii) any event of default under either of the Senior Note Indentures or
(iii) any event of default or any default under any other mortgage, indenture or
instrument referred to in Section 6.1(e) hereof, describing such Default, Event
of Default or other event of default or default, its status and what action the
Company is taking or proposes to take with respect thereto.
Section 4.13 INTENTIONALLY OMITTED.
Section 4.14 Repurchase at the Option of Holders upon a Termination
of Trading. (a) 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 such 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 at a price (the "Repurchase Price") equal to 100 percent
of the Accreted Value of such Convertible Notes on any Repurchase Date occurring
prior to January 13, 2001, together with accrued and unpaid interest, if any,
thereon to the Repurchase Date or 100 percent of the principal amount at Stated
Maturity of such Convertible Notes on any Repurchase Date occurring on or after
January 13, 2001, plus accrued and unpaid interest, if any, thereon to the
Repurchase Date. On or prior to 10:00 a.m., New York City time on the Repurchase
Date, the Company shall irrevocably deposit with the Trustee or a Paying Agent
an amount of money sufficient to pay the Repurchase Price of the Convertible
Notes which are to be repurchased on or promptly following the Repurchase Date.
(b) On or before the 15th day after the occurrence of a
Termination of Trading, the Company, or the Trustee at the request and expense
of the Company, shall send to each Holder by first class mail, postage prepaid,
a notice prepared by the Company stating:
(i) that a Termination of Trading has occurred and that
each Holder has the right to require a repurchase of such Holder's Convertible
Notes, which repurchase right is made pursuant to this Section 4.14, and that
all Convertible Notes properly tendered will be repurchased;
(ii) the Repurchase Price, and the date Convertible Notes
are to be repurchased, which date shall be a date occurring no earlier than 30
days nor later than 40 days subsequent to the date such notice is mailed;
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(iii) that any Convertible Notes or portions thereof
not properly tendered will continue to accrete in value or accrue interest,
as the case may be, and will continue to have conversion rights;
(iv) that, unless the Company defaults in the payment
of the Repurchase Price with respect thereto, all Convertible Notes or
portions thereof accepted for payment pursuant to the exercise of such
repurchase right shall cease to accrete in value or accrue interest, as the
case may be, from and after the Repurchase Date and will cease to have any
conversion rights;
(v) that any Holder electing to have any Convertible
Notes or portions thereof repurchased pursuant to the exercise of such
repurchase right will be required to surrender such Convertible Notes, with
the form entitled "Option of Holder to Elect Purchase" on the reverse of
such Convertible Notes completed, to the Paying Agent at the address
specified in the notice, prior to the close of business on the Repurchase
Date;
(vi) that any Holder electing to have Convertible
Notes purchased pursuant to such repurchase right must specify the
principal amount that is being tendered for purchase, which principal
amount must be $1,000 or an integral multiple thereof;
(vii) that any Holder of Certificated Convertible Notes
whose Certificated Convertible Notes are being purchased only in part will
be issued a new Certificated Convertible Note or Certificated Convertible
Notes equal in principal amount to the unpurchased portion of the
Certificated Convertible Note or Certificated Convertible Notes
surrendered, which unpurchased portion will be equal in principal amount to
$1,000 or an integral multiple thereof;
(viii) that the Trustee will return to the Holder of a
Global Convertible Note that is being purchased in part, such Global
Convertible Note with a notation on Schedule A thereof adjusting the
principal amount thereof to be equal to the unpurchased portion of such
Global Convertible Note; and
(ix) the instructions and any other information
necessary to enable any Holder to exercise such repurchase right or effect
withdrawal of such exercise.
(c) 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 Paying Agent (or an agent
designated by the Paying Agent for such purpose) and to the 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. The Company or the
Trustee shall promptly send by first class mail, postage prepaid, to each Holder
of Convertible Notes or portions thereof so accepted for payment,
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payment in an amount equal to the Repurchase Price for such Convertible Notes or
portions thereof. The Company shall publicly announce the results of the
exercises of repurchase rights upon a Termination of Trading on or as soon as
practicable after the Repurchase Date. For purposes of this Section 4.14, the
Trustee shall act as the Paying Agent.
Section 4.15 INTENTIONALLY OMITTED.
ARTICLE V
CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER
Section 5.1 Merger, Consolidation or Sale of Assets. The Company
shall not in any transaction or series of related transactions, consolidate
with, or merge with or into, any other Person or permit any other Person to
merge with or into the Company (other than a merger of a Restricted Subsidiary
of the Company into the Company in which the Company is the continuing
corporation), or sell, convey, assign, transfer, lease or otherwise dispose of
all or substantially all of the Property and assets of the Company and its
Restricted Subsidiaries taken as a whole to any other Person, unless:
(a) either (i) the Company shall be the continuing corporation or
(ii) the corporation (if other than the Company) formed by such consolidation or
into which the Company is merged, or the Person which acquires, by sale,
assignment, conveyance, transfer, lease or disposition, all or substantially all
of the Property and assets of the Company and its Restricted Subsidiaries taken
as a whole (any such corporation or Person being the "Surviving Entity") shall
be a corporation organized and validly existing under the laws of the United
States of America, any political subdivision thereof, any state thereof or the
District of Columbia, and shall expressly assume, by an indenture supplemental
hereto, executed and delivered to the Trustee, in form reasonably satisfactory
to the Trustee, the due and punctual payment of the principal of (and premium,
if any) and interest on all the Convertible Notes and the performance of every
covenant and obligation in this Indenture on the part of the Company to be
performed or observed;
(b) immediately after giving effect to such transaction or series of
related transactions on a pro forma basis (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction or series of related transactions), no Default or
Event of Default shall have occurred and be continuing or would result
therefrom; and
(c) immediately after giving effect to such transaction or series 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.
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In connection with any consolidation, merger, sale, assignment,
conveyance, lease, transfer of assets or other transactions contemplated by this
Section 5.1, the Company shall deliver, or cause to be delivered, to the
Trustee, in form and substance reasonably satisfactory to the Trustee, an
Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger, sale, assignment, conveyance, lease, transfer or other
transaction and any supplemental indenture in respect thereto comply with this
Article V and that all conditions precedent herein provided for relating to such
transactions have been complied with (all of the foregoing, a "Permitted
Merger").
Section 5.2 Successor Corporation Substituted. Upon any Permitted
Merger, the Surviving Entity shall succeed to, and be substituted for, and may
exercise every right and power of, the Company hereunder and the Convertible
Notes with the same effect as if such Surviving Entity had been named as the
Company herein; and when a Surviving Person duly assumes all of the obligations
and covenants of the Company pursuant hereto and the Convertible Notes, except
in the case of a lease, the predecessor Person shall be relieved of all such
obligations.
If such Surviving Entity shall have succeeded to and been substituted
for the Company, such surviving Entity may cause to be signed, and may issue
either in its own name or in the name of the Company prior to such succession
any or all of the Convertible Notes issuable hereunder which theretofore shall
not have been signed by the Company and delivered to the Trustee; and upon the
order of such Surviving Entity, instead of the Company, and subject to all of
the terms, conditions and limitations in this Indenture, the Trustee shall act
thereafter and shall deliver any Convertible Notes which previously shall have
been signed and delivered by two Officers of the Company to the Trustee for
authentication. All of the Convertible Notes so issued, and any Convertible
Notes which such Surviving Entity thereafter shall cause to be signed and
delivered to the Trustee, shall have the same legal rights and benefits under
this Indenture as the Convertible Notes theretofore or thereafter issued in
accordance with the terms of this Indenture and the Convertible Note Guarantees,
if any, as though all of such Convertible Notes had been issued on the date of
execution hereof.
In the case of any such substitution, merger, sale, transfer,
conveyance or other disposal, such changes in phraseology and form (and in
substance) may be made in the Convertible Notes to be issued as may be
appropriate.
For all purposes of this Indenture and the Convertible Notes,
Subsidiaries of any Surviving Entity will, upon such transaction or series of
transactions, become Restricted Subsidiaries or Unrestricted Subsidiaries as
provided pursuant to this Indenture.
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ARTICLE VI
DEFAULTS AND REMEDIES
Section 6.1 Events of Default. "Event of Default," wherever used
herein with respect to the Convertible Notes, means any one of the following
events (whatever the reason for such event, and whether it shall be voluntary or
involuntary, or be effected by operation of law, pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(a) default in the payment of interest on any Convertible Note when
the same becomes due and payable, and the continuance of such Default for a
period of 30 days; or
(b) default in the payment of the principal of (or premium, if any,
on) any Convertible Note when the same becomes due and payable whether upon
Maturity, optional redemption, required repurchase (including pursuant to a
Change of Control Offer, an Asset Sale Offer or a repurchase offer upon a
Termination of Trading) or otherwise, or the failure to make an offer to
purchase any Convertible Note as herein required; or
(c) default in the performance, or breach, of any covenant or
agreement contained in Section 4.7, Section 4.8, Section 4.14 or Article V
hereof; or
(d) default in the performance, or breach, of any covenant or
warranty of the Company contained in this Indenture or the Convertible Notes
(other than a covenant or warranty addressed in Section 6.1(a), Section 6.1(b)
or Section 6.1(c) hereof), and the continuance of such Default or breach for a
period of 45 days after written notice thereof has been given to the Company by
the Trustee or to the Company and the Trustee by the Holders of at least 25
percent of the aggregate principal amount at Stated Maturity of the outstanding
Convertible Notes; or
(e) Indebtedness of the Company or any Restricted Subsidiary is not
paid when due and payable within the applicable grace period, if any, or is
accelerated by the holders thereof and, in either case, the principal amount of
such accelerated or unpaid Indebtedness exceeds $5,000,000; or
(f) the entry by a court of competent jurisdiction of one or more
final nonappealable judgments uninsured or unindemnified for the payment of
money against the Company or any Restricted Subsidiary of the Company in an
aggregate uninsured or unindemnified amount in excess of $5,000,000, which is
not discharged, waived, stayed, bonded or satisfied for a period of 60
consecutive days; or
(g) the entry by a court having jurisdiction in the premises of (i) a
decree or order for relief in respect of the Company or any Significant
Restricted Subsidiary of the Company in an involuntary case or proceeding under
United States bankruptcy laws, as now or hereafter constituted, or any other
applicable Federal, state, or foreign bankruptcy, insolvency, or other similar
law or (ii) a decree or order adjudging the Company or any Significant
Restricted Subsidiary of the
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Company a bankrupt or insolvent, or approving as properly filed a petition
seeking reorganization, arrangement, adjustment or composition of, or in respect
of, the Company or any Significant Restricted Subsidiary of the Company under
United States bankruptcy laws, as now or hereafter constituted, or any other
applicable Federal, state or foreign bankruptcy, insolvency, or similar law, or
appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or
other similar official of the Company or any Significant Restricted Subsidiary
of the Company or of any substantial part of the Property or assets of the
Company or any Significant Restricted Subsidiary of the Company, or ordering the
winding-up or liquidation of the affairs of the Company or any Significant
Restricted Subsidiary of the Company, and the continuance of any such decree or
order for relief or any such other decree or order unstayed and in effect for a
period of 60 consecutive days; or
(h) (i) the commencement by the Company or any Significant
Restricted Subsidiary of the Company of a voluntary case or proceeding under
United States bankruptcy laws, as now or hereafter constituted, or any other
applicable Federal, state, or foreign bankruptcy, insolvency or other similar
law or of any other case or proceeding to be adjudicated a bankrupt or
insolvent; or (ii) the consent by the Company or any Significant Restricted
Subsidiary of the Company to the entry of a decree or order for relief in
respect of the Company or any Significant Restricted Subsidiary of the Company
in an involuntary case or proceeding under United States bankruptcy laws, as now
or hereafter constituted, or any other applicable Federal, state, or foreign
bankruptcy, insolvency, or other similar law or to the commencement of any
bankruptcy or insolvency case or proceeding against the Company or any
Significant Restricted Subsidiary of the Company; or (iii) the filing by the
Company or any Significant Restricted Subsidiary of the Company of a petition or
answer or consent seeking reorganization or relief under United States
bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal, state or foreign bankruptcy, insolvency or other similar law; or (iv)
the consent by the Company or any Significant Restricted Subsidiary of the
Company to the filing of such petition or to the appointment of or taking
possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator
or similar official of the Company or any Significant Restricted Subsidiary of
the Company or of any substantial part of the Property or assets of the Company
or any Significant Restricted Subsidiary, or the making by the Company or any
Significant Restricted Subsidiary of the Company of an assignment for the
benefit of creditors; or (v) the admission by the Company or any Significant
Restricted Subsidiary of the Company in writing of its inability to pay its
debts generally as they become due; or (vi) the taking of corporate action by
the Company or any Significant Restricted Subsidiary of the Company in
furtherance of any such action; or
(i) the occurrence and continuation of an "event of default" under
either of the Senior Note Indentures for a period of 30 consecutive days, after
written notice of the occurrence of such "event of default" has been given to
the Company by the Trustee or a Holder or Holders of Convertible Notes, which
notice states that such an event constitutes a Default hereunder.
Section 6.2 Acceleration. If any Event of Default (other than an
Event of Default specified in Section 6.1(g) or Section 6.1(h) hereof) occurs
and is continuing, then and in every such case, the Trustee by a notice in
writing to the Company, or the Holders of not less than 25 percent of the
outstanding aggregate principal amount at Stated Maturity of Convertible Notes
by a notice
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in writing to the Company and the Trustee, may declare the Default Amount,
premium, if any, and any accrued and unpaid interest on all Convertible Notes
then outstanding to be immediately due and payable. Upon any such declaration,
such Default Amount, premium, if any, and any accrued and unpaid interest on all
Convertible Notes then outstanding will become and be immediately due and
payable. If an Event of Default specified in Section 6.1(g) or Section 6.1(h)
hereof occurs, the Default Amount, premium, if any, and any accrued and unpaid
interest on all Convertible Notes then outstanding shall ipso facto become and
be immediately due and payable without any declaration or other act on the part
of the Trustee or any Holder of Convertible Notes.
In the event of a declaration of acceleration because an Event of
Default set forth in Section 6.1(e) hereof has occurred and is continuing, such
declaration of acceleration shall be automatically rescinded and annulled if the
event of default triggering such Event of Default pursuant to Section 6.1(e)
hereof shall be remedied, or cured or waived by the holders of the relevant
Indebtedness within 60 days after such event of default; provided that no
judgment or decree for the payment of the money due on the Convertible Notes has
been obtained by the Trustee as hereinafter in this Article VI provided. In the
event of a declaration of acceleration because an Event of Default set forth in
Section 6.1(i) hereof has occurred and is continuing, such declaration of
acceleration shall be automatically rescinded and annulled (A) if the 14% Senior
Notes and/or 14 5/8% Senior Notes, as applicable, have been repaid, (B) if the
event of default under the 14% Senior Note Indenture and/or the 14 5/8% Senior
Note Indenture, as applicable, triggering such Event of Default pursuant to
Section 6.1(i) hereof shall be remedied or cured, or waived by the holders of
the 14% Senior Notes and/or the 14 5/8% Senior Notes, as applicable, or (C) if
the 14% Senior Notes and/or 14 5/8% Senior Notes, as applicable, have been
accelerated, then the acceleration of the 14% Senior Notes and/or 14 5/8% Senior
Notes, as applicable, shall have been rescinded within 60 days of the occurrence
of such event of default under the 14% Senior Note Indenture and/or the 14 5/8%
Senior Note Indenture, as applicable, and, in the case of clauses (A), (B) or
(C) above, the applicable Senior Note Trustee so certifies to the Trustee,
provided that any such event described in clause (A), (B) or (C) above must
occur prior to the commencement of an enforcement proceeding with respect to
this Indenture.
Until January 13, 2001, the "Default Amount" shall equal the Accreted
Value of the Convertible Notes, as of the date of determination. Thereafter, the
Default Amount of each Convertible Note shall equal 100 percent of the principal
amount at Stated Maturity thereof.
At any time after a declaration of acceleration with respect to
Convertible Notes has been made and before a judgment or decree for payment of
the money due has been obtained by the Trustee as hereinafter in this Article VI
provided, the Holders of a majority in aggregate principal amount at Stated
Maturity of the outstanding Convertible Notes, by written notice to the Company
and the Trustee, may rescind and annul such declaration and its consequences if,
(a) the Company has paid or deposited with the Trustee a sum
sufficient to pay
(i) all overdue installments of interest, if any, on all
Convertible Notes,
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(ii) the principal of (and premium, if any, on) any
Convertible Notes which have become due otherwise than by such declaration
of acceleration and interest thereon at the rate or rates prescribed
therefor in the Convertible Notes and this Indenture,
(iii) to the extent that payment of such interest, if
any, is lawful, interest on the Defaulted Interest at the rate prescribed
therefor in the Convertible Notes and this Indenture, and
(iv) all moneys paid or advanced by the Trustee
hereunder and the reasonable compensation, expenses, disbursements and
advances of the trustee, its agents and counsel and all other amounts due
to the Trustee pursuant to Section 7.7 hereof; and
(b) all Events of Default with respect to the Convertible Notes,
other than the non-payment of the principal of Convertible Notes which have
become due solely by such declaration of acceleration, have been cured or waived
by the Holders as provided herein.
No such rescission shall affect any subsequent Default or impair any
right consequent thereon.
Section 6.3 Other Remedies. The Company covenants that if an Event of
Default specified in Section 6.1(a) or Section 6.1(b) occurs the Company shall,
upon demand of the Trustee, pay to the Trustee, for the benefit of the Holders,
the whole amount then due and payable on the Convertible Notes for principal
(and premium, if any), accrued and unpaid interest, if any, and, to the extent
that payment of such interest shall be legally enforceable, interest upon the
overdue principal (and premium, if any) and upon Defaulted Interest, at the rate
or rates prescribed therefor in such Convertible Notes; and, in addition
thereto, such further amount as shall be sufficient to cover the costs and
expenses of collection, including the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel and all other
amounts due to the Trustee pursuant to Section 7.7 hereof. If the Company fails
to pay such amounts forthwith upon such demand, the Trustee, in its own name and
as trustee of an express trust, may institute a judicial proceeding for the
collection of, or pursue any available remedy under this Indenture or otherwise
to collect, the sums so due and unpaid, and may prosecute such proceeding to
judgment or final decree, and may enforce the same against the Company or any
other obligor upon such Convertible Notes and collect the moneys adjudged or
decreed to be payable in the manner provided by law out of the Property and
assets of the Company or any other obligor upon such Convertible Notes, wherever
situated.
If an Event of Default with respect to the Convertible Notes occurs
and is continuing, the Trustee may in its discretion proceed to protect and
enforce its rights and the rights of the Holders by such appropriate judicial
proceedings as the Trustee shall deem most effectual to protect and enforce any
such rights, whether for the specific enforcement of any covenant or agreement
in this Indenture or in aid of the exercise of any power granted herein, or to
enforce any other proper remedy.
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Section 6.4 Waiver of Existing Defaults. The Holders of a majority in
aggregate principal amount at Stated Maturity of the Convertible Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all the
Convertible Notes waive any existing Default or Event of Default and its
consequences under this Indenture except (a) a continuing Default or Event of
Default in the payment of interest on, premium, if any, on or the principal of,
the Convertible Notes or (b) in respect of a covenant or provision hereof which
under Section 9.2 hereof cannot be modified or amended without the consent of
the Holder of each outstanding Note affected. Upon any such waiver, such Default
shall cease to exist, and any Event of Default arising therefrom shall be deemed
to have been cured for every purpose of this Indenture; but no such waiver shall
extend to any subsequent or other Default or impair any right consequent
thereon.
Section 6.5 Control by Majority. The Holders of not less than a
majority in aggregate principal amount at Stated Maturity of the outstanding
Convertible Notes shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee; provided that
(a) such direction shall not be in conflict with any rule of law
or with this Indenture or unduly prejudicial to the rights of other Holders and
would not subject the Trustee to personal liability, it being understood that
(subject to Section 7.1 hereof) the Trustee shall have no duty to ascertain
whether or not such directions are unduly prejudicial to such Holders, and
(b) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction.
Section 6.6 Limitation on Suits. No Holder of Convertible Notes shall
have any right to institute any proceeding, judicial or otherwise, with respect
to this Indenture, or for the appointment of a receiver or trustee, or for any
other remedy hereunder, unless
(a) such Holder has previously given written notice to the
Trustee of a continuing Event of Default with respect to the Convertible Notes;
(b) the Holders of not less than 25 percent in aggregate
principal amount at Stated Maturity of the outstanding Convertible Notes shall
have made written request to the Trustee to institute proceedings in respect of
such Event of Default in its own name as Trustee hereunder;
(c) such Holder or Holders have offered to the Trustee security
or indemnity satisfactory to the Trustee in its reasonable discretion against
the costs, expenses and liabilities to be incurred in compliance with such
request;
(d) the Trustee for 30 days after its receipt of such notice,
request and offer of indemnity has failed to institute any such proceeding; and
(e) no direction inconsistent with such written request has been
given to the Trustee during such 30-day period by the Holders of a majority in
aggregate principal amount at
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Stated Maturity of the outstanding Convertible Notes; in any event, it being
understood and intended that no one or more Holders of Convertible Notes shall
have any right in any manner whatever by virtue of, or by availing of, any
provision of this Indenture to affect, disturb or prejudice the rights of any
other Holders of Convertible Notes, or to obtain or to seek to obtain priority
or preference over any other of such Holders or to enforce any right under this
Indenture, except in the manner herein provided and for the equal and ratable
benefit of all Holders of Convertible Notes.
Section 6.7 Rights of Holders to Receive Payment. Notwithstanding any
other provision of this Indenture, the right of any Holder to receive payment of
principal of (premium, if any) and interest on the Convertible Notes held by
such Holder, on or after the respective due dates expressed in the Convertible
Notes or the Redemption Dates or purchase dates provided for herein or therein,
or to bring suit for the enforcement of any such payment on or after such
respective dates, shall be absolute and unconditional and shall not be impaired
or affected without the consent of such Holder.
Section 6.8 Trustee May File Proofs of Claim. In case of the pendency
of any receivership, insolvency, liquidation, bankruptcy, reorganization,
arrangement, adjustment, composition or other judicial proceedings, or any
voluntary or involuntary case under United States bankruptcy laws, as now or
hereafter constituted, relative to the Company or any other obligor upon the
Convertible Notes or the Property and assets of the Company or of such other
obligor or their creditors, the Trustee (irrespective of whether the principal
of such Convertible Notes shall then be due and payable as therein expressed or
by declaration or otherwise or irrespective of whether the Trustee or any Holder
shall have made any demand on the Company for the payment of overdue principal
or interest or performed any other act pursuant to the provisions of this
Article) shall be entitled and empowered, by intervention in such proceeding or
otherwise, (i) to file and prove a claim for the whole amount of principal (and
premium, if any) and interest owing and unpaid in respect of the Convertible
Notes, to file such other papers or documents and to take such other actions,
including participating as a member or otherwise in any official committee of
creditors appointed in the matter, as may be necessary or advisable in order to
have the claims of the Trustee (including any claim for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel and all other amounts due to the Trustee pursuant to Section 7.7
hereof) and of the Holders allowed in such judicial proceeding, (ii) unless
prohibited by applicable law and regulations to vote on behalf of the Holders of
the Convertible Notes in any election of a trustee or standby trustee in an
arrangement, reorganization, liquidation or other bankruptcy or insolvency
proceedings or Person performing similar actions in comparable proceedings, and
(iii) to collect and receive any moneys or other Property payable or deliverable
on any such claims and to distribute the same; and any receiver, assignee,
trustee, custodian, liquidator, sequestrator (or other similar official) in any
such proceeding is hereby authorized by each Holder to make such payments to the
Trustee, and in the event that the Trustee shall consent to the making of such
payments directly to the Holders, to pay to the Trustee any amount due it for
the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, and any other amounts due the Trustee under
Section 7.7 hereof. Nothing contained herein shall be deemed to authorize the
Trustee to authorize or consent to or accept or adopt on behalf of any Holder
any plan of reorganization, arrangement,
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adjustment or composition affecting the Convertible Notes or the rights of any
Holder thereof, or to authorize the Trustee to vote in respect of the claim of
any Holder in any such proceeding.
In any proceedings brought by the Trustee (and any proceedings
involving the interpretation of this Indenture to which the Trustee shall be a
party), the Trustee shall be held to represent all the Holders of the
Convertible Notes, and it shall not be necessary to make any Holders of the
Convertible Notes parties to any such proceedings.
Section 6.9 Priorities. Any money collected by the Trustee pursuant
to this Article VI shall be applied in the following order, at the date or dates
fixed by the Trustee and, in case of the distribution of such money on account
of principal (premium, if any), interest, if any, upon presentation of the
Convertible Notes and the notation thereon of the payment if only partially paid
and upon surrender thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee under Section
7.7 hereof;
SECOND: To the payment of the amounts then due and unpaid for
principal of (and premium, if any) or interest, if any, on the Convertible
Notes, ratably, without preference or priority of any kind, according to the
amounts due and payable on such Convertible Notes for principal (and premium, if
any) and interest, respectively; and
THIRD: To the Company, the Guarantors, if any, or as a court of
competent jurisdiction shall decide.
The Trustee may fix a record date and payment date from any payment to
Holders pursuant to this Section 6.9. At least 15 days before such record date,
the Company shall mail to each Holder and the Trustee a notice that states such
record date, the payment date and amount to be paid. The Trustee may mail such
notice in the name and at the expense of the Company.
Section 6.10 Undertaking for Costs. All parties to this Indenture
agree, and each Holder of any Convertible Note by such Holder's acceptance
thereof shall be deemed to have agreed, that any court may in its discretion
require, in any suit for the enforcement of any right or remedy under this
Indenture and the Convertible Note Guarantees, if any, or in any suit against
the Trustee for any action taken, suffered or omitted by it as Trustee, the
filing by any party litigant in such suit of an undertaking to pay the costs of
such suit and that such court may in its discretion assess reasonable costs,
including reasonable attorneys' fees, against any party litigation in such suit,
having due regard to the merits and good faith of the claims or defenses made by
such party litigant; but the provisions of this Section shall not apply to any
suit instituted by the Trustee, to any suit instituted by any Holder, or group
of Holders, holding in the aggregate more than 10 percent in principal amount at
Stated Maturity of the outstanding Convertible Notes, or to any suit instituted
by any Holder for the enforcement of the payment of the principal of (or
premium, if any) or interest, if any, on any Convertible Note on or after its
Stated Maturity.
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Section 6.11 Waiver of Usury, Stay or Extension Laws. The Company and
each Guarantor, if any, (to the extent it may lawfully do so) shall not at any
time insist upon, or plead, or in any manner whatsoever claim or take the
benefit or advantage of, any usury, stay or extension law wherever enacted, now
or at any time hereafter in force, which may affect the covenants or the
performance of this Indenture or the Convertible Note Guarantees, if any; and
the Company and each Guarantor, if any, (to the extent that it may lawfully do
so) hereby expressly waive all benefit or advantage of any such law, and shall
not hinder, delay or impede the execution of any power herein granted to the
Trustee, but shall suffer and permit the execution of every such power as though
no such law had been enacted.
Section 6.12 Trustee May Enforce Claims Without Possession of the
Convertible Notes. All rights of action and claims under this Indenture, the
Convertible Note Guarantees, if any, or the Convertible Notes may be prosecuted
and enforced by the Trustee without the possession of any of the Convertible
Notes or the production thereof in any proceeding relating thereto, and any such
proceeding instituted by the Trustee shall be brought in its own name, as
trustee of an express trust, and any recovery of judgement shall, after
provision for the payment of the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, be for the
ratable benefit of the Holders of the Convertible Notes.
Section 6.13 Restoration of Rights and Remedies. If the Trustee or
any Holder of Convertible Notes has instituted any proceeding to enforce any
right or remedy under this Indenture and such proceeding has been discontinued
or abandoned for any reason, or has been determined adversely to the Trustee or
to such Holder, then and in every such case the Company, the Trustee and the
Holders shall, subject to any determination in such proceeding, be restored
severally and respectively to their former positions hereunder, and thereafter
all rights and remedies of the Trustee and the Holders shall continue as though
no such proceeding had been instituted.
Section 6.14 Rights and Remedies Cumulative. Except as otherwise
provided in Section 2.7 hereof, no right or remedy herein conferred upon or
reserved to the Trustee or to the Holders is intended to be exclusive of any
other right or remedy, and every right and remedy shall, to the extent permitted
by law, be cumulative and in addition to every other right and remedy given
hereunder or now or hereafter existing at law or in equity or otherwise. The
assertion or employment of any right or remedy hereunder, or otherwise, shall
not prevent the concurrent assertion or employment of any other appropriate
right or remedy.
Section 6.15 Delay or Omission Not Waiver. No delay or omission of the
Trustee or of any Holder of any Convertible Note to exercise any right or remedy
accruing upon any Event of Default shall impair any such right or remedy or
constitute a waiver of any such Event of Default or an acquiescence therein.
Every right and remedy given by this Article VI, by the Convertible Note
Guarantees, if any, or by law to the Trustee or to the Holders may be exercised
from time to time, and as often as may be deemed expedient, by the Trustee or by
the Holders, as the case may be.
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ARTICLE VII
TRUSTEE
Section 7.1 Duties of Trustee. (a) If an Event of Default has
occurred and is continuing, the Trustee shall exercise the rights and powers
vested in it by this Indenture and shall use the same degree of care and skill
in their exercise as a prudent person would exercise or use under the
circumstances in the conduct of such person's own affairs.
(b) Except during the continuance of an Event of Default: (i)
the Trustee undertakes to perform such duties and only such duties as are
specifically set forth in this Indenture and no implied covenants or obligations
shall be read into this Indenture against the Trustee; and (ii) in the absence
of bad faith on its part, the Trustee may conclusively rely, as to the truth of
the statements and the correctness of the opinions expressed therein, upon
certificates or opinions furnished to the Trustee and conforming to the
requirements of this Indenture; provided that in the case of any such
certificates or opinions that by any provision of this Indenture are
specifically required to be furnished to the Trustee, the Trustee shall examine
such certificates and opinions to determine whether or not they conform to the
requirements of this Indenture.
(c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act or its own willful
misconduct, provided that: (i) this paragraph (c) shall not limit the effect of
paragraph (b) of this Section 7.1; (ii) the Trustee shall not be liable for any
error of judgment made in good faith by a Trust Officer unless it is proved that
the Trustee was negligent in ascertaining the pertinent facts; and (iii) the
Trustee shall not be liable with respect to any action it takes or omits to take
in good faith in accordance with a direction received by it pursuant to Section
6.5 hereof.
(d) The Trustee shall not be liable for interest on any money
received by it except as the Trustee may agree in writing with the Company.
