<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 23, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
e.spire COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 4813 52-1947746
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) NO.)
</TABLE>
133 NATIONAL BUSINESS PARKWAY
ANNAPOLIS JUNCTION, MARYLAND 20701
(301) 617-4200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
RILEY M. MURPHY, ESQ.
e.spire COMMUNICATIONS, INC.
133 NATIONAL BUSINESS PARKWAY
ANNAPOLIS JUNCTION, MARYLAND 20701
(301) 617-4215
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
------------------------
with copies to:
MARIO PONCE
SIMPSON THACHER & BARTLETT
425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017-3954
(212) 455-2000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED DISTRIBUTION OF THE SECURITIES
TO THE PUBLIC: As soon as practicable after the Registration Statement becomes
effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
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. [ ]
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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. [ ]
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------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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- -----------------------------------------------------------------------------------
TITLE OF PROPOSED PROPOSED
EACH CLASS OF MAXIMUM MAXIMUM
SECURITIES AMOUNT OFFERING AGGREGATE AMOUNT OF
TO BE TO BE PRICE PER OFFERING REGISTRATION
REGISTERED REGISTERED UNIT(1) PRICE(1) FEE
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<S> <C> <C> <C> <C>
10.625% Senior Notes due 2008.......... $375,000,000 59.989% $224,958,750 $66,363
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
------------------------
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 THIS 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> 2
ADDITIONAL INFORMATION
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and in
accordance therewith files reports, proxy and information statements and other
information with the Securities Exchange Commission (the "Commission" as "SEC").
Such reports, proxy and information statements and other information may be
inspected and copied at the public reference facilities of the SEC at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, or at its
regional offices located at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of such material can be obtained from the SEC by mail at
prescribed rates, or in certain cases by accessing the SEC's World Wide Web site
at http://www.sec.gov. Requests should be directed to the SEC's Public Reference
Section, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549. The Company's Common Stock is quoted on the Nasdaq National Market and
material filed by the Company can be inspected at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street N.W., Washington, D.C.
20006.
The Company has filed with the SEC a registration statement on Form S-4
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the New Notes
offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all of the information set forth or incorporated by
reference in the Registration Statement and the exhibits and schedules thereto,
certain parts of which are omitted in accordance with the rules and regulations
of the SEC. For further information with respect to the Company and the New
Notes offered hereby, reference is made to the Registration Statement. This
Prospectus contains summaries of the material terms and provisions of certain
documents and, in each instance, reference is made to the copy of such document
filed as an exhibit to the Registration Statement. Copies of the Registration
Statement and the exhibits thereto may be inspected, without charge, at the
offices of the SEC at the address set forth above.
Certain statements contained in "Risk Factors," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business,"
including statements regarding the development of the Company's businesses, the
markets for the Company's services and products, the Company's anticipated
capital expenditures, regulatory reform and other statements contained herein
regarding matters that are not historical facts, are forward-looking statements
(as such term is defined in the Private Securities Litigation Reform Act of
1995). Because such statements include risks and uncertainties, actual results
may differ materially from those expressed or implied by such forward-looking
statements. Factors that could cause actual results to differ materially
include, but are not limited to, those discussed under "Risk Factors." The
Company expressly disclaims any obligation or undertaking to release publicly
any updates or revisions to any of the forward-looking statements contained
herein to reflect any change in the Company's expectations, with regard thereto
or any changes in events, conditions or circumstances on which any statement is
based.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents previously filed by the Company with the SEC are
hereby incorporated by reference into this Prospectus:
(i) the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1997;
(ii) the Company's Quarterly Reports on Form 10-QSB for the quarterly
periods ended March 31, and June 30, 1998;
(iii) the Company's Current Reports on Form 8-K, dated January 8,
1998, January 20, 1998, January 26, 1998, January 28, 1998, February 3,
1998, March 17, 1998, April 14, 1998, July 27, 1998 and August 25, 1998;
and
i
<PAGE> 3
(iv) the description of the Company's Common Stock contained in its
registration statement on Form 8-A filed with the SEC on December 23, 1994,
including any amendments or reports filed for the purpose of updating such
description.
All documents subsequently filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act prior to the Expiration Date to which
this Prospectus relates shall be deemed to be incorporated by reference into
this Prospectus and to be part hereof from the date of filing thereof.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein or in any other subsequently filed
document which also is incorporated herein modifies or replaces such statement.
Any statement so modified or superseded shall not be deemed, in its unmodified
form, to constitute a part of this Prospectus.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE WITHOUT CHARGE BY
WRITTEN OR ORAL REQUEST FROM RILEY M. MURPHY, EXECUTIVE VICE PRESIDENT -- LEGAL
AND REGULATORY AFFAIRS, e.spire COMMUNICATIONS, INC., AT THE COMPANY'S EXECUTIVE
OFFICES LOCATED AT 133 NATIONAL BUSINESS PARKWAY, SUITE 200, ANNAPOLIS JUNCTION,
MD 20701, TELEPHONE (301) 617-4200. IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY REQUEST SHOULD BE MADE BY , 1998.
ii
<PAGE> 4
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED SEPTEMBER 23, 1998
PROSPECTUS
, 1998
[ESPIRE LOGO]
E.SPIRE COMMUNICATIONS, INC.
OFFER TO EXCHANGE
ITS 10.625% SENIOR DISCOUNT NOTES DUE JULY 1, 2008 FOR ITS
OUTSTANDING 10.625% SENIOR DISCOUNT NOTES DUE JULY 1, 2008
------------------------
e.spire Communications, Inc., a Delaware corporation ("e.spire" or the
"Company"), hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus (this "Prospectus") and the accompanying Letter of
Transmittal (the "Letter of Transmittal") to exchange (the "Exchange Offer") up
to $375,000,000 aggregate principal amount at maturity of a new series of its
10.625% Senior Discount Notes due July 1, 2008 (the "New Notes") for up to
$375,000,000 aggregate principal amount at maturity of its outstanding 10.625%
Senior Discount Notes due July 1, 2008 (the "Old Notes") (the "Exchange Offer").
There will be no cash proceeds to the Company from the Exchange Offer.
------------------------
The form and terms of the New Notes are the same as the form and terms of
the Old Notes except that (i) the New Notes will have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and thus will not
bear restrictive legends restricting their transfer pursuant to the Securities
Act and (ii) holders of New Notes will not be entitled to certain rights of
holders of the Old Notes, under the Registration Rights Agreement (as defined)
which will terminate upon the consummation of the Exchange Offer. See "The
Exchange Offer -- Consequences of Failure to Exchange." The Old Notes and the
New Notes are sometimes referred to herein collectively as the "Notes."
The Old Notes were issued at a substantial discount from their principal
amount so as to yield gross proceeds of approximately $225.0 million. No
interest will accrue or be payable on the New Notes prior to July 1, 2003.
Thereafter, interest on the New Notes will accrue at a rate of 10.625% per annum
and will be payable in cash semi-annually in arrears on January 1 and July 1 of
each year, commencing January 1, 2004.
The New Notes will be redeemable at the option of the Company, in whole or
in part, at any time on or after July 1, 2003 at the redemption prices set forth
herein, plus accrued and unpaid interest, if any, thereon to the applicable
redemption date. Prior to July 1, 2001, up to 35% of the aggregate principal
amount of New Notes originally issued will be redeemable at the option of the
Company from the net proceeds of one or more Public Equity Offerings (as defined
herein), at a redemption price equal to 110.625% of the Accreted Value (as
defined herein) thereof. Upon the occurrence of a Change of Control (as defined
herein), the Company is required to offer to purchase all outstanding New Notes
at a price equal to 101% of their Accreted Value on or before July 1, 2003 or
101% of their principal amount plus accrued and unpaid interest to the date of
purchase after July 1, 2003. See "Description of Notes".
The New Notes will be senior unsecured obligations of the Company and will
rank pari passu in right of payment with all existing and future senior
unsecured obligations of the Company. The New Notes will be effectively
subordinated to all existing and future indebtedness of the Company's
subsidiaries. The Indenture (as defined herein) will permit the Company and its
subsidiaries to incur additional indebtedness, subject to certain limitations.
See "Description of Notes".
------------------------
The Old Notes were originally issued and sold on July 24, 1998 in
transactions not registered under the Securities Act, in reliance upon the
exemption provided in Section 4(2) of the Securities Act. Accordingly, the Old
Notes may not be reoffered, resold or otherwise pledged, hypothecated or
transferred in the United States unless so registered or unless an applicable
exemption from the registration requirements of the Securities Act is available.
Based on interpretations by the staff of the Securities and Exchange Commission
set forth in no-action letters, the Company believes that the New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold and otherwise transferred by holders thereof (other than any such
holder which is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's business, such
holders have no arrangement with any person to participate in the distribution
of such New Notes and neither such holders nor any other person is engaging in
or intends to engage in a distribution of such New Notes. However the Company
has not sought, and does not intend to seek, its own no-action letter, and there
can be no assurance that the staff of the Securities and Exchange Commission
would make a similar determination with respect to the Exchange Offer. Each
broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer where the Old Notes were acquired by such broker-dealer as a
result of market-making or other trading activities, may be a statutory
underwriter and must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. The Letter of Transmittal relating to the
Exchange Offer states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with New Notes received in exchange for Old Notes where such Old Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities. e.spire will, for a period of 120 days after the Expiration
Date (as defined herein), make copies of this Prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
The New Notes constitute new issues of securities with no established
trading market. Any Old Notes not tendered and accepted in the Exchange Offer
will remain outstanding. To the extent that Old Notes are tendered and accepted
in the Exchange Offer, a holder's ability to sell untendered Old Notes could be
adversely affected. No assurance can be given as to the liquidity of the trading
market for the Old Notes. See "Risk Factors -- Lack of Public Market for the
Notes."