(e) Money held in trust by the Trustee need not be segregated
from other funds except to the extent required by law.
(f) No provision of this Indenture shall require the Trustee to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder, or in the exercise of any of its
rights or powers, if it shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk of liability is
not reasonably assured to it.
(g) Every provision of this Indenture relating to the conduct or
affecting the liability of or affording protection to the Trustee shall be
subject to the provisions of this Article VII and to the provisions of the Trust
Indenture Act.
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Section 7.2 Rights of Trustee. (a) The Trustee may rely on any
document believed by it to be genuine and to have been signed or presented by
the proper Person. Except as provided in Section 7.1(b) hereof, the Trustee
need not investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may
require an Officers' Certificate or an Opinion of Counsel. The Trustee shall not
be liable for any action it takes or omits to take in good faith in reliance on
any Officers' Certificate or Opinion of Counsel.
(c) The Trustee may act through agents and shall not be
responsible for the misconduct or negligence of any such agent; provided that
such agent was appointed with due care by the Trustee.
(d) The Trustee shall not be liable for any action it takes or
omits to take in good faith which it believes to be authorized or within its
rights or powers; provided that the Trustee's conduct does not constitute
willful misconduct or negligence.
(e) The Trustee shall not be charged with knowledge of any
Default or Event of Default under Sections 6.1(c), 6.1(d), 6.1(e), 6.1(f),
6.1(g), 6.1(h) or 6.1(i) hereof (provided that the Trustee shall comply with the
automatic stay provisions of United States bankruptcy laws), of the identity of
any Restricted Subsidiary or of the existence of any Change of Control, Asset
Sale or Termination of Trading unless either (i) a Trust Officer shall have
actual knowledge thereof, or (ii) the Trustee shall have received notice thereof
in accordance with Sections 4.12 and 14.2 hereof from the Company or in
accordance with Section 14.2 hereof from any Holder of Convertible Notes.
(f) The Trustee may consult with counsel and the written advice
of such counsel or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or omitted
by it hereunder in good faith and in reliance thereon.
(g) The Trustee shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order, bond,
debenture or other paper or document, but the Trustee, in its discretion may
make such further inquiry or investigation into such facts or matters as it may
see fit, and, if the Trustee shall determine to make such further inquiry or
investigation, it shall be entitled to examine the books, records and premises
of the Company, personally or by agent or attorney.
(h) The Trustee shall be under no obligation to exercise any of
the rights or powers vested by this Indenture at the request or direction of any
of the Holders pursuant to this Indenture, unless such Holders shall have
offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which might be incurred by it in compliance with such
request or direction.
(i) The Trustee shall not be required to give any bond or surety
in respect of the performance of its powers and duties hereunder.
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As used throughout this Indenture, the term "actual knowledge" means
the actual fact or statement of knowing, without any duty to make any
investigation with regard thereto.
Section 7.3 Individual Rights of Trustee. The Trustee, any Paying
Agent or Registrar, in its individual or any other capacity, may become the
owner or pledgee of Convertible Notes and may otherwise deal with the Company or
its Affiliates with the same rights it would have if it were not Trustee, Paying
Agent or Registrar hereunder, as the case may be; provided that the Trustee must
in any event comply with Section 7.10 and Section 7.11 hereof.
Section 7.4 Trustee's Disclaimer. The Trustee shall not be
responsible for and makes no representation as to the validity or adequacy of
this Indenture, the Convertible Note Guarantees, if any, or the Convertible
Notes, it shall not be accountable for the Company's use of the proceeds from
the Convertible Notes, and it shall not be responsible (a) for any statement of
the Company in this Indenture, including the recitals contained herein, or in
any document issued in connection with the sale of the Convertible Notes or in
the Convertible Notes other than the Trustee's certificate of authentication or
(b) for compliance by the Company with the Registration Rights Agreement.
Section 7.5 Notice of Defaults. Within 90 days after the occurrence
of any Default hereunder with respect to the Convertible Notes, the Trustee
shall transmit by mail to all Holders, as their names and addresses appear in
the Security Register, notice of such Default hereunder known to the Trustee,
unless such Default shall have been cured or waived; provided that, except in
the case of a Default in the payment of the principal of (or premium, if any) or
interest, if any, on any Convertible Note, the Trustee shall be protected in
withholding such notice if and so long as the board of directors, the executive
committee or a trust committee of directors and/or Trust Officers of the Trustee
in good faith determine that the withholding of such notice is in the interest
of Holders.
Section 7.6 Preservation of Information; Reports by Trustee to
Holders. (a) The Company shall furnish or cause to be furnished to the Trustee:
(i) semiannually, not less than 10 days prior to each
Interest Payment Date, a list, in such form as the Trustee may reasonably
require, of the names and addresses of the Holders as of the Record Date
immediately preceding such Interest Payment Date, and
(ii) at such other times as the Trustee may request in
writing, within 30 days after the receipt by the Company of any such
request, a list of similar form and content as of a date not more than 15
days prior to the time such list is furnished;
provided that if and so long as the Trustee shall be the Registrar for the
Convertible Notes, no such list need be furnished with respect to the
Convertible Notes.
(b) The Trustee shall preserve, in as current a form as is
reasonably practicable, the names and addresses of Holders contained in the most
recent list furnished to the
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Trustee as provided in Section 7.6(a) hereof and the names and addresses of
Holders received by the Trustee in its capacity as Registrar, if so acting. The
Trustee may destroy any list furnished to it as provided in Section 7.6(a)
hereof upon receipt of a new list so furnished.
(c) Holders may communicate as provided in Section 312(b) of the
Trust Indenture Act with other Holders with respect to their rights under this
Indenture, the Convertible Note Guarantees, if any, or the Convertible Notes.
(d) Each Holder of Convertible Notes, by receiving and holding
the same, agrees with the Company and the Trustee that neither the Company nor
the Trustee shall be held accountable by reason of the disclosure of any such
information as to the names and addresses of the Holders in accordance with this
Section 7.6, regardless of the source from which such information was derived,
and that the Trustee shall not be held accountable by reason of mailing any
material pursuant to a request made under this Section 7.6.
(e) Within 60 days after May 15 of each year commencing with the
year 1997, the Trustee shall transmit by mail to all Holders of Convertible
Notes, a brief report dated as of such May 15 if and to the extent required
under Section 313(a) of the Trust Indenture Act.
(f) The Trustee shall comply with Sections 313(b) and 313(c) of
the Trust Indenture Act.
(g) A copy of each report described in Section 7.6(e) hereof
shall, at the time of its transmission to Holders, be filed by the Trustee with
each securities exchange, if any, upon which the Convertible Notes are then
listed, with the Commission and also with the Company. The Company shall
promptly notify the Trustee of any securities exchange upon which the
Convertible Notes are listed.
Section 7.7 Compensation and Indemnity. The Company shall pay to the
Trustee from time to time reasonable compensation for its services. The Company
shall reimburse the Trustee upon request for all reasonable out-of-pocket
expenses incurred or made by it, including costs of collection, in addition to
the compensation for its services. Such expenses shall include the reasonable
compensation and expenses, disbursements and advances of the Trustee's agents
and counsel. The Trustee's compensation shall not be limited by any law on
compensation of a trustee of an express trust.
The Company shall indemnify the Trustee for, and hold it harmless
against, any and all loss, liability or expense (including reasonable attorneys'
fees) arising out of or incurred by it in connection with the acceptance or
administration of the trust created by this Indenture and the performance of its
duties hereunder, except as set forth in the next paragraph. The Trustee shall
notify the Company promptly of any claim for which it may seek indemnity.
Failure by the Trustee to so notify the Company shall not relieve the Company of
its obligations hereunder. The Company shall defend any such claim and the
Trustee shall cooperate in the defense of such claim. The Trustee may have
separate counsel and the Company shall pay the reasonable fees and expenses of
such
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counsel. The Company need not pay for any settlement made without its consent,
which consent shall not be unreasonably withheld.
The Company need not reimburse any expense or indemnify against any
loss, liability or expense incurred by the Trustee through the Trustee's own
willful misconduct or negligence.
To secure the Company's payment obligations in this Section 7.7, the
Trustee shall have a Lien prior to the Convertible Notes on all money or
property held or collected by the Trustee other than money or property held in
trust to pay principal of, premium, if any, and interest on, particular
Convertible Notes.
The Company's payment obligations pursuant to this Section 7.7 shall
survive the resignation or removal of the Trustee and discharge of this
Indenture and any Convertible Note Guarantees. Subject to any other rights
available to the Trustee under applicable bankruptcy law, when the Trustee
incurs expenses after the occurrence of a Default specified in Section 6.1(g) or
Section 6.1(h) hereof, the expenses are intended to constitute expenses of
administration under bankruptcy law.
Section 7.8 Replacement of Trustee. (a) No resignation or removal of
the Trustee and no appointment of a successor Trustee pursuant to this Article
VII shall become effective until the acceptance of appointment by the successor
Trustee under this Section 7.8.
(b) The Trustee may resign at any time by giving written notice
thereof to the Company. If an instrument of acceptance by a successor Trustee
shall not have been delivered to the Trustee within 30 calendar days after the
giving of such notice of resignation, the resigning Trustee may petition any
court of competent jurisdiction for the appointment of a successor Trustee.
(c) The Trustee may be removed at any time by Act of the Holders
of a majority in aggregate principal amount at Stated Maturity of the
outstanding Convertible Notes, delivered to the Trustee and to the Company.
(d) If at any time:
(i) The Trustee shall fail to comply with Section 310(b)
of the Trust Indenture Act after written request therefor by the Company or
by any Holder who has been a bona fide Holder of a Convertible Note for at
least six months, unless the Trustee's duty to resign is stayed in
accordance with the provisions of Section 310(b) of the Trust Indenture
Act; or
(ii) The Trustee shall cease to be eligible under Section
7.10 hereof and shall fail to resign after written request therefor by the
Company or by any such Holder; or
(iii) The Trustee shall become incapable of acting or a
decree or order for relief by a court having jurisdiction in the premises
shall have been
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entered in respect of the Trustee in an involuntary case under the United
States bankruptcy laws, as now or hereafter constituted, or any other
applicable Federal or state bankruptcy, insolvency or similar law; or a
decree or order by a court having jurisdiction in the premises shall have
been entered for the appointment of a receiver, custodian, liquidator,
assignee, trustee, sequestrator (or other similar official) of the Trustee
or of its Property and assets or affairs, or any public officer shall take
charge or control of the Trustee or of its Property and assets or affairs
for the purpose of rehabilitation, conservation, winding up or liquidation;
or
(iv) The Trustee shall commence a voluntary case under the
United States bankruptcy laws, as now or hereafter constituted, or any
other applicable Federal or state bankruptcy, insolvency or similar law or
shall consent to the appointment of or taking possession by a receiver,
custodian, liquidator, assignee, trustee, sequestrator (or other similar
official) of the Trustee or its Property and assets or affairs, or shall
make an assignment for the benefit of creditors, or shall admit in writing
its inability to pay its debts generally as they become due, or shall take
corporate action in furtherance of any such action,
then, in any such case, (i) the Company by a Board Resolution may remove the
Trustee with respect to the Convertible Notes, or (ii) subject to Section 6.10
hereof, any Holder who has been a bona fide Holder of a Convertible Note for at
least six months may, on behalf of such Holder and all others similarly
situated, petition any court of competent jurisdiction for the removal of the
Trustee and the appointment of a successor Trustee for the Convertible Notes.
(e) If the Trustee shall resign, be removed or become incapable
of acting, or if a vacancy shall occur in the office of Trustee for any cause,
the Company, by or pursuant to a Board Resolution, shall promptly appoint a
successor Trustee. If, within one year after such resignation, removal or
incapability, or the occurrence of such vacancy, a successor Trustee shall be
appointed by the Holders of a majority in aggregate principal amount at Stated
Maturity of the outstanding Convertible Notes delivered to the Company and the
retiring Trustee, the successor Trustee so appointed shall, forthwith upon its
acceptance of such appointment in accordance with this Section 7.8, become the
successor Trustee and to that extent replace any successor Trustee appointed by
the Company. If no successor Trustee shall have been so appointed by the Company
or the Holders and shall have accepted appointment in the manner hereinafter
provided, any Holder that has been a bona fide Holder of a Convertible Note for
at least six months may, subject to Section 6.10 hereof, on behalf of himself
and all others similarly situated, petition any court of competent jurisdiction
for the appointment of a successor Trustee.
(f) The Company shall give notice of each resignation and each
removal of the Trustee and each appointment of a successor Trustee by mailing
written notice of such resignation, removal and appointment by first class mail,
postage prepaid, to the Holders as their names and addresses appear in the
Security Register. Each notice shall include the name of the successor Trustee
with respect to the Convertible Notes and the address of its Corporate Trust
Office.
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(g) In the event of an appointment hereunder of a successor
Trustee, each such successor Trustee so appointed shall execute, acknowledge and
deliver to the Company and to the retiring trustee an instrument accepting such
appointment, and thereupon the resignation or removal of the retiring Trustee
shall become effective and such successor Trustee, without any further act, deed
or conveyance, shall become vested with all the rights, powers, trusts, and
duties of the retiring Trustee but, on request of the Company or the successor
Trustee, such retiring Trustee shall, upon payment of its charges, execute and
deliver an instrument transferring to such successor Trustee all the rights,
powers and trusts of the retiring Trustee, and shall duly assign, transfer and
deliver to such successor Trustee all Property and money held by such former
Trustee hereunder, subject to its Lien, if any, provided for in Section 7.7
hereof.
(h) Upon request of any such successor Trustee, the Company
shall execute any and all instruments for more fully and certainly vesting in
and confirming to such successor Trustee all such rights, powers and trusts
referred to in Section 7.8(g) hereof.
(i) No successor Trustee shall accept its appointment unless at
the time of such acceptance such successor Trustee shall be qualified and
eligible under this Article VII and under the Trust Indenture Act.
Section 7.9 Successor Trustee by Merger. Any corporation into which
the Trustee may be merged or converted or with which it may be consolidated, or
any corporation resulting from any merger, conversion or consolidation to which
the Trustee shall be a party, or any corporation succeeding to all or
substantially all of the corporate trust business of the Trustee, shall be the
successor of the Trustee hereunder; provided that such corporation shall be
otherwise qualified and eligible under this Article VII and under the Trust
Indenture Act, without the execution or filing of any paper or any further act
on the part of any of the parties hereto. In case any Convertible Notes shall
have been authenticated, but not delivered, by the Trustee then in office, any
successor by merger, conversion or consolidation to such authenticating Trustee
may adopt such authentication and deliver the Convertible Notes so authenticated
with the same effect as if such successor Trustee had itself authenticated such
Convertible Notes. In the event that any Convertible Notes shall not have been
authenticated by such predecessor Trustee, any such successor Trustee may
authenticate and deliver such Convertible Notes, in either its own name or that
of its predecessor Trustee, with the full force and effect which this Indenture
provides for the certificate of authentication of the Trustee.
Section 7.10 Eligibility; Disqualification. There shall at all times
be a Trustee hereunder which shall be
(i) a corporation organized and doing business under the
laws of the United States of America, any State or Territory thereof or the
District of Columbia, authorized under such laws to exercise corporate
trust powers, and subject to supervision or examination by Federal, State,
Territorial or District of Columbia authority, or
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(ii) a corporation or other Person organized and doing
business under the laws of a foreign government that is permitted to act as
Trustee pursuant to a rule, regulation or order of the Commission,
authorized under such laws to exercise corporate trust powers, and subject
to supervision or examination by authority of such foreign government or a
political subdivision thereof substantially equivalent to supervision or
examination applicable to United States institutional trustees, in either
case having a combined capital and surplus of at least $100,000,000.
If such Person publishes reports of condition at least annually,
pursuant to law or to the requirements of the aforesaid supervising or examining
authority, then for the purposes of this Section 7.10, the combined capital and
surplus of such corporation shall be deemed to be its combined capital and
surplus as set forth in its most recent report of condition so published. If at
any time the Trustee shall cease to be eligible to serve as Trustee hereunder
pursuant to the provisions of this Section 7.10, it shall resign immediately in
the manner and with the effect specified in this Article VII.
The Indenture shall always have a Trustee which satisfies the
requirements of Section 310(a)(1), (2), and (5) of the Trust Indenture Act. If
the Trustee has or shall acquire any "conflicting interest" within the meaning
of Section 310(b) of the Trust Indenture Act, the Trustee and the Company shall
in all respects comply with the provisions of Section 310(b) of the Trust
Indenture Act. Nothing herein shall prevent the Trustee from filing with the
Commission the application referred to in the penultimate paragraph of Section
310(b) of the Trust Indenture Act.
Neither the Company, any Guarantor, any Subsidiary nor any Affiliate
of the Company shall serve as Trustee hereunder.
Section 7.11 Preferential Collection of Claims Against Company. The
Trustee shall comply with Section 311(a) of the Trust Indenture Act, excluding
any creditor relationship listed in Section 311(b) of the Trust Indenture Act.
A Trustee who has resigned or been removed shall be subject to Section 311(a) of
the Trust Indenture Act to the extent indicated therein.
ARTICLE VIII
DEFEASANCE
Section 8.1 Company's Option to Effect Legal Defeasance or Covenant
Defeasance. The Company may elect, at its option, at any time, to have Section
8.2 or Section 8.3 hereof applied to the outstanding Convertible Notes (in whole
and not in part) upon compliance with the conditions set forth below in this
Article VIII, such election shall be evidenced by a Board Resolution delivered
to the Trustee.
Section 8.2 Legal Defeasance and Discharge. Upon the Company's
exercise of its option to have this Section 8.2 applied to the outstanding
Convertible Notes (in whole and not in part), the Company shall be deemed to
have been discharged from its obligations with respect to such Convertible Notes
as provided in this Section 8.2 on and after the date the conditions set forth
in
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Section 8.4 hereof are satisfied (hereinafter called "Defeasance"). For this
purpose, such Defeasance means that the Company shall be deemed to have paid and
discharged the entire indebtedness represented by such Convertible Notes and the
Company and the Guarantors, if any, shall be deemed to have satisfied all their
other obligations under such Convertible Notes, the Convertible Note Guarantees,
if any, and this Indenture (and the Trustee, at the expense of the Company,
shall execute proper instruments acknowledging the same), subject to the
following which shall survive until otherwise terminated or discharged
hereunder:
(a) the rights of Holders of such Convertible Notes to receive,
solely from the trust fund described in Section 8.4 hereof and as more fully set
forth in such Section 8.4 payments in respect of the principal of and any
premium and interest on such Convertible Notes when payments are due,
(b) the Company's obligations with respect to such Convertible
Notes under Sections 2.6, 2.7, 2.9, 4.2, 4.3, 4.4 and 11.3 hereof,
(c) the rights, powers, trusts, duties and immunities of the
Trustee under this Indenture,
(d) Article III hereof,
(e) this Article VIII, and
(f) Article XII hereof.
Subject to compliance with this Article VIII, the Company may exercise
its option to have this Section 8.2 applied to the outstanding Convertible Notes
(in whole and not in part) notwithstanding the prior exercise of its option to
have Section 8.3 hereof applied to such Convertible Notes.
Section 8.3 Covenant Defeasance. Upon the Company's exercise of its
option to have this Section 8.3 applied to the outstanding Convertible Notes (in
whole and not in part), (i) the Company shall be released from its obligations
under Sections 4.5 through 4.11, inclusive, Section 4.14, and any covenant added
to this Indenture subsequent to the Issue Date pursuant to Section 9.1 hereof,
(ii) the occurrence of any event specified in Section 6.1(c) or Section 6.1(d)
hereof, with respect to any of Sections 4.5 through 4.11, inclusive, Section
4.14, and any covenant added to this Indenture subsequent to the Issue Date
pursuant to Section 9.1 hereof, shall be deemed not to be or result in an Event
of Default, in each case with respect to such Convertible Notes as provided in
this Section 8.3 on and after the date the conditions set forth in Section 8.4
hereof are satisfied (hereinafter called "Covenant Defeasance"). For this
purpose, such Covenant Defeasance means that, with respect to such Convertible
Notes, the Company and the Guarantors, if any, may omit to comply with and shall
have no liability in respect of any term, condition or limitation set forth in
any such specified Section (to extent so specified in the case of Sections
6.1(c) and 6.1(d) hereof), whether directly or indirectly by reason of any
reference elsewhere herein to any such Section or by reason of any reference in
any such Section to any other provision herein or in any other document; but the
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remainder of this Indenture, the Convertible Note Guarantees, if any, and such
Convertible Notes shall be unaffected thereby.
Section 8.4 Conditions to Defeasance or Covenant Defeasance. The
following shall be the conditions to the application of Section 8.2 or Section
8.3 hereof to the outstanding Convertible Notes:
(a) The Company shall irrevocably have deposited or caused to be
deposited with the Trustee as trust funds in trust for the purpose of making the
following payments, specifically pledged as security for, and dedicated solely
to the benefits of the Holders of such Convertible Notes, (i) money in an
amount, or (ii) U.S. Government Obligations which through the scheduled payment
of principal and interest in respect thereof in accordance with their terms will
provide, not later than one day before the due date of any payment, money in an
amount, or (iii) a combination thereof, in each case sufficient, in the opinion
of a nationally recognized firm of independent public accountants expressed in a
written certification thereof delivered to the Trustee, to pay and discharge,
and which shall be applied by the Trustee (or any such other qualifying trustee)
to pay and discharge, the principal of and any installment of interest on, such
Convertible Notes at the Stated Maturity thereof, in accordance with the terms
of this Indenture and such Convertible Notes.
(b) In the event of an election to have Section 8.2 hereof apply
to the outstanding Convertible Notes, the Company shall have delivered to the
Trustee an Opinion of Counsel stating that (i) the Company has received from, or
there has been published by, the Internal Revenue Service a ruling or (ii) since
the date of this Indenture, there has been a change in the applicable Federal
income tax law, in either case (i) or (ii) to the effect that, and based thereon
such opinion shall confirm that, the Holders of such Convertible Notes will not
recognize gain or loss for Federal income tax purposes as a result of the
deposit, Defeasance and discharge to be effected with respect to such
Convertible Notes and will be subject to Federal income tax on the same amount,
in the same manner and at the same times as would be the case if such deposit,
Defeasance and discharge were not to occur.
(c) In the event of an election to have Section 8.3 hereof apply
to the outstanding Convertible Notes, the Company shall have delivered to the
Trustee an Opinion of Counsel to the effect that the Holders of such Convertible
Notes will not recognize gain or loss for Federal income tax purposes as a
result of the deposit and Covenant Defeasance to be effected with respect to
such Convertible Notes and will be subject to Federal income tax on the same
amount, in the same manner and at the same times as would be the case if such
deposit and Covenant Defeasance were not to occur.
(d) No Default or Event of Default with respect to the
outstanding Convertible Notes shall have occurred and be continuing at the time
of such deposit after giving effect thereto and no Default or Event of Default
under Section 6.1(g) or 6.1(h) shall have occurred and be continuing on or prior
to the 91st day after the date of such deposit (it being understood that this
condition shall not be deemed satisfied until after such 91st day).
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(e) Such Defeasance or Covenant Defeasance shall not cause the
Trustee to have a conflicting interest within the meaning of the Trust Indenture
Act (assuming for the purpose of this clause (e) that all Convertible Notes are
in default within the meaning of such Act).
(f) Such Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or coincided a default under, any other agreement or
instrument to which the Company or any Guarantor, if any, is a party or by which
it is bound.
(g) Such Defeasance or Covenant Defeasance shall not result in
the trust arising from such deposit constituting an investment company within
the meaning of the Investment Company Act of 1940, as amended, unless such trust
shall be registered under such Act or exempt from registration thereunder.
(h) The Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent with respect to such Defeasance or Covenant Defeasance have been
complied with.
Section 8.5 Deposited Money and U.S. Government Obligations to be Held
in Trust; Miscellaneous Provisions. All money and U.S. Government Obligations
(including the proceeds thereof) deposited with the Trustee pursuant to Section
8.4 hereof in respect of the outstanding Convertible Notes shall be held in
trust and applied by the Trustee, in accordance with the provisions of such
Convertible Notes and this Indenture, to the payment, either directly or through
any such Paying Agent as the Trustee may determine, to the Holders of such
Convertible Notes, of all sums due and to become due thereon in respect of
principal and any premium and interest, but money so held in trust need not be
segregated from other funds except to the extent required by law. The Company
shall pay and indemnify the Trustee against any tax, fee or other charge imposed
on or assessed against the U.S. Government Obligations deposited pursuant to
Section 8.4 hereof or the principal and interest received in respect thereof
other than any such tax, fee or other charge which by law is for the account of
the Holders of outstanding Convertible Notes.
Anything in this Article VIII to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time upon Company Order
any money or U.S. Government Obligations held by it as provided in Section 8.4
hereof which, in the opinion of a nationally recognized firm of independent
public accounts expressed in a written certification thereof delivered to the
Trustee, are in excess of the amount thereof that would the be required to be
deposited to effect the Defeasance or Covenant Defeasance, as the case may be,
with respect to the outstanding Convertible Notes.
Section 8.6 Reinstatement. If the Trustee or Paying Agent is unable
to apply any money in accordance with this Article VIII with respect to any
Convertible Notes by reason of any order or judgment of any court or
governmental authority enjoining, restraining or otherwise prohibiting such
application then the obligations under this Indenture, the Convertible Note
Guarantees, if any, and such Convertible Notes from which the Company and any
Guarantor has been discharged or released pursuant to Section 8.2 or 8.3 hereof
shall be revived and reinstated as though
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no deposit has occurred pursuant to this Article VIII with respect to such
Convertible Notes, until such time as the Trustee or Paying Agent is permitted
to apply all money held in trust pursuant to Section 8.5 hereof with respect to
such Convertible Notes in accordance with this Article VIII; provided that if
the Company or any Guarantor makes any payment of principal of or any premium,
interest, if any, on any such Convertible Note following such reinstatement of
its obligations, the Company or such Guarantor, as the case may be, shall be
subrogated to the rights (if any) of the Holders of such Convertible Notes to
receive such payment from the money so held in trust.
ARTICLE IX
AMENDMENTS
Section 9.1 Without Consent of Holders. The Company, the Guarantors,
if any, and the Trustee may, at any time, and from time to time, without notice
to or consent of any Holders of Convertible Notes, enter into one or more
indentures supplemental hereto, in form satisfactory to the Trustee, for any of
the following purposes:
(a) to evidence the succession of another Person to the Company
or a Guarantor, as applicable, and the assumption by such successor of the
covenants and obligations of the Company in this Indenture and the Convertible
Notes or such Guarantor contained in its Convertible Note Guarantee and this
Indenture; or
(b) to add to the covenants of the Company, for the benefit of
the Holders of all of the Convertible Notes, or to surrender any right or power
herein conferred upon the Company or the Guarantors, if any, by this Indenture;
or
(c) to add any additional Events of Default; or
(d) to provide for uncertificated Convertible Notes in addition
to or in place of Certificated Convertible Notes; or
(e) to evidence and provide for the acceptance of appointment
hereunder of a successor Trustee; or
(f) to cure any ambiguity herein, or to correct or supplement
any provision hereof which may be inconsistent with any other provision hereof
or to add any other provisions with respect to matters or questions arising
under this Indenture; provided that such actions shall not adversely affect the
interests of the Holders of Convertible Notes in any material respect; or
(g) to provide for Restricted Subsidiaries to become Guarantors
pursuant to Section 4.9 hereof and Article X hereof; or
(h) to secure the Convertible Notes; or
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(i) to make provisions with respect to the conversion rights of
Holders pursuant to the requirements of Section 12.4 or Section 12.11 hereof; or
(j) to comply with the requirements of the Commission in order
to effect or maintain qualification of this Indenture under the Trust Indenture
Act.
Section 9.2 With Consent of Holders. With the consent of the Holders
of not less than a majority in aggregate principal amount of the outstanding
Convertible Notes, by Act of said Holders delivered to the Company, the
Guarantors, if any, and the Trustee, the Company, the Guarantors, if any, and
the Trustee may enter into one or more indentures supplemental hereto for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of this Indenture or of modifying in any manner the rights of
the Holders; provided that no such supplemental indenture shall, without the
consent of the Holder of each outstanding Convertible Note:
(a) change the Stated Maturity of the principal of, or any
installment of interest, if any, on, any Convertible Note, or reduce the
Accreted Value or principal amount at Stated Maturity thereof (or any premium,
if any), or the interest thereon, that would be due and payable upon Stated
Maturity thereof, or reduce the Default Amount that would be due and payable
upon Stated Maturity thereof, or change the place of payment where, or the coin
or currency in which, any Convertible Note or any premium or interest thereon is
payable, or impair the right to institute suit for the enforcement of any such
payment on or after the Stated Maturity thereof; or
(b) reduce the percentage in principal amount, of the
outstanding Convertible Notes, the consent of whose Holders is necessary for any
such supplemental indenture or required for any waiver of compliance with
certain provisions of this Indenture or the Convertible Note Guarantees, if any,
or Defaults hereunder; or
(c) modify any of the provisions of Section 6.4 hereof, except
to increase any percentage set forth therein or to provide that certain other
provisions of this Indenture cannot be modified or waived without the consent of
the Holder of each outstanding Convertible Note affected thereby; or
(d) subordinate in right of payment, or otherwise subordinate,
the Convertible Notes or any Convertible Note Guarantees to any other
Indebtedness other than Senior Indebtedness; or
(e) modify any of the provisions of this Section 9.2, except to
increase any percentage set forth herein or to provide that certain other
provisions of this Indenture cannot be modified or waived without the consent of
the Holder of each outstanding Convertible Note affected thereby; or
(f) make any change in the provisions of Article XI, which would
adversely affect the Holders of the Convertible Notes; or
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(g) adversely affect the rights of the Holders of the
Convertible Notes to convert such Convertible Notes; or
(h) modify the obligations of the Company to make offers to
purchase Convertible Notes upon a Change of Control or from the proceeds of
Asset Sales or upon a Termination of Trading.
It shall not be necessary for any Act of Holders under this Section
9.2 to approve the particular form of any proposed supplemental indenture, but
it shall be sufficient if such Act shall approve the substance thereof.
Section 9.3 Effect of Supplemental Indentures. Upon the execution of
any supplemental indenture under this Article IX, this Indenture shall be
modified in accordance therewith, and such supplemental indenture shall form a
part of this Indenture for all purposes; and every Holder of Convertible Notes
theretofore or thereafter authenticated and delivered hereunder shall be bound
thereby.
Section 9.4 Compliance with Trust Indenture Act. Every amendment or
supplement to this Indenture or the Convertible Notes shall comply with the
Trust Indenture Act as then in effect.
Section 9.5 Revocation and Effect of Consents and Waivers. A consent
to an amendment, supplement or a waiver by a Holder of a Convertible Note shall
bind the Holder and every subsequent Holder of such Convertible Note or portion
of such Convertible Note that evidences the same debt as the consenting Holder's
Convertible Note, even if notation of the consent or waiver is not made on such
Convertible Note; provided that any such Holder or subsequent Holder may revoke
the consent or waiver as to such Holder's Convertible Note or portion of such
Convertible Note if the Trustee receives the notice of revocation before the
date the amendment, supplement or waiver become effective. After an amendment,
supplement or waiver becomes effective pursuant to this Article IX, it shall
bind every Holder.
The Company may, but shall not be obligated to, fix a record date for
the purpose of determining the Holders entitled to give their consent or take
any other action described above or required or permitted to be taken pursuant
to this Indenture. If a record date is fixed, then notwithstanding the
immediately preceding paragraph, those Persons who were Holders at such record
date (or their duly designated proxies), and only those Persons, shall be
entitled to give such consent or to revoke any consent previously given or to
take any such action, whether or not such Persons continue to be Holders after
such record date. No such consent shall be valid or effective for more than 120
days after such record date.
Section 9.6 Notation on or Exchange of Convertible Notes. If a
supplemental indenture changes the terms of a Convertible Note, the Trustee may
require the Holder thereof to deliver such Convertible Note to the Trustee. The
Trustee may place an appropriate notation on such Convertible Note regarding the
changed terms and return it to the Holder. Alternatively, if the Company or the
Trustee so determines, the Company in exchange for such Convertible Note shall
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issue and the Trustee shall authenticate a new Convertible Note that reflects
the changed terms. Failure to make the appropriate notation or to issue a new
Convertible Note shall not affect the validity of such amendment of supplement.
Section 9.7 Trustee to Execute Supplemental Indentures. The Trustee
shall execute any supplemental indenture authorized pursuant to this Article IX
if such supplemental indenture does not adversely affect the rights, duties,
liabilities or immunities of the Trustee. If it does, the Trustee may, but
shall not be required to, execute such supplemental indenture. In executing any
supplemental indenture, the Trustee shall be entitled to received indemnity
reasonably satisfactory to it and to receive, and (subject to Section 7.1
hereof) shall be fully protected in relying upon, an Officers' Certificate
(which need only cover the matters set forth in clause (a) below) and an Opinion
of Counsel provided by the Company stating that:
(a) such supplemental indenture is authorized or permitted by
this Indenture and that all conditions precedent to the execution, delivery and
performance of such supplemental indenture have been satisfied;
(b) the Company and the Guarantors, if any, have all necessary
corporate power and authority to execute and deliver the supplemental indenture
and that the execution, delivery and performance of such supplemental indenture
has been duly authorized by all necessary corporate action of the Company and
the Guarantors, if any;
(c) the execution, delivery and performance of the supplemental
indenture do not conflict with, or result in the breach of or constitute a
default under any of the terms, conditions or provisions of (i) this Indenture,
(ii) the charter documents and by-laws of the Company or any Guarantor, or (iii)
any material agreement or instrument to which the Company or any Guarantor is
subject;
(d) to the best knowledge and belief of legal counsel writing
such Opinion of Counsel, the execution, delivery and performance of the
supplemental indenture do not conflict with, or result in the breach of any of
the terms, conditions or provisions of (i) any law or regulation applicable to
the Company or any Guarantor, or (ii) any material order, writ, injunction or
decree of any court or governmental instrumentality applicable to the Company or
any Guarantor;
(e) such supplemental indenture has been duly and validly
executed and delivery by the Company and the Guarantors, if any, and this
Indenture together with such supplemental indenture constitutes a legal, valid
and binding obligation of the Company and the Guarantors, if any, enforceable
against the Company and the Guarantors, as applicable, in accordance with its
terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency or similar laws affecting the enforcement of creditors' rights
generally and general equitable principles; and
(f) this Indenture together with such amendment or supplement
complies with the Trust Indenture Act.
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Section 9.8 Solicitation of Consents. Neither the Company nor any of
its Subsidiaries nor any of their Affiliates shall, directly or indirectly, pay
or cause to be paid any consideration, whether by way of interest, fees or
otherwise, to any Holders of any Convertible Notes for or as an inducement to
any consent, waiver or amendment of any of the terms or provisions of this
Indenture, the Convertible Note Guarantees, if any, or the Convertible Notes,
unless such consideration is offered to be paid or agreed to be paid to all
Holders of the Convertible Notes that consent, waive or agree to amend in the
time frame set forth in the solicitation documents relating to such consent,
waiver or agreement.
ARTICLE X
CONVERTIBLE NOTE GUARANTEES
Section 10.1 Convertible Note Guarantees. (a) Subject to the
provisions of this Article X, each Restricted Subsidiary of the Company, if any,
which in accordance with Section 4.9 hereof is required in the future to become
a Guarantor and to guarantee the obligations of the Company and the Guarantors
under the Convertible Notes and the Convertible Note Guarantees, upon execution
of a supplemental indenture, hereby jointly and severally, irrevocably and
unconditionally guarantees to the Trustee and to each Holder of a Convertible
Note authenticated and delivered by the Trustee irrespective of the validity or
enforceability of this Indenture, the Convertible Notes, or the obligations of
the Company and any other Guarantors, under this Indenture that: (i) the
principal of, premium, if any, and any interest, if any, on the Convertible
Notes (including, without limitation, any interest that accrues after the filing
of a proceeding of the type described in Sections 6.1(g) and (h)) and any fees,
expenses and other amounts owing under this Indenture will be duly and
punctually paid in full when due, whether at Stated Maturity, by acceleration,
call for redemption, upon a Change of Control Offer, Asset Sale Offer, exercise
of a repurchase right upon a Termination of Trading, purchase or otherwise, and
interest on the overdue principal and (to the extent permitted by law) interest,
if any, on the Convertible Notes and any other amounts due in respect of the
Convertible Notes, if lawful, and all other obligations of the Company and the
Guarantors, if any, to the Holders of the Convertible Notes under this Indenture
and the Convertible Notes, whether now or hereafter existing, will be promptly
paid in full or performed, all strictly in accordance with the terms hereof, of
the Convertible Notes and of the Convertible Note Guarantees, if any; and (ii)
in case of any extension of time of payment or renewal of any Convertible Notes
or any of such other obligations, the same will be promptly paid in full when
due or performed in accordance with the terms of the extension or renewal,
whether at Stated Maturity, by acceleration, call for redemption, upon a Change
of Control Offer, Asset Sale Offer, exercise of a repurchase right upon a
Termination of Trading, purchase or otherwise. If payment is not made when due
of any amount so guaranteed for whatever reason, each Guarantor shall be jointly
and severally obligated to pay the same individually whether or not such failure
to pay has become an Event of Default which could cause acceleration pursuant to
Section 6.2. Each Guarantor agrees that this is a guarantee of payment and not
a guarantee of collection. An Event of Default under this Indenture or the
Convertible Notes shall constitute an Event of Default under this Convertible
Note Guarantee, and shall entitle the Holders to accelerate the obligations of
each Guarantor hereunder in the same manner and to the same extent as the
obligations of the Company. This Convertible Note Guarantee is intended to be
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superior to or pari passu in right of payment with all Indebtedness of the
Guarantors, other than the Senior Note Guarantees, if any, of such Guarantors,
and each Guarantor's obligations are independent of any obligation of the
Company or any other Guarantor.
(b) Each Guarantor hereby agrees that its obligations hereunder
shall be joint and several, absolute, irrevocable and unconditional,
irrespective of the validity, regularity or enforceability of the Convertible
Notes, this Indenture, or any other document relating thereto, the absence of
any action to enforce the same, any waiver or consent by any Holder with respect
to any provisions hereof or thereof, any release of any other Guarantor, the
recovery of any judgment against the Company or any other Person, any action to
enforce the same or any other circumstance (including, without limitation, any
statute of limitations) which might otherwise constitute a legal or equitable
discharge or defense of a Guarantor. Each Guarantor hereby waives promptness,
diligence, presentment, demand of payment, filing of claims with a court in the
event of insolvency or bankruptcy of the Company or any other Person, any right
to require a proceeding first against the Company or any other Person, protest,
notice and all demands whatsoever and covenants that its Convertible Note
Guarantee will not be discharged except by complete performance of the
obligations contained in the Convertible Notes, this Indenture and this
Convertible Note Guarantee. If any Holder or the Trustee is required by any
court or otherwise to return to the Company or to any Guarantor, or any
receiver, trustee, assignee, liquidator or similar official under any applicable
bankruptcy or insolvency or other similar law any amount paid by the Company or
such Guarantor to the Trustee or such Holder, this Convertible Note Guarantee,
to the extent theretofore discharged, shall be reinstated in full force and
effect.
(c) Until such time as the Convertible Notes and the other
obligations of the Company guaranteed hereby have been satisfied in full, each
Guarantor hereby irrevocably waives any claim or other rights that it may now or
hereafter acquire against the Company or any other Guarantor that arise from the
existence, payment, performance or enforcement of such Guarantor's obligations
under this Convertible Note Guarantee, including, without limitation, any right
of subrogation, reimbursement, exoneration, contribution or indemnification and
any right to participate in any claim or remedy of the Holders or the Trustee
against the Company or any other Guarantor, whether or not such claim, remedy or
right arises in equity or under contract, statute or common law, including,
without limitation, the right to take or receive from the Company or any other
Guarantor, directly or indirectly, in cash or other property or by set-off or in
any other manner, payment or security on account of such claim, remedy or right.
If any amount shall be paid to such Guarantor in violation of the preceding
sentence at any time prior to the later of the payments in full of the
Convertible Notes and all other amounts payable under this Indenture, this
Convertible Note Guarantee and the Stated Maturity of the Convertible Notes,
such amount shall be held in trust for the benefit of the Holders and the
Trustee and shall forthwith be paid to the Trustee to be credited and applied to
the Convertible Notes and all other amounts payable under this Convertible Note
Guarantee, whether matured or unmatured, in accordance with the terms of this
Indenture, or to be held as collateral for any obligations or other amounts
payable under this Convertible Note Guarantee thereafter arising. Each Guarantor
acknowledges that it will receive direct and indirect benefits from the
financing arrangements contemplated by this Indenture and that the waiver set
forth in this Section 10.1(c) is knowingly made in contemplation of such
benefits. Each Guarantor further agrees that,
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as between it, on the one hand, and the Holders and the Trustee, on the other
hand, (x) subject to this Article X, the maturity of the obligations guaranteed
hereby may be accelerated as provided in Article VI for the purposes of this
Convertible Note Guarantee, notwithstanding any stay, injunction or other
prohibition preventing such acceleration in respect of the obligations
guaranteed hereby, and (y) in the event of any acceleration of such obligations
guaranteed hereby as provided in Article VI, such obligations (whether or not
due and payable) shall further then become due and payable by the Guarantors for
the purposes of this Convertible Note Guarantee.
(d) A Guarantor that makes a distribution or payment under a
Convertible Note Guarantee shall be entitled to contribution from each other
Guarantor in a pro rata amount based on the Adjusted Net Assets of each such
other Guarantor for all payments, damages and expenses incurred by that
Guarantor in discharging the Company's obligations with respect to the
Convertible Notes and this Indenture, or any other Guarantor with respect to its
Convertible Note Guarantee, so long as the exercise of such right does not
impair the rights of the Holders of the Convertible Notes under the Convertible
Note Guarantees.
(e) The Company shall cause each Restricted Subsidiary which,
after the date of this Indenture, is required pursuant to Section 4.10(a) hereof
to become a Guarantor to (a) execute and deliver to the Trustee a supplemental
indenture in form and substance reasonably satisfactory to the Trustee which
subjects such Restricted Subsidiary to the provisions of this Indenture as a
Guarantor, and (b) deliver to the Trustee an Opinion of Counsel to the effect
that such supplemental indenture has been duly authorized and executed by such
Person and constitutes the legal, valid, binding and enforceable obligation of
such Person (subject to such customary exceptions concerning debtor's rights and
equitable principles as may be acceptable to the Trustee in its reasonable
discretion) and containing such other matters as the Trustee may reasonably
request.
Section 10.2 Limitation of Guarantor's Liability. Each Guarantor and,
by its acceptance hereof, each beneficiary hereof, hereby confirms that it is
its intention that the Convertible Note Guarantee by such Guarantor not
constitute a fraudulent transfer or conveyance for purposes of the United States
Bankruptcy Code, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent
Transfer Act, or any other bankruptcy, receivership, insolvency, liquidation or
other similar legislation or legal principles under any applicable foreign law
to the extent applicable to any Convertible Note Guarantees. To effectuate the
foregoing intention, each such Guarantor hereby irrevocably agrees that the
obligation of such Guarantor under its Convertible Note Guarantee under this
Article X shall be limited to the lesser of (a) an amount equal to such
Guarantor's Adjusted Net Assets as of the date such Guarantee is executed and
delivered or (b) the maximum amount as will, after giving effect to such maximum
amount and all other contingent and fixed liabilities of such Guarantor that are
relevant under such laws and after giving effect to any collections from, rights
to receive contribution from or payments made by or on behalf of any other
Guarantor in respect of the obligations of such other Guarantor under this
Article X result in the obligations of such Guarantor in respect of such maximum
amount not constituting a fraudulent conveyance or fraudulent transfer or not
otherwise being void, voidable or unenforceable under any bankruptcy,
reorganization, receivership, insolvency, liquidation or other similar
legislation or legal principles under any applicable foreign law.
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Section 10.3 Execution and Delivery of Convertible Note Guarantees.
To further evidence its Convertible Note Guarantee set forth in Section 10.1
hereof, each Guarantor hereby agrees that a notation of such Convertible Note
Guarantee may be, but is not required to be, endorsed on each Convertible Note
authenticated and delivered by the Trustee and executed by either manual or
facsimile signature of an authorized officer of such Guarantor. Each Guarantor
hereby agrees that its Convertible Note Guarantee set forth in Section 10.1
hereof shall remain in full force and effect notwithstanding any failure to
endorse on each Convertible Note a notation of such Convertible Note Guarantee.
If an Officer of a Guarantor whose signature is on this Indenture or a
Convertible Note no longer holds that office at the time the Trustee
authenticates such Convertible Note or at any time thereafter, such Guarantor's
Convertible Note Guarantee of such Convertible Note shall be valid nevertheless.
The delivery of any Convertible Note by the Trustee, after the authentication
thereof hereunder, whether or not endorsed with a notation of the Convertible
Note Guarantee, shall constitute due delivery of any Convertible Note Guarantee
set forth in this Indenture on behalf of such Guarantor.
Section 10.4 When a Guarantor May Merge, etc. No Guarantor shall
consolidate with or merge with or into (whether or not such Guarantor is the
surviving person) another corporation, Person or entity whether or not
affiliated with such Guarantor (but excluding any consolidation or merger if the
surviving corporation is no longer a Subsidiary) unless (i) subject to the
provisions of Section 10.5 hereof, the Person formed by or surviving any such
consolidation or merger (if other than such Guarantor) assumes all the
obligations of such Guarantor pursuant to a supplemental indenture in form
reasonably satisfactory to the Trustee under the Convertible Notes and this
Indenture and (ii) immediately after giving effect to such transaction, no
Default or Event of Default exists. In connection with any such consolidation
or merger, the Trustee shall be entitled to receive an Officers' Certificate and
an Opinion of Counsel stating that such consolidation or merger is permitted by
this Section 10.4.
Section 10.5 Release of a Guarantor. (a) Upon the sale or other
transfer of all of the Capital Stock of a Guarantor to any Person that is not an
Affiliate of the Company in compliance with the terms of this Indenture
(including, without limitation, Section 4.8 hereof), such Guarantor shall be
deemed automatically and unconditionally released and discharged from all
obligations under this Indenture without any further action required on the part
of the Trustee or any Holder; provided that the Net Cash Proceeds of such sale
or other disposition are applied in accordance with Section 4.8 of this
Indenture as if such sale or disposition were an Asset Sale and in accordance
with the applicable provisions of this Indenture. The Trustee shall deliver an
appropriate instrument or instruments evidencing such release upon receipt of a
request of the Company accompanied by an Officers' Certificate and Opinion of
Counsel certifying as to the compliance with this Section 10.5(a) and the other
applicable provisions of this Indenture.
(b) Notwithstanding the foregoing, any Convertible Note
Guarantee by a Restricted Subsidiary shall be automatically and unconditionally
released and discharged upon the release or discharge of the guarantee of
Guaranteed Indebtedness which resulted in the creation of such Convertible Note
Guarantee pursuant to Section 4.9 hereof, except a discharge or release by, or
as a result of, payment under such guarantee. The Trustee shall deliver an
appropriate instrument
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or instruments evidencing such release upon receipt of a request of the Company
accompanied by an Officers' Certificate and Opinion of Counsel certifying as to
compliance with this Section 10.5(b) and the other applicable provisions of this
Indenture.
ARTICLE XI
SUBORDINATION OF CONVERTIBLE NOTES AND
CONVERTIBLE NOTE GUARANTEES
Section 11.1 Convertible Notes and Convertible Note Guarantees
Subordinated to Senior Indebtedness. The Company and the Guarantors covenant
and agree, and each Holder of a Convertible Note, by acceptance thereof,
likewise covenants and agrees, that, to the extent and in the manner hereinafter
set forth and except as otherwise set forth in this Article, the Indebtedness
represented by the Convertible Notes and this Indenture (including the
Convertible Note Guarantees) and the payment of the principal of and premium, if
any, and interest on each and all of the Convertible Notes and of any amounts
due in respect of any Convertible Notes and this Indenture (including the
Convertible Note Guarantees and any payments thereon made or to be made by a
Guarantor under its Convertible Note Guarantee), are hereby expressly made
subordinate and subject in right of payment to the prior payment in full of all
Senior Indebtedness.
Section 11.2 Payment Over of Proceeds Upon Dissolution, etc. In the
event of (a) any insolvency or bankruptcy case or proceeding, or any
receivership, liquidation, reorganization or other similar case or proceeding,
relative to the Company or other Obligor or to its creditors, as such, or to a
substantial part of its assets, or (b) any proceeding for the liquidation,
dissolution or other winding up of the Company or any other Obligor, whether
voluntary or involuntary and whether or not involving insolvency or bankruptcy,
or (c) any assignment for the benefit of creditors or any other marshalling of
assets and liabilities of the Company or any other Obligor, then and in any such
event the holders of Senior Indebtedness shall be entitled to receive payment in
full of all amounts due or to become due on or in respect of all Senior
Indebtedness, or provision shall be made for such payment in money or money's
worth, before the Holders of the Convertible Notes are entitled to receive any
payment or distribution of any kind or character, whether in cash, property or
securities, on account of principal of or premium, if any, or interest on the
Convertible Notes and on account of any amounts due in respect of any
Convertible Notes and any payment thereon made or to be made by a Guarantor
under its Convertible Note Guarantee, and to that end until the Senior
Indebtedness is paid in full the holders of Senior Indebtedness shall be
entitled to receive, for application to the payment thereof, any payment or
distribution of any kind or character, whether in cash, property or securities,
including any such payment or distribution which may be payable or deliverable
by reason of the payment of any other indebtedness of the Company or any other
Obligor being subordinated to the payment of the Convertible Notes or the
Convertible Note Guarantees, as applicable, which may be payable or deliverable
in respect of the Convertible Notes or the Convertible Note Guarantees, as
applicable, in any such case, proceeding, dissolution, liquidation or other
winding up, assignment for the benefit of creditors or other marshalling of
assets and liabilities of the Company or any other Obligor.
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In the event that, notwithstanding the foregoing provisions of this
Section, the Trustee or the Holder of any Convertible Note shall have received
any payment or distribution of assets of the Company or any other Obligor of any
kind or character, whether in cash, property or securities, prohibited by the
foregoing, including any such payment or distribution which may be payable or
deliverable by reason of the payment of any other indebtedness of the Company or
of a Guarantor being subordinated to the payment of the Convertible Notes or a
Convertible Note Guarantee, as applicable, before all Senior Indebtedness is
paid in full or payment thereof provided for, and if such fact shall, at or
prior to the time of such payment or distribution, have been made known to a
Trust Officer of the Trustee in writing or such Holder, as the case may be, then
and in such event such payment or distribution shall be paid over or delivered
forthwith to the trustee in bankruptcy, receiver, liquidating trustee,
custodian, assignee, agent or other person making payment or distribution of
assets of the Company or any other Guarantor for application to the payment of
all Senior Indebtedness remaining unpaid, to the extent necessary to pay all
Senior Indebtedness in full, after giving effect to any concurrent payment or
distribution to or for the holders of Senior Indebtedness.
For purposes of this Article only, the words "cash, property or
securities" shall not be deemed to include securities of the Company or any
other Guarantor or other Person as reorganized or readjusted, or securities of
the Company or any other Guarantor or any other Person which are Capital Stock
or subordinated in right of payment to all Senior Indebtedness which may at the
time be outstanding to substantially the same extent as, or to a greater extent
than, the Convertible Notes or the Convertible Note Guarantees are so
subordinated as provided in this Article. The consolidation of the Company
with, or the merger of the Company into, another Person or the liquidation or
dissolution of the Company following the conveyance or transfer of its
Properties and assets substantially as an entirety to another person upon the
terms and conditions set forth in Article V shall not be deemed a dissolution,
winding up, liquidation, reorganization, assignment for the benefit of creditors
or marshalling of assets and liabilities of the Company for the purposes of this
Section if the Person formed by such consolidation or into which the Company is
merged or which acquires by conveyance or transfer such properties and assets
substantially as an entirety, as the case may be, shall, as part of such
consolidation, merger, conveyance or transfer, comply with the conditions set
forth in Article V. Similarly, the consolidation of a Guarantor with, or the
merger of a Guarantor into, another Person or the liquidation or dissolution of
a Guarantor to the extent permitted by this Indenture shall not be deemed a
dissolution, winding up, liquidation, reorganization, assignment for the benefit
of creditors or marshalling of assets and liabilities of a Guarantor for the
purposes of this Section.
Section 11.3 Prior Payment to Senior Indebtedness upon Acceleration
of Convertible Notes. In the event that any Convertible Notes are declared due
and payable before their Stated Maturity, then and in such event the holders of
Senior Indebtedness outstanding at the time such Convertible Notes so become due
and payable shall be entitled to receive payment in full in cash of all amounts
due on or in respect of such Senior Indebtedness before the Holders of the
Convertible Notes are entitled to receive any payment (including any payment
which may be payable by reason of the payment of any other indebtedness of the
Company or any other Obligor being subordinated to the payment of the
Convertible Notes or the Convertible Note Guarantees, as applicable) by the
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Company or any other Obligor on account of the principal of or premium, if any,
or interest, on or other amounts due in respect of, the Convertible Notes or the
Convertible Note Guarantees, as applicable, or on account of the purchase or
other acquisition of Convertible Notes, except for payments in Capital Stock or
securities which are subordinated in right of payment to all Senior
Indebtedness, which may at the time be outstanding, to substantially the same
extent as, or to a greater extent than, the Convertible Notes or the Convertible
Note Guarantees are so subordinated, as provided in this Article.
In the event that, notwithstanding the foregoing, the Company shall
make any payment to the Trustee or the Holder of any Convertible Note prohibited
by the foregoing provisions of this Section, and if such fact shall, at or prior
to the time of such payment, have been made known to a Trust Officer of the
Trustee in writing, or such Holder, as the case may be, then and in such event
such payment shall be paid over and delivered forthwith to the Company.
The provisions of this Section shall not apply to any payment with
respect to which Section 11.2 would be applicable.
Section 11.4 No Payment When Senior Indebtedness in Default. (a)
In the event (i) and during the continuation of any default in the payment of
principal of, premium, if any, on, interest, if any, on, or other amounts due in
respect of, any Senior Indebtedness, whether at the date of a required payment,
maturity, upon mandatory prepayment, redemption or otherwise, or (ii) that any
event of default with respect to any Senior Indebtedness shall have occurred and
be continuing and shall have resulted in such Senior Indebtedness becoming or
being declared due and payable prior to the date on which it would otherwise
have become due and payable unless and until such event of default shall have
been cured or waived in writing or shall have ceased to exist and such
acceleration shall have been rescinded or annulled or if any judicial proceeding
is pending with respect to such event of default with respect to the Senior
Indebtedness, then no payment (including any payment which may be payable by
reason of the payment of any other indebtedness of the Company being
subordinated to the payment of the Convertible Notes) shall be made by the
Company on account of the principal of, premium, if any, interest on, or other
amounts due in respect of, the Convertible Notes or on account of the purchase,
redemption or other acquisition of Convertible Notes, except for payments in
Capital Stock or securities which are subordinated in right of payment to all
Senior Indebtedness, which may at the time be outstanding, to substantially the
same extent as, or to a greater extent than, the Convertible Notes or the
Convertible Note Guarantees are so subordinated, as provided in this Article.
(b) In the event that, notwithstanding the foregoing, the Company
shall make any payment to the Trustee or the Holder of any Convertible Note
prohibited by the foregoing provisions of this Section, and if such fact shall,
at or prior to the time of such payment, have been made known to a Trust Officer
of the Trustee in writing or to such Holder, as the case may be, then and in
such event such payment shall be paid over and delivered forthwith to the
Company.
The provisions of this Section shall not apply to any payment with
respect to which Section 11.2 would be applicable.
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Section 11.5 Payment Permitted If No Default. Nothing contained in
this Article or elsewhere in this Indenture or in any of the Convertible Notes
shall prevent (a) the Company or the Guarantors, at any time except during the
pendency of any case, proceeding, dissolution, liquidation, or other winding up,
assignment for the benefit of creditors or other marshalling of assets and
liabilities of the Company referred to in Section 11.2 or under the conditions
described in Section 11.3 or 11.4, from making payments at any time of principal
of and premium, if any, or interest on the Convertible Notes, or other amounts
due in respect of the Convertible Notes, or the Convertible Note Guarantees, as
applicable, or (b) the application by the Trustee of any money deposited with it
hereunder to the payment of or on account of the principal of, premium, if any,
or interest on, or other amounts due in respect of, the Convertible Notes or
retention of such payment by the Holders, if, at the time of such application by
the Trustee, it did not have knowledge that such payment would have been
prohibited by the provisions of this Article.
Section 11.6 Subrogation to Rights of Holders of Senior Indebtedness.
Subject to the prior payment in full of all amounts due on or in respect of
Senior Indebtedness, the Holders of the Convertible Notes shall be subrogated to
the extent of the payments or distributions made to the holders of such Senior
Indebtedness pursuant to the provisions of this Article to the rights of the
holders of such Senior Indebtedness to receive payments and distributions of
cash, property and securities applicable to the Senior Indebtedness until the
principal of, premium, if any, on, interest on, and any other amounts due in
respect of, the Convertible Notes shall be paid in full. For purposes of such
subrogation, no payments or distributions to the holders of the Senior
Indebtedness of any cash, property or securities to which the Holders of the
Convertible Notes or the Trustee would be entitled except for the provisions of
this Article, and no payments over pursuant to the provisions of this Article to
the holders of Senior Indebtedness by Holders of the Convertible Notes or the
Trustee, shall, as among the Company and any Guarantor, as the case may be, its
respective creditors other than holders of Senior Indebtedness and the Holders
of the Convertible Notes, be deemed to be a payment or distribution by the
Company or any Guarantor, as applicable, to or on account of the Senior
Indebtedness.
Section 11.7 Provisions Solely to Define Relative Rights. The
provisions of this Article are and are intended solely for the purpose of
defining the relative rights of the Holders of the Convertible Notes on the one
hand and the holders of Senior Indebtedness on the other hand. Nothing contained
in this Article or elsewhere in this Indenture or in the Convertible Notes is
intended to or shall (a) impair, as among the Company or any Guarantor, its
respective creditors other than holders of Senior Indebtedness and the Holders
of the Convertible Notes, the obligation of the Company or such Guarantor, which
is absolute and unconditional, to pay to the Holders of the Convertible Notes,
the principal of, premium, if any, on, interest on, and any other amounts due in
respect of, the Convertible Notes or in respect of the Convertible Note
Guarantees, as applicable, as and when the same shall become due and payable in
accordance with their terms; or (b) affect the relative rights against the
Company or the Guarantors, if any, of the Holders of the Convertible Notes and
creditors of the Company other than the holders of Senior Indebtedness; or (c)
prevent the Trustee or the Holder of any Convertible Notes from exercising all
remedies otherwise permitted by applicable law upon default under this
Indenture, subject to the rights, if any, under this Article of the
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holders of Senior Indebtedness to receive cash, property and securities
otherwise payable or deliverable to the Trustee or such Holder.
Section 11.8 Trustee to Effectuate Subordination. Each Holder of a
Convertible Note by his acceptance thereof authorizes and directs the Trustee on
his behalf to take such action as may be necessary or appropriate to effectuate
the subordination provided for in this Article and appoints the Trustee his
attorney-in-fact for any and all such purposes.
Section 11.9 No Waiver of Subordination Provisions. No right of any
present or future holder of any Senior Indebtedness to enforce subordination as
herein provided shall at any time in any way be prejudiced or impaired by any
act or failure to act on the part of the Company or any Guarantor or by any act
or failure to act, in good faith, by any such holder, or by any noncompliance by
the Company or any Guarantor with the terms, provisions and covenants of this
Indenture, regardless of any knowledge thereof any such holder may have or be
otherwise charged with. No provision of the subordination provisions contained
in this Article may be amended without the consent of a majority in principal
amount at Stated Maturity of Senior Indebtedness as provided by the terms of
such Senior Indebtedness.
Without in any way limiting the generality of the foregoing paragraph,
the holders of Senior Indebtedness may, at any time and from time to time,
without the consent of or notice to the Trustee or the Holders of the
Convertible Notes, without incurring responsibility to the Holders of the
Convertible Notes and without impairing or releasing the subordination provided
in this Article or the obligations hereunder of the Holders of the Convertible
Notes to be holders of Senior Indebtedness, do any one or more of the following:
(i) change the manner, place or terms of payment or extend the time of payment,
of, or renew or alter, Senior Indebtedness, or otherwise amend or supplement in
any manner Senior Indebtedness or any instrument evidencing the same or any
agreement under which Senior Indebtedness is outstanding; (ii) sell, exchange,
release or otherwise deal with any property pledged, mortgaged or otherwise
securing Senior Indebtedness; (iii) release any person liable in any manner for
the collection of Senior Indebtedness; and (iv) exercise or refrain from
exercising any rights against the Company or any Guarantor and any other Person.