The Company will accept for exchange any and all Old Notes validly tendered
and not withdrawn prior to 5:00 p.m., New York City time, on , 1998,
unless extended by the Company in its sole discretion (such date as it may be so
extended, the "Expiration Date"). The Company will not extend the Exchange Offer
beyond , 1998. Tenders of Old Notes may be withdrawn at any time prior
to the Expiration Date. The Expiration Offer is subject to certain customary
conditions. See "The Exchange Offer."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DESCRIPTION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS OF OLD NOTES
WHO TENDER THEIR OLD NOTES IN THE EXCHANGE OFFER.
------------------------
THESE NOTES 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 COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE> 5
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and Notes thereto appearing
elsewhere or incorporated by reference in this Prospectus. Subsequent to June
30, 1996, the Company changed its fiscal year-end from June 30 to December 31.
Accordingly, all data for the fiscal period ended December 31, 1996 are for the
six-month period then ended. Please refer to the "Glossary" for the definitions
of certain capitalized terms used herein and elsewhere in this Prospectus. As
used in this Prospectus, unless the context otherwise requires, "e.spire" or the
"Company" refers to e.spire Communications, Inc. and its subsidiaries.
THE COMPANY
e.spire Communications, Inc., formed in 1993, seeks to be a leading
facilities-based integrated communications provider ("ICP") to businesses in
markets primarily in the southern half of the United States. By the end of 1997,
the Company had become one of the first competitive local exchange carriers
("CLECs") to combine the provision of dedicated, local and long distance voice
services with frame relay, asynchronous transfer mode ("ATM") and Internet
services. Having established this suite of telecommunications services which
emphasizes data capabilities in addition to traditional CLEC offerings, the
Company has evolved into an ICP. e.spire seeks to provide customers with
superior service and competitive prices while offering a single source for
integrated communications services designed to meet its business customers'
needs. The Company's facilities-based network infrastructure is designed to
provide services to customers on an end-to-end basis, and, as of June 30, 1998,
was comprised of 1,433 route miles of fiber in its 32 local networks in 19
states, 44 Newbridge ATM switches, 17 Lucent 5ESS switches and approximately
22,000 backbone longhaul miles in its leased coast-to-coast broadband data
network.
With the passage of the federal Telecommunications Act of 1996 (the "FTA"),
the Company has enhanced the scope of its product offerings from dedicated
services to a full range of switched voice, data and Internet services in order
to meet the needs of business end-users, and is expanding its sales, marketing,
customer care and operations support systems ("OSS") capabilities. The Company
introduced local switched voice services, including local exchange services in
late 1996 and long distance services in late 1997. By June 30, 1998, e.spire had
sold 96,405 customer access lines, of which 85,633 were installed, representing
a significant increase over the 9,177 access lines sold as of June 30, 1997.
The Company believes that there is significant unmet demand by businesses
for integrated voice and data services from a single-source communications
provider. In addition, the domestic market for Internet-related business
services is growing rapidly. The Company believes that, through its data and
Internet network, it is well positioned to satisfy these customer demands by
providing its suite of network solutions. This suite of services is integrated
through the Company's Internet access product, which combines its Internet
Service Provider ("ISP") capabilities and ATM, frame relay, and Internet
Protocol ("IP") services. The Company also provides additional Internet-based
and other data custom solutions and value-added services such as web hosting,
managed services and firewall services. The Company's data and Internet products
are currently offered in all of its markets to complement its existing services.
For the year ended December 31, 1997 and the six months ended June 30,
1998, approximately 42% and 39%, respectively of the Company's revenues were
derived from network services, approximately 38% and 32%, respectively, were
derived from data and Internet services and approximately 20% and 30%,
respectively, from switched local and other services. Included in the network
services category of revenues are high capacity dedicated and special access
services, and revenues from ACSI Network Technologies for construction contracts
and long term leases of high capacity systems. For the year ended December 31,
1997 and the six month period ended June 30, 1998, approximately $1.7 million
and $8.1 million is included from these contracts, of which $4.6 million of 1998
revenues was derived from a contract with a single interexchange carrier.
Revenues
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<PAGE> 6
for the year ended December 31, 1997, increased $49.6 million, or 527%, to $59.0
million from $9.4 million for the year ended December 31, 1996. Revenues for the
six months ended June 30, 1998, increased $43.4 million, or 219% to $63.2
million from $19.8 million for the six months ended June 30, 1997. As of June
30, 1998, the Company served over 10,400 telecommunications customers, excluding
internet dial-up customers.
The Company believes that a key factor in the successful implementation of
its strategy and its improved operating performance is the quality of its
management team. In the past 21 months, the Company hired Jack E. Reich as
President and Chief Executive Officer and David L. Piazza as Chief Financial
Officer, complementing Pompliano, the Company's founder and Chairman, and Riley
M. Murphy, the Company's General Counsel. In addition, in February 1998, the
Company hired Ronald E. Spears as Chief Operating Officer. Collectively, these
individuals have an average of 21 years of telecommunications industry
experience. The Company also has significantly increased its marketing and sales
forces during the past year by hiring an additional 151 employees in such
departments. As of June 30, 1998, the Company had a total of 278 employees in
its marketing and sales forces, an increase of over 119% from June 30, 1997.
STRATEGY
The Company seeks to provide its customers a choice for local access,
utilizing its facilities-based network infrastructure to deliver both voice and
data solutions. In order to increase penetration in its target markets, build
brand recognition and achieve its strategic objectives, the Company seeks to:
PROVIDE "ONE-STOP" INTEGRATED COMMUNICATIONS SERVICES
To meet customer demand and to accelerate penetration in its markets, the
Company has broadened the range of voice, data and Internet services it offers
and has integrated these services into a bundled package offering a single
source solution designed to meet its customers' communications needs. In 1997,
the Company introduced new voice products such as local dial tone, long
distance, audio conferencing and voice messaging services. In addition, through
the 1997 acquisition of Cybergate, Inc. (the "Cybergate Acquisition"), the
Company also introduced its Internet services and, as of June 30, 1998, served
over 46,000 Internet customers. In late 1997, the Company introduced its data
and Internet products, which it currently offers in all of its markets. In April
1998, the Company also introduced its PLATINUM product, which offers customers
integrated local, long distance, toll free and dedicated Internet access using a
single multi-purpose T1. PLATINUM is available in 20 markets. The Company
believes that its ability to provide one-stop integrated communications services
will enable it to capture a larger portion of its customers' total expenditures
on communication services, and reduce customer turnover.
EXPLOIT RAPIDLY GROWING MARKET FOR DATA SERVICES
The Company believes that the market for data services is one of the
fastest growing segments of the communications market. The Company's suite of
data products consisting primarily of the e.spire family of high-speed Internet
and data products for small and medium-sized businesses, will be transported
over the Company's coast-to-coast, leased broadband data communications network.
The data and Internet products include the following services:
*e.spire INTERNET ACCESS SERVICE: provides customers access to the
Company's Internet data backbone which provides high-quality dedicated and
dial-up Internet connection and IP transport.
*e.spire FRAME RELAY SERVICE: provides capabilities to customers with
varying bandwidth needs and interconnects geographically dispersed networks
and equipment.
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<PAGE> 7
*e.spire ATM SERVICE: provides a solution to local, regional and
national businesses with high bandwidth, delay-sensitive data
communications applications.
*e.spire BUNDLED INTERNET SOLUTIONS: provides turnkey solutions,
including dedicated Internet access, web site hosting, news feeds and other
services.
*e.spire CUSTOM NETWORK SERVICES: includes design, installation,
hardware (such as switches, routers and modems) and configuration of a
customer's network.
*e.spire MANAGED NETWORK SERVICE: provides complete management and
monitoring of all customer equipment and network elements needed to operate
dedicated Internet or frame relay services.
ENHANCE FACILITIES-BASED INFRASTRUCTURE
Expansion of the Company's facilities-based infrastructure will increase
the proportion of communications traffic that is originated and/or terminated on
its network and switching facilities, which the Company believes will result in
higher long-term operating margins and greater control over its network
operations. The Company uses both an on-net and a resale strategy to capture new
customers, and intends to accelerate migration of traffic onto its own
facilities.
The Company will continue to install voice and data switches, construct
SONET digital local fiber networks and increase the reach of its data backbone.
The Company's expansion decisions are structured to efficiently deploy capital
and are based upon a number of economic factors, including customer demographics
in each market and anticipated cost savings associated with particular
installations. The Company's state-of-the-art infrastructure and high capacity
bandwidth facilitate efficient network expansion. The Company recently announced
plans to expand its local network infrastructure into six additional markets:
Atlanta, Washington, D.C., San Antonio, South Florida, New York and
Philadelphia. In addition, the Company plans to deploy a broadband long-haul
network between New York and Baltimore. Combined, these expansions are
anticipated to increase the network facilities to over 2,200 route miles by year
end. The Company also installed 20 Lucent 5ESS switches as of August 31, 1998
and plans to install an additional 5 by year end.
BUILD MARKET SHARE THROUGH FOCUSED CUSTOMER SALES AND SERVICE
The Company believes that its local, customer-oriented, single
point-of-service sales structure facilitates greater customer care in both the
sales and customer service processes and differentiates e.spire as a
customer-focused telecommunications services provider. In addition to its field
sales force, the Company's major account team targets large national accounts,
and its carrier sales group targets dedicated services to long distance carriers
and ISPs. As of June 30, 1998, the Company had 278 employees in its marketing
and sales forces, an increase of over 119% from June 30, 1997. The Company
supplements its internal marketing and sales force through alternative sales
channels, and had executed 117 sales agency agreements as of June 30, 1998.
The Company currently is implementing an integrated customer care strategy
that emphasizes infrastructure improvements, training of personnel, performance
monitoring and image/brand recognition. The customer care strategy is intended
to provide a heightened level of responsive and cost efficient customer service
across the Company's full range of existing and planned products and services,
with a particular emphasis on operational support and other
information/financial systems. The Company is in the process of supplementing
its customer service effort with an integrated customer care and billing
software platform, differentiating e.spire from its major competitors.
3
<PAGE> 8
EXPAND THROUGH STRATEGIC ACQUISITIONS AND ALLIANCES
The Company believes that acquisitions of, and joint ventures and other
strategic alliances with, related or complementary businesses in its region will
enable it to more rapidly execute its business plan by providing additional
customers, new products and services, service and technical support and
additional cash flow. For example, the Cybergate Acquisition increased the
Company's penetration of its current markets and accelerated its entry into new
markets by expanding the scope of the Company's Internet product offerings. As
part of its expansion strategy, the Company plans to consider additional
acquisitions, joint ventures and strategic alliances in communications, Internet
access and other related service areas.
RECENT DEVELOPMENTS
1998 COMMON STOCK OFFERING. On April 3, 1998, the Company completed the
offering of 8,100,000 shares of Common Stock at a price of $18.50 per share (the
"1998 Common Stock Offering"). 7,502,418 of such shares were issued and sold by
the Company and 597,582 of such shares were sold by certain stockholders of the
Company. Total net proceeds to the Company from the 1998 Common Stock Offering
and the exercise of certain options and warrants in connection therewith were
approximately $134.2 million.
NAME CHANGE. On April 15, 1998, the Company announced that it had changed
its name from American Communications Services, Inc. to e.spire Communications,
Inc. Effective as of such date, "ESPI" became the Company's new Nasdaq trading
symbol for its common stock.
NETWORK EXPANSION. On June 25, 1998, the Company announced that it intends
to expand its local networks into Atlanta, Washington, D.C., South Florida and
San Antonio, and to extend its existing local networks in 15 of its 32 existing
cities. On August 25, 1998, the Company announced that it intends to deploy
local fiber optic networks in New York City and Philadelphia and expand its ATM
backbone and longhaul capabilities with a broadband fiber network between New
York and the Baltimore-Washington, D.C. area through long term leases of fiber
from Metromedia Fiber Network Inc.
ACSI NETWORK TECHNOLOGIES. The Company recently has begun offering local
telecommunications network construction and related services for carriers and
other businesses through ACSI Network Technologies, a wholly owned subsidiary.
GSCP CREDIT FACILITIES. Goldman Sachs Credit Partners L.P. ("GSCP") has
entered into a commitment letter with the Company to provide senior secured
credit facilities aggregating up to $300.0 million (the "GSCP Credit
Facilities") that are expected to close in the third quarter of 1998. The GSCP
Credit Facilities are expected to consist of (i) a $35.0 million secured term
facility (the "Series A Facility"), the proceeds of which will be used to
refinance the New AT&T Credit Facility and (ii) a $265.0 million secured
purchase money facility (the "Series B Facility"), $40.0 million of which would
be in the form of a term facility (the "Series B Term Facility") and $225.0
million of which would be in the form of a revolving facility (the "Series B
Revolving Facility"). The proceeds of the Series B Facility would be available
to the Company only to provide purchase money financing for the acquisition,
construction and improvement of telecommunications assets of the Company's
operating subsidiaries. See "Description of Certain Indebtedness -- GSCP Credit
Facilities".
4
<PAGE> 9
THE EXCHANGE OFFER
Registration Rights
Agreement;
Effect on Holders........ The Old Notes were sold by e.spire on July 24, 1998
to Goldman, Sachs & Co., Bear, Stearns & Co. Inc.
and ING Furman Selz LLC, as the initial
purchasers (the "Initial Purchasers") pursuant to
a Purchase Agreement dated July 21, 1998 between
e.spire and the Initial Purchasers (the "Purchase
Agreement"). The Initial Purchasers subsequently
sold the Old Notes to qualified institutional
buyers and non-U.S. persons in reliance on Rule
144A and Regulation S, respectively, under the
Securities Act (the "Private Placement").
Pursuant to the Purchase Agreement, e.spire and
the Initial Purchasers entered into a
Registration Rights Agreement dated as of July
24, 1998 (the "Registration Rights Agreement")
which grants the holders of the Old Notes certain
exchange and registration rights. This Exchange
Offer is intended to satisfy such rights.
Therefore, the holders of the New Notes are not
entitled to any exchange or registration rights
with respect thereto. All untendered Old Notes
will continue to be subject to the restrictions
on transfer described under "The Exchange
Offer -- Consequences of Failure to Exchange." To
the extent that Old Notes are tendered and
accepted in the Exchange Offer, the trading
market for untendered Old Notes could be
adversely affected. See "The Exchange
Offer -- Purpose and Effect of the Exchange
Offer" and "-- Consequences of Failure to
Exchange" and "Risk Factors -- Lack of Public
Market for the Notes."
The Exchange Offer......... Up to $375,000,000 in aggregate principal amount at
maturity of New Notes will be exchanged for up to
$375,000,000 in aggregate principal amount at
maturity of Old Notes. e.spire will issue the New
Notes to holders on the earliest possible date
following the Expiration Date.
Expiration Date............ 5:00 p.m., New York City time, on ,
1998 unless the Exchange Offer is extended by
e.spire in its sole discretion, in which case the
term "Expiration Date" means the latest date and
time to which the Exchange Offer is extended. The
Company will not extend the Exchange Offer beyond
, 1998.
Conditions to the Exchange
Offer.................... The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Old Notes
being tendered for exchange. However, the
Exchange Offer is subject to certain customary
conditions, which may be waived by e.spire. See
"The Exchange Offer -- Conditions of the Exchange
Offer." e.spire reserves the right to terminate
the Exchange Offer if any of such conditions have
not been satisfied and to amend the Exchange
Offer at any time prior to the Expiration Date.
Procedures for Tendering
the Old Notes.............. See "The Exchange Offer -- Procedures for
Tendering" and "-- Guaranteed Delivery
Procedures."
5
<PAGE> 10
Withdrawal Rights.......... Tenders may be withdrawn at any time prior to the
Expiration Date. See "The Exchange
Offer--Withdrawal of Tenders."
Acceptance of the Old Notes
and Delivery of the New
Notes.................... e.spire will accept for exchange any and all Old
Notes which are properly tendered in the Exchange
Offer prior to the Expiration Date. The New Notes
issued pursuant to the Exchange Offer will be
delivered on the earliest practicable date
following the Expiration Date. See "The Exchange
Offer -- Terms of the Exchange Offer."
Certain Tax
Considerations............. For a discussion of certain federal income tax
consequences of the exchange of the Old Notes,
see "Certain Federal Income Tax Considerations."
Exchange Agent............. The Chase Manhattan Bank is serving as the exchange
agent (the "Exchange Agent") in connection with
the Exchange Offer.
TERMS OF THE NOTES
The Exchange Offer applies to $375,000,000 aggregate principal amount at
maturity of the Old Notes. The Old Notes were issued at a substantial discount
from their principal amount so as to yield gross proceeds of approximately
$225,000,000. The form and terms of the New Notes are the same as the form and
terms of the Old Notes, except that the New Notes will have been registered
under the Securities Act and thus will not bear restrictive legends restricting
their transfer pursuant to the Securities Act.
Maturity Date.............. July 1, 2008.
Interest Payment Dates..... The Notes will accrete (representing the
amortization of original issue discount) at a
rate of 10.625% on a semi-annual bond-equivalent
basis, to an aggregate principal amount at
maturity of $375.0 million by July 1, 2003. No
interest will accrue on the Notes prior to July
1, 2003. The Notes will accrue cash interest at
the rate of 10.625% per annum from July 1, 2003
payable semi-annually in arrears on January 1 and
July 1 of each year, commencing January 1, 2004.
Effective Yield............ 10.625% per annum, computed on a semi-annual
bond-equivalent basis using a 360-day year
comprised of twelve 30-day months and calculated
from July 24, 1998.