Section 11.10 Notice to Trustee. The Company and each Guarantor shall
give prompt written notice to the Trustee of any fact known to the Company or
such Guarantor which would prohibit the making of any payment to or by the
Trustee in respect of the Convertible Notes or the Convertible Note Guarantees,
as applicable. Notwithstanding the provisions of this Article or any other
provision of this Indenture, the Trustee shall not be charged with knowledge of
the existence of any facts which would prohibit the making of any payment to or
by the Trustee in respect of the Convertible Notes or the Convertible Note
Guarantees unless and until a Trust Officer of the Trustee shall have received
written notice thereof from the Company, any Guarantor or a holder of Senior
Indebtedness or from any trustee therefor; and, prior to the receipt of any such
written notice, the Trustee, subject to the provisions of Section 7.1, shall be
entitled in all respects to assume that no such facts exist; provided that if a
Trust Officer of the Trustee shall not have received the notice provided for in
this Section at least three Business Days prior to the date upon which by the
terms hereof any money may become payable for any purpose (including, without
limitation, the payment of the principal of, premium, if any, or interest on,
and any other amounts due in respect of any
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Convertible Note), then, anything herein contained to the contrary
notwithstanding, the Trustee shall have full power and authority to receive such
money and to apply the same to the purpose for which such money was received and
shall not be affected by any notice to the contrary which may be received by it
within three Business Days prior to such date.
Subject to the provisions of Section 7.1, the Trustee shall be
entitled to rely on the delivery to it of a written notice by a Person
representing himself to be a holder of Senior Indebtedness (or a trustee
therefor) to establish that such notice has been given by a holder of Senior
Indebtedness (or a trustee therefor). In the event that the Trustee determines
in good faith that further evidence is required with respect to the right of any
person as a holder of Senior Indebtedness to participate in any payment or
distribution pursuant to this Article, the Trustee may request such Person to
furnish evidence to the satisfaction of the Trustee as to the amount of Senior
Indebtedness held by such Person, the extent to which such Person is entitled to
participate in such payment or distribution and any other facts pertinent to the
rights of such person under this Article, and if such evidence is not furnished,
the Trustee may defer any payment to such Person pending judicial determination
as to the right of such Person to receive such payment.
Section 11.11 Reliance on Judicial Order or Certificate of Liquidating
Agent. Upon any payment or distribution of assets of the Company referred to in
this Article, the Trustee, subject to the provisions of Section 7.1, and the
Holders of the Convertible Notes shall be entitled to rely upon any order or
decree entered by any court of competent jurisdiction in which such insolvency,
bankruptcy, receivership, liquidation, reorganization, dissolution, winding up
or similar case or proceeding is pending, or a certificate of the trustee in
bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit
of creditors, agent or other Person making such payment or distribution,
delivered in writing to the Trustee or to the Holders of Convertible Notes, for
the purpose of ascertaining the Persons entitled to participate in such payment
or distribution, the holders of the Senior Indebtedness and other indebtedness
of the Company, the amount thereof or payable thereon, the amount or amounts
paid or distributed thereon and all other facts pertinent thereto or to this
Article.
Section 11.12 Trustee Not Fiduciary for Holders of Senior
Indebtedness. The Trustee shall not be deemed to owe any fiduciary duty to the
holders of Senior Indebtedness and shall not be liable to any such holders if it
shall in good faith mistakenly pay over or distribute to Holders of Convertible
Notes or to the Company or to any other Person cash, property or securities to
which holders of Senior Indebtedness shall be entitled by virtue of this Article
or otherwise.
Section 11.13 Rights of Trustee as Holder of Senior Indebtedness;
Preservation of Trustee's Rights. The Trustee in its individual capacity shall
be entitled to all the rights set forth in this Article with respect to any
Senior Indebtedness which may at any time be held by it, to the same extent as
any other holder of Senior Indebtedness, and nothing in this Indenture shall
deprive the Trustee of any of its rights as such holder.
Nothing in this Article shall apply to claims of, or payment to, the
Trustee under or pursuant to Section 7.7.
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Section 11.14 Article Applicable to Paying Agents. In case at any time
any Paying Agent other than the Trustee shall have been appointed by the Company
and be then acting hereunder, the term "Trustee" as used in this Article shall
in such case (unless the context otherwise requires) be construed as extending
to and including such Paying Agent within its meaning as fully for all intents
and purposes as if such Paying Agent were named in this Article in addition to
or in place of the Trustee; provided that Section 11.13 shall not apply to the
Company or any Affiliate of the Company if it or such Affiliate acts as Paying
Agent.
Section 11.15 Certain Conversions Deemed Payment. For the purposes of
this Article only, (a) the issuance and delivery of junior securities upon
conversion of Convertible Notes in accordance with Article XII shall not be
deemed to constitute a payment or distribution on account of the principal of,
premium, if any, on, interest on, or other amounts due in respect of,
Convertible Notes or on account of the purchase or other acquisition of
Convertible Notes and (b) the payment, issuance or delivery of cash, property or
securities (other than junior securities) upon conversion of a Convertible Note
shall be deemed to constitute payment on account of the principal of such
Convertible Note. For the purposes of this Section, the term "junior securities"
means (i) shares of any class of Capital Stock of the Company and (ii)
securities of the Company or a Guarantor which are subordinated in right of
payment to all Senior Indebtedness which may be outstanding at the time of
issuance or delivery of such securities to substantially the same extent as, or
to a greater extent than, the Convertible Notes are so subordinated as provided
in this Article. Nothing contained in this Article or elsewhere in this
Indenture or in the Convertible Notes or the respective Convertible Note
Guarantees is intended to or shall impair, as among the Company, its respective
creditors other than holders of Senior Indebtedness and the Holders of the
Convertible Notes, the right, which is absolute and unconditional, of the Holder
of any Convertible Note to convert such Convertible Notes in accordance with and
subject to the provisions of Article XII.
ARTICLE XII
CONVERSION OF CONVERTIBLE NOTES
Section 12.1 Conversion Privilege and Conversion Price. Subject to and
upon compliance with the provisions of this Article, at the option of the Holder
thereof, any Convertible Note or any portion of the principal amount thereof
which equals $1,000 or any integral multiple thereof may be converted at any
time on or after 9:00 a.m. New York City time on March 13, 1998 at the Accreted
Value thereof (or of such portion thereof) as of the date of conversion thereof,
if such date of conversion is prior to January 13, 2001, or the principal amount
at Stated Maturity thereof (or of such portion thereof) if the date of
conversion thereof is on or after January 13, 2001, into fully paid and
nonassessable shares (calculated as to each conversion to the nearest 1/100 of a
share) of Common Stock, at the Conversion Price, determined as hereinafter
provided, in effect at the time of conversion. Such conversion right shall
expire at the close of business on the Business Day next preceding the Stated
Maturity of principal. In case a Convertible Note or portion thereof is called
for redemption, such conversion right in respect of the Convertible Note or
portion so called shall expire at the close of business on the Business Day next
preceding the Redemption Date, unless the Company defaults in making the payment
due upon redemption.
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The price at which Common Stock of the Company shall be delivered upon
conversion (herein called the "Conversion Price") shall be equal to $10.121 per
share.
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 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 percent
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.
Notwithstanding anything to the contrary contained herein, no Holder
shall be entitled to convert any of its Convertible Notes into Common Stock of
the Company to the extent that any such conversion would constitute a violation
of any applicable securities laws of the United States, or any other applicable
jurisdiction. Any certificates evidencing Common Stock of the Company issued
upon the conversion of Convertible Notes shall bear such legends, including
legends reflecting restrictions on transfer required in order to maintain
compliance with the provisions of the Securities Act, as the Company shall deem
to be necessary or appropriate.
Section 12.2 Exercise of Conversion Privileges. In order to
exercise the conversion privilege, the Holder of any Convertible Note shall
surrender such Convertible Note, duly endorsed or assigned to the Company or in
blank, at any office or agency of the Company maintained pursuant to Section
4.2, accompanied by written notice to the Company in the form provided in the
Convertible Note (or such other notice as is acceptable to the Company) at such
office or agency that the Holder elects to convert such Convertible Note or, if
less than the entire principal amount thereof is to be converted, the portion
thereof to be converted. In the case of any Convertible Note which is
surrendered for conversion during the period from the close of business on any
Record Date through and including the next succeeding Interest Payment Date
(other than any Convertible Note whose Maturity is prior to such Interest
Payment Date), interest that is payable on such Interest Payment Date shall be
payable on such Interest Payment Date notwithstanding such conversion, and such
interest (whether or not punctually paid or duly provided for) shall be paid to
the Person in whose name that Convertible Note is registered at the close of
business on such Record Date; provided that Convertible Notes surrendered for
conversion subsequent to any such Record Date shall (except in the case of
Convertible Notes or portions thereof which have been called for redemption on a
Redemption Date within such period) be accompanied by payment in New York
Clearing House funds or other funds acceptable to the Company of an amount equal
to the interest payable on such Interest Payment Date on the principal amount
being surrendered for conversion. Except as provided in the immediately
preceding sentence, in the case of any Convertible Note which is converted (a)
interest whose Stated Maturity is after the date of conversion of such
Convertible
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Note shall not be payable, and (b) no payment or adjustment shall be made upon
conversion on account of any dividends on the Common Stock of the Company issued
upon conversion.
Convertible Notes shall be deemed to have been converted immediately
prior to the close of business on the day of surrender of such Convertible Notes
for conversion in accordance with the foregoing provisions, and at such time the
rights of the Holders of such Convertible Notes as Holders shall cease, and the
Person or Persons entitled to receive the Common Stock of the Company issuable
upon conversion shall be treated for all purposes as the record holder or
holders of such Common Stock as and after such time. As promptly as practicable
on or after the conversion date, the Company shall issue and shall deliver at
any office or agency of the Company maintained pursuant to Section 4.2 a
certificate or certificates for the number of full shares of Common Stock of the
Company issuable upon conversion, together with payment in lieu of any fraction
of a share, as provided in Section 12.3.
In the case of any Convertible Note which is converted in part only,
upon such conversion the Company shall execute and the Trustee shall
authenticate and deliver to the Holder thereof, at the expense of the Company, a
new Convertible Note or Convertible Notes of authorized denominations in
aggregate principal amount equal to the unconverted portion of the principal
amount of such Convertible Note.
Section 12.3 Fractions of Shares. No fractional share of Common Stock
of the Company shall be issued upon conversion of Convertible Notes. If more
than one Convertible Note shall be surrendered for conversion at one time by the
same Holder, the number of full shares of Common Stock which shall be issuable
upon conversion thereof shall be computed on the basis of the aggregate
principal amount of the Convertible Notes (or specified portions thereof) so
surrendered. Instead of any fractional share of such Common Stock which would
otherwise be issuable upon conversion of any Convertible Note or Convertible
Notes (or specified portions thereof), the Company shall pay a cash adjustment
in respect of such fractional share in an amount equal to such fraction
multiplied by the Closing Price at the close of business on the day of
conversion (or, if such day is not a Trading Day, on the Trading Day immediately
preceding such day).
Section 12.4 Adjustment of Conversion Price.
(a) In case the Company shall make a dividend or other distribution
on any class or series of Capital Stock of the Company exclusively in Common
Stock of the Company (other than a distribution referred to in paragraph (c) of
this Section), the Conversion Price in effect at the opening of business on the
day following the date fixed for the determination of stockholders entitled to
receive such dividend or other distribution shall be reduced by multiplying such
Conversion Price by a fraction of which the numerator shall be the number of
shares of Common Stock of the Company outstanding at the close of business on
the date fixed for such determination and the denominator shall be the sum of
such number of shares of Common Stock and the total number of shares of Common
Stock constituting such dividend or other distribution, such reduction to become
effective immediately after the opening of business on the day following the
date fixed for such determination. In case the Company shall make a dividend or
other distribution on its Common Stock in shares of
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its Capital Stock other than Common Stock, and such dividend or distribution
would not otherwise require reduction of the Conversion Price pursuant to
paragraph (d), then the Conversion Price and the number and kind of shares of
Capital Stock of the Company issuable upon the conversion of a Convertible Note
(as in effect immediately prior to such dividend or distribution) shall be
proportionately adjusted, so that the Holder of any Convertible Note thereafter
converted may receive the aggregate number and kind of shares of Capital Stock
of the Company that such Holder would have owned immediately following such
dividend or distribution if such Convertible Note had been converted immediately
prior thereto. For the purpose of this paragraph (a), the amount of Common
Stock of the Company at any time outstanding shall not include shares held in
the treasury of the Company but shall include shares issuable in respect of
scrip certificates issued in lieu of fractions of shares of such Common Stock.
The Company shall not pay any dividend or make any distribution on shares of
Common Stock held in the treasury of the Company.
(b) Subject to the last sentence of paragraph (e) of this Section, in
case the Company shall make a dividend or other distribution on its Common Stock
consisting exclusively of, or shall otherwise issue to all holders of its Common
Stock, rights, options or warrants entitling the holders thereof to subscribe
for or purchase Common Stock or securities convertible into or exchangeable for
Common Stock at a price per share (determined on an as-converted or as-exercised
basis if the rights, options or warrants pertain to securities convertible into
or exchangeable for Common Stock) which is less than the Current Market Price
(determined as provided in paragraph (h) of this Section) on the date fixed for
the determination of stockholders entitled to receive such rights, options or
warrants, the Conversion Price in effect at the opening of business on the day
following the date fixed for such determination shall be reduced by multiplying
such Conversion Price by a fraction of which the numerator shall be the number
of shares of Common Stock outstanding at the close of business on the date fixed
for such determination plus the number of shares of Common Stock which the
aggregate of the offering price (including the minimum consideration payable
upon conversion or exchange of securities convertible into or exchangeable for
Common Stock) of the total number of shares of such Common Stock so offered for
subscription or purchase would purchase at such Current Market Price and the
denominator shall be the number of shares of Common Stock outstanding at the
close of business on the date fixed for such determination plus the number of
shares of Common Stock so offered for subscription or purchase, such reduction
to become effective immediately after the opening of business on the day
following the date fixed for such determination. For the purposes of this
paragraph (b), the number of shares of Common Stock at any time outstanding
shall not include shares held in the treasury of the Company but shall include
shares issuable in respect of scrip certificates issued in lieu of fractions of
shares of such Common Stock. The Company shall not issue any rights, options or
warrants in respect of shares of Common Stock held in the treasury of the
Company.
(c) In case outstanding shares of Common Stock of the Company shall
be subdivided into a greater number of shares of such Common Stock, the
Conversion Price in effect at the opening of business on the day following the
day upon which such subdivision becomes effective shall be proportionately
reduced, and, conversely, in case outstanding shares of such Common Stock shall
be combined into a smaller number of shares of Common Stock, the Conversion
Price in effect at the opening of business on the day following the day upon
which such combination
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becomes effective shall be proportionately increased, such reduction or
increase, as the case may be, to become effective immediately after the opening
of business on the day following the day upon which subdivision or combination
becomes effective.
(d) (i) Subject to the last sentence of this paragraph (d)(i) and the
last sentence of paragraph (e) of this Section, in case the Company shall, by
dividend or otherwise, distribute to all holders of its Common Stock evidences
of its Indebtedness, shares of any class of its Capital Stock, cash or other
assets (including securities, but excluding any rights, options or warrants
referred to in paragraph (b) of this Section, excluding any dividend or
distribution paid exclusively in cash out of consolidated current or retained
earnings as shown on the books of the Company prepared in accordance with GAAP
(other than any Extraordinary Cash Dividend (as hereinafter defined)) and
excluding any dividend or distribution referred to in paragraph (a) or (c) of
this Section), the Conversion Price shall be reduced by multiplying the
Conversion Price in effect immediately prior to the close of business on the
date fixed for the determination of stockholders entitled to such distribution
by a fraction of which the numerator shall be the Current Market Price
(determined as provided in paragraph (h) of this Section) on such date less the
fair market value (as determined by the Board of Directors, whose determination
shall be conclusive and described in a Board Resolution) on such date of the
portion of the evidences of Indebtedness, shares of Capital Stock, cash and
other assets to be distributed applicable to one share of Common Stock and the
denominator shall be such Current Market Price, such reduction to become
effective immediately prior to the opening of business on the day following such
date. If the Board of Directors determines the fair market value of any
distribution for purposes of this paragraph (d)(i) by reference to the actual or
when-issued trading market for any securities comprising part or all of such
distribution, it must in doing so consider those prices in such market over the
same period used in computing the Current Market Price pursuant to paragraph (h)
of this Section, to the extent possible. For purposes of this paragraph (d), an
"Extraordinary Cash Dividend" shall be that portion, if any, of the aggregate
amount of all cash dividends paid in any fiscal year which exceeds $25,000,000.
For purposes of this paragraph (d), any dividend or distribution that includes
shares of Common Stock of the Company, rights, options or warrants to subscribe
for or purchase shares of such Common Stock or securities convertible into or
exchangeable for shares of Common Stock shall be deemed to be (x) a dividend or
distribution of the evidences of Indebtedness, cash, assets or shares of Capital
Stock other than shares of Common Stock, such rights, options or warrants or
such convertible or exchangeable securities (making any conversion price
reduction required by this paragraph (d)(i)) immediately followed by (y) in the
case of shares of Common Stock or such rights, options or warrants, a dividend
or distribution thereof (making any further conversion price reduction required
by paragraph (a) and (b) of this Section, except any shares of Common Stock
included in such dividend or distribution shall not be deemed "outstanding at
the close of business on the date fixed for such determination" within the
meaning of paragraph (a) of this Section), or (z) in the case of such
convertible or exchangeable securities, a dividend or distribution of the number
of shares of Common Stock as would then be issuable upon the conversion or
exchange thereof, whether or not the conversion or exchange of such securities
is subject to any conditions (making any further conversion price reduction
required by paragraph (a) of this Section, except that the shares deemed to
constitute such dividend or distribution shall not be deemed "outstanding at the
close of business on the date fixed for such determination" within the meaning
of paragraph (a) of this Section).
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(ii) In case the Company shall issue its Common Stock
for a consideration per share less than the Current Market Price
(determined as provided in paragraph (h) of this Section), the Conversion
Price shall be reduced by multiplying the Conversion Price in effect
immediately prior to the close of business on the date on which the Company
fixes the offering price of such additional Common Stock by a fraction of
which the numerator shall be the number of shares of Common Stock
outstanding at the close of business on the date fixed for such
determination plus a fraction equal to the aggregate consideration received
by the Company from the issuance of such additional shares of Common Stock
over the Current Market Price on the date on which the Company fixes the
offering price of such additional shares of Common Stock (determined as
provided in paragraph (h) of this Section), and the denominator of which
shall be the number of shares of Common Stock outstanding immediately after
giving effect to such issuance. The reduction in the Conversion Price
provided for in the preceding sentence shall not apply to issuances of
securities in transactions described in clauses (i) through (xi) of Section
15(d)(ii) of the Warrant Agreement;
(iii) In case the Company shall issue any securities
convertible into or exchangeable for its Common Stock for a consideration
per share (including the minimum consideration per share payable upon
conversion or exchange of any securities convertible into or exchangeable
for Common Stock) of Common Stock initially deliverable upon conversion or
exchange of such securities less than the Current Market Price (determined
as provided in paragraph (h) of this Section), the Conversion Price shall
be reduced by multiplying the Conversion Price in effect immediately prior
to the close of business on the date on which the Company fixes the
offering price of such additional shares by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding
immediately prior to the issuance of such securities plus a fraction equal
to the aggregate consideration received for the issuance of such securities
(including the minimum consideration per share payable upon conversion or
exchange of any securities convertible into or exchangeable for such Common
Stock) over the Current Market Price on the date on which the Company fixes
the offering price of such additional shares (determined as provided in
paragraph (h) of this Section), and the denominator of which shall be the
number of shares outstanding immediately prior to the issuance of such
securities plus the maximum number of shares deliverable upon conversion of
or in exchange for such securities at the initial conversion or exchange
rate. The reduction in the Conversion Price provided for in the preceding
sentence shall not apply to issuances of securities in transactions
described in clauses (i) through (ix) of Section 15(d)(iii) of the Warrant
Agreement.
(e) The reclassification of Common Stock of the Company into
securities which include securities other than such Common Stock (other than any
reclassification upon a consolidation or merger to which Section 12.11 applies)
shall be deemed to involve (i) a distribution of such securities other than such
Common Stock to all holders of such Common Stock (and the
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effective date of such reclassification shall be deemed to be "the date fixed
for the determination of stockholders entitled to such distribution" within the
meaning of paragraph (d)(i) of this Section), and (ii) a subdivision or
combination, as the case may be, of the number of shares of Common Stock of the
Company outstanding immediately prior to such reclassification into the number
of shares of Common Stock outstanding immediately thereafter (and the effective
date of such reclassification shall be deemed to be "the day upon which such
subdivision becomes effective" or "the day upon which such combination becomes
effective," as the case may be, and "the day upon which such subdivision or
combination becomes effective" within the meaning of paragraph (c) of this
Section). Rights, options or warrants issued by the Company to all holders of
the Common Stock entitling the holders thereof to subscribe for or purchase
shares of such Common Stock (either initially or under certain circumstances),
which rights, options or warrants (i) are deemed to be transferred with such
Common Stock, (ii) are not exercisable and (iii) are also issued in respect of
future issuances of such Common Stock, in each case in clauses (i) through (iii)
until or upon the occurrence of a specified event or events ("Trigger Event"),
shall for purposes of this Section 12.4 not be deemed issued until the
occurrence of the earliest Trigger Event.
(f) In case the Company shall, by dividend or otherwise, at any time
distribute to all holders of the Common Stock of the Company cash (excluding any
cash that is distributed as part of a distribution referred to in paragraph
(d)(i) of this Section in an aggregate amount that, together with (i) the
aggregate amount of any other distributions to all holders of such Common Stock
made exclusively in cash within the 12 months preceding the date fixed for the
determination of shareholders entitled to such distribution and in respect of
which no Conversion Price adjustment pursuant to paragraph (d)(i) or this
paragraph (f) has been made previously and (ii) the aggregate of any cash plus
the fair market value (as determined by the Board of Directors, whose
determination shall be conclusive and described in a resolution of the Board of
Directors) as of such date of determination of consideration payable in respect
of any tender offer by the Company or a Restricted Subsidiary for all or any
portion of its Common Stock, and any purchase by the Company of its Common Stock
in the open market, consummated within the 12 months preceding such date of
determination and in respect of which no Conversion Price adjustment pursuant to
paragraph (f) of this Section has been made previously, exceeds 12.5% of the
product of the Current Market Price (determined as provided in paragraph (h) of
this Section) on such date of determination times the number of shares of Common
Stock of the Company outstanding on such date, the Conversion Price shall be
reduced by multiplying the Conversion Price in effect immediately prior to the
close of business on such date of determination by a fraction of which the
numerator shall be the Current Market Price (determined as provided in paragraph
(h) of this Section) on such date less the amount of cash to be distributed at
such time applicable to one share of such Common Stock and the denominator shall
be such Current Market Price, such reduction to become effective immediately
prior to the opening of business on the day after such date.
(g) In case a tender or exchange offer made by the Company or any
Subsidiary for all or any portion of the Common Stock of the Company shall be
consummated, or in case the Company shall purchase shares of Common Stock in the
open market, the Conversion Price shall be reduced by multiplying the Conversion
Price in effect immediately prior to the Expiration Time by a fraction of which
(x) the numerator shall be the product of the Current Market Price
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(determined as provided in paragraph (h) of this Section) times the number of
shares of such Common Stock outstanding (including any tendered or exchanged
shares) at the Expiration Time and (y) the denominator shall be the sum of (A)
the fair market value (determined as aforesaid) of the aggregate consideration
payable to shareholders upon consummation of such tender or exchange offer, or
upon such purchase, and (B) the product of such Current Market Price times such
number of outstanding shares at the Expiration Time minus the number of shares
accepted for payment in such tender or exchange offer, or so purchased (the
"Purchased Shares"). For the purpose of this paragraph, "Expiration Time" means
either the last time that tenders may be made pursuant to a tender offer or
exchanges may be made pursuant to an exchange offer, or the time of an agreement
to purchase shares in the open market, as the case may be. Any reduction in the
Conversion Price pursuant to this paragraph shall be made immediately following
the close of business on the last Trading Day used to compute Current Market
Price; provided, that, such reduction shall be deemed to have become effective
immediately prior to the opening of business on the day following the Expiration
Time. To the extent that a Holder converts Convertible Notes prior to the
conclusion of the period for which Current Market Price is to be calculated, any
adjustment in the amount of Common Stock of the Company issuable upon exercise
of such Convertible Note shall inure to the benefit of the Holder of such
Convertible Note at the close of business on the first Trading Day following the
Expiration Time. In no event shall the Exercise Price be increased as a result
of the consummation of any of the transactions contemplated by this paragraph
(g).
(h) For the purpose of any computation under this paragraph and
paragraphs (b) and (d), of this Section, the current market price per share of
Common Stock (the "Current Market Price") on any date shall be deemed to be the
average of the daily Closing Prices for the 30 consecutive Trading Days
commencing 45 Trading Days before the date in question. Notwithstanding anything
to the contrary contained in this paragraph, (i) if the "ex" date for any event
(other than the issuance or distribution requiring such computation) that
requires an adjustment to the Conversion Price pursuant to paragraph (a), (b),
(c) or (d) above occurs on or after the 15th Trading Day prior to the date in
question and prior to the "ex" date for the issuance or distribution requiring
such computation, the Closing Price for each Trading Day prior to the "ex" date
for such other event shall be adjusted by multiplying such Closing Price by the
same fraction by which the Conversion Price is so required to be adjusted as a
result of such other event, (ii) if the "ex" date for any event (other than the
issuance or distribution requiring such computation) that requires an adjustment
to the Conversion Price pursuant to paragraph (a), (b), (c) or (d), above occurs
on or after the "ex" date for the issuance or distribution requiring such
computation and on or prior to the date in question, the Closing Price for each
Trading Day on and after the "ex" date for such other event shall be adjusted by
multiplying such Closing Price by the reciprocal of the fraction by which the
Conversion Price is so required to be adjusted as a result of such other event,
and (iii) if the "ex" date for the issuance or distribution requiring such
computation is on or prior to the date in question, after taking into account
any adjustment required pursuant to clause (ii) of this proviso, the Closing
Price for each Trading Day on or after such "ex" date shall be adjusted by
adding thereto the amount of any cash and the fair market value on the date in
question (as determined by the Board of Directors in a manner consistent with
any determination of such value for purposes of paragraph (d) of this Section,
whose determination shall be conclusive and described in a Board Resolution) of
the evidences of Indebtedness, shares of Capital Stock or assets being
distributed applicable to one share of Common
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Stock of the Company as of the close of business on the day before such "ex"
date. If on any date there has not been a Public Equity Offering of if there is
no Closing Price available for the Common Stock of the Company on any date, the
Current Market Price shall be determined (a) in good faith by the Board of
Directors of the Company and certified in a board resolution, based on the most
recently completed arms-length transaction between the Company and a person
other than an Affiliate (as defined in Rule 405 of the Securities Act of 1933,
as amended) of the Company and the closing of which occurs on such date or
within such a six-month period of (b) if no transaction shall have occurred with
the six-month period preceding such date or if such transaction is in excess of
$1 million, by an Independent Financial Expert appointed in the manner provided
for in paragraph (g)(i) of this Section 12.4.
(i) (i) If any event shall occur as to which the other
provisions of this Section 12.4 are not strictly applicable but the failure to
make any adjustment would have the effect of depriving Holders of the benefit of
all or a portion of the conversion rights in respect of any Convertible Note in
accordance with the essential intent and principles of this Section 12.4, then,
in each such case, the Company shall appoint an Independent Financial Expert,
which shall give its opinion upon the adjustment, if any, on a basis consistent
with the essential intent and principles established in this Section 12.4
necessary to preserve, without dilution, such conversion rights. Upon receipt of
such opinion, the Company will promptly mail a copy thereof to the Holders and
shall make the adjustments described therein. As used herein, an "Independent
Financial Expert" is a firm (A) which does not, and whose directors, officers
and employees or Affiliates do not, have a direct or indirect financial interest
in the Company and (B) which, in the judgment of the Board of Directors, is
otherwise independent and qualified to perform the task for which it is to be
engaged.
(ii) The Company will not, by amendment of its certificate
of incorporation or through any consolidation, merger, reorganization,
transfer of assets, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of
any of the terms of the Convertible Notes, but will at all times in good
faith assist in the carrying out of all such terms and in the taking of all
such action as may be necessary or appropriate in order to protect the
rights of the Holders thereof against dilution or other impairment. Without
limiting the generality of the foregoing, the Company (i) will take all
such action as may be necessary or appropriate in order that the Company
may validly and legally issue fully paid and nonassessable shares of its
Common Stock on the conversion of the Convertible Notes from time to time
outstanding and (ii) will not take any action which results in any
adjustment of the Conversion Price if the total number of shares of its
Common Stock issuable after the action upon the conversion of all of the
Convertible Notes would exceed the total number of shares of such Common
Stock then authorized by the Company's certificate of incorporation and
available for the purposes of issue upon such exercise.
(j) The Company may, but shall not be obligated to, make such
reductions in the Conversion Price, in addition to those required by paragraphs
(a), (b), (c), (d) and (e) of this Section, as it considers to be advisable in
order that any event treated for United States federal
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income tax purposes as a dividend of stock or stock rights shall not be taxable
to the recipients or, if that is not possible, to diminish any income taxes that
are otherwise payable because of such event.
(k) No adjustment in the Conversion Price shall be required unless
such adjustment (plus any other adjustments not previously made by reason of
this paragraph (k) would require an increase or decrease of at least 1 percent
in the Conversion Price; provided that any adjustments which by reason of this
paragraph (k) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment.
(l) Notwithstanding any other provision of this Section 12.4, no
adjustment to the Conversion Price shall reduce the Conversion Price below the
then par value per share of the Common Stock of the Company, and any such
purported adjustment shall instead reduce the Conversion Price to such par
value. The Company hereby covenants not to take any action to increase the par
value per share of its Common Stock.
(m) In any case in which this Section 12.4 shall require that an
adjustment in the Conversion Price be made effective as of or immediately after
a record date for a specified event, the Company may elect to defer until the
occurrence of such event (i) issuing to the Holder of any Convertible Note
exercised after such record date the shares of Common Stock and other Capital
Stock of the Company, if any, issuable upon such exercise over and above the
shares of Common Stock and other Capital Stock of the Company, if any, issuable
upon such exercise on the basis of the Conversion Price prior to such adjustment
and (ii) paying to such Holder any amount in cash in lieu of a fractional share
pursuant to Section 12.3 hereof; provided that the Company shall deliver to such
Holder a due bill or other appropriate instrument evidencing such Holder's right
to receive such additional shares of Common Stock, other Capital Stock and cash
upon the occurrence of the event requiring such adjustment.
(n) When No Adjustment Required.