Optional Redemption........ The Notes are not redeemable at the Company's
option prior to July 1, 2003. Thereafter the
Notes will be subject to redemption at the option
of the Company, in whole or in part, upon not
less than 30 days' notice, at the redemption
prices set forth herein, plus accrued and unpaid
interest thereon to the applicable redemption
date. See "Description of Notes -- Optional
Redemption". In addition, prior to July 1, 2001,
up to 35% of the aggregate principal amount of
Notes will be redeemable at the option of the
Company, at a redemption price equal to 110.625%
of the Accreted Value on the date of redemption;
provided, however, that, after giving effect to
any such redemption, at least 65% of the
principal amount of the Notes remain outstanding.
See "Description of Notes -- Optional
Redemption".
6
<PAGE> 11
Change of Control.......... Upon the occurrence of a Change of Control, each
holder of Notes shall have the right to require
the Company to repurchase their Notes, in whole
or in part, at a price equal to 101% of the
aggregate principal amount thereof, plus accrued
and unpaid interest, if any, to any Change of
Control Payment Date or, if such repurchase is to
be consummated prior to July 1, 2003, 101% of the
Accreted Value thereof, to any Change of Control
Payment Date. See "Description of
Notes -- Repurchase at Option of Holders Upon
Change of Control".
Certain Covenants.......... The Indenture pursuant to which the Old Notes have
been issued and the New Notes will be issued (the
"Indenture") contains certain covenants that,
among other things, limit the ability of the
Company and its Restricted Subsidiaries (as
defined herein) to incur additional indebtedness
and issue preferred stock, pay dividends or
distributions or make investments or make certain
other Restricted Payments (as defined herein),
enter into certain transactions with affiliates,
dispose of certain assets and incur liens. See
"Description of Notes".
Original Issue Discount.... The Old Notes were issued with original issue
discount (that is, the difference between the
stated principal amount at maturity and the issue
price of the Notes) for federal income tax
purposes. Thus, although interest will not accrue
on the Notes prior to July 1, 2003, and there
will be no payments of interest on the Notes
prior to January 1, 2004, original issue discount
will accrue from the issue date and is included
as interest income periodically in a holder's
gross income for federal income tax purposes in
advance of receipt of the cash payments to which
the income is attributable. See "Certain Federal
Income Tax Considerations".
USE OF PROCEEDS
There will be no proceeds to the Company from the Exchange Offer.
RISK FACTORS
Holders of the Old Notes should take into account the specific
considerations set forth under "Risk Factors" as well as the other information
set forth in the Prospectus before tendering Old Notes in exchange for New
Notes.
e.spire is a Delaware corporation. The Company's principal executive
offices are located at 133 National Business Parkway, Suite 200, Annapolis
Junction, Maryland 20701, and its telephone number is (301) 361-4200.
7
<PAGE> 12
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS YEAR ENDED
JUNE 30, ENDED YEAR ENDED DECEMBER 31, 1997
------------------- DECEMBER 31, DECEMBER 31, --------------------------
1995 1996 1996(1) 1996(1) ACTUAL AS ADJUSTED(2)
-------- -------- ------------ ------------ --------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................... $ 389 $ 3,415 $ 6,990 $ 9,417 $ 59,000 $ 59,000
Operating expenses:
Network, development and
operations.................... 3,282 5,265 8,703 11,046 52,881 52,881
Selling, general and
administrative................ 4,598 13,464 20,270 30,656 59,851 59,851
Non-cash stock compensation..... 6,419 2,736 550 2,081 4,274 4,274
Depreciation and amortization... 498 3,078 4,911 7,228 24,131 24,131
-------- -------- -------- -------- --------- ---------
Total operating expenses...... 14,797 24,543 34,434 51,011 141,137 141,137
-------- -------- -------- -------- --------- ---------
Loss from operations............. (14,408) (21,128) (27,444) (41,594) (82,137) (82,137)
Interest and other income........ 218 4,410 2,757 6,390 8,686 8,686
Interest and other expense....... (170) (10,477) (10,390) (18,032) (41,565) (66,764)
-------- -------- -------- -------- --------- ---------
Loss before minority interest.... (14,746) (27,195) (35,077) (53,236) (115,016) (140,215)
Minority interest(3)............. 48 413 160 417 -- --
-------- -------- -------- -------- --------- ---------
Net loss......................... $(14,698) $(26,782) $(34,917) $(52,819) $(115,016) $(140,215)
======== ======== ======== ======== ========= =========
Basic and diluted net loss per
common share.................... $ (3.30) $ (4.96) $ (5.48) $ (8.54) $ (4.65) $ (4.30)
Weighted average shares
outstanding..................... 4,772 6,185 6,734 6,653 27,234 35,334
OTHER DATA:
EBITDA(4)........................ $ (7,443) $(14,901) $(21,822) $(31,868) $ (53,732) $ (53,732)
Capital expenditures............. 15,303 60,856 64,574 107,773 135,036 135,036
Deficiency of earnings to cover
fixed charges(5)................ -- -- -- -- -- --
Ratio of debt to capital(6)...... .09 3.26 3.80 3.80 1.37 1.46
<CAPTION>
SIX MONTHS SIX MONTHS ENDED
ENDED JUNE 30, 1998
JUNE 30, -------------------------
1997 ACTUAL AS ADJUSTED(2)
----------- -------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................... $ 19,793 $ 63,221 $ 63,221
Operating expenses:
Network, development and
operations.................... 19,640 43,597 43,597
Selling, general and
administrative................ 28,205 41,454 41,454
Non-cash stock compensation..... 823 3,427 3,427
Depreciation and amortization... 9,457 17,383 17,383
-------- -------- --------
Total operating expenses...... 58,125 105,861 105,861
-------- -------- --------
Loss from operations............. (38,332) (42,640) (42,640)
Interest and other income........ 1,078 9,991 9,991
Interest and other expense....... (12,421) (31,891) (45,477)
-------- -------- --------
Loss before minority interest.... (49,675) (64,540) (78,126)
Minority interest(3)............. -- -- --
-------- -------- --------
Net loss......................... $(49,675) $(64,540) $(78,126)
======== ======== ========
Basic and diluted net loss per
common share.................... $ (2.82) $ (1.97) $ (2.29)
Weighted average shares
outstanding..................... 17,994 41,496 41,496
OTHER DATA:
EBITDA(4)........................ $(28,052) $(21,830) $(21,830)
Capital expenditures............. 73,213 79,752 79,752
Deficiency of earnings to cover
fixed charges(5)................ -- -- --
Ratio of debt to capital(6)...... 1.94 1.05 1.51
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, 1998
------------------ DECEMBER 31, DECEMBER 31, JUNE 30, -------------------------
1995 1996 1996 1997 1997 ACTUAL AS ADJUSTED(7)
------- -------- ------------ ------------ -------- -------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents............... $20,351 $134,116 $ 78,619 $260,837 $ 8,499 $294,581 $ 512,916
Total assets............................ 37,627 223,600 230,038 638,895 243,381 782,442 1,007,401
Working capital......................... 13,908 114,966 46,001 272,234 (13,274) 296,227 514,562
Property, plant and equipment, net...... 15,567 76,739 136,083 250,477 202,904 349,267 349,267
Long-term debt, including current
portion................................ 3,798 184,382 210,410 461,285 225,079 506,343 731,302
Long-term liabilities................... 4,723 189,072 216,484 461,321 224,562 499,634 724,593
Redeemable stock and options............ 2,931 2,155 2,000 206,160 2,000 222,259 222,259
Stockholders' equity (deficit).......... 22,141 8,982 (27,038) (65,356) (18,226) (453) (453)
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1995 1996 1996 1997 1997 1998
-------- -------- ------------ ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
NETWORK AND SELECTED STATISTICAL
DATA(8):
Networks in operation.................. 5 15 21 32 31 32
Route miles............................ 43 386 697 1,061 957 1,433
Fiber miles............................ 1,754 28,476 48,792 92,528 82,693 123,982
Buildings connected.................... 36 216 595 1,604 1,083 2,393
VGE circuits in service................ 31,920 137,431 384,134 1,052,698 886,375 1,233,988
Voice switches installed............... -- -- 1 16 8 17
Access lines sold...................... -- -- -- 43,581 9,177 96,405
Employees.............................. 74 199 322 803 559 979
</TABLE>
(see footnotes on following page)
8
<PAGE> 13
(footnotes to previous page)
- ---------------
(1) Subsequent to June 30, 1996, the Company changed its fiscal year-end from
June 30 to December 31.
(2) As adjusted for the Private Placement, the net proceeds to the Company of
which were approximately $218.3 million, as if such transaction had occurred
on January 1, 1997. Includes interest expense on the Notes calculated at a
rate of 10.625% per annum, compounded semi-annually, applied to the $225.0
million gross proceeds of the Private Placement, plus amortization of debt
issuance costs, as if the Private Placement had occurred on January 1, 1997.
The ratio of debt to capital, however, is as adjusted as if such transaction
had occurred on December 31, 1997 and June 30, 1998, respectively.
(3) Minority interest represents a 7.25% ownership of AT&T Credit Corporation in
the Company's subsidiaries that operate its networks in Louisville, Fort
Worth, Greenville, Columbia and El Paso. See "Description of Certain
Indebtedness." Such minority interest of AT&T in the Company's subsidiaries
was exchanged for 207,964 shares of Common Stock on December 30, 1997 in
connection with the Company entering into the New AT&T Credit Facility.