(i) No adjustment need be made for a transaction referred
to in subsections (a), (b), (c) or (d) of this Section 12.4 if Holders are to
participate in the transaction on a basis and with notice that the Board of
Directors determines to be fair and appropriate in light of the basis and notice
on which holders of Common Stock of the Company participate in the transaction.
(ii) No adjustment need be made for a change in the par
value, or from par value to no par value, or from no par value to par value, of
the Common Stock of the Company.
(iii) No adjustment need to be made in respect of (x) the
issuance of the Senior Note Contingent Warrants and Old Convertible Note
Contingent Warrants or the exercise of any such Warrants.
(iv) No adjustment need to be made in respect of the
issuance of any Additional Warrants (as defined in the Old Convertible Note
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Indenture) or convertible securities pursuant to Section 4.15 of the Old
Convertible Note Indenture or the exercise of such Additional Warrants or
the conversion of such convertible securities.
(v) No adjustment need be made in respect of (x) any
adjustment in the warrant exercise price of the warrants issued pursuant to
the 1996 Warrant Agreement as contemplated by such 1996 Warrant Agreement
or (y) any adjustment in the warrant exercise price of the Additional
Warrants as contemplated thereby.
(vi) No adjustment need be made in respect of (1) the
exercise of the warrants issued pursuant to the 1997 Warrant Agreement, as
contemplated by the 1997 Warrant Agreement; (2) the exercise of warrants
issued pursuant to the Consent Warrant Agreement, as contemplated by the
Consent Warrant Agreement; (3) the conversion of shares of the Company's
9.0% Cumulative Convertible Pay-In-Kind Preferred Stock, Series A; and (4)
any adjustment of the warrant exercise price of the warrants issued
pursuant to the 1997 Warrant Agreement or the warrants issued pursuant to
the Consent Warrant Agreement in accordance with their respective terms or
any adjustment in the conversion price of the Old Convertible Notes in
accordance with the terms of the Old Convertible Note Indenture.
Section 12.5 Notice of Adjustments of Conversion Price. Whenever the
Conversion Price is adjusted as herein provided:
(a) the Company shall compute the adjusted Conversion Price in
accordance with Section 12.4 and shall prepare a certificate signed by the
Treasurer or Chief Financial Officer of the Company setting forth the adjusted
Conversion Price and showing in reasonable detail the facts upon which such
adjustment is based, and such certificate shall forthwith be filed (with a copy
to the Trustee) at each office or agency maintained for the purpose of
conversion of Convertible Notes pursuant to Section 4.2; and
(b) a notice stating that the Conversion Price has been adjusted
and setting forth the adjusted Conversion Price shall forthwith be prepared, and
as soon as practicable after it is prepared, such notice shall be furnished by
the Company to the Trustee and mailed by the Company at its expense to all
Holders at their last addresses as they shall appear in the Security Register.
Section 12.6 Notice of Certain Corporate Action. In case:
(a) the Company shall declare a dividend (or any other
distribution) on its Common Stock payable (i) otherwise than exclusively in cash
or (ii) exclusively in cash in an amount that would require a Conversion Price
adjustment pursuant to paragraph (d) (i) of Section 13.4; or
(b) the Company shall authorize the granting to the holders of
its Common Stock of rights, options or warrants to subscribe for or purchase any
shares of Capital Stock of any
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class or of any other rights (excluding shares of Capital Stock or options for
Capital Stock issued pursuant to a benefit plan for employees, officers or
directors of the Company); or
(c) of any reclassification of the Common Stock of the Company
(other than a subdivision or combination of the outstanding shares of such
Common Stock), or of any consolidation, merger or share exchange to which the
Company is a party and for which approval of any stockholders of the Company is
required, or of the sale or transfer of all or substantially all of the assets
of the Company; or
(d) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company; or
(e) the Company or any Subsidiary shall commence a tender or
exchange offer (other than an exchange offer contemplated by clause (c) above)
for all or a portion of the outstanding shares of Common Stock (or shall amend
any such tender or exchange offer to change the maximum number of shares being
sought or the amount or type of consideration being offered (including by
exchange) therefor);then the Company shall cause to be filed at each office or
agency maintained pursuant to Section 4.2, and shall cause to be mailed to all
Holders at their last addresses as they shall appear in the Note Register, at
least 21 days (or 11 days in any case specified in clause (a), (b) or (e) above)
prior to the applicable record, effective or expiration date hereinafter
specified, a notice stating (x) the date on which a record is to be taken for
the purpose of such dividend, distribution or granting of rights, options or
warrants, or, if a record is not to be taken, the date as of which the holders
of its Common Stock of record who will be entitled to such dividend,
distribution, rights, options or warrants are to be determined, (y) the date on
which such reclassification, consolidation, merger, share exchange, sale,
transfer, dissolution, liquidation or winding up is expected to become
effective, and the date as of which it is expected that holders of its Common
Stock of record shall be entitled to exchange their Common Stock for securities,
cash or other property deliverable upon such reclassification, consolidation,
merger, share exchange, sale, transfer, dissolution, liquidation or winding up,
or (z) the date on which such tender or exchange offer (other than an exchange
offer contemplated by clause (y) above) commenced, the date on which such tender
or exchange offer is scheduled to expire unless extended, the consideration
offered and the other material terms thereof (or the material terms of any
amendment thereto). Neither the failure to give any such notice nor any defect
therein shall affect the legality or validity of any action described in clauses
(a) through (e) of this Section 12.6.
Section 12.7 Company to Reserve Common Stock. The Company shall at all
times reserve and keep available, free from preemptive rights, out of its
authorized but unissued Common Stock or out of its Common Stock held in
treasury, for the purpose of effecting the conversion of Convertible Notes, the
full number of shares of its Common Stock then issuable upon the conversion of
all outstanding Convertible Notes.
Section 12.8 Taxes on Conversions. The Company will pay any and all
original issuance, transfer, stamp and other similar taxes that may be payable
in respect of the issue or delivery of shares of its Common Stock on conversion
of Convertible Notes pursuant hereto. The Company
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shall not, however, be required to pay any tax which may be payable in respect
of any transfer involved in the issue and delivery of shares of its Common Stock
in a name other than that of the Holder of the Convertible Note or Convertible
Notes to be converted, and no such issue or delivery shall be made unless and
until the person requesting such issue has paid to the Company the amount of any
such tax, or has established to the satisfaction of the Company that such tax
has been paid.
Section 12.9 Covenant as to Common Stock.
(a) The Company covenants that all shares of its Common Stock
which may be issued upon conversion of Convertible Notes will upon issue be
validly issued, fully paid and nonassessable.
(b) The Company shall from time to time take all action
necessary so that the Common Stock which may be issued upon conversion of
Convertible Notes, immediately upon their issuance (or, if such Common Stock is
subject to restrictions on transfer under the Securities Act, upon their resale
pursuant to an effective registration statement filed under the Securities Act),
will be listed on the principal securities exchanges, interdealer quotation
systems and markets, if any, on which other shares of Common Stock of the
Company are then listed or quoted.
Section 12.10 Cancellation of Converted Convertible Notes. All
Convertible Notes delivered for conversion shall be delivered to the Trustee to
be canceled by or at the direction of the Trustee, which shall dispose of the
same as provided in Section 2.10.
Section 12.11 Provisions as to Consolidation, Merger or Sale of
Assets. In case of any consolidation of the Company with, or merger of the
Company into, any other person, any merger of another person into the Company
(other than a merger which does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of Common Stock of the Company)
or any sale or transfer of all or substantially all of the assets of the
Company, the Person formed by such consolidation or resulting from such merger
or which acquires such assets, as the case may be, shall execute and deliver to
the Trustee a supplemental indenture providing that the Holder of each
Convertible Note then outstanding shall have the right thereafter, during the
period such Convertible Note shall be convertible as specified in Section 12.1,
but subject to Section 12.12 hereof, to convert such Convertible Note only into
the kind and amount of securities, cash and other Property, if any, receivable
upon such consolidation, merger, sale or transfer by a holder of the amount of
Common Stock of the Company into which such Convertible Note might have been
converted immediately prior to such consolidation, merger, sale or transfer,
assuming such holder of Common Stock (i) is not a Person with which the Company
consolidated or into which the Company merged or which merged into the Company
or to which such sale or transfer was made, as the case may be (a "Constituent
Person"), or an Affiliate of a Constituent Person and (ii) failed to exercise
his rights of election, if any, as to the kind or amount of securities, cash and
other property receivable upon such consolidation, merger, sale or transfer
(provided that if the kind or amount of securities, cash and other Property
receivable upon such consolidation, merger, sale or transfer is not the same for
each share of Common Stock held immediately prior to such consolidation, merger,
sale or transfer by other than a Constituent Person or an Affiliate thereof and
in respect of which such rights
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of election shall not have been exercised ("nonelecting share"), then for the
purpose of this Section the kind and amount of securities, cash and other
property receivable upon such consolidation, merger, sale or transfer by each
nonelecting share shall be deemed to be the kind and amount so receivable per
share by a plurality of the nonelecting shares). Such supplemental indenture
shall provide for adjustments which, for events subsequent to the effective date
of such supplemental indenture, shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Article. The above
provisions of this Section shall similarly apply to successive consolidations,
mergers, sales or transfers.
ARTICLE XIII
SATISFACTION AND DISCHARGE
Section 13.1 Satisfaction and Discharge. This Indenture shall upon
the request of the Company cease to be of further effect (except as to surviving
rights of registration of transfer or exchange of Convertible Notes herein
expressly provided for, the Company's obligations under Sections 7.7 and 13.4
hereof, and the Company's, the Trustee's and the Paying Agent's obligations
under Section 13.3 hereof) and the Trustee, at the expense of the Company, shall
execute proper instruments acknowledging satisfaction and discharge of this
Indenture when
(a) either
(i) all Convertible Notes theretofore authenticated and
delivered (other than (A) Convertible Notes which have been destroyed, lost
or stolen and which have been replaced or paid as provided in Section 2.7
and (B) Convertible Notes for whose payment money has been deposited in
trust with the Trustee or any Paying Agent and thereafter paid to the
Company or discharged from such trust) have been delivered to the Trustee
for cancellation; or
(ii) all such Convertible Notes not theretofore delivered
to the Trustee for cancellation
(A) have become due and payable, or
(B) will become due and payable at their Stated
Maturity within one year, or
(C) are to be called for redemption within one year
under arrangements satisfactory to the Trustee for the giving of notice of
redemption by the Trustee in the name, and at the expense, of the Company,
and the Company, in the case of clause (A), (B) or (C) above, has irrevocably
deposited or caused to be deposited with the Trustee as trust funds in trust for
such purpose money or U.S. Government Obligations in an amount sufficient (as
certified by an independent public
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accountant designated by the Company) to pay and discharge the entire
indebtedness on such Convertible Notes not theretofore delivered to the Trustee
for cancellation, for principal (and premium, if any) and interest, if any, to
the date of such deposit (in the case of Convertible Notes which have become due
and payable) or the Stated Maturity or Redemption Date, as the case may be;
(b) the Company has paid or caused to be paid all other sums
then due and payable hereunder by the Company;
(c) no Default or Event of Default with respect to the
Convertible Notes shall have occurred and be continuing on the date of such
deposit and after giving effect to such deposit; and
(d) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent herein provided for relating to the satisfaction and discharge of this
Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the
Company's obligations in Sections 2.3, 2.4, 2.6, 2.7, 2.11, 7.7, 7.8, 13.2, 13.3
and 13.4 and the conversion provisions contained in Article XII and the
Trustee's and Paying Agent's obligations in Section 13.3 shall survive until the
Convertible Notes are no longer outstanding. Thereafter, only the Company's
obligations in Sections 7.7, 13.3 and 13.4 and the Trustee's and Paying Agent's
obligations in Section 13.3 shall survive.
In order to have money available on a payment date to pay principal or
interest on the Convertible Notes, the U.S. Government Obligations shall be
payable as to principal or interest at least one Business Day before such
payment date in such amounts as will provide the necessary money. U.S.
Government Obligations shall not be callable at the issuer's option.
Section 13.2 Application of Trust Money. All money deposited with
the Trustee pursuant to Section 13.1 shall be held in trust and, at the written
direction of the Company, be invested prior to maturity in U.S. Government
Obligations, and applied by the Trustee in accordance with the provisions of the
Convertible Notes and this Indenture, to the payment, either directly or through
any Paying Agent as the Trustee may determine, to the Persons entitled thereto,
of the principal (and premium if any) and interest for the payment of which
money has been deposited with the Trustee; but such money need not be segregated
from other funds except to the extent required by law.
Section 13.3 Repayment to the Company. The Trustee and the Paying
Agent shall promptly pay to the Company upon written request any excess money or
securities held by them at any time.
The Trustee and the Paying Agent shall pay to the Company upon written
request any money held by them for the payment of principal or interest that
remains unclaimed for two years after the date upon which such payment shall
have become due; provided, that the Company shall
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have either caused notice of such payment to be mailed to each Holder of the
Convertible Notes entitled thereto no less than 30 days prior to such repayment
or within such period shall have published such notice in a financial newspaper
of widespread circulation published in The City of New York, including, without
limitation, The Wall Street Journal. After payment to the Company, Holders
entitled to the money must look to the Company for payment as general creditors
unless an applicable abandoned property law designates another person, and all
liability of the Trustee and such Paying Agent with respect to such money shall
cease.
Section 13.4 Reinstatement. If the Trustee or Paying Agent is unable
to apply any money or U.S. Government Obligations in accordance with Section
13.1 by reason of any legal proceeding or by reason of any order or judgment of
any court or governmental authority enjoining, restraining or otherwise
prohibiting such application, the Company's and Guarantors' obligations under
this Indenture, the Convertible Notes and the Convertible Note Guarantees, if
any, shall be revived and reinstated as though no deposit has occurred pursuant
to Section 13.1 until such time as the Trustee or Paying Agent is permitted to
apply all such money or U.S. Government Obligations in accordance with Section
13.2; provided that if the Company or the Guarantors have made any payment of
interest on or principal of any Convertible Notes because of the reinstatement
of their obligations, the Company or such Guarantors shall be subrogated to the
rights of the Holders of such Convertible Notes to receive such payment from the
money or U.S. Government Obligations held by the Trustee or Paying Agent.
ARTICLE XIV
MISCELLANEOUS
Section 14.1 Trust Indenture Act Controls. If and to the extent
that any provision of this Indenture limits, qualifies or conflicts with the
duties imposed by, or with another provision (an "incorporated provision")
included in this Indenture by operation of, Sections 310 to 318, inclusive, of
the Trust Indenture Act, such imposed duties or incorporated provision shall
control. If any provisions of this Indenture modifies or excludes any provision
of the Trust Indenture Act that may be so modified or excluded, the latter
provision shall be deemed to apply to this Indenture as so modified or excluded,
as the case may be.
Section 14.2 Notices. Any notice or communication shall be in
writing and delivered in person or mailed by first class mail, postage prepaid,
addressed as follows: if to the Company: USN Communications, Inc., 10 South
Riverside Plaza, Suite 401, Chicago, Illinois 60606-3709, Attention: Thomas A.
Monson, Esq., Vice President and General Counsel, with a copy to Skadden, Arps,
Slate, Meager & Flom, 333 West Wacker Drive, Chicago, Illinois 60606, Attention:
Gary P. Cullen; if to the Trustee: Harris Trust and Savings Bank, 311 West
Monroe, Chicago, Illinois 60606, Attention: Indenture Trustee Administration.
The Company or the Trustee, by notice to the other, many designate
additional or different addresses for subsequent notices or communications. Any
notice or communication mailed to a Holder shall be sent to the Holder by first
class mail, postage prepaid, at the Holder's address as
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it appears in the Security Register and shall be duly given if so sent within
the time prescribed. Failure to mail a notice or communication to a Holder or
any defect in it shall not affect its sufficiency with respect to other Holders.
If a notice or communication is mailed to the Company, the Trustee or a Holder
in the manner provided above, it is duly given, whether or not the addressee
receives it, but shall not be effective in the case of the Trustee unless it is
actually received. In case by reason of the suspension of regular mail service
or by reason of any other cause it shall be impracticable to give notice by mail
to Holders, then such notification as shall be made with the approval of the
Trustee shall constitute a sufficient notification for every purpose hereunder.
Section 14.3 Certificate and Opinion as to Conditions Precedent.
Upon any request or application by the Company to the Trustee to take or refrain
from taking any action under this Indenture, the Company shall furnish to the
Trustee: (a) an Officers' Certificate stating that, in the opinion of the
signers, all conditions precedent, if any, provided for in this Indenture
relating to the proposed action have been complied with; and (b) an Opinion of
Counsel stating that, in the opinion of such counsel, all such conditions
precedent have been complied with.
Section 14.4 Statements Required in Certificate or Opinion. Each
certificate or opinion with respect to compliance with a covenant or condition
provided for in this Indenture (other than pursuant to Section 4.12 hereof)
shall include: (a) a statement that the individual making such certificate or
opinion has read such covenant or condition; (b) a brief statement as to the
nature and scope of the examination or investigation upon which the statements
or opinions contained in such certificate or opinion are based; (c) a statement
that, in the opinion of such individual, such person has made such examination
or investigation as is necessary to enable such person to express an informed
opinion as to whether or not such covenant or condition has been complied with;
and (d) a statement as to whether or not, in the opinion of such individual,
such covenant or condition has been complied with.
Section 14.5 Communications by Holders with Other Holders. Holders
may communicate pursuant to Section 312(b) of the Trust Indenture Act with other
Holders with respect to their rights under this Indenture or the Convertible
Notes. The Company, the Guarantors, the Trustee, the Registrar and anyone else
shall have the protection of Section 312(c) of the Trust Indenture Act.
Section 14.6 Rules by Trustee, Paying Agent and Registrar. The
Trustee may make reasonable rules for action by or a meeting of Holders, and any
Registrar and Paying Agent may make reasonable rules for their functions;
provided that no such rule shall conflict with terms of this Indenture or the
Trust Indenture Act.
Section 14.7 Payments on Business Days. If a payment hereunder is
scheduled to be made on a date that is not a Business Day, payment shall be made
on the next succeeding date that is a Business Day, and no interest shall accrue
with respect to that payment during the intervening period. If a regular record
date is a date that is not a Business Day, such record date shall not be
affected.
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Section 14.8 Governing Law. THIS INDENTURE AND THE CONVERTIBLE NOTES
SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
NEW YORK, EXCEPT WITH REGARD TO PRINCIPLES OF CONFLICTS OF LAWS, APPLICABLE TO
AGREEMENTS MADE AND TO BE PERFORMED IN SAID STATE.
Section 14.9 No Recourse Against Others. No director, officer,
employer, incorporator or stockholder of the Company, as such, shall have any
liability for any obligations of the Company under the Convertible Notes or this
Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation, solely by reason of its status as a director,
officer, employee, incorporator or stockholder of the Company. By accepting a
Convertible Note, each Holder waives and releases all such liability (but only
such liability) as part of the consideration for issuance of such Convertible
Note to such Holder.
Section 14.10 Successors. All agreements of the Company in this
Indenture and the Convertible Notes shall bind its successors and assigns
whether so expressed or not. All agreements of the Trustee in this Indenture
shall bind its successors and assigns whether so expressed or not.
Section 14.11 Counterparts. This Indenture may be executed in any
number of counterparts and by the parties thereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
Section 14.12 Table of Contents; Headings. The table of contents,
cross-reference table and headings of the Articles and Sections of this
Indenture have been inserted for convenience of reference only, are not intended
to be considered a part hereof and shall not modify or restrict any of the terms
of provisions hereof.
Section 14.13 Severability. In case any provision in this Indenture
or in the Convertible Notes shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
Section 14.14 Further Instruments and Acts. Upon request of the
Trustee, the Company will execute and deliver such further instruments and do
such further acts as may be reasonably necessary or proper to carry out more
effectively the purposes of this Indenture.
Section 14.15 Independent Covenants. Each covenant contained in this
Indenture is intended by the parties to be a separate and independent covenant,
the compliance or noncompli ance with such to be determined independently and
without regard to whether the Company or a Restricted Subsidiary is in
compliance with another covenant contained in this Indenture.
102
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed, and their respective corporate seals to be hereunto affixed
and attested, all as of the day and year first above written.
USN COMMUNICATIONS, INC.
By
---------------------------
Name: J. Thomas Elliott
Title Chairman of the Board,
President and Chief Executive
Officer
[Corporate Seal]
Attest
- ----------------------
HARRIS TRUST AND SAVINGS BANK,
as Trustee
By
---------------------------
Name:
Title:
[Corporate Seal]
Attest
- ----------------------
103
<PAGE>
STATE OF ILLINOIS )
) SS.:
COUNTY OF COOK )
On the ___ day of January, 1988, before me personally came J. Thomas Elliott, to
me known, who being by me duly sworn, did depose and say that he is Chairman of
the Board, President and Chief Executive Officer of USN Communications, Inc.,
one of the corporations described in and which executed the foregoing
instrument; that he knows the seal of said corporation; that the seal affixed to
said instrument is such corporate seal; that it was so affixed by authority of
the Board of Directors of said corporation, and that he signed his name thereto
by like authority.
Notary Public
State of Illinois
My commission expires
[Seal]
104
<PAGE>
STATE OF ILLINOIS )
) SS.:
COUNTY OF COOK )
On the ___ day of January, 1998, before me personally came J. Thomas Elliott, to
me known, who being by me duly sworn, did depose and say that he is Chairman of
the Board, President and Chief Executive Officer of USN Communications, Inc.,
one of the corporations described in and which executed the foregoing
instrument; that he knows the seal of said corporation; that the seal affixed to
said instrument is such corporate seal; that it was so affixed by authority of
the Board of Directors of said corporation, and that he signed his name thereto
by like authority.
Notary Public
State of Illinois
My commission expires
[Seal]
105
<PAGE>
EXHIBIT 5.1
February 2, 1998
USN Communications, Inc.
10 South Riverside Plaza
Suite 401
Chicago, Illinois 60606
Re: USN Communications, Inc.
Registration Statement on
Form S-1 (No. 333-38381)
-------------------------
Ladies and Gentlemen:
We are acting as special counsel to USN Communications, Inc., a Delaware
corporation (the "Company"), in connection with the initial public offering (the
"Offering") of up to 9,200,000 shares (the "Shares") of its Common Stock, par
value $.01 per share (the "Common Stock"), of which 1,200,000 Shares are
expected to be subject to an over-allotment option granted by the Company to the
Underwriters (as defined below). All of the Shares are being offered by the
Company.
This opinion is being furnished in accordance with the requirements of
Item 601(b)(5) of Regulation S-K under the Securities Act of 1933, as amended
(the "Act").
In connection with this opinion, we have examined originals or copies
certified or otherwise identified to our satisfaction, of (i) a Registration
Statement on Form S-1 (File No. 333-38381), as filed by the Company with the
Securities and Exchange Commission (the "Commission") under the Act on October
21, 1997, Amendment No. 1 thereto filed on January 7, 1998 and Amendment No. 2
thereto filed on February 2, 1998 (such Registration Statement, as so amended,
being hereinafter referred to as the "Registration Statement"), (ii) the form of
the U.S. Purchase Agree-
<PAGE>
USN Communications, Inc.
February 2, 1998
Page 2
ment (the "U.S. Purchase Agreement") proposed to be entered into by and among
the Company and Merrill Lynch & Co., Merrill, Lynch, Pierce, Fenner & Smith
Incorporated, Cowen & Company and Donaldson, Lufkin & Jenrette Securities
Corporation, as representatives of the several underwriters named therein (the
"U.S. Underwriters"), filed as an exhibit to the Registration Statement, (iii)
the form of the International Purchase Agreement (the "International Purchase
Agreement" and, together with the U.S. Purchase Agreement, the "Purchase
Agreements") proposed to be entered into by and among the Company and Merrill
Lynch International, Cowen International L.P. and Donaldson, Lufkin & Jenrette
International, as lead managers for the several international managers named
therein (the "International Managers" and, together with the U.S. Underwriters,
the "Underwriters"), (iv) the Second Amended and Restated Certificate of
Incorporation (the "Charter") and the Amended and Restated Bylaws of the Company
(the "Bylaws"), in each case as filed as exhibits to the Registration Statement;
(v) a specimen certificate representing the Common Stock; and (vi) certain
resolutions of the Board of Directors of the Company (the "Resolutions"),
relating to the issuance and sale of the Shares and related matters. We have
also examined originals or copies, certified or otherwise identified to our
satisfaction, of such records of the Company and such agreements, certificates
of public officials, certificates of officers or other representatives of the
Company and others, and such other documents, certificates and records as we
have deemed necessary or appropriate as a basis for the opinions set forth
herein.
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, conformed or photostatic copies and the
authenticity of the originals of such latter documents. In making our
examination of documents executed or to be executed by parties other than the
Company, we have assumed that such parties had or will have the power, corporate
or other, to enter into and perform all obligations thereunder and have also
assumed the due authorization by all requisite action, corporate or other, and
execution and delivery by such parties of such documents and the validity and
binding
<PAGE>
USN Communications, Inc.
February 2, 1998
Page 3
effect thereof. As to any facts material to the opinions expressed herein which
we have not independently established or verified, we have relied upon
statements and representations of officers and other representatives of the
Company and others.
Members of our firm are admitted to the practice of law in the State of
Illinois, and we do not express any opinion as to the laws of any other
jurisdiction other than the Delaware General Corporation Law.
Based upon and subject to the foregoing, we are of the opinion that when
(i) the Registration Statement becomes effective, (ii) the price at which the
Shares are to be sold to the Underwriters pursuant to the Purchase Agreements
and other matters relating to the issuance and sale of the Shares have been
approved by the Board of Directors of the Company in accordance with the
Resolutions, (iii) the Purchase Agreements have been duly executed and
delivered; (iv) the Charter has been filed with the Secretary of State of
Delaware and becomes effective and the Bylaws become effective; and (v)
certificates representing the Shares in the form of the specimen certificate
examined by us have been manually signed by an authorized officer of the
transfer agent and registrar for the Common Stock and registered by such
transfer agent and registrar, and delivered to and paid for by the Underwriters
as contemplated by the Purchase Agreements, the issuance and sale of the Shares
will have been duly authorized, and the Shares will be validly issued, fully
paid and nonassessable.
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement. We also consent to the reference to our
firm under the heading "Legal Matters" in the Registration Statement. In giving
this consent, we do not thereby admit that we are included in the category of
persons whose consent is required under Section 7 of the Act or the rules and
regulations of the Commission.
Very truly yours,
/s/ Skadden, Arps, Slate,
Meagher & Flom (Illinois)
<PAGE>
STOCK PURCHASE AGREEMENT
By and Among
MARK HATTEN,
TRIUMPH-CONNECTICUT LIMITED PARTNERSHIP,
SOLOMON SCHECHTER DAY SCHOOL OF GREATER HARTFORD, INC.,
FSC CORP.,
HATTEN COMMUNICATIONS HOLDING COMPANY, INC.
And
USN COMMUNICATIONS, INC.
January 7, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE I
PURCHASE AND SALE OF SECURITIES
1.1 Transfer of Securities................................................. 1
1.2 Consideration.......................................................... 2
1.3 Indemnification Escrow Amount.......................................... 3
1.4 The Closing............................................................ 3
1.5 Deliveries of the Parties.............................................. 4
1.6 Post-Closing Adjustment................................................ 7
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE
COMPANY AND SELLERS
2.1 Corporate Organization................................................ 8
2.2 Capital Stock......................................................... 9
2.3 Ownership of Stock.................................................... 9
2.4 Authorization, Etc.................................................... 9
2.5 Financial Statements.................................................. 10
2.6 No Approvals or Conflicts............................................. 11
2.7 Compliance with Law; Governmental Authorizations...................... 12
2.8 Litigation............................................................ 12
2.9 Changes............................................................... 12
2.10 Taxes................................................................. 12
2.11 Employee Benefits..................................................... 14
2.12 Labor Relations....................................................... 15
2.13 Contracts and Leases.................................................. 16
2.14 Environmental Matters................................................. 16
2.15 Title to Assets and Leases............................................ 16
2.16 Numbers of Customers and Units........................................ 17
2.17 Intellectual Property................................................. 17
2.18 Insurance............................................................. 17
2.19 Affiliated Transactions............................................... 18
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
2.20 No Brokers' or Other Fees............................................ 18
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BUYER
3.1 Organization.......................................................... 18
3.2 Authorization, Etc.................................................... 18
3.3 No Approvals or Conflicts............................................. 19
3.4 Periodic Reports...................................................... 19
3.5 No Distribution....................................................... 20
3.6 Compliance with Law; Governmental Authorizations...................... 20
3.7 Buyer's Registration Statement........................................ 20
3.8 No Brokers' or Other Fees............................................. 21
ARTICLE IV
CONDITIONS TO EACH PARTY'S OBLIGATIONS
4.1 Regulatory Consents................................................... 21
4.2 Injunctions........................................................... 21
4.3 Transfer of Whitecap and CMI Assets................................... 21
4.4 Indemnification Escrow Agreement...................................... 21
ARTICLE V
CONDITIONS TO SELLERS' OBLIGATIONS
5.1 Representations and Warranties........................................ 22
5.2 Performance........................................................... 22
5.3 Officer's Certificate................................................. 22
5.4 Closing Deliveries.................................................... 22
5.5 Opinion of Counsel.................................................... 22
5.6 Deposit Escrow Amount................................................. 22
5.7 Consents.............................................................. 23
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
ARTICLE VI
CONDITIONS TO BUYER'S OBLIGATIONS
<S> <C> <C>
6.1 Representations and Warranties........................................ 23
6.2 Performance........................................................... 23
6.3 Officer's Certificate................................................. 23
6.4 Closing Deliveries.................................................... 23
6.5 Opinion of Counsel.................................................... 23
6.6 Consents.............................................................. 24
6.7 Resignations.......................................................... 24
6.8 Noncompetition Agreements............................................. 24
6.9 Employment Agreements................................................. 24
6.10 Financing............................................................. 24
ARTICLE VII
COVENANTS AND AGREEMENTS
7.1 Conduct of Business................................................... 24
7.2 Access to Books and Records........................................... 26
7.3 Approvals and Consents................................................ 27
7.4 Further Assurances.................................................... 28
7.5 Confidentiality Agreement............................................. 28
7.6 Tax Matters........................................................... 28
7.7 Schedule of Employees................................................. 31
7.8 Supplements to Disclosure Schedule.................................... 31
7.9 Covenant to Satisfy Conditions........................................ 31
7.10 Financing............................................................. 31
7.11 Affiliated Transactions............................................... 32
7.12 Financial Statements and Reports...................................... 32
7.13 Transfer of Whitecap and CMI Assets................................... 32
7.14 Disclosure............................................................ 33
7.15 No Solicitation....................................................... 33
7.16 Delivery of Disclosure Schedule....................................... 34
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
Page
----
ARTICLE VIII
TERMINATION
<S> <C> <C>
8.1 Termination........................................................... 35
8.2 Effect of Termination................................................. 35
ARTICLE IX
INDEMNIFICATION
9.1 Indemnification by Sellers............................................ 36
9.2 Indemnification by Buyer.............................................. 37
9.3 Notification of Claims................................................ 38
ARTICLE X
MISCELLANEOUS
10.1 Termination of Representations and Warranties, Etc.................. 39
10.2 Fees and Expenses................................................... 39
10.3 Governing Law....................................................... 40
10.4 Amendment........................................................... 40
10.5 No Assignment....................................................... 40
10.6 Waiver.............................................................. 40
10.7 Notices............................................................. 40
10.8 Complete Agreement.................................................. 42
10.9 Counterparts........................................................ 43
10.10 Publicity........................................................... 43
10.11 Headings............................................................ 43
10.12 Severability........................................................ 43
10.13 Time of the Essence................................................. 43
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
EXHIBITS
Sellers' Holdings and Purchase Price Share........................... Exhibit A
Form of Deposit Escrow Agreement..................................... Exhibit B
Form of Indemnification Escrow Agreement............................. Exhibit C
Form of Noncompetition Agreement..................................... Exhibit D
</TABLE>
v
<PAGE>
STOCK PURCHASE AGREEMENT
------------------------
This STOCK PURCHASE AGREEMENT ("Agreement") is made and entered into
as of January 7, 1998, by and among Mark Hatten, Triumph- Connecticut Limited
Partnership, a Connecticut limited partnership, Solomon Schechter Day School of
Greater Hartford, Inc., a not-for-profit educational institution ("SSDS"), FSC
Corp., a Massachusetts corporation (collectively, "Sellers"), Hatten
Communications Holding Company, Inc., a Connecticut corporation (the "Company"),
and USN Communications, Inc., a Delaware corporation ("Buyer").