(4) EBITDA consists of net income (loss) before net interest, income taxes,
depreciation and amortization, noncash stock compensation and, in fiscal
year ended June 30, 1995, debt conversion expense of $0.4 million. It is a
measure commonly used in the telecommunications industry and is presented to
assist in understanding the Company's operating results. However, it is not
intended to represent cash flow or results of operations in accordance with
generally accepted accounting principles ("GAAP"). Noncash compensation
associated with employee stock and stock options was $6.4 million, $2.7
million, $0.5 million, $2.1 million, $4.3 million, $0.8 million and $3.4
million for the years ended June 30, 1995 and 1996, the six months ended
December 31, 1996, the years ended December 31, 1996 and 1997 and the six
months ended June 30, 1997 and 1998, respectively. See Note 7 of the
Company's Consolidated Financial Statements.
(5) For purposes of calculating the ratio of earnings to cover fixed charges,
earnings (loss) consists of earnings (loss) before minority interest and
fixed charges. Fixed charges consists of interest, whether expensed or
capitalized, (including amortization of debt issuance costs). For the years
ended June 30, 1995 and 1996, the six months ended December 31, 1996, the
years ended December 31, 1996 and 1997 and the six months ended June 30,
1997 and 1998, the Company's earnings were insufficient to cover its fixed
charges by $15.3 million, $30.2 million, $37.3 million, $57.8 million,
$118.9 million, $52.3 million and $65.4 million, respectively. On a pro
forma basis for the year ended December 31, 1997 and the six months ended
June 30, 1998, assuming the Private Placement had occurred at the beginning
of each of those periods, the Company's earnings would have been
insufficient to cover its fixed charges by $144.1 million and $79.0 million,
respectively.
(6) The Debt to Capital Ratio is calculated as the ratio of (i) the amount of
Indebtedness of the Company on a consolidated basis to (ii) the capital of
the Company on a consolidated basis as at such date. For purposes of this
calculation, "capital" shall mean stockholders' equity (deficit), except
that all Preferred Stock shall be included and retained earnings (deficit)
shall be excluded, each as determined in accordance with GAAP.
(7) As adjusted for the Private Placement, as if such transaction had occurred
on June 30, 1998.
(8) Network and Selected Statistical Data are derived from the Company's
records.
9
<PAGE> 14
RISK FACTORS
Holders of Old Notes should consider carefully the following information in
conjunction with the other information set forth or incorporated by reference in
this Prospectus before tendering their Old Notes in the Exchange Offer. The risk
factors set forth below (other than "Consequences of Failure to Exchange") are
generally applied to the Old Notes as well as the New Notes.
NEGATIVE CASH FLOW; ANTICIPATED FUTURE LOSSES; SIGNIFICANT FUTURE CAPITAL
REQUIREMENTS; NEED FOR ADDITIONAL CASH.
Since its inception, the Company has incurred significant net operating
losses and negative cash flow. As of June 30, 1998, the Company had an
accumulated deficit of $262.0 million. During the year ended December 31, 1997
and the six months ended June 30, 1998, the Company incurred a net operating
loss of $115.0 million and $64.5 million, respectively, and generated negative
cash flow from operations of $76.4 million and $29.3 million, respectively.
After giving pro forma effect to the Private Placement, the Company's pro forma
earnings would have been insufficient to cover fixed charges by $144.1 million
and $79.0 million, for the year ended December 31, 1997 and the six months ended
June 30, 1998, respectively. The Company will continue to incur significant
expenditures in the future in connection with the acquisition, development and
expansion of its networks, services and customer base. There can be no assurance
that the Company will achieve or sustain profitability or generate positive cash
flow in the future.
The Company's further development and enhancement of new services as well
as the continued development, construction, expansion, operation and potential
acquisition of networks, will require substantial capital expenditures. The
funding of these expenditures is dependent upon the Company's ability to raise
substantial financing. As of June 30, 1998, the Company had raised approximately
$759 million from debt and equity financings ($977 million after giving pro
forma effect to the Private Placement). The Company estimates that for 1998,
capital required for expansion of its infrastructure and services and to fund
negative cash flow will be approximately $200 million. At June 30, 1998, the
Company had approximately $323.8 million of cash and cash equivalents available
for such purposes ($542.1 million after giving pro forma effect to the Private
Placement). The Company continues to consider potential acquisitions or other
arrangements that may fit the Company's strategic plan. Any such acquisitions or
arrangements that the Company might consider are likely to require additional
equity or debt financing, which the Company will seek to obtain as required and
may also require that the Company obtain the consent of its debt holders. See
"-- Strategic Investments; Business Combinations".
Management anticipates that the Company's current cash resources are
sufficient to fund the Company's continuing negative cash flow and required
capital expenditures in the near future. To meet its additional remaining
capital requirements and to successfully implement its strategy, the Company
will be required to borrow under the GSCP Credit Facilities, sell additional
equity securities, acquire additional credit facilities or sell additional debt
securities, certain of which would require the consent of the Company's debt
holders. Accordingly, there can be no assurance that the Company will be able to
obtain the additional financing necessary to satisfy its cash requirements or to
implement its strategy successfully, in which event the Company will be unable
to fund its ongoing operations, which would have a material adverse effect on
its business, results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
SUBSTANTIAL LEVERAGE; RECENT DEFAULT; FUTURE CASH OBLIGATIONS
Since inception, other than for the year ended June 30, 1996, the Company's
consolidated cash flow from operations has been negative. As a result, the
Company has been required to pay its fixed charges (including interest on
existing indebtedness) and operating expenses with the proceeds from sales of
its debt and equity securities. Under the terms of its debt securities, the
Company will be required to satisfy substantially higher periodic cash debt
service obligations in the future. Commencing in the year 2001, cash interest on
the Company's 13% Senior Discount Notes due
10
<PAGE> 15
2005 (the "2005 Notes") and 12 3/4% Senior Discount Notes due 2006 (the "2006
Notes") will be payable semi-annually at the rate of 13% per annum
(approximately $24.7 million per year) and 12 3/4% per annum (approximately
$15.3 million per year), respectively. In addition, the Company has substantial
cash interest requirements with respect to its 13 3/4% Senior Notes due 2007
(the "2007 Notes", and, together with the 2006 Notes and the 2005 Notes, the
"Existing Notes") and, commencing January 1, 2004, will have substantial cash
interest requirements with respect to the Notes. As of June 30, 1998, the
Company had approximately $35.0 million in debt outstanding under the New AT&T
Credit Facility. As of June 30, 1998, the Company had approximately $506.3
million of consolidated outstanding long-term indebtedness, including current
portion ($731.3 million after giving pro forma effect to the Private Placement).
As of June 30, 1998, the total consolidated liabilities of the Company were
approximately $560.6 million ($785.5 million after giving pro forma effect to
the Private Placement). It is expected that the Company and its subsidiaries
will incur additional indebtedness. Many factors, some of which are beyond the
Company's control, will affect its performance and, therefore, its ability to
meet its ongoing obligations to repay the Existing Notes, the Notes and its
other debt. There can be no assurance that the Company will be able to generate
sufficient cash flow or otherwise obtain funds in the future to cover interest
and principal payments associated with the Notes, the Existing Notes and its
other debt. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources", "Description of
Certain Indebtedness" and "Description of the Notes".
On June 11, 1997, the Company notified the trustee under each of the
indentures governing the 2005 Notes (as amended as of February 26, 1998, the
"2005 Indenture") and the 2006 Notes (as amended as of February 26, 1998, the
"2006 Indenture", together with the 2005 Indenture and the indenture governing
the 2007 Notes (as amended as of February 26, 1998, the "2007 Indenture"), the
"Existing Indentures") that, as of June 10, 1997, it had approximately $13.0
million in the aggregate of ordinary course trade accounts payable that were
more than 60 days overdue. As of June 30, 1997, the Company had approximately
$17.4 million in the aggregate of ordinary course trade accounts payable that
were more than 60 days overdue. These overdue amounts constituted Indebtedness
of the Company, as that term is defined in the 2005 Indenture and 2006
Indenture. The incurrence by the Company of such Indebtedness was not permitted
under the 2005 Indenture and 2006 Indenture and, therefore, constituted an Event
of Default (as defined in the 2005 Indenture and 2006 Indenture) under the 2005
Indenture and 2006 Indenture. The Company used a portion of the proceeds of the
Unit Offering (as defined herein) to pay in full all ordinary course trade
accounts payable that were more than 60 days overdue to cure such Event of
Default.
In addition, in connection with the Unit Offering and Junior Preferred
Stock Offering (as defined herein), the Company issued the 14 3/4% Preferred
Stock and the 12 3/4% Preferred Stock (each, as defined herein), respectively,
dividends on which may be paid, at the Company's option, either in cash or by
the issuance of additional shares of Preferred Stock; provided, however, that
after June 30, 2002, to the extent and so long as the Company is not precluded
from paying cash dividends on the Preferred Stock by the terms of any then
outstanding indebtedness or any other agreement or instrument to which the
Company is then subject, the Company is required to pay dividends on such
Preferred Stock in cash.
The level of the Company's indebtedness and its other obligations could
have important consequences to holders of the Notes, including the following:
(i) the debt service requirements of the Company's existing indebtedness and any
additional indebtedness could make it difficult for the Company to make payments
on the Notes, the Existing Notes and the Preferred Stock; (ii) the ability of
the Company to obtain any necessary financing in the future for working capital,
capital expenditures, debt service requirements or other purposes may be
limited; (iii) any cash flow from the operations of certain of the Company's
subsidiaries may need to be dedicated to debt service payments and might not be
available for other purposes; (iv) the Company's level of indebtedness could
limit its flexibility in planning for, or reacting to, changes in its business;
(v) the Company is more highly leveraged than most of its competitors, which may
place it at a competitive disadvan-
11
<PAGE> 16
tage; and (vi) the Company's high degree of indebtedness will make it more
vulnerable to a downturn in its business.
Prior to July 1, 2003, the Company's interest expense on the Notes will be
comprised solely of the accretion of original issue discount. Thereafter, the
Notes will require annual cash interest payments of $39.8 million.
HOLDING COMPANY STRUCTURE
The operations of the Company are conducted through its subsidiaries and,
therefore, the Company is dependent upon cash flow from those entities to meet
its obligations. The Company's subsidiaries will have no direct obligation to
pay amounts due on the Notes and will not guarantee the New Notes. As a result,
the New Notes effectively will be subordinated to all existing and future
third-party indebtedness and other liabilities of the Company's subsidiaries
(including trade payables). See "Description of Certain Indebtedness." Any
rights of the Company and its creditors, including the holders of New Notes, to
participate in the assets of any of the Company's subsidiaries upon any
liquidation or reorganization of any such subsidiary will be subject to the
prior claims of that subsidiary's creditors (including trade creditors).
RANKING OF THE NOTES; ASSET ENCUMBRANCES
The New Notes will be general unsecured obligations of the Company and will
rank pari passu in right of payment with all future senior indebtedness of the
Company. The New Notes will be effectively subordinated to all senior secured
indebtedness of the Company to the extent of such security, including
indebtedness under the GSCP Credit Facilities, which will provide for revolving
credit borrowings of up to $225.0 million and term loans of up to $75.0 million.
It is expected that the Company's obligations under the GSCP Credit Facilities
will be secured by a pledge of substantially all of the capital stock of the
Company's subsidiaries, and the tangible and intangible assets of the Company
and its subsidiaries. If the Company becomes insolvent or is liquidated, or if
payment under the GSCP Credit Facilities is accelerated, the lenders under the
GSCP Credit Facilities will be entitled to exercise the remedies available to a
secured lender under applicable law pursuant to the GSCP Credit Facilities.
Accordingly, such lenders will have a prior claim with respect to such assets.
See "Description of Certain Indebtedness -- GSCP Credit Facilities" and
"Description of the Notes".
CERTAIN FINANCIAL AND OPERATING RESTRICTIONS
The Indenture, the Existing Indentures, the New AT&T Credit Facility and
the certificates of designation relating to the 14 3/4% Preferred Stock and
12 3/4% Preferred Stock impose, and it is expected that the GSCP Credit
Facilities will impose, operating and financial restrictions on the Company and
its subsidiaries. These restrictions affect, and in certain cases significantly
limit or prohibit, among other things, the ability of the Company and its
subsidiaries to incur additional indebtedness or create liens on their assets,
pay dividends, sell assets, engage in mergers or acquisitions or make
investments. Failure to comply with any of these restrictions could limit the
availability of borrowings or result in a default thereunder. See "Description
of Certain Indebtedness" and "Description of the Notes". In addition, the terms
of any debt or equity financings undertaken by the Company to meet its future
cash requirements could restrict the Company's operational flexibility and
thereby adversely affect the Company's business, results of operations and
financial condition.
12
<PAGE> 17
CHANGE OF CONTROL RISK
The existence of the holders' right to require, subject to certain
conditions, the Company to repurchase Notes upon a Change of Control may deter a
third party from acquiring the Company in a transaction that constitutes a
Change of Control. If a Change of Control Offer (as defined) is made, there can
be no assurance that the Company will have sufficient funds to pay the purchase
price for all Notes tendered by holders seeking to accept the Change of Control
Offer. In addition, instruments governing other indebtedness of the Company may
prohibit the Company from purchasing any Notes prior to their stated maturity,
including pursuant to a Change of Control Offer. See "Description of Certain
Indebtedness." In the event that a Change of Control Offer occurs at a time when
the Company does not have sufficient available funds to pay the purchase price
for all Notes tendered pursuant to such offer or a time when the Company is
prohibited from purchasing the Notes (and the Company is unable either to obtain
the consent of the holders of the relevant indebtedness or to repay such
indebtedness), an Event of Default would occur under the Indenture. In addition,
one of the events that constitutes a Change of Control under the Indenture is a
sale, conveyance, transfer or lease of all or substantially all of the property
of the Company. The Indenture is governed by New York law, and there is no
established definition under New York law of "substantially all" of the assets
of a corporation. Accordingly, if the Company were to engage in a transaction in
which it disposed of less than all of its assets, a question of interpretation
could arise as to whether such disposition was of "substantially all" of its
assets and whether the Company was required to make a Change of Control Offer.
MANAGEMENT OF RAPID GROWTH
Subject to the sufficiency of its cash resources, the Company intends to
continue to expand its business rapidly. The Company's future performance will
depend, in large part, upon its ability to implement and manage its growth
effectively. The Company's rapid growth has placed, and in the future will
continue to place, a significant strain on its administrative, operational and
financial resources. The Company anticipates that, if successful in expanding
its business, the Company will be required to integrate its newest senior
managers successfully and to recruit and hire a substantial number of new
managerial, finance, accounting and support personnel. Failure to retain and
attract additional management personnel who can manage the Company's growth
effectively would have a material adverse effect on the Company and its growth.
To manage its growth successfully, the Company will also have to continue to
improve and upgrade operational, financial, accounting and information systems,
controls and infrastructure as well as expand, train and manage its employee
base. In the event the Company is unable to upgrade its financial controls and
accounting and reporting systems adequately to support its anticipated growth,
the Company's business, results of operations and financial condition could be
materially adversely affected.
DEPENDENCE ON BILLING, CUSTOMER SERVICES AND INFORMATION SYSTEMS
Integrated management information and processing systems are vital to the
Company's growth and its ability to monitor costs, bill customers, provision
customer orders and achieve operating efficiencies. As the Company transitions
to the provisioning of integrated communications services, the need for
sophisticated billing and information systems will increase significantly. The
Company's plans for the development and implementation of its billing systems
rely, for the most part, on the delivery of products and services by third party
vendors. Similarly, the Company is developing customer call centers to respond
to service orders. Information systems are vital to the success of the call
centers, and the information systems for these call centers are largely being
developed by third party vendors. Failure of these vendors to deliver these
systems solutions in a timely and effective manner and at acceptable costs,
failure of the Company to adequately identify and integrate all of its
information and processing needs, failure of the Company's related processing or
information systems, or the failure of the Company to upgrade systems as
necessary could have a material adverse effect on the ability of the Company to
reach its objectives, on its financial condition and on its results of
operations.
13
<PAGE> 18
While the Company believes that the majority of its software applications
are year 2000 compliant, there can be no assurance until the year 2000 occurs
that all systems will then function adequately. Further, if the hardware or
software comprising the Company's network elements acquired from third party
vendors or the software applications of the ILECs, long distance carriers or
others on whose services the Company depends or with whom the Company's systems
interface are not year 2000 compliant, it could affect the Company's systems,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
DEPENDENCE ON A SMALL NUMBER OF MAJOR CUSTOMERS; AGE OF ACCOUNTS RECEIVABLE
The Company receives a significant portion of its revenues from a small
number of major customers, particularly the IXCs and ISPs. For the year ended
December 31, 1997 and the six months ended June 30, 1998, approximately 20% and
13% of the Company's revenues were attributable to access services provided to
five and four, respectively, of the largest IXCs, including services provided
for the benefit of their customers. In addition, the Company derived
approximately 20% of its 1997 revenues and 11% of its revenues for the first six
months of 1998 from services provided to ISPs, which operate in a highly
competitive and uncertain environment. The Company is, and expects to continue
to be, dependent upon such IXC and ISP customers, and the loss of any one of the
IXCs or certain of the ISP customers could have a material adverse effect on the
Company's business, results of operations and financial condition. Additionally,
customers who account for significant portions of the Company's revenues may
have the ability to negotiate prices for the Company's services that are more
favorable to the customer and that result in lower profit margins for the
Company. In addition, a significant portion of the Company's accounts receivable
are at least 90 days past due. A substantial portion of such overdue amount
consists of reciprocal compensation payments due from ILECs. An inability to
collect on its accounts receivable could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"-- Competition," "Business -- Competition" and "-- Regulation".
DEPENDENCE UPON SUPPLIERS
The Company relies on other companies to supply certain key components of
its network infrastructure, including telecommunications services, network
capacity and switching and networking equipment, which, in the quantities and
quality demanded by the Company, are available only from sole or limited
sources. The Company is also dependent upon ILECs and other carriers to provide
telecommunications services and facilities to the Company and its customers. The
Company has from time to time experienced delays or other problems in receiving
telecommunications services and facilities which it requests, and there can be
no assurance that the Company will be able to obtain such services or facilities
on the scale and within the time frames required by the Company at an affordable
cost, or at all. Any failure to obtain such components, services or additional
capacity on a timely basis at an affordable cost, or at all, would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Regulation".