WHEREAS, the Company has a capitalization consisting of 71,650
authorized shares of Class A Common Stock, $.01 par value per share (the "Class
A Common Stock"), of which 71,650 shares are issued and outstanding; 33,350
shares of Class B Common Stock, $.01 par value per share (the "Class B Common
Stock" and, together with the Class A Common Stock, the "Common Stock"), of
which no shares are issued and outstanding; warrants (the "Warrants") to
purchase 28,350 shares of Class B Common Stock (the "Warrant Shares"); and 7,000
shares of Series A Cumulative Redeemable Preferred Stock, $.01 par value per
share (the "Preferred Stock"), of which 7,000 shares are issued and outstanding,
all of which Common Stock, Warrants, Warrant Shares, if applicable, and
Preferred Stock (collectively, the "Securities") are owned as of the date of
this Agreement by Sellers in the respective amounts set forth opposite each
Seller's name on Exhibit A hereto; and
WHEREAS, Sellers desire to sell the Securities to Buyer, and Buyer
desires to purchase the Securities from Sellers.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements contained in this Agreement, Sellers and Buyer agree as
follows:
ARTICLE I
PURCHASE AND SALE OF SECURITIES
1.1 Transfer of Securities. On the Closing Date (as defined herein)
and subject to the terms and conditions set forth in this Agreement, Sellers
will sell, assign, transfer and deliver to Buyer the Securities (other than the
shares of Preferred Stock, it being understood that such shares of Preferred
Stock will be redeemed by the Company simultaneously with the Closing (as
defined herein)), in each case free
<PAGE>
and clear of all options, pledges, security interests, liens, charges or other
encum brances or restrictions on transfer ("Encumbrances") of any kind
whatsoever, other than the restrictions imposed by federal and state securities
laws.
1.2 Consideration. (a) On the Closing Date and subject to the terms
and conditions set forth in this Agreement, in reliance on the representations,
warranties, covenants and agreements of the parties contained herein and in
consideration of the sale, assignment, transfer and delivery of the Securities
(other than the shares of Preferred Stock), Buyer will pay to Sellers
$68,000,000, less (i) the amount of the Company's and Included Subsidiaries' (as
defined herein) outstanding indebtedness for borrowed money under the Second
Amended and Restated Master Credit Agreement, by and among the Company and its
Subsidiaries, BankBoston, N.A. and State Street Bank, dated May 23, 1997, the
Amended and Restated Subordinated Promissory Note payable to Charles Hatten,
dated January 30, 1997 and all replacements to the aforementioned indebtedness
and all additions to outstanding indebtedness for borrowed money, other than
outstanding indebtedness incurred in respect of the advertising and marketing
expenses referred to in Section 7.1(b)(iv) and in respect of the capital
expenditures referred to in Section 7.1(b)(vii) of the Disclosure Schedule (as
defined herein) (the "Closing Indebtedness"), at Closing (as defined herein),
(ii) the total obligations of the Company for redemption of the Preferred Stock
(the "Preferred Stock Redemption Price") at Closing, (iii) if applicable, the
amount of the Deposit Escrow Amount (as defined herein), (iv) the aggregate
amount of the obligations referred to in Section 2.11(d) hereof, (v) the
Indemnification Escrow Amount (as defined herein), payable as set forth in
Section 1.2(b) herein and (vi) the amount of the NOL Shortfall (as defined in
the immediately following sentence), if any (the "Purchase Price"). For
purposes of this Section 1.2(a), "NOL Shortfall" shall mean the amount by which
the NOLs (as defined herein) of the Company are not sufficient in amount to
offset and currently reduce to zero any Transfer Income or Gain (as defined in
Section 2.10 hereof). The pro rata share of the Purchase Price and, if
applicable, the Deposit Escrow Amount payable to each Seller shall be as set
forth on Exhibit A hereto.
(b) On the Closing Date and subject to the terms and conditions set
forth in this Agreement, the Purchase Price and, if applicable, the Deposit
Escrow Amount shall be payable to Sellers as follows:
(i) a cash payment of immediately available funds in an amount
equal to the Purchase Price; and
2
<PAGE>
(ii) if applicable, the release to Sellers from escrow of
$2,500,000 (the "Deposit Escrow Amount"), pursuant to the terms and
conditions of an escrow agreement to be entered into by Sellers, Buyer and
the escrow agent thereunder substantially in the form set forth in Exhibit
B hereto (the "Deposit Escrow Agreement").
(c) On the Closing Date and subject to the terms and conditions set
forth in this Agreement, the Preferred Stock Redemption Price shall be payable
by the Company to the holders of the Preferred Stock, as set forth on Exhibit A
hereto, by wire transfer of immediately available funds.
1.3 Indemnification Escrow Amount. On the Closing Date and subject
to the terms and conditions set forth in this Agreement, $5 million in
immediately available funds (the "Indemnification Escrow Amount") shall be
deposited into an escrow account (the "Indemnification Escrow Account") pursuant
to the terms of an escrow agreement substantially in the form set forth in
Exhibit C hereto (the "Indemnification Escrow Agreement") for the purpose of
partially securing the obligations of Sellers pursuant to Sections 9.1(a)(ii),
9.1(b) and 9.1(c) hereto. Sellers shall have until 5:00 p.m., New York time, on
January 21, 1998 (the "Notification Time") to notify Buyer of Sellers' election
to deposit into the Indemnification Escrow Account on the Closing Date, in lieu
of $5 million in immediately available funds, a $5 million letter of credit in
form and substance reasonably satisfactory to Buyer issued by a bank reasonably
satisfactory to Buyer to secure the obligations of Sellers described in the
immediately preceding sentence, in which case Buyer and Sellers shall negotiate
in good faith such changes to the form of Indemnification Escrow Agreement as
are necessary to give effect to such election. In such event, Sellers shall be
required, if necessary, to renew from time to time such letter of credit during
the term of the Indemnification Escrow Agreement, as such term may be extended
to take into account claims existing on July 31, 1999. In the event that
Sellers do not so notify Buyer on or prior to the Notification Time, the
Indemnification Escrow Account shall be funded with $5 million in immediately
available funds.
1.4 The Closing. The closing (the "Closing") of the transactions
contemplated in this Agreement shall take place at the offices of Skadden, Arps,
Slate, Meagher & Flom LLP, New York, New York at 10:00 a.m. local time, on the
second business day following the date on which all of the conditions set forth
in Article IV, Article V and Article VI hereof shall have been satisfied or
waived, or at such other
3
<PAGE>
place and time as may be agreed upon in writing by Sellers and Buyer (the
"Closing Date").
1.5 Deliveries of the Parties.
(a) Deliveries of Sellers. At or prior to the Closing, Sellers shall
deliver or cause to be delivered to Buyer the following:
(i) certificates evidencing the shares of Common Stock, which
certificates shall be properly endorsed for transfer or accompanied by duly
executed stock powers, in either case executed in blank or in favor of
Buyer or its nominee as Buyer may have directed prior to the Closing Date,
and otherwise in a form acceptable for transfer on the books of the
Company;
(ii) certificates evidencing the shares of Preferred Stock;
(iii) certificates evidencing the Warrants, if applicable, which
certificates shall be properly endorsed for transfer in favor of Buyer or
its nominee as Buyer may have directed prior to the Closing Date, and
otherwise in a form acceptable for transfer on the books of the Company;
(iv) certificates or instruments evidencing the Warrant
Shares, if applicable, which certificates shall be properly endorsed for
transfer or accompanied by duly executed stock powers, in either case
executed in blank or in favor of Buyer or its nominee as Buyer may have
directed prior to the Closing Date, and otherwise in a form acceptable for
transfer on the books of the Company;
(v) evidence reasonably satisfactory to Buyer of each of the
Closing Indebtedness and the Preferred Stock Redemption Price;
(vi) a copy of the charter of each of the Company and the
Included Subsidiaries (as defined herein), certified as of a date within 30
days of the Closing Date by the Secretary of State of the State of
Connecticut, and certified by the respective corpo-
4
<PAGE>
rate secretary as to the absence of any amendments to such charter between
the date of such certification by the Secretary of State of the State of
Connecticut and the Closing Date;
(vii) a good standing certificate for each of the Company and
the Included Subsidiaries, certified as of a date within ten days of the
Closing Date by the Secretary of State of the State of Connecticut;
(viii) a certificate of the corporate secretary of the Company
attaching thereto true and correct copies of the bylaws of each of the
Company and the Included Subsidiaries and the resolutions of the Board of
Directors of the Company authorizing this Agreement and the consummation of
the transactions contemplated hereby;
(ix) the Sellers' certificate required by Section 6.3 hereof;
(x) all books and records of the Company, including its minute
book, seal, stock ledger book and all financial and tax records and
information;
(xi) all licenses, permits, orders, consents, approvals,
registrations, authorizations, qualifications, filings and waivers required
to be obtained and delivered by Sellers pursuant to Section 6.6 hereof;
(xii) the opinions of counsel for Sellers required by Section
6.5 hereof;
(xiii) the resignations of the members of the Board of Directors
of the Company and those officers of the Company designated by Buyer as
required by Section 6.7 hereof;
(xiv) the Noncompetition Agreements required by Section 6.8
hereof;
(xv) the employment agreements required by Section 6.9 hereof;
and
5
<PAGE>
(xvi) all other previously undelivered documents required to be
delivered by Sellers or the Company to Buyer at or prior to the Closing
Date in connection with the transactions contemplated hereby as required
hereunder.
(b) Deliveries by Buyer. At or prior to the Closing, Buyer shall
deliver or cause to be delivered to Sellers the following:
(i) the Purchase Price by wire transfer of immediately
available funds to an account or accounts designated by Sellers;
(ii) if applicable, the Deposit Escrow Amount by release of
$2,500,000 of such funds pursuant to the terms of the Deposit Escrow
Agreement;
(iii) the Preferred Stock Redemption Price;
(iv) a copy of the charter of Buyer certified as of a date
within 30 days of the Closing Date by the Secretary of State of the State
of Delaware, and certified by the corporate secretary of Buyer as to the
absence of any amendments to such charter between the date of certification
by the Secretary of State of the State of Delaware and the Closing Date;
(v) a certificate from the Secretary of State of the State of
Delaware as to the good standing of Buyer in Delaware, certified as of a
date within ten days of the Closing Date;
(vi) a certificate of the corporate secretary of Buyer
attaching thereto a true and correct copy of the bylaws of Buyer and the
resolutions of the Board of Directors of Buyer authorizing this Agreement
and the consummation of the transactions contemplated hereby;
(vii) the Buyer's certificate required by Section 5.3 hereof;
6
<PAGE>
(viii) the opinion of counsel for Buyer required by Section 5.5
hereof; and
(ix) all other previously undelivered documents required to be
delivered by Buyer to Seller at or prior to the Closing Date in connection
with the transactions contemplated hereby as required hereunder.
1.6 Post-Closing Adjustment. Buyer shall prepare and present not
later than 45 days after the Closing a special purpose statement (the "Special
Purpose Statement") which shall set forth Buyer's true and correct determination
as of the Special Purpose Statement date of the Closing Indebtedness. To the
extent that the Closing Indebtedness as reflected in the Special Purpose
Statement is greater than the amount of the Closing Indebtedness pursuant to
which the Purchase Price was calculated at Closing, then such difference shall
be refunded to Buyer by Sellers pro rata in accordance with Exhibit A hereto in
immediately available funds within two business days after completion of the
dispute resolution process set forth in this Section 1.6 below.
The Special Purpose Statement shall be certified by the Company as
being prepared on a basis consistent with that of the balance sheets contained
in the financial statements referred to in Section 2.5 hereof. In the event
that Sellers shall make a preliminary determination that the Special Purpose
Statement has not been prepared in accordance with the previous sentence,
Sellers shall have ten business days after receipt of such statement to notify
Buyer in writing thereof. In the event that Sellers do not object to the
Special Purpose Statement within such ten business day period, Sellers shall be
deemed to have accepted it and no challenge to the Special Purpose Statement
shall be recognized. In the event of a disagreement, the parties shall then
have 15 business days to resolve the matter. If the matter cannot be resolved
in this manner during the 15 business day period, the parties shall submit
within five business days after such 15 business day period the matter to an
independent accounting firm mutually satisfactory to the parties (the
"Auditor"). The Auditor shall have 30 business days to audit the Special
Purpose Statement. The audit will be performed using generally accepted
auditing standards and will address whether the information contained in the
Special Purpose Statement presents fairly, in all material respects, the Closing
Indebtedness as of the Closing Date in accordance with generally accepted
accounting principles on a basis consistent with that of the balance sheets
contained in the financial statements referred to in Section 2.5 hereof. The
costs of retaining the Auditor, including their reasonable out-of-pocket
expenses
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(collectively, the "Accounting Costs"), in connection with the procedures set
forth in this Section 1.6 shall be shared equally by Sellers, on the one hand,
and Buyer, on the other.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE
COMPANY AND SELLERS
The Company and Sellers, jointly and severally, represent and warrant
to Buyer as follows:
2.1 Corporate Organization. The Company is duly organized, validly
existing and in good standing under the laws of the State of Connecticut and has
full corporate power and authority to own and operate its properties and assets
and to carry on its business as it is now being conducted. The Company is duly
qualified or licensed to do business as a foreign corporation in good standing
in the jurisdictions in which the ownership of property or the conduct of its
business requires such qualification, except jurisdictions in which the failure
to be so qualified would not, individually or in the aggregate, have a material
adverse effect on the business, operations, assets, liabilities or financial
condition of the Company and the Included Subsidiaries, taken as a whole, or on
the ability of the Company and Sellers to consummate the transactions
contemplated hereby (hereinafter referred to as a "Material Adverse Effect").
Sellers have previously delivered to Buyer complete and correct copies of the
charter and all amendments thereto and the bylaws as presently in effect of each
of the Company and the Subsidiaries. The Company owns all of the issued and
outstanding capital stock of Connecticut Telephone and Communications Systems,
Inc. ("CTCSI"), Connecticut Mobilecom, Inc. ("CMI"), US East Telecommunications
of Massachusetts, Inc. and US East Telecommunications of Rhode Island, Inc. (the
"Included Subsidiaries") and, as of the date of this Agreement, Whitecap
Technologies, Inc. ("Whitecap" and, together with the Included Subsidiaries, the
"Subsidiaries"). Each Subsidiary is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation and has full corporate power and authority to own and operate its
properties and assets and to carry on its business as it is now being conducted.
Except as set forth in Section 2.1 of the Disclosure Schedule relating to this
Agreement (the "Disclosure Schedule"), the Company does not own, directly or
indirectly, any capital stock or other equity securities of any corporation or
have any direct or indirect equity or ownership interest in any partnership,
joint venture or other business.
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2.2 Capital Stock. The authorized capital stock of the Company
consists of 71,650 shares of Class A Common Stock, of which 71,650 shares are
issued and outstanding; 33,350 shares of Class B Common Stock, of which no
shares are issued and outstanding; and 7,000 shares of Preferred Stock, of which
7,000 shares are issued and outstanding. Other than the Warrants and except as
set forth in Section 2.2 of the Disclosure Schedule as of the date of this
Agreement only (it being understood that any existing as of the date of this
Agreement will be extinguished on or prior to Closing), there are no
subscriptions, options, warrants, calls, rights, contracts, commitments,
understandings, restrictions or arrangements relating to the issuance, sale or
transfer by Sellers, the Company or any of the Subsidiaries of any shares of
such capital stock, including any rights of conversion or exchange under any
outstanding securities or other instruments. All outstanding shares of capital
stock of the Company have been duly authorized and validly issued and are fully
paid, nonassessable and free of preemptive rights. All of the issued and
outstanding shares of each Included Subsidiary and, as of the date of this
Agreement, of Whitecap, are owned by the Company, free and clear of all
Encumbrances of any kind whatsoever (except as set forth in Section 2.2 of the
Disclosure Schedule as of the date of this Agreement only (it being understood
that any existing as of the date of this Agreement will be extinguished on or
prior to Closing)), other than the restrictions imposed by the federal and state
securities laws, and all such shares have been duly authorized and validly
issued and are fully paid, nonassessable and free of preemptive rights. The
Preferred Stock is redeemable at the option of the Company and will be redeemed
on the Closing Date. The CMI Assets (as defined in Section 7.13 hereof)
constitute all of the assets of or related to Smartlink Development, L.P. and
Smartlink, Inc. held by the Company and the Included Subsidiaries.
2.3 Ownership of Stock. The Securities are owned by Sellers (as more
specifically set forth in Exhibit A hereto), free and clear of all Encumbrances
of any kind whatsoever, other than the restrictions imposed by federal and state
securities laws. Upon the consummation of the transactions contemplated hereby,
Buyer will acquire title to the Securities (other than the shares of Preferred
Stock, which will be redeemed by the Company), free and clear of all
Encumbrances of any kind whatsoever, other than the restrictions imposed by
federal and state securities laws.
2.4 Authorization, Etc. Each Seller has full power, authority and
capacity, and the Company has full corporate power and authority, to execute and
deliver this Agreement, the Indemnification Escrow Agreement and, if applicable,
the Deposit Escrow Agreement and to carry out the transactions contemplated
hereby and thereby. The Board of Directors of the Company has duly approved and
authorized
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the execution and delivery of this Agreement, the Indemnification Escrow
Agreement and, if applicable, the Deposit Escrow Agreement and the consummation
of the transactions contemplated hereby and thereby, and no other proceedings,
corporate or other, on the part of Sellers or the Company are necessary to
approve and authorize the execution and delivery of this Agreement, the
Indemnification Escrow Agreement and, if applicable, the Deposit Escrow
Agreement by Sellers and the Company and the consummation by Sellers and the
Company of the transactions contemplated hereby and thereby. This Agreement and
the Indemnification Escrow Agreement constitute, and, if applicable, the Deposit
Escrow Agreement will constitute, valid and binding agreements of each of
Sellers and the Company enforceable against Sellers and the Company in
accordance with their respective terms, except that the enforcement hereof and
thereof may be limited by (i) bankruptcy, insolvency, reorganization, moratorium
or other similar laws now or hereafter in effect relating to creditors' rights
generally and (ii) general principles of equity (regardless of whether
enforceability is considered in a proceeding in equity or at law).
2.5 Financial Statements. The audited consolidated financial
statements of the Company for the year ended April 30, 1997, and the unaudited
consolidated financial statements of the Company for the six months ended
October 31, 1997 are set forth in Section 2.5(a) of the Disclosure Schedule.
Such financial statements are referred to herein as the "Financial Statements."
The Financial Statements have been prepared in accordance with generally
accepted accounting principles consistently applied and, subject, in the case of
the six month consolidated financial statements, to normal year-end adjustments,
fairly present in all material respects the financial condition of the Company
and the consolidated results of operations of the Company for the periods
indicated, except as set forth in the notes thereto. Except as disclosed in the
Financial Statements or in Section 2.5(a) of the Disclosure Schedule, neither
the Company nor the Subsidiaries have any liabilities or obligations, whether
accrued, absolute, contingent or otherwise, which (i) would be required to be
disclosed on a financial statement prepared in conformity with generally
accepted accounting principles or (ii) are material to the consolidated business
or operations of the Company and the Included Subsidiaries (the "Business"),
except for obligations incurred or paid in connection with transactions since
October 31, 1997 by the Company and the Subsidiaries in the ordinary course of
business consistent with past practice, and except for routine, ongoing
compliance obligations under statutes, regulations and ordinances of general
applicability to the Business and liabilities and obligations under this
Agreement and the agreements contemplated hereby. Set forth in Section 2.5(b) of
the Disclosure Schedule is a description of each
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outstanding indebtedness for borrowed money of each of the Company and any
Subsidiary as of the date of this Agreement.
2.6 No Approvals or Conflicts. Except as set forth in Section 2.6 of
the Disclosure Schedule, neither the execution and delivery by Sellers and the
Company of this Agreement, the Indemnification Escrow Agreement and, if
applicable, the Deposit Escrow Agreement nor the consummation by Sellers and the
Company of the transactions contemplated hereby and thereby will (i) violate,
conflict with or result in a breach of any provision of the charter or bylaws of
any of the Company and the Subsidiaries, (ii) conflict with or result in a
breach of any provision of, or constitute a default under, or result in the
termination or cancellation of, or accelerate the performance required by, or
result in the creation of any lien, security interest, charge or encumbrance
upon any of the properties of any of the Company and the Subsidiaries or upon
any Seller's interest in the Securities under, any note, bond, mortgage,
indenture, deed of trust, license, franchise, permit, lease, contract, agreement
or other instrument or commitment or obligation to which any Seller or any of
the Company and the Subsidiaries or any of their respective properties may be
bound or affected, (iii) violate any order, writ, injunction, decree, judgment,
ruling, law, rule or regulation of any court or governmental authority, domestic
or foreign, applicable to any Seller or any of the Company and the Subsidiaries
or any of their respective properties, or (iv) except for applicable
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), and approvals of the Federal Communications Commission
(the "FCC") and the Connecticut Department of Public Utility Control (the
"PUC"), require any consent, approval or authorization of, or notice to, or
declaration, filing or registration with, any governmental or regulatory
authority or other third party in connection with the execution, delivery and
performance of this Agreement by any Seller or the Company or to enable the
Company and the Included Subsidiaries to continue fully to conduct the Business
after the Closing Date in a manner which is in all material respects consistent
with that in which it is presently conducted, which, in the case of clauses
(ii), (iii) and (iv) above, would, individually or in the aggregate, be
reasonably likely to have a Material Adverse Effect. The Company has received
from Southern New England Telephone Company ("SNET") a waiver of any and all
rights SNET and its affiliates may have with respect to the transactions
contemplated by this Agreement. A true and correct copy of the aforementioned
waiver has been delivered to Buyer.
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2.7 Compliance with Law; Governmental Authorizations. Neither the
Company nor any of the Subsidiaries is in violation of any applicable law,
statute, order, rule or regulation (including those relating to the protection
of the environment) promulgated or judgment entered by any federal, state, local
or United States court or governmental authority relating to or affecting the
operation, conduct or ownership of any property or business of any of the
Company and the Subsidiaries which, individually or in the aggregate, would
reasonably be expected to have a Material Adverse Effect. Except as set forth in
Section 2.7 of the Disclosure Schedule, the licenses, permits and other
governmental authorizations held by the Company and the Subsidiaries are valid
and sufficient for the conduct of the Business as currently conducted.
2.8 Litigation. Except as otherwise set forth in Section 2.8 of the
Disclosure Schedule, there are no claims, actions, proceedings or investigations
pending or, to the best knowledge of Sellers and the Company, threatened against
the Company or any of the Subsidiaries before any court or governmental or
regulatory authority or body which, individually or in the aggregate, is
reasonably likely to have a Material Adverse Effect. Neither the Company, the
Subsidiaries nor any of their respective properties is subject to any order,
judgment, injunction or decree which, individually or in the aggregate, would be
likely to have a Material Adverse Effect.
2.9 Changes. Since October 31, 1997, except as otherwise disclosed in
Section 2.9 of the Disclosure Schedule:
(a) the Business has been conducted only in the ordinary course and
consistent with past practice in all material respects;
(b) neither the Company nor any of the Subsidiaries has suffered any
Material Adverse Effect; and
(c) the Company has not taken any action which would require the
consent of Buyer under Section 7.1(b) had such action been taken by the Company
after the date hereof.
2.10 Taxes. (a) The Company, or an affiliate or other representative
of the Company on its behalf, has (i) duly filed with the appropriate Federal,
state, local and foreign taxing authorities all material Tax Returns (as defined
below) required to be filed by or with respect to the Company and the
Subsidiaries, and (ii) paid or made provision for in the Financial Statements
all Taxes (as defined below)
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due and required to be paid by the Company and the Subsidiaries regardless of
whether shown as being owed on such required Tax Returns. The Company is the
common parent of an affiliated group of corporations that includes each
Subsidiary (the "Tax Group"), and no member of the Tax Group is or was at any
time a member of any other consolidated, combined or unitary group. Except as
set forth in Section 2.10 of the Disclosure Schedule, as of the date of this
Agreement, (i) neither Sellers, the Company, any Subsidiary nor any affiliate
or, to the Company's knowledge, other representative of the Company has received
any written notice of deficiency or assessment from any Federal, state, local or
foreign taxing authority with respect to liabilities for Taxes of any member of
the Tax Group which have not been paid or finally settled and any such
deficiency or assessment disclosed in Section 2.10 of the Disclosure Schedule is
being contested in good faith through appropriate proceedings; (ii) no audit of
any Tax Return concerning any member of the Tax Group is pending, being
conducted, or, to the knowledge of the Company and the Sellers, threatened to be
instituted by a Tax authority; (iii) no extension of the statute of limitations
on the assessment of any Taxes has been granted to any member of the Tax Group
or is currently in effect with respect to any member of the Tax Group; (iv) no
consent under Section 341(f) of the Internal Revenue Code of 1986, as amended
(the "Code"), has been filed with respect to any member of the Tax Group; (v)
neither the Company nor any Subsidiary is a party to any agreement or
arrangement that would result, separately or in the aggregate, in the actual or
deemed payment by the Company or any Subsidiary of any "excess parachute
Payments" within the meaning of Section 280G of the Code that is not exempted
from the provisions of Section 280G(a) of the Code; (vi) except with respect to
Smartlink Development Limited Partnership, neither the Company nor any
Subsidiary has been at any time a member of any partnership or joint venture or
the holder of a beneficial interest in any trust for any period for which the
statute of limitations for any Tax has not expired; (vii) the Company has not
been a United States real property holding corporation within the meaning of
Section 897(c)(2) of the Code during the applicable period specified in Section
897(c)(1)(A)(ii) of the Code; (viii) neither the Company nor any Subsidiary is
doing business in or engaged in a trade or business in any jurisdiction in which
it has not filed all required income or franchise Tax Returns; (ix) all Taxes
required to be withheld, collected or deposited by or with respect to the
Company or the Subsidiaries have been timely withheld, collected or deposited,
as the case may be, and, to the extent required, have been paid to the relevant
taxing authority; (x) no power of attorney that is currently in force has been
granted with respect to any matter relating to Taxes that could materially
affect the Tax liability of the Company or the Subsidiaries; (xi) neither the
Company nor any Subsidiary is a party to any written or unwritten tax sharing
agreement or Indemnity agreement or agreement executed or
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agreed to on or prior to the date of this Agreement; and (xii) the Company and
the Subsidiaries have no liability for the Taxes of any person other than the
members of the Tax Group under Treasury regulation section 1.1502-6 (or any
similar provision of state, local or foreign law). Section 2.10 of the
Disclosure Schedule sets forth the true and correct amount of net operating
losses ("NOLs") of the Company in all material respects as of September 30,
1997. The NOLs will be available under applicable law and, except as set forth
in Section 2.10 of the Disclosure Schedule, will be sufficient in amount to
offset and currently reduce to zero any income or gain (the "Transfer Income or
Gain") recognized by the Company or any Subsidiary for federal, state or local
tax purposes (exclusive of the alternative minimum tax) by reason of the
transfer prior to Closing of the capital stock of Whitecap and the CMI Assets
(as defined in Section 7.13 hereof), as contemplated by Section 7.13 hereof.
(b) For purposes of this Agreement, "Taxes" shall mean all taxes,
charges, fees, levies, penalties or other assessments imposed by any United
States Federal, state, local or foreign taxing authority, including, but not
limited to, income, gross receipts, service, leasing, occupation, excise,
property, sales and use, transfer, gains, franchise, payroll, withholding,
social security or other taxes, including any interest, penalties or additions
attributable thereto.
(c) For purposes of this Agreement, "Tax Return" shall mean any
return, amended return, report, information return or other document (including
any related or supporting information) filed or required to be filed with any
taxing authority with respect to Taxes.
2.11 Employee Benefits. (a) Section 2.11(a) of the Disclosure
Schedule sets forth a true and complete list of each employee benefit or
compensation plan, program and contract, including, but not limited to, any
employee benefit plan within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and any
multiemployer plan within the meaning of Section 3(37) of ERISA, to which the
Company or any Subsidiary is a party, under which any employee or former
employee of the Company or any Subsidiary has any present or future right to
benefits, with respect to which the Company or any Subsidiary could incur
liability under ERISA or the Code that is maintained for employees or former
employees of the Company or any Subsidiary and to which the Company or any
Subsidiary or any trade or business, whether or not incorporated, that together
with the Company or any Subsidiary would be deemed a "single employer" within
the meaning of Section 4001(b) of ERISA (an "ERISA Affiliate"), is obligated to
contribute (the "Plans"). Each Plan has been maintained in substantial
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compliance with all applicable laws and has been operated in all material
respects in compliance with its terms. Except as set forth in Section 2.11(a)
of the Disclosure Schedule, (i) no Plan has an accumulated or waived funding
deficiency within the meaning of Section 412 of the Code, and (ii) no
proceedings have been instituted to terminate any Plan that is subject to Title
IV of ERISA. Any Plan intended to be "qualified" (within the meaning of Section
401(a) of the Code) either (x) has received a favorable Determination Letter
from the Internal Revenue Service and, to the knowledge of Sellers and the
Company, no event has occurred nor condition exists which could reasonably be
expected to result in the revocation of such Determination Letter, or (y) is the
subject of an application for such a Determination Letter.