DEPENDENCE UPON NETWORK INFRASTRUCTURE; RISK OF SYSTEM FAILURE; SECURITY RISKS
The Company's success in marketing its services to business and government
users requires that the Company provide superior reliability, capacity and
security via its network infrastructure. The Company's networks and the networks
upon which it depends are subject to physical damage, power loss, capacity
limitations, software defects, breaches of security (by computer virus, break-
ins or otherwise) and other factors, certain of which may cause interruptions in
service or reduced capacity for the customers. Interruptions in service,
capacity limitations or security breaches could have a material adverse effect
on the Company's business, financial condition and results of operations.
14
<PAGE> 19
DEPENDENCE ON RIGHTS-OF-WAY AND OTHER THIRD PARTY AGREEMENTS
In order to acquire and develop its networks the Company must obtain local
franchises and other permits, as well as rights to utilize underground conduit
and aerial pole space and other rights-of-way and fiber capacity from entities
such as ILECs and other utilities, railroads, long distance companies, state
highway authorities, local governments and transit authorities. There can be no
assurance that the Company will be able to maintain its existing franchises,
permits and rights or to obtain and maintain the other franchises, permits and
rights needed to implement its business plan on acceptable terms. Although the
Company does not believe that any of the existing arrangements will be canceled
or will not be renewed as needed in the near future, cancellation or non-renewal
of certain of such arrangements could materially adversely affect the Company's
business in the affected metropolitan area. In addition, the failure to enter
into and maintain any such required arrangements for a particular network,
including a network which is already under development, may affect the Company's
ability to acquire or develop that network. See "Business -- Regulation".
EFFECT OF REGULATION
As a common carrier, the Company is subject to substantial federal, state
and local regulation. The Company's local networks do not require authorization
from the Federal Communications Commission (the "FCC") for construction or
installation. However, the Company currently must file FCC tariffs stating its
rates, terms and conditions of service for interstate access services and must
file tariffs covering its interstate and international long distance traffic.
State regulatory agencies regulate intrastate communications, while local
authorities control the Company's access to and use of municipal rights-of-way.
Under the FTA, state and local legal requirements which prohibit or have the
effect of prohibiting any entity from providing any intrastate
telecommunications service are preempted. However, many states continue to
require telecommunications carriers to obtain a certificate, license, permit or
similar approval before providing services. Thus, the Company's ability to
provide additional intrastate services is dependent upon its receipt of
requisite state regulatory approval. The inability to obtain the approvals
necessary to provide intrastate switched services could have a material adverse
effect on the Company's business, results of operations and financial condition.
The FTA imposes a duty upon all ILECs to negotiate in good faith with
potential interconnectors such as the Company to provide interconnection to the
ILEC network, exchange local traffic, make unbundled basic local network
elements available and permit resale of most local services. All local
interconnection agreements must be filed with state Public Service Commissions
("PSCs") for approval. In the event that negotiations with the ILECs do not
succeed, the Company has a right to seek PSC arbitration of any unresolved
issues.
Although passage of the FTA should result in increased opportunities for
companies that are competing with the ILECs, no assurance can be given that
changes in current or future regulations adopted by the FCC or state regulators
or other legislative or judicial initiatives relating to the telecommunications
industry would not have a material adverse effect on the Company. In addition,
although the FTA makes RBOC entry into the in-region long distance market
conditional upon their offering of local interconnection arrangements to other
telecommunications service providers, there can be no assurance that these ILECs
will negotiate quickly with competitors such as the Company for the required
interconnection of the competitor's networks with those of the ILEC.
Internet-related information services are not currently subject to direct
regulation by the FCC or any other U.S. agency other than regulation applicable
to businesses generally. The FCC is considering whether additional regulations
should be applied to Internet services and whether Internet service providers
should pay interexchange access charges and universal service fees. Moreover, as
discussed hereafter, the FTA and similar state laws create civil and criminal
penalties for the knowing transmission of "indecent" material over the Internet.
Additionally, the FTA may permit telecommunications companies, RBOCs or others
to increase the scope or reduce the cost
15
<PAGE> 20
of their Internet access services. These and other changes in the regulatory
environment relating to the telecommunications or Internet-related services
industry could have an adverse effect on the Company's Internet-related services
business.
On December 31, 1997, a United States District Court judge in Texas held
unconstitutional certain sections of the FTA, including Section 271, which
prevents RBOC subsidiaries from providing in-region long distance services until
certain conditions are met. This decision would permit the three RBOCs that are
parties in the case immediately to begin offering widespread in-region long
distance services. However, the judge stayed the effectiveness of his own order,
and the decision was reversed by the United States Court of Appeals for the
Fifth Circuit on September 4, 1998. The company cannot predict whether the
decision of the Fifth Circuit will be further appealed, or the resolution of any
such further appeals. If the Fifth Circuit decision were reversed, such a
decision could have a material adverse effect on the Company. In addition, the
Company cannot predict the effect that the FTA or any future legislation,
regulation or regulatory changes may have on its business.
The Company believes it is entitled to receive reciprocal compensation from
ILECs for the transport and termination of Internet traffic as local traffic
pursuant to various interconnection agreements. Some ILECs have not paid and/or
have disputed these charges, arguing that ISP traffic is not local traffic as
defined by the various agreements. Both state and federal regulators currently
are considering the proper jurisdictional classification of local access calls
placed to an ISP, and whether ISP calling triggers an obligation to pay
reciprocal compensation. There can be no assurance that these issues will be
resolved. Any final order by the FCC or a state PSC in a state in which the
Company's interconnection agreements entitle it to reciprocal compensation, or a
final determination by a Federal or applicable state court that no reciprocal
compensation is owed for calls placed to ISPs could have a material adverse
effect on the Company. See "Business -- Regulation -- State Regulation -- Local
Interconnection".
COMPETITION
The Company operates in a highly competitive environment and currently does
not have a significant market share in any of its markets. Most of its actual
and potential competitors have substantially greater financial, technical,
marketing and other resources (including brand name recognition) than the
Company. Also, the continuing trend toward business alliances in the
telecommunications industry and the absence of substantial barriers to entry in
the data and Internet services markets, could give rise to significant new
competition.
In each of its markets, the Company's primary competitor is the ILEC
serving that geographic area. ILECs are established providers of dedicated and
local telephone services to all or virtually all telephone subscribers within
their respective service areas. ILECs also have long-standing relationships with
regulatory authorities at the federal and state levels. While recent FCC
administrative decisions and initiatives provide increased business
opportunities to voice, data and Internet-service providers such as the Company,
they also provide the ILECs with increased pricing flexibility for their private
line and special access and switched access services. In addition, with respect
to competitive access services (as opposed to switched local exchange services),
the FCC recently proposed a rule that would provide for increased ILEC pricing
flexibility and deregulation for such access services either automatically or
after certain competitive levels are reached. If the ILECs are allowed
additional flexibility by regulators to offer discounts to large customers
through contract tariffs, decide to engage in aggressive volume and term
discount pricing practices for their customers, and/or seek to charge
competitors excessive fees for interconnection to their networks, the revenue of
competitors to the ILECs, including the Company, could be materially adversely
affected. If future regulatory decisions afford the ILECs increased access
services pricing flexibility or other regulatory relief, such decisions could
also have a material adverse effect on competitors to the ILECs, including the
Company.
16
<PAGE> 21
In the local exchange market, the Company also faces competition or
prospective competition from several other carriers, many of which have
significantly greater financial resources than the Company. For example, AT&T
Communications ("AT&T"), MCI Communications Corporation ("MCI") and Sprint
Corporation ("Sprint"), which historically have been purely long distance
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 addition to these long distance service providers,
entities that currently offer or are potentially capable of offering local
switched services include companies that have previously been known purely as
competitive access providers ("CAPs"), cable television companies, electric
utilities, microwave carriers, wireless telephone system operators and large
customers who build private networks. These entities, upon entering into
appropriate interconnection agreements or resale agreements with ILECs,
including RBOCs, can offer single source local and long distance services, like
those offered by the Company. In addition, a continuing trend towards business
combinations and alliances in the telecommunications industry may create
significant new competitors to the Company. The proposed merger of WorldCom,
Inc. and MCI or AT&T's proposed acquisition of Teleport Communications Group,
Inc. and TCI Cable are examples of some of the alliances that are being formed.
Many 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.
The Company will also face competition from fixed wireless services,
including MMDS, LMDS, 24 GHz 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. See
"Business -- Regulation". In addition, 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.
With respect to mobile 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 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. See
"Business -- Regulation".
Section 271 of the FTA 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 denied the following
applications for such approval: SBC Communications Inc.'s Oklahoma application
in June 1997; Ameritech Inc.'s Michigan application in August 1997; and
BellSouth Corporation applications for South Carolina and Louisiana in December
1997 and February 1998, respectively. The Company anticipates that a number of
RBOCs will file additional applications for in-region long distance authority 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.