(b) No event has occurred which would subject the Company or any
Subsidiary to any material liability under the terms of any Plan (including
solely for this purpose, any Plan maintained by any ERISA Affiliate of the
Company) under ERISA, the Code or any other applicable law.
(c) Section 2.11(c) of the Disclosure Schedule contains a summary of
each employment, severance, termination or similar agreement entered into by the
Company and/or any of the Included Subsidiaries that is in effect on the date
hereof.
(d) Except as set forth in Section 2.11(d) of the Disclosure
Schedule, the consummation of the transactions contemplated by this Agreement
will not (i) entitle any current or former employee or officer of the Company or
any of the Subsidiaries to severance pay, unemployment compensation or any other
payment or (ii) accelerate the time of payment or vesting or increase the amount
of compensation due any such employee or officer.
2.12 Labor Relations. Except as set forth in Section 2.12 of the
Disclosure Schedule, neither the Company nor any of the Subsidiaries is a party
to any collective bargaining agreement, labor contract or letter of
understanding with a union or labor organization applicable to employees of the
Company or any of the Subsidiaries, nor are any of their employees represented
by any other union or labor organization. Except as set forth in Section 2.12
of the Disclosure Schedule, (i) each of the Company and the Subsidiaries is in
material compliance with all applicable laws respecting employment and
employment practices, terms and conditions of employment and wages and hours,
(ii) neither the Company nor any of the Subsidiaries is engaged in any unfair
labor practice which, individually or in the aggregate, has had or is reasonably
expected to have a Material Adverse Effect, and (iii) there is no labor
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strike, material slowdown or stoppage or material labor dispute actually pending
or, to the knowledge of the Company, threatened against the Company.
2.13 Contracts and Leases. Section 2.13(a) of the Disclosure
Schedule identifies each of the material contracts, leases, agreements and
understandings to which any of the Company and the Subsidiaries is a party or by
which any of their respective assets or operations may be bound, other than
customer contracts (a "Material Contract"). Section 2.14(b) of the Disclosure
Schedule contains the form or forms of customer contract presently in use by the
Company and/or any of its Subsidiaries (the "Customer Contracts"). Except as
otherwise disclosed in Section 2.13(c) of the Disclosure Schedule, each Material
Contract and Customer Contract is in full force and effect, except where the
failure to be in full force and effect would not, individually or in the
aggregate, have a Material Adverse Effect. There are no existing defaults by
any of the Company and the Subsidiaries under any Material Contract, which
defaults would, individually or in the aggregate, result in a Material Adverse
Effect.
2.14 Environmental Matters. Except as set forth in Section 2.14 of
the Disclosure Schedule or except as failure of the following to be true and
correct would not, individually or in the aggregate, have a Material Adverse
Effect, none of the Sellers, the Company nor any of the Subsidiaries has
received any written notice alleging the past or present violation of any
applicable federal, state and local laws and regulations related to the
protection of human health or the environment ("Environmental Laws"), and (i)
each of the Company and the Subsidiaries is in compliance in all material
respects with all Environmental Laws; (ii) each of the Company and the
Subsidiaries has obtained and complies in all material respects with all
required governmental environmental permits with respect to the Business as
currently conducted; (iii) no storage, treatment or disposal of hazardous waste,
substance or material on the real estate owned, and to the knowledge of the
Company, leased or managed by any of the Company and the Subsidiaries has been
made except in compliance in all material respects with applicable Environmental
Laws; and (iv) each of the Company and the Subsidiaries has lawfully disposed in
all material respects of its hazardous waste products with respect to the
operations of the Business.
2.15 Title to Assets and Leases. (a) Except as set forth in Section
2.15 of the Disclosure Schedule relating to Whitecap and/or the CMI Assets, on
October 31, 1997, either the Company or a Subsidiary had and, except with
respect to assets disposed of in the ordinary course of business since October
31, 1997, now
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has, good and marketable title to all real property and all other properties and
assets reflected on the Financial Statements or which would have been reflected
thereon had they not been fully depreciated, free and clear of all Encumbrances
except for (i) Encumbrances which secure indebtedness or obligations which are
properly reflected on the Financial Statements; (ii) liens for Taxes accrued but
not yet payable; (iii) liens arising as a matter of law in the ordinary course
of business, provided that the obligations secured by such liens are not
delinquent or are being contested in good faith; (iv) such imperfections of
title and encumbrances, if any, as do not materially interfere with the present
use of any of its properties and assets; and (v) leases, if any, to third
parties which, if material, are set forth on Section 2.15 of the Disclosure
Schedule. Either the Company or an Included Subsidiary owns, or has valid
leasehold interests in, all material properties and assets used in the conduct
of the Business.
(b) Neither the Company nor any of the Included Subsidiaries has any
legal obligation, absolute or contingent, to any other person to sell or
otherwise dispose of any substantial part of its assets, or to sell or otherwise
dispose of any of its assets except in the ordinary course of business and
except as provided in Section 7.13 hereof.
2.16 Numbers of Customers and Units. As of the date of this
Agreement, the Company and the Included Subsidiaries provide cellular telephone
services to not less than 64,800 revenue producing cellular telephone access
numbers and paging services to not less than 15,100 revenue producing paging
units.
2.17 Intellectual Property. (a) Except as set forth in Section 2.17
of the Disclosure Schedule, segregated by ownership, license or use, the Company
and the Included Subsidiaries do not own, license or use any patents,
trademarks, tradenames or other intellectual property and have not filed any
applications or registrations therefor.
(b) Neither the Company nor any of the Subsidiaries is knowingly, in
any material respect, or has received written notice alleging that the Company
or any of the Subsidiaries is, infringing or violating any patents, trademarks,
service marks, trade names, trade secrets, copyrights, royalty rights, design
rights or other intellectual property rights, or applications or registrations
therefor, foreign or domestic, of any person.
2.18 Insurance. (a) Set forth in Section 2.18 of the Disclosure
Schedule is a list of all material policies and binders of insurance held by or
on behalf
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of the Company and/or the Subsidiaries or relating to their respective
businesses and properties (specifying the amount of the coverage, the type of
the coverage and any pending claims thereunder). Each of these policies and
binders is valid and enforceable in accordance with its terms and is outstanding
and duly in force.
(b) Neither the Company nor any of the Subsidiaries is in material
default with respect to any provision contained in any such policy or binder,
nor has there been any failure to give notice or to present any claim relating
to the Company or any of the Subsidiaries under any such policy or binder in a
timely fashion or in the manner or detail required by the policy or binder.
There are no outstanding unpaid premiums (except premiums not yet due and
payable), and no notice of cancellation or nonrenewal with respect to, or
disallowance of any claim under, any such policy or binder has been received by
the Company or any of the Subsidiaries.
2.19 Affiliated Transactions. Set forth in Section 2.19 of the
Disclosure Schedule is a list of all contracts, arrangements or obligations
between the Company or any of the Subsidiaries, on the one hand, and Sellers or
any of their affiliates, on the other hand, either (i) entered into since April
30, 1997 or (ii) in force and effective as of the date of this Agreement.
2.20 No Brokers' or Other Fees. Except as set forth in Section 2.20
of the Disclosure Schedule, no broker, finder or investment banker is entitled
to any brokerage, finder or other fee or commission in connection with the
transactions contemplated hereby based upon arrangements made by or on behalf of
any Seller, the Company or any affiliate thereof.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Sellers as follows:
3.1 Organization. Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware.
3.2 Authorization, Etc. Buyer has full corporate power and authority
to execute and deliver this Agreement, the Indemnification Escrow Agreement and,
if applicable, the Deposit Escrow Agreement and to carry out the transactions
contemplated hereby and thereby. The Board of Directors of Buyer has duly ap-
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proved and authorized the execution and delivery of this Agreement, the
Indemnification Escrow Agreement and, if applicable, the Deposit Escrow
Agreement and the consummation of the transactions contemplated hereby and
thereby, and no other corporate proceedings on the part of Buyer are necessary
to approve and authorize the execution and delivery of this Agreement, the
Indemnification Escrow Agreement and, if applicable, the Deposit Escrow
Agreement by Buyer and the consummation by Buyer of the transactions
contemplated hereby and thereby. This Agreement and the Indemnification Escrow
Agreement constitute, and, if applicable, the Deposit Escrow Agreement will
constitute, valid and binding obligations of Buyer enforceable against Buyer in
accordance with their respective terms, except that the enforcement hereof and
thereof may be limited by (i) bankruptcy, insolvency, reorganization, moratorium
or other similar laws now or hereafter in effect relating to creditors' rights
generally and (ii) general principles of equity (regardless of whether
enforceability is considered in a proceeding at law or in equity).
3.3 No Approvals or Conflicts. Except as set forth in Section 3.3 of
the Disclosure Schedule, neither the execution and delivery by Buyer of this
Agreement, the Indemnification Escrow Agreement and, if applicable, the Deposit
Escrow Agreement nor the consummation by Buyer of the transactions contemplated
hereby and thereby will (i) violate, conflict with or result in a breach of any
provision of the organizational documents of Buyer, (ii) conflict with or result
in a breach of any provision of, or constitute a default under, or result in the
termination or cancellation of, or accelerate the performance required by, or
result in the creation of any lien, security interest, charge or encumbrance
upon any of Buyer's properties under, any note, bond, mortgage, indenture, deed
of trust, license, franchise, permit, lease, contract, agreement or other
instrument or commitment or obligation to which Buyer or any of its properties
may be bound or affected, (iii) violate any order, writ, injunction, decree,
judgment, ruling, law, rule or regulation of any court or governmental
authority, domestic or foreign, applicable to Buyer or any of its properties, or
(iv) except for applicable requirements of the HSR Act and approvals of the FCC
and the PUC, require any consent, approval or authorization of, or notice to, or
declaration, filing or registration with, any governmental or regulatory
authority in connection with the execution, delivery and performance of this
Agreement by Buyer, which, in the case of clauses (ii), (iii) and (iv) above,
would, individually or in the aggregate, reasonably likely have a material
adverse effect on the business, assets, liabilities, operations or financial
condition of Buyer.
3.4 Periodic Reports. Buyer has filed all periodic reports and other
documents required to be filed by it under the Securities Exchange Act of 1934,
as
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amended (the "Exchange Act"), with the Securities and Exchange Commission (the
"SEC") since December 31, 1996, pursuant to the federal securities laws and the
SEC rules and regulations thereunder, all of which, as of their respective
filing dates, complied in all material respects with all applicable requirements
of the Exchange Act (as such documents have been amended since the time of their
filing, collectively, the "Buyer SEC Reports"). None of the Buyer SEC Reports
filed prior to the date hereof, including, without limitation, any financial
statements or schedules included therein, as of their respective dates or, if
amended, as of the date of the last such amendment, contained, and any Buyer SEC
Reports filed subsequent to the date hereof will not contain, any untrue
statement of a material fact or omitted, or will omit, any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, or will be
made, not misleading.
3.5 No Distribution. The Securities will not be taken by Buyer with a
view to the public distribution thereof, and will not be transferred except in a
transaction registered or exempt from registration under the Securities Act of
1933, as amended.
3.6 Compliance with Law; Governmental Authorizations. Buyer is not in
violation of any applicable law, statute, order, rule or regulation (including
those relating to the protection of the environment) promulgated or judgment
entered by any federal, state, local or United States court or governmental
authority relating to or affecting the operation, conduct or ownership of any
property or business of Buyer which, individually or in the aggregate, would
reasonably be expected to have a material adverse effect on the business,
operations, assets, liabilities or financial condition of Buyer or on the
ability of Buyer to consummate the transactions contemplated hereby. The
licenses, permits and other governmental authorizations held by Buyer are valid
and sufficient for the conduct of the businesses of Buyer as currently
conducted.
3.7 Buyer's Registration Statement. The Registration Statement
referred to in Section 7.10 hereof, when it becomes effective, will comply in
all material respects with all applicable requirements of the Securities Act of
1933, as amended; such Registration Statement at such time will not contain any
untrue statement of a material fact or omit any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they will be made, not misleading.
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3.8 No Brokers' or Other Fees. Except as set forth in Section 3.8
of the Disclosure Schedule, no broker, finder or investment banker is entitled
to any brokerage, finder or other fee or commission in connection with the
transactions contemplated hereby based upon arrangements made by or on behalf of
Buyer.
ARTICLE IV
CONDITIONS TO EACH PARTY'S OBLIGATIONS
The obligation of Sellers to sell the Securities and the obligation of
Buyer to purchase the Securities are subject to the satisfaction or waiver by
Sellers and Buyer, at or prior to the Closing, of each of the following
conditions.
4.1 Regulatory Consents. All waiting periods applicable under the
HSR Act with respect to the transactions contemplated hereby shall have expired
or been terminated and all applicable approvals of the FCC and the PUC shall
have been received and all material approvals of any other governmental agency
or authority shall have been received.
4.2 Injunctions. On the Closing Date there shall be no injunction,
writ, preliminary restraining order or other order in effect of any nature
issued by a court or governmental agency of competent jurisdiction directing
that the transactions provided for herein not be consummated as provided herein.
4.3 Transfer of Whitecap and CMI Assets. The capital stock of
Whitecap and the CMI Assets shall have been transferred in accordance with the
provisions of Section 7.13 hereof.
4.4 Indemnification Escrow Agreement. It shall be a condition to
Buyer's obligations hereunder that each of Sellers, together with the escrow
agent thereunder, shall have executed and delivered the Indemnification Escrow
Agreement. It shall be a condition to Sellers' obligations hereunder that Buyer,
together with the escrow agent thereunder, shall have executed and delivered the
Indemnification Escrow Agreement.
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ARTICLE V
CONDITIONS TO SELLERS' OBLIGATIONS
The obligations of Sellers under this Agreement are subject to the
satisfaction, at or prior to the Closing, of each of the following conditions,
unless waived in writing by Sellers.
5.1 Representations and Warranties. The representations and
warranties made by Buyer in this Agreement that are qualified by materiality
shall be true and correct in all respects on the Closing Date as though such
representations and warranties were made at such date, except to the extent such
representations and warranties speak only as of an earlier date, in which case
they shall be true in all respects as of such earlier date, and the
representations and warranties made by Buyer in this Agreement that are not
qualified by materiality shall be true and correct in all material respects on
the Closing Date as though such representations and warranties were made at such
date, except to the extent such representations and warranties speak only as of
an earlier date, in which case they shall be true in all material respects as of
such earlier date.
5.2 Performance. Buyer shall have performed and complied in all
material respects with all agreements, obligations and conditions required by
this Agreement to be so performed or complied with by Buyer prior to the
Closing.
5.3 Officer's Certificate. Buyer shall have delivered to Sellers a
certificate, dated the date of the Closing and executed by an appropriate
officer of Buyer, certifying to the fulfillment of the conditions specified in
Sections 5.1 and 5.2 hereof.
5.4 Closing Deliveries. Sellers shall have received from Buyer those
items set forth in Section 1.5(b) hereof.
5.5 Opinion of Counsel. Sellers shall have received the opinion of
counsel for Buyer in form and substance reasonably satisfactory to Sellers with
respect to the matters contained in Sections 3.1 and 3.2 hereof.
5.6 Deposit Escrow Amount. If applicable, the Deposit Escrow
Amount shall have been released to Sellers in accordance with the terms of the
Deposit Escrow Agreement.
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5.7 Consents. All consents referred to in Section 7.3(b) hereof shall
have been obtained.
ARTICLE VI
CONDITIONS TO BUYER'S OBLIGATIONS
6.1 Representations and Warranties. The representations and
warranties made by Sellers and the Company in this Agreement that are qualified
by materiality shall be true and correct in all respects on the Closing Date as
though such representations and warranties were made at such date, except to the
extent such representations and warranties speak as of an earlier date, in which
case they shall be true in all respects as of such earlier date, and the
representations and warranties made by Sellers and the Company in this Agreement
that are not qualified by materiality shall be true and correct in all material
respects on the Closing Date as though such representations and warranties were
made at such date, except to the extent such representations and warranties
speak as of an earlier date, in which case they shall be true in all material
respects as of such earlier date.
6.2 Performance. Sellers and the Company shall have performed and
complied in all material respects with all agreements, obligations and
conditions required by this Agreement to be so performed or complied with by
Sellers and the Company prior to the Closing.
6.3 Officer's Certificate. Sellers and the Company shall have
delivered to Buyer a certificate, dated the date of the Closing and executed by
the Chief Executive Officer of the Company certifying to the fulfillment of the
conditions specified in Sections 6.1 and 6.2 hereof.
6.4 Closing Deliveries. Buyer shall have received from Sellers or
the Company those items set forth in Section 1.5(a) hereof.
6.5 Opinion of Counsel. Buyer shall have received the opinion of
Cummings & Lockwood in form and substance reasonably satisfactory to Buyer with
respect to the matters contained in Sections 2.1, 2.2, 2.3, 2.4, 2.6, 2.7, 2.8
and 2.13 hereof (provided that certain matters may be addressed by other counsel
for Sellers reasonably satisfactory to Buyer).
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6.6 Consents. All consents referred to in Section 7.3(b) hereof shall
have been obtained.
6.7 Resignations. Buyer shall have received the resignations from
such of the directors and officers of the Company and the Included Subsidiaries
as Buyer shall specify in a notice given to Sellers not less than five business
days prior to the Closing.
6.8 Noncompetition Agreements. Buyer shall have received executed
copies of noncompetition agreements in the form attached as Exhibit D hereto
(the "Noncompetition Agreements") from each of the parties set forth in Section
6.8 of the Disclosure Schedule.
6.9 Employment Agreements. Buyer shall have entered into
employment agreements reasonably satisfactory to Buyer with the persons set
forth in Section 6.9 of the Disclosure Schedule.
6.10 Financing. Buyer shall have completed the financing referred to
in Section 7.10 hereof.
ARTICLE VII
COVENANTS AND AGREEMENTS
7.1 Conduct of Business. Sellers and the Company covenant that,
except for actions specifically contemplated hereby or as consented to in
writing by Buyer, from and after the date of this Agreement and until the
Closing Date they shall:
(a) use all reasonable efforts consistent with good business judgment
to: (i) preserve the present business organization of the Company and the
Subsidiaries intact; (ii) consistent with prior practice, keep available the
services of employees of the Company and the Subsidiaries; and (iii) operate the
Company and the Subsidiaries in the ordinary course consistent with prior
practice;
(b) except as otherwise provided in Section 7.1 of the Disclosure
Schedule and as provided in Section 7.13 hereof, not (i) issue or sell any
shares of capital stock or other securities of the Company or any of the
Subsidiaries or any options, warrants or commitments of any kind with respect
thereto; (ii) directly or indi-
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rectly purchase, redeem or otherwise acquire or dispose of any shares of capital
stock of the Company or any of the Subsidiaries; (iii) except for a payment of
up to $500,000 pursuant to the terms of the Recapitalization Agreement by and
among the Company, Triumph-Connecticut Limited Partnership, FSC Corp. and Mark
Hatten, dated May 23, 1997 (the "Recapitalization Agreement"), declare, set
aside or pay any dividend or other distribution or advance on its capital stock
or make any other distribution to its stockholders; (iv) except in order to make
a payment of up to $500,000 pursuant to the terms of the Recapitalization
Agreement, and except in order to fund advertising and marketing expenses of the
Company and/or the Included Subsidiaries in an aggregate amount not to exceed
$345,000, and except for borrowings in the ordinary course of business under the
existing credit facilities as of the date of this Agreement, borrow or agree to
borrow any funds or incur, whether directly or by way of guarantee, any
obligation for borrowed money; (v) subject any of the property or assets of the
Company or any of the Subsidiaries (real, personal or mixed, tangible or
intangible) to any Encumbrance or otherwise permit or allow the sale or other
disposition of any material property or assets of the Company or any of the
Subsidiaries (real, personal or mixed, tangible or intangible), other than the
sale of products in the ordinary course of business consistent with past
practice and other than Encumbrances under existing credit facilities as of the
date of this Agreement with respect to newly acquired properties or assets
permitted to be acquired pursuant to the terms of this Agreement; (vi) make any
material change in its accounting policies from those applied in the preparation
of the Financial Statements; (vii) make any capital expenditures not set forth
in the budget set forth in Section 7.1 of the Disclosure Schedule, except for
capital expenditures not in excess of $200,000 individually or $500,000 in the
aggregate; (viii) modify or change in any material respect in a manner adverse
to the Company, or enter into or terminate, any material contract or commitment;
(ix) acquire an equity interest in, or the assets of, any other corporation or
entity; (x) waive any claims or rights relating to the Company's business,
except with respect to customers and suppliers in the ordinary course of
business and consistent with past practice and otherwise in an amount not to
exceed $100,000 in the aggregate; (xi) permit the Company and the Included
Subsidiaries to alter their billing and collection practices; (xii) permit the
Company and the Included Subsidiaries to increase the aging of trade and other
payables, except with respect to payables which the Company and the Included
Subsidiaries can reasonably demonstrate to Buyer are being contested in good
faith; (xiii) increase the compensation payable or to become payable to any of
the officers or employees of the Company or any of the Subsidiaries or take any
action with respect to the grant of any severance or termination pay, or stay
bonus or other incentive arrangement (other than pursuant to benefit plans and
policies in effect on the date of this Agreement), except any
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increases made in the ordinary course of business consistent with past practice;
(xiv) make or change any material Tax election, other than in the ordinary
course of business consistent with past practice or pay any amounts under, or in
respect of, any tax sharing agreement or arrangement; (xv) amend the charter or
bylaws of the Company or any of the Subsidiaries; (xvi) enter into any
agreements or arrangements with an affiliate; (xvii) take any action that would,
or that could reasonably be expected to, result in any of the representations or
warranties of Sellers or the Company set forth in this Agreement to become
untrue; or (xviii) agree to do any of the foregoing (unless such agreement is
explicitly contingent upon, and is reasonably not designed to result in, the
failure to consummate the transactions contemplated by this Agreement); and
(c) maintain the books and records of the Company and the
Subsidiaries in accordance with prior practice.
7.2 Access to Books and Records. The Company shall, and shall cause
each of the Subsidiaries to, afford to Buyer, and to Buyer's accountants,
counsel and other representatives, reasonable access and permit them to make
such inspections as they may reasonably require during normal business hours,
including all available environmental reviews or audits, during the period from
the date of this Agreement through the Closing to their respective properties,
books, contracts, commitments and records. The Company and the Subsidiaries
shall furnish or cause to be furnished to Buyer such financial and operating
data and other information with respect to the business and properties of the
Company and the Subsidiaries, including access to the work papers of the
Company's independent auditors, as Buyer may from time to time reasonably
request, and Buyer and its representatives shall be entitled, in consultation
with the Company, to such access to the representatives, officers and employees
of the Company and the Subsidiaries as Buyer may reasonably request. Without
limiting the generality of the foregoing, for the purpose of assisting Buyer in
connection with the financing referred to in Section 7.10 hereof, the Company
shall cause all necessary audited and unaudited financial statements of the
Company and the Subsidiaries through October 31, 1997, and all necessary related
consents of the Company's independent accountants, to be delivered to Buyer no
later than January 21, 1998. Buyer will hold, and will cause its affiliates,
associates and representatives to hold, any nonpublic information in accordance
with the terms of the Confidentiality Agreement, dated as of December 1, 1997,
between Buyer and the Company (the "Confidentiality Agreement").
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7.3 Approvals and Consents. (a) After the execution hereof, each of
the Company and Sellers, on the one hand, and Buyer, on the other: (i) shall
promptly prepare and make any required filings under the HSR Act and under the
regulations of the FCC and the PUC, as required, and (ii) shall use all
reasonable efforts to obtain and to cooperate in obtaining any consent,
approval, authorization or order of, or in making any registration or filing
with, any governmental agency or body required in connection with the execution,
delivery or performance of this Agreement. The Company and Buyer will furnish to
one another such necessary information and reasonable assistance as may be
requested in connection with the preparation of necessary filings or submissions
under the provisions of the HSR Act and under the regulations of the FCC and the
PUC. Sellers and Buyer will supply to one another copies of all correspondence,
filings or communications (or memoranda setting forth the substance thereof)
between Buyer or Sellers or their respective representatives, on the one hand,
and the Federal Trade Commission, the Antitrust Division of the U.S. Department
of Justice, the FCC, the PUC or any other governmental agency or authority or
their respective staffs, on the other hand, with respect to this Agreement or
the transactions contemplated hereby, other than confidential or proprietary
information therein.
(b) Sellers and the Company shall use all reasonable efforts to
obtain at the earliest practicable date and prior to the Closing all consents,
waivers and/or approvals required in connection with the performance of this
Agreement and the consummation of the transactions contemplated hereby pursuant
to the terms of (i) all Material Contracts and (ii) any other contracts, leases,
agreements and understandings to which any of the Company and the Subsidiaries
is a party or by which any of their respective assets or operations may be
bound, except in the case of this clause (ii) for any consents, waivers and/or
approvals which the failure to obtain would not impair in any material respect
the transactions contemplated hereby or the ability of the Company and the
Subsidiaries to operate the Business following the Closing. The Sellers and the
Company shall also proceed in good faith to obtain prior to the Closing all
other consents that may be required in connection with the performance of this
Agreement pursuant to the terms of other agreements or instruments of the
Company and the Subsidiaries. Buyer shall use all reasonable efforts to obtain
at the earliest practicable date and prior to the Closing all consents, waivers
and/or approvals required in connection with the performance of this Agreement
and the consummation of the transactions contemplated hereby pursuant to the
terms of any contracts, leases, agreements and understandings to which Buyer is
a party or by which any of its assets or operations may be bound, except for any
consents, waivers and/or approvals which the failure to obtain would not impair
in any material respect the transactions contemplated hereby.
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7.4 Further Assurances. After the Closing, each party hereto shall
from time to time, at the request of the other party and without further cost or
expense to such other party, execute and deliver or cause to be executed and
delivered such other instruments of conveyance and transfer and such other
certificates and other documents and take such other actions as such other party
may reasonably request in order to more effectively consummate the transactions
contemplated hereby.
7.5 Confidentiality Agreement. The Confidentiality Agreement will
survive and remain in full force and effect following the Closing or the
termination of this Agreement. Buyer also agrees that for a period of 12 months
following the termination of this Agreement it will not solicit for employment
employees of the Company and/or the Subsidiaries.
7.6 Tax Matters. (a) Sellers Indemnification. Subject to the third
proviso of Section 9.1(a) hereof with respect to state sales and use taxes,
Sellers shall be liable for, and shall indemnify and hold Buyer, the Company,
the Included Subsidiaries and their affiliates harmless against, all Taxes (i)
imposed on any person (other than the Company or the Included Subsidiaries)
under Treas. Reg. (S) 1.1502-6 (or any similar provision under state, local or
foreign law) (including as a transferee or successor, by conduct or otherwise);
or (ii) of the Company or the Subsidiaries for any taxable year or taxable
period ending on or before the Closing Date due or payable with respect to the
income, operations, assets or business of the Company or the Subsidiaries on or
before the Closing Date, but only to the extent that the aggregate amount of
such Taxes exceeds the amount of Taxes that have been reserved for in the
Financial Statements. In order to appropriately apportion any income taxes
relating to any taxable year beginning before (and ending after) the Closing
Date, the parties hereto shall apportion such income taxes to the taxable period
ending on or before the Closing Date by a closing of the Company's and the
Subsidiaries' books, except that exemptions, allowances or deductions that are
calculated on a time basis, such as the deduction for depreciation, shall be
apportioned on a time basis. In order to appropriately apportion any non-income
taxes relating to any taxable year beginning before (and ending after) the
Closing Date, the parties hereto shall apportion such non-income taxes to the
taxable period ending on or before the Closing Date as follows: (x) ad valorem
taxes (including, without limitation, real and personal property taxes) shall be
accrued on a monthly basis over the period for which such taxes are levied, or
if it cannot be determined over what period such taxes are being levied, over
the fiscal period of the relevant taxing authority, in each case irrespective of
the lien or assessment date of such taxes, (y) all Taxes relating to actions
outside the ordinary course of business occurring on or prior to the Closing
Date shall be
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apportioned to the period ending on or prior to Closing, including, without
limitation and notwithstanding any provision herein to the contrary, all Taxes
relating directly or indirectly to the transfer of the capital stock of Whitecap
and the CMI Assets as contemplated by Section 7.13 herein, and (z) franchise and
other privilege taxes not measured by income shall be accrued on a monthly basis
over the period to which the privilege relates. Any tax allocation agreement or
arrangement between the Company and Sellers or any of their affiliates in effect
prior to the Closing (other than this Agreement) shall cease to exist as of the
Closing Date.
(b) Company's Indemnification. Except as otherwise provided in
Section 7.6(a) hereof, the Company and Buyer shall be liable for, and shall
indemnify and hold Sellers or any affiliate of Sellers harmless against, any and
all Taxes imposed on the Company or the Included Subsidiaries relating to any
taxable year ending after the Closing Date.
(c) Refunds or Credits. The Company shall promptly pay to Sellers any
refunds or credits of Taxes for which Sellers may be liable under Section 7.6(a)
hereof. For purposes of this Section 7.6(c), the term "refund" shall include a
reduction in Taxes and the use of an overpayment of Taxes as an audit or other
tax offset and receipt of a refund shall occur upon the filing of a return or an
adjustment thereto using such reduction, overpayment or offset, or upon the
receipt of cash. Upon the reasonable request of Sellers, the Company shall
prepare and file, or cause to be prepared and filed, all claims for refunds
relating to such Taxes; provided, however, that the Company shall not be
required to file such claims for refund to the extent such claims for refund
would have a Material Adverse Effect on the Company and the Included
Subsidiaries in future periods or to the extent the claims for refund relate to
a carryback of an item. The Company shall be entitled to all other refunds and
credits of Taxes.
(d) Mutual Cooperation. As soon as practicable, but in any event
within 15 days after either Sellers' or Buyer's request, as the case may be,
Buyer shall deliver to Sellers or Sellers shall deliver to Buyer, as the case
may be, such information and other data relating to the Tax Returns and Taxes of
the Company and the Subsidiaries and shall provide such other assistance as may
reasonably be requested, to cause the completion and filing of all Tax Returns
or to respond to audits by any taxing authorities with respect to any Tax
Returns or taxable periods or to otherwise enable Sellers, Buyer or the Company
to satisfy their accounting or Tax requirements. For a period of five years from
and after the Closing, Buyer and Sellers shall, and shall cause their affiliates
to, maintain and make available to the
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other party, on such other party's reasonable request, copies of any and all
information, books and records referred to in this Section 7.6(d). After such
five-year period, Buyer or Sellers may dispose of such information, books and
records, provided that prior to such disposition Buyer or Sellers shall give the
other party the opportunity to take possession of such information, books and
records. Sellers shall be responsible for preparing and filing the federal
income tax return for the period ending on the Closing Date which return shall
be timely filed and the Taxes with respect thereto timely paid.
(e) Contests. Whenever any taxing authority asserts a claim, makes an
assessment, or otherwise disputes the amount of Taxes for which Sellers or
Whitecap are or may be liable under this Agreement, Buyer shall, if informed of
such an assertion, promptly inform Sellers, and Sellers shall have the right to
control any resulting proceedings and to determine whether and when to settle
any such claim, assessment or dispute to the extent such proceedings or
determinations affect the amount of Taxes for which Sellers are liable under
this Agreement. Whenever any taxing authority asserts a claim, makes an
assessment or otherwise disputes the amount of Taxes for which Buyer is liable
under this Agreement, Sellers shall, if informed of such an assertion, promptly
inform Buyer, and Buyer shall have the right to control any resulting
proceedings and to determine whether and when to settle any such claim,
assessment or dispute, except to the extent such proceedings affect the amount
of Taxes for which Sellers are liable under this Agreement.
(f) Resolution of Disagreements Between Sellers and Buyer. If Sellers
and Buyer disagree as to the amount of Taxes for which Sellers or Buyer may be
liable under this Agreement, Sellers and Buyer shall promptly consult each other
in an effort to resolve such dispute. If any such point of disagreement cannot
be resolved within 60 days of the date of consultation, Sellers and Buyer shall
within 10 days after such 60-day period jointly select a nationally recognized
independent public accounting firm which has not, except pursuant to this
Section 7.6(f), performed any services since January 1, 1992, for either Sellers
or Buyer or their respective subsidiaries, to act as an arbitrator to resolve,
within 60 days after their selection, all points of disagreement concerning tax
matters with respect to this Agreement and presented to such accounting firm at
the time of its selection. If the parties cannot agree on the selection of an
accounting firm within such ten-day period, within two business days after such
ten-day period the parties shall petition the Chief Judge of the United States
District Court for the Northern District of Illinois to select such accounting
firm. The cost of any such independent public accounting firm shall be paid
equally by the parties.
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(g) Survival of Obligations. The obligations of the parties set forth
in this Section 7.6 shall be unconditional and absolute, and shall remain in
effect without limitation as to time or amount of recovery.
7.7 Schedule of Employees. A schedule shall be delivered to Buyer by
the Company prior to the Closing Date, setting forth the name and position of
each person employed on a full-time or part-time basis by the Company and/or the
Subsidiaries and the aggregate compensation (including salary, bonuses and
commissions) paid to each such person for the period commencing January 1, 1997,
and ending with the pay period not more than 30 days prior to the Closing Date,
together with the date of most recent commencement of service of each such
person and the accrued holiday, vacation, sick leave, long-service entitlement
(if any) of each such person and permitted time off due as compensation for
additional time worked by each person.
7.8 Supplements to Disclosure Schedule. From time to time prior to
the Closing, Sellers, the Company and Buyer will promptly supplement or amend
the sections of the Disclosure Schedule relating to their respective
representations and warranties in this Agreement with respect to any matter,
condition or occurrence hereafter arising which, if existing or occurring at the
date of this Agreement, would have been required to be set forth or described in
their respective sections of the Disclosure Schedule. No such supplement or
amendment by Sellers, the Company or Buyer shall have any effect for the purpose
of (i) determining satisfaction by Sellers of the conditions set forth in
Sections 5.1 and 5.2 hereof or (ii) determining satisfaction by Buyer of the
conditions set forth in Sections 6.1 and 6.2 hereof.
7.9 Covenant to Satisfy Conditions. Each party agrees to use all
reasonable efforts to insure that the conditions set forth in Article IV,
Article V and Article VI hereof are satisfied, insofar as such matters are
within the control of such party.
7.10 Financing. Buyer has filed a registration statement on Form S-1
with the SEC with respect to an initial public offering of its common stock,
copies of which have been provided to Sellers. As promptly as practicable, Buyer
shall provide to Sellers copies of any amendments to such registration statement
which are filed with the SEC. Buyer shall use all reasonable efforts to
consummate as soon as practicable an initial public offering of its common stock
at a price per share equal to or in excess of the price per share referred to in
the letter of Buyer dated even date herewith which results in gross proceeds of
at least $125,000,000.
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7.11 Affiliated Transactions. Except as provided herein or as set
forth in Section 7.11 of the Disclosure Schedule, prior to or concurrently with
the Closing, all contracts, arrangements or obligations between the Company or
any of the Subsidiaries, on the one hand, and Sellers or any of their
affiliates, on the other hand, shall be terminated without the payment of any
monies required by the Company or the Subsidiaries.
7.12 Financial Statements and Reports. (a) As promptly as
practicable, the Company shall provide to Buyer true and complete copies of the
Company's monthly unaudited balance sheets and statements of operations,
stockholders' deficit and cash flows, together with the notes thereto, if any
(the "Interim Financial Statements"). The Interim Financial Statements shall be
prepared on a basis consistent with the Financial Statements referred to in
Section 2.5 hereof and shall fairly present in all material respects the
financial position and results of operations of the Company in accordance with
GAAP as of the dates and for the periods set forth in such interim financial
statements. As promptly as practicable, the Company shall deliver to Buyer true
and complete copies of such other regularly prepared financial statements,
reports and analyses as may be prepared by the Company and delivered to the
Company's existing lenders under its credit facilities.
(b) Sellers shall use their best efforts to cause KPMG Peat Marwick,
no later than January 15, 1998, to conduct a Statement on Auditing Standards No.
71 review and provide financial statement accounting comfort, in form and
substance reasonably satisfactory to Buyer, in each case with respect to the
consolidated financial statements of the Company for the twelve month period
ended December 31, 1996 and for the nine month periods ended September 30, 1996
and September 30, 1997. Sellers also shall use their best efforts to cause the
delivery, no later than January 21, 1998, of audited financial statements in
form and substance reasonably satisfactory to Buyer for CTCSI and CMI for the
year ending April 30, 1995. Sellers also shall use their best efforts to cause
the independent accounting firms that conducted such audits to provide one or
more consents as may be required in connection with the financing referred to in
Section 7.10 hereof. In the event that the obligations of the three immediately
preceding sentences are satisfied but the Closing does not occur, Buyer shall be
liable for the actual out-of-pocket costs to the Company in satisfying such
obligations.
7.13 Transfer of Whitecap and CMI Assets. Sellers shall, prior to
Closing, (i) effectuate a spin-off of the capital stock Whitecap or otherwise
cause the transfer of the capital stock of Whitecap from the Company and (ii)
transfer from CMI
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all of the assets listed in Section 7.13 of the Disclosure Schedule (the "CMI
Assets"), in each case in a manner reasonably satisfactory to Buyer. Sellers
shall provide Buyer with any information Buyer may reasonably request with
respect to the status of the transactions specified in clauses (i) and (ii)
above and shall provide Buyer reasonable opportunity to review and comment upon
draft documentation relating to such transactions. Sellers shall, prior to
Closing, deliver to Buyer a fairness opinion in form and substance reasonably
satisfactory to Buyer prepared by an appraiser agreed upon in writing by Sellers
and Buyer which sets forth the fair market value of the capital stock of
Whitecap and the CMI Assets.
7.14 Disclosure. Sellers and the Company shall promptly notify Buyer
of, and furnish Buyer with any information Buyer may reasonably request with
respect to the occurrence, to the best knowledge of Sellers and the Company of,
any event or condition or the existence of any fact that would cause any of the
conditions to Buyer's obligations to consummate the transactions contemplated by
this Agreement not to be fulfilled. Buyer shall promptly notify Sellers of, and
furnish Sellers with any information Sellers may reasonably request with respect
to the occurrence, to the best knowledge of Buyer, of any event or condition or
the existence of any fact that would cause any of the conditions to Sellers'
obligations to consummate the transactions contemplated by this Agreement not to
be fulfilled.
7.15 No Solicitation. (a) The Company shall not, directly or
indirectly, through any officer, director, employee, investment banker,
attorney, representative or agent of the Company or any of the Subsidiaries (in
any case, a "Representative"), solicit, initiate or encourage any inquiries or
proposals that constitute, or could reasonably be expected to lead to, an offer
or proposal for, or indication of interest in, a merger or other business
combination involving the Company or the acquisition of any equity interest in,
or a substantial portion of the assets of, the Company or any Included
Subsidiary (an "Acquisition Proposal"); provided that, subject to the provisions
set forth in Section 7.15(b) and (c) below, nothing contained in this Agreement
shall prevent the Company from furnishing information or data to, or entering
into discussions or negotiations with, any person in connection with an
unsolicited Acquisition Proposal; provided, further, that in no event shall the
Company, any Subsidiary or any of their respective Representatives provide to
any other party the identity of Buyer or the terms of this Agreement.
(b) The Company shall (i) promptly (and in no event later than 24
hours after receipt of any Acquisition Proposal) notify Buyer after receipt by
it (or any of its Representatives) of any Acquisition Proposal or any inquiries
indicating that any
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person is considering making or wishes to make an Acquisition Proposal, (ii)
promptly notify Buyer after receipt of any request for information relating to
it or any of the Subsidiaries or for access to its or any of the Subsidiaries'
properties, books or records by any person, identifying the information
requested by such person that may be considering making, or has made, an
Acquisition Proposal and promptly provide Buyer with any information which is
given to such person pursuant to this Section 7.15(b), and (iii) keep Buyer
advised on a timely basis as of the status and principal financial terms of any
such Acquisition Proposal, indication or request.
(c) In the event that the Company receives a bona fide written
Acquisition Proposal for all of the outstanding Securities or all or
substantially all of the assets of the Company and the Included Subsidiaries
which is (i) payable in cash and/or publicly traded securities in an aggregate
amount greater than $68 million (which price includes satisfaction of all of the
obligations of the Company for its outstanding indebtedness for borrowed money
and for redemption of its preferred stock), exclusive of any consideration for
Whitecap and the CMI Assets and (ii) received in a manner consistent with the
provisions of Section 7.15(a) and (b) hereof (a "Competing Proposal"), then the
Company shall give notice to Buyer of such Competing Proposal and shall deliver
to Buyer a copy of such Competing Proposal, and Buyer shall have the option,
within five days of the receipt of such notice, to deposit in an escrow account
the Deposit Escrow Amount pursuant to the terms of the Deposit Escrow Agreement.
In the event that Buyer exercises its option to deposit in escrow the Deposit
Escrow Amount, Sellers shall immediately terminate all discussions with the
person making the Competing Proposal and shall be prohibited from responding to
any further inquiries from any party other than Buyer and its Representatives
about any Acquisition Proposal. In the event that Buyer does not so exercise its
option to deposit the Deposit Escrow Amount, this Agreement shall be terminable
by delivery of written notice to Buyer by the Sellers within two business days
after the five day period referred to above.
7.16 Delivery of Disclosure Schedule. Sellers shall deliver to Buyer
a copy of the Disclosure Schedule required to be prepared by Sellers hereunder
on or prior to 5:00 p.m., New York time, on the sixth business day following the
date of this Agreement. Buyer shall have five business days following its
receipt of the Disclosure Schedule to review such Disclosure Schedule and to
notify Sellers of its intention not to proceed with the transactions
contemplated by this Agreement and to terminate this Agreement. In the event
that Buyer does not so notify Sellers of its intention to terminate this
Agreement within such five-day period, Buyer's right to terminate this Agreement
pursuant to Section 8.1(f) shall expire.
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<PAGE>
ARTICLE VIII
TERMINATION
8.1 Termination. This Agreement may be terminated and abandoned at
any time prior to Closing:
(a) by the mutual consent of Sellers and Buyer;
(b) by either Sellers or Buyer in the event the Closing has not
occurred by March 1, 1998 (the "Cutoff Date"), unless the failure of such
consummation shall be due to the failure of the party seeking to terminate this
Agreement to comply in all material respects with the agreements and covenants
contained herein to be performed by such party on or before the Cutoff Date;
(c) by either Sellers or Buyer in the event any court of competent
jurisdiction in the United States or other federal, state or local governmental
body shall have issued an order, decree or ruling or taken any other action
restraining, enjoining or otherwise prohibiting the transactions contemplated
hereby and such order, decree or ruling or other action shall have become final
and nonappealable;
(d) by Sellers, pursuant to the terms of Section 7.15 hereof;
(e) by Buyer in the event that the deliveries contemplated by Section
7.12(b) are not satisfied; or
(f) by Buyer, pursuant to the terms of Section 7.16 hereof.
8.2 Effect of Termination. In the event of any termination of this
Agreement, neither party to this Agreement will have any liability to the other,
except for (i) any breach of any provisions of this Agreement and (ii)
obligations arising out of Section 7.5 hereof.
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ARTICLE IX
INDEMNIFICATION
9.1 Indemnification by Sellers. (a) Sellers jointly and severally
(except with respect to each of SSDS and FSC Corp., which shall be several in
proportion to its holding of Securities as set forth on Exhibit A hereto)
(including their successors and assigns) agree to indemnify promptly Buyer, its
successors and assigns, and any officer, director, employee or affiliate of
Buyer (collectively, the "Buyer Parties") against and hold the Buyer Parties
harmless from and in respect of any and all assessments, liens, losses, claims,
damages (excluding consequential damages), fines, penalties, judgments,
settlements, liabilities, costs, reasonable expenses (including, without
limitation, reasonable expenses of investigation and defense fees and
disbursements of counsel and other professionals) and any other obligations of
any nature whatsoever which may be incurred by any of the Buyer Parties directly
or indirectly by virtue of or resulting from the breach (collectively, the
"Losses") of (i) any covenant or agreement made by the Company prior to Closing
or Sellers in this Agreement or (ii) any of the representations and warranties
made by the Company prior to Closing or Sellers in this Agreement, in each case
without regard to any "materiality" or "Material Adverse Effect" or similar
limitations, thresholds or exceptions contained in such representations and
warranties and without regard to whether any such Loss is incurred prior to or
after the Closing Date, provided, that Sellers shall not be required to
indemnify any of the Buyer Parties for claims under this clause (ii) of Section
9.1(a) unless and until (but only to the extent that) the aggregate amount of
Losses exceeds $500,000; provided, further, that Sellers shall not be required
to indemnify any of the Buyer Parties for claims under this clause (ii) of
Section 9.1(a) to the extent that the aggregate amount of Losses exceeds $34
million; provided, further, that the provisions of this Article IX shall not
apply to the covenants and agreements contained in Section 7.6 hereof, which
shall be controlled by the terms therein (other than with respect to state sales
and use taxes, which shall be controlled by the terms of this Section 9.1(a));
provided, further, that indemnification for breaches of the representations and
warranties listed in clause (ii) of this Section 9.1(a) shall not be available
except with respect to claims of breaches made thereunder by any Buyer Party
prior to July 31, 1999 other than claims of breaches under Sections 2.10 or
2.11, which shall survive the applicable statute of limitations, and other than
claims of breaches under Sections 2.2 or 2.3, which shall survive indefinitely;
provided, further, that any claims for indemnification under clause (ii) of this
Section 9.1(a) shall be decreased or refunded to Sellers, pro rata in accordance
with Exhibit A hereto, as the case may be, dollar for dollar to the extent of
any actual
36
<PAGE>
insurance recoveries or actual recoveries from other unaffiliated third parties
with respect to matters for which claims for indemnification were made under
such clause.
(b) Sellers and Whitecap jointly and severally (except with respect
to each of SSDS and FSC Corp., which shall be several in proportion to its
holding of Securities as set forth on Exhibit A hereto) (including their
successors and assigns) agree to indemnify promptly the Buyer Parties against
and hold the Buyer Parties harmless from and in respect of any and all Losses
which may be incurred by any of the Buyer Parties directly or indirectly which
relate to or arise out of the operations of Whitecap, the CMI Assets or
Smartlink Development, L.P. or the transactions contemplated by Section 7.13
hereof (including, without limitation, any liability for Taxes), whether such
Losses arise before or after the Closing Date and regardless of whether such
Losses result from a breach of any representation or warranty or any covenant
contained in this Agreement.
(c) Sellers jointly and severally (except with respect to each of
SSDS and FSC Corp., which shall be several in proportion to its holding of
Securities as set forth on Exhibit A hereto) (including their successors and
assigns) agree to indemnify promptly the Buyer Parties against and hold the
Buyer Parties harmless from and in respect of any and all Losses
(notwithstanding anything to the contrary contained in Section 9.1(a) hereof)
which may be incurred by any of the Buyer Parties directly or indirectly by
virtue of any discrepancy between the actual amount of the Closing Indebtedness
and the amount of the Closing Indebtedness represented to Buyers pursuant to
Section 1.6(a)(v).
9.2 Indemnification by Buyer. Buyer (including its successors and
assigns) agrees to indemnify promptly Sellers, their successors and assigns, and
any affiliate of any of Sellers (collectively the "Seller Parties") against and
hold the Seller Parties harmless from and in respect of any and all Losses which
may be incurred by any of the Seller Parties directly or indirectly by virtue of
or resulting from the breach of (i) any covenant or agreement made by Buyer in
this Agreement or (ii) any of the representations and warranties made by Buyer
in this Agreement, in each case without regard to any "materiality" or "Material
Adverse Effect" or similar limitations, thresholds or exceptions contained in
such representations and warranties and without regard to whether any such Loss
is incurred prior to or after the Closing Date, provided, that Buyer shall not
be required to indemnify any of the Seller Parties for claims under this Section
9.2(ii) unless and until (but only to the extent that) the aggregate amount of
Losses exceeds $500,000; provided, further, that Buyer shall not be required to
indemnify any of the Seller Parties for claims under this Section 9.2(ii)
37
<PAGE>
to the extent that the aggregate amount exceeds $34 million; provided, further,
that the provisions of this Article IX shall not apply to the covenants and
agreements contained in Section 7.6 hereof, which shall be controlled by the
terms therein; provided, further, that any claims for indemnification under
clause (ii) of this Section 9.2 shall be decreased or refunded to Buyer, as the
case may be, dollar for dollar to the extent of any actual insurance recoveries
or actual recoveries from unaffiliated third partes with respect to matters for
which claims for indemnification were made under such clause.
9.3 Notification of Claims. (a) A party entitled to be indemnified
pursuant to Section 9.1 or 9.2 hereof (the "Indemnified Party") shall notify the
party liable for such indemnification (the "Indemnifying Party") in writing of
any claim or demand which the Indemnified Party has determined has given or
could give rise to a right of indemnification under this Agreement. Such notice
must be given, in the case of a third-party claim, within twenty (20) days after
actual receipt by the Indemnified Party of written notice of the third-party
claim; provided, however, that the Indemnified Party shall in any event give
written notice to the Indemnifying Party within such reasonable period of time
as shall be necessary to allow the Indemnifying Party to respond to any judicial
pleading or other document for which a timely response is required.
(b) If the Indemnified Party shall notify the Indemnifying Party of
any claim or demand pursuant to Section 9.3(a) hereof, and if such claim or
demand relates to a claim or demand asserted by a third party against the
Indemnified Party which the Indemnifying Party acknowledges is a claim or demand
for which it must indemnify or hold harmless the Indemnified Party under Section
9.1 or 9.2 hereof, the Indemnifying Party shall have the right to employ counsel
reasonably acceptable to the Indemnified Party and to control the defense of any
such claim or demand asserted against the Indemnified Party. The Indemnified
Party shall have the right to cooperate in the defense of any such claim or
demand at its own expense. The Indemnifying Party shall notify the Indemnified
Party in writing, within 30 days after the date of the notice of claim given by
the Indemnified Party to the Indemnifying Party under Section 9.3(a) hereof, of
its election to defend in good faith any such third-party claim or demand. So
long as the Indemnifying Party is defending in good faith any such claim or
demand asserted by a third party against the Indemnified Party, the Indemnified
Party shall not settle or compromise such claim or demand. The Indemnified Party
shall make available to the Indemnifying Party or its agents all records and
other materials in the Indemnified Party's possession, and employees and
accountants of the Indemnified Party, reasonably required by the Indemnifying
Party
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<PAGE>
for its use in contesting any third-party claim or demand. If the Indemnifying
Party does not assume the defense of a third-party claim or demand, the
Indemnified Party shall defend such claim or demand and the Indemnifying Party
shall have the right to participate in such defense. The Indemnified Party
shall, in such defense, have the right, in its sole discretion, to settle or
compromise such claim or demand, provided that such settlement or compromise is
solely for the payment of money and includes a full release of the Indemnified
Party for the subject matter of such claim or demand; otherwise the Indemnified
Party shall not settle or compromise such claim or demand, except with the
written consent of the Indemnifying Party, which shall not be unreasonably
withheld or delayed.
(c) Except for specific performance, injunctive relief and/or
recoveries for claims of fraud, indemnification pursuant to this Article IX
shall be the sole remedy available to the parties hereto for the indemnifiable
subject matter.
ARTICLE X
MISCELLANEOUS
10.1 Termination of Representations and Warranties, Etc. Except as
set forth in this Agreement and the Disclosure Schedule, no representations or
warranties are being made by any of the parties hereto. Except as set forth in
Section 9.1 hereof, the respective representations and warranties of the
Company, Sellers and Buyer contained herein or in any certificates or other
documents delivered prior to or at the Closing shall expire with and be
terminated and extinguished as of the Closing, and thereafter neither Sellers
nor Buyer nor any officer, director or principal thereof shall be under any
liability whatsoever with respect to any such representation or warranty.
10.2 Fees and Expenses. Each of the parties shall bear its own
expenses in connection with the negotiation and consummation of the transactions
contemplated by this Agreement. If any of the parties has retained a broker or
finder in connection with the transactions contemplated herein, such party shall
bear the fees and expenses of such broker or finder; provided, that Sellers
shall be solely responsible for the fees and expenses of any broker or finder
employed by or on behalf of Sellers, the Company or any of the Subsidiaries.
39
<PAGE>
10.3 Governing Law. This Agreement shall be construed under and
governed by the laws of the State of Delaware without regard to the
conflicts-of-laws provisions thereof.
10.4 Amendment. This Agreement may not be amended, modified or
supplemented except upon the execution and delivery of a written agreement
executed by the parties hereto.
10.5 No Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by either party hereto
without the prior written consent of the other party; provided, that Buyer may
assign its rights and obligations hereunder (except pursuant to Section 7.10
hereof) to an affiliate of Buyer without the consent of any other party;
provided, that no such assignment shall relieve Buyer of its obligations to the
Company and Sellers hereunder.
10.6 Waiver. Any of the terms or conditions of this Agreement which
may be lawfully waived may be waived in writing at any time by the party which
is entitled to the benefits thereof. Any waiver of any of the provisions of this
Agreement by any party hereto shall be binding only if set forth in an
instrument in writing signed on behalf of such party. No failure to enforce any
provision of this Agreement shall be deemed to or shall constitute a waiver of
such provision, and no waiver of any of the provisions of this Agreement shall
be deemed to or shall constitute a waiver of any other provision hereof (whether
or not similar) nor shall such waiver constitute a continuing waiver.
10.7 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given by hand,
overnight delivery service, delivery, telex, telecopier or mail (registered or
certified by mail, postage prepaid, return receipt requested) to the respective
parties as follows:
If to Buyer:
USN Communications, Inc.
10 S. Riverside Plaza
Suite 401
Chicago, IL 60606
Attention: Mr. J. Thomas Elliott
(312) 474-0814 (telecopier)
(312) 906-3640 (telephone)
40
<PAGE>
with copies to:
USN Communications, Inc.
10 S. Riverside Plaza
Suite 401
Chicago, IL 60606
Attention: Thomas A. Monson, Esq.
(312) 474-0814 (telecopier)
(312) 906-3592 (telephone)
and
Gary P. Cullen, Esq.
Skadden, Arps, Slate, Meagher
& Flom (Illinois)
333 West Wacker Drive
Chicago, Illinois 60606
(312) 407-0411 (telecopier)
(312) 407-0680 (telephone)
If to Sellers:
Mark Hatten
10 Pheasant Hill Road
Farmington, Connecticut 06032
(860) 677-5539 (telecopier)
(860) 676-2064 (telephone)
with a copy, post-closing, to:
Lawrence Mitchell, Esq.
5 Brookside Drive
Wallingford, Connecticut 06492
41
<PAGE>
and with an additional copy, pre-closing, to:
Joseph Mazzarella
Hatten Communications Holding Company, Inc.
1271 South Broad Street
Wallingford, Connecticut 06492
(203) 269-5475 (telecopier)
(203) 284-4762 (telephone)
and
Triumph-Connecticut Limited Partnership
60 State Street, 21/st/ Floor
Boston, MA 02109
Attention: Richard Williams
(617) 557-6020 (telecopier)
(617) 557-6025 (telephone)
FSC Corp.
100 Federal Street
Boston, MA 02110
Attention: Mary Reilly
(617) 434-1153 (telecopier)
(617) 434-7890 (telephone)
or to such other address as any party hereto may, from time to time, designate
in a written notice given in like manner.
Notices shall be deemed given, in the case of hand delivery, upon
receipt, in the case of overnight delivery service, on the second business day
after delivery to a recognized overnight delivery service, in the case of telex
and telecopy, upon telephonic confirmation of transmission and, in the case of
mail, upon the fifth business day after deposit with the U.S. mail.
10.8 Complete Agreement. This Agreement, the Disclosure Schedule, the
Deposit Escrow Agreement, the Indemnification Escrow Agreement, the
Confidentiality Agreement and the other documents and writings referred to
herein or delivered pursuant hereto contain the entire understanding of the
parties with respect to its subject matter. There are no restrictions,
agreements, promises, warran-
42
<PAGE>
ties, covenants or undertakings other than those expressly set forth in such
documents with respect to the subject matter of this Agreement. Except for the
Confidentiality Agreement, which shall remain in full force and effect, this
Agreement supersedes all prior agreements and understandings, both written and
oral, between the parties with respect to this subject matter. This Agreement
shall be binding upon and shall inure to the benefit of the parties hereto and
their respective successors.
10.9 Counterparts. This Agreement may be executed in one or more
counterparts all of which shall be considered one and the same agreement and
each of which shall be deemed an original.
10.10 Publicity. No publication and/or press release of any nature
shall be issued pertaining to this Agreement or the transactions contemplated
hereby without the prior consent of the parties hereto (which shall not be
unreasonably withheld) or except as may be required by the federal securities
laws.
10.11 Headings. The headings contained in this Agreement are for
reference only and shall not affect in any way the meaning or interpretation of
this Agreement.
10.12 Severability. Any provision of this Agreement which is invalid,
illegal or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity, illegality, or unenforceability,
without affecting in any way the remaining provisions hereof in such
jurisdiction or rendering that or any other provision of this Agreement invalid,
illegal or unenforceable in any other jurisdiction.
10.13 Time of the Essence. The parties agree that the Cutoff Date and
the other dates contained herein pursuant to which actions are to be completed
are significant to the transactions contemplated hereby and that time is of the
essence in satisfying the conditions and/or obligations subject to such dates.
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<PAGE>
IN WITNESS WHEREOF, the Company, Sellers and Buyer have executed this
Agreement or caused this Agreement to be executed by their duly authorized
officers as of the day and year first above written.
/s/ Mark Hatten
----------------------------------------
Mark Hatten
TRIUMPH-CONNECTICUT
LIMITED PARTNERSHIP
By /s/ Richard J. Williams
-------------------------------------
Title: General Partner of its General
Partner
SOLOMON SCHECHTER DAY SCHOOL
OF GREATER HARTFORD, INC.
By /s/ Bruce H. Stanger
-------------------------------------
Title: President
FSC CORP.
By /s/ Mary J. Reilly
-------------------------------------
Title: Vice President
HATTEN COMMUNICATIONS
HOLDING COMPANY, INC.
By /s/ Mark Hatten
-------------------------------------
Title: President
<PAGE>
USN COMMUNICATIONS, INC.
By /s/ J. Thomas Elliott
---------------------------------------
Title: Chairman of the Board, President and
Chief Executive Officer
For purposes of Section 9.1(b) only:
WHITECAP TECHNOLOGIES, INC.
By /s/ Colin McWay
---------------------------------------
Title: President
<PAGE>
EXH. 23.1
INDEPENDENT AUDITORS' CONSENT
Board of Directors and Stockholders of
USN Communications, Inc.
Chicago, Illinois
We consent to the use in this Amendment No. 2 to Registration Statement No. 333-
38381 on Form S-1 of USN Communications, Inc. of our report dated March 14, 1997
(September 4, 1997 as to Note 22), which expresses an unqualified opinion and
includes an explanatory paragraph concerning substantial doubt about the
entity's ability to continue as a going concern, appearing in the Prospectus,
which is part of this Registration Statement.
We also consent to the reference to us under the headings "Selected Historical
Consolidated Financial and Operating Data" and "Experts" in such Registration
Statement.
/s/ Deloitte & Touche LLP
February 2, 1998
Chicago, Illinois
<PAGE>
Exhibit 23.3
The Board of Directors
Hatten Communications Holding Company, Inc. and
Connecticut Mobilecom, Inc.:
We consent to the inclusion of our report dated June 20, 1997, with respect to
the consolidated balance sheets of Hatten Communications Holding Company, Inc.
and subsidiaries as of April 30, 1997 and 1996, and the related consolidated
statements of operations, stockholder's deficit, and cash flows for each of the
years in the two-year period ended April 30, 1997, which report appears in Form
S-1 (No. 333-38381) of USN Communications, Inc.
As discussed in note 12, the Company executed a recapitalization of its stock
and a refinancing of its existing debt on May 23, 1997.
We consent to the inclusion of our report dated January 16, 1998, with respect
to the balance sheet of Connecticut Mobilecom, Inc. as of April 30, 1995, and
the related statements of operations, stockholders' deficit, and cash flows for
the year then ended, which report appears in Form S-1 (No. 333-38381) of USN
Communications, Inc.
We consent to the reference to our firm under the heading "Experts" in this
registration statement.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Providence, Rhode Island
January 29, 1998
<PAGE>
EXHIBIT 23.4
CONSENT TO INCLUDE REPORT ON FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES IN
REGISTRATION STATEMENT
We consent to the use in this registration statement of USN Communications, Inc.
on Amendment No. 2 to Registration Statement No. 333-38381 on Form S-1 of our
report dated May 24, 1995, which expresses an unqualified opinion. We also
consent to the reference of our firm under the heading "Experts" in such
registration Statement.
/s/ Kostin, Ruffkess & Company, LLC
KOSTIN, RUFFKESS & COMPANY, LLC
West Hartford, Connecticut
February 2, 1998