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. On December 31, 1997, a United States
District Court judge in Texas held unconstitutional certain sections of the FTA,
including Section 271. This decision would permit the three RBOCs immediately to
begin offering widespread in-region long distance services. The decision,
however, was stayed on February 11, 1998 by the Court upon motion from the
defendants. Unless overturned on appeal, this decision could have a material
adverse effect on the Company. The FCC and certain IXCs have filed appeals of
the decision with the United States Court of Appeals for the Fifth Circuit.
Although
17
<PAGE> 22
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, new FCC rules went into effect in February 1998 which will
make it substantially easier for many non-U.S. telecommunications companies to
enter the U.S. market, thus potentially further increasing the number of
competitors.
The market for data communications and Internet access services, including
IP switching, is extremely competitive. There are no substantial barriers to
entry, and the Company expects that competition will intensify in the future.
The Company believes that its ability to compete successfully depends on a
number of factors, including: market presence; the ability to execute a rapid
expansion strategy; the capacity, reliability and security of its network
infrastructure; ease of access to and navigation of the Internet; the pricing
policies of its competitors and suppliers; the timing of the introduction of new
services by the Company and its competitors; the Company's ability to support
industry standards; and industry and general economic trends. The Company's
success in this market will depend heavily upon its ability to provide high
quality Internet connections and value-added Internet services at competitive
prices. See "Business -- Competition".
IMPACT OF TECHNOLOGICAL CHANGE
The telecommunications industry is subject to rapid and significant
technological change that could materially affect the continued use of fiber
optic cable or the electronics utilized in the Company's networks. Future
technological changes, including changes related to the emerging wireline and
wireless transmission and switching technologies and Internet-related services
and technologies, could have a material adverse effect on the Company's
business, results of operations and financial condition.
The market for the Company's telecommunications services is characterized
by rapidly changing technology, evolving industry standards, emerging
competition and frequent new product and service introductions. There can be no
assurance that the Company will successfully identify new service opportunities
and develop and bring new services to market. The Company's pursuit of necessary
technological advances may require substantial time and expense, and there can
be no assurance that the Company will succeed in adapting its telecommunications
services business to alternate access devices, conduits and protocols.
STRATEGIC INVESTMENTS; BUSINESS COMBINATIONS
The Company expects to actively pursue over the next several months one or
more acquisitions of companies engaged in businesses similar or related to the
business of the Company. As consideration for such acquisitions, the Company may
be required to incur additional indebtedness or issue capital. There can be no
assurance that the Company will be able to obtain such financing. In addition,
the Company from time to time engages in discussions with (i) potential business
partners looking toward formation of business combinations or strategic
alliances that would expand the reach of the Company's networks or services and
(ii) potential strategic investors (i.e., investors in the same or related
business) who have expressed an interest in making an investment in the Company.
Such acquisitions, combinations or alliances, if consummated, could divert the
resources and management time of the Company and would require integration with
the Company's existing networks and services. There can be no assurance that any
acquisitions, combinations or alliances will occur or, if consummated, would be
on terms favorable to the Company or would be successfully integrated into the
Company's operations. An investment, business combination or strategic alliance
could constitute a Change of Control (as defined in the Indenture and the
Existing Indentures) requiring the Company to offer to purchase all Notes and
Existing Notes. In the event that such a Change of Control occurs at a time when
the Company does not have sufficient available funds to purchase all Notes and
Existing Notes tendered or at a time when the Company is prohibited from
purchasing the Notes and the Existing Notes, an Event of Default (as defined in
the
18
<PAGE> 23
Indenture and the Existing Indentures) could occur under the relevant indenture.
See "-- Change of Control Risk".
POTENTIAL LIABILITY OF INTERNET ACCESS PROVIDERS
The law governing the liability of on-line services providers and Internet
access providers for participating in the hosting or transmission of
objectionable materials or information currently is unsettled. Under the terms
of the FTA, both civil and criminal penalties can be imposed for the use of
interactive computer services for the transmission of certain indecent or
obscene communications. However, this provision was recently found to be
unconstitutional by the U.S. Supreme Court. Nonetheless, many states have
adopted or are considering adopting similar requirements, and the
constitutionality of such state requirements remains unsettled at this time.
Congress is also considering several bills addressing these issues. In addition,
several private lawsuits have been filed seeking to hold Internet access
providers accountable for information which they transmit. While the outcome of
these activities is uncertain, the ultimate imposition of potential liability on
Internet access providers for information which they host, distribute or
transport could materially change the way they must conduct business. To avoid
undue exposure to such liability, Internet access providers could be compelled
to engage in burdensome investigation of subscriber materials or even
discontinue offering services altogether. Any such event could have a material
adverse effect on the Company's business, results of operations and financial
condition.
DEPENDENCE ON KEY PERSONNEL
The Company is currently managed by a small number of key management and
operating personnel whose efforts will largely determine the Company's success.
The success of the Company also depends upon its ability to hire and retain
qualified operating, marketing, sales, financial, accounting and technical
personnel. Competition for qualified personnel in the telecommunications
industry is intense and, accordingly, there can be no assurance that the Company
will be able to continue to hire or retain necessary personnel. The loss of key
management personnel would likely have a material adverse impact on the Company.
See "Management".
CONTROL BY CERTAIN STOCKHOLDERS AND MANAGEMENT
As of June 30, 1998, the Company's directors and executive officers
beneficially owned approximately 8.2% of the outstanding Common Stock. In
addition, as of such date approximately 31.2% of the outstanding Common Stock
was beneficially owned by The Huff Alternative Income Fund, L.P. ("Huff"), the
designees of which occupy three positions on the Board of Directors,
approximately 16.7% was beneficially owned by ING Equity Partners, L.P. I
("ING"), the designees of which occupy two positions on the Board of Directors,
and approximately 6.3% was beneficially owned by affiliates of First Analysis
Corporation ("FAC"), a designee of which occupies one position on the Board of
Directors, respectively. In addition, at the date hereof Huff is the beneficial
owner of approximately 13% of the 14 3/4% Preferred Stock, which shares have
voting rights in certain circumstances, and ING Baring (U.S.) Securities, Inc.,
which is affiliated with the limited partner of ING, is the beneficial owner of
approximately 4% of such Preferred Stock. Accordingly, if they choose to act
together, these persons will be able to control the election of the Board of
Directors and other matters voted upon by the stockholders. There can be no
assurance that the interests of such persons will not conflict with the
interests of the holders of the Notes.
In addition, a sale of Common Stock by one or more of the principal
stockholders to third parties could trigger the right of the holders of the
Notes and the Existing Notes to require the Company to repurchase the Notes and
the Existing Notes (a "Change of Control Offer"). In the event that a Change of
Control Offer occurs at a time when the Company does not have sufficient
available funds to pay the Change of Control Purchase Price (as defined in the
Indenture and the Existing Indentures) for all Notes and Existing Notes
tendered, or at a time when the Company is prohibited from purchasing the Notes
and the Existing Notes, an Event of Default (as defined in the relevant
19
<PAGE> 24
indentures) could occur. See "-- Change of Control Risk", "Management",
"Principal Stockholders", "Description of Certain Indebtedness -- The Existing
Notes" and "Description of the Notes".
ORIGINAL ISSUE DISCOUNT; POSSIBLE UNFAVORABLE TAX AND OTHER LEGAL CONSEQUENCES
FOR HOLDERS OF NOTES AND THE COMPANY
The Notes were issued at a substantial discount from the stated principal
amount. Consequently, holders of the Notes should be aware that, although there
will be no periodic payments of interest on the Notes prior to January 1, 2004,
original issue discount (that is, the difference between the stated redemption
price at maturity and the issue price of the Notes) will accrue from the issue
date of the Notes and will be includible as interest income periodically
(including for periods ending prior to July 1, 2003) in a holder's gross income
for U.S. federal income tax purposes in advance of receipt of the cash payments
to which the income is attributable. Similar results may apply under state and
other tax laws.
If a bankruptcy case is commenced by or against the Company under the U.S.
Bankruptcy Code after the issuance of the Notes, the claim of a holder of Notes
with respect to the principal amount may be limited to an amount equal to the
sum of (i) the initial offering price and (ii) that portion of the original
issue discount that is not deemed to constitute "unmatured interest" for
purposes of the U.S. Bankruptcy Code. Any original issue discount that was not
amortized as of any such bankruptcy filing would constitute "unmatured
interest."
See "Certain Federal Income Tax Considerations" for a more detailed
discussion of the federal income tax consequences to the holders regarding the
ownership and disposition of the Notes.
LACK OF PUBLIC MARKET FOR THE NOTES
The Notes constitute new issues of securities with no established trading
market. In addition, because the Exchange Offer is not conditioned upon any
minimum number of Old Notes being tendered for exchange, the number of New Notes
issued could be quite small, which could have an adverse effect on the liquidity
of the New Notes. Also, to the extent that Old Notes are tendered and accepted
in the Exchange Offer, a holder's ability to sell untendered Old Notes could be
adversely affected. Therefore, no assurance can be given as to the liquidity of
the trading market for the Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes which are not exchanged for New Notes pursuant to the
Exchange Offer will remain restricted securities within the meaning of Rule 144
of the Securities Act. Accordingly, such Old Notes may be resold under limited
circumstances, as discussed in "The Exchange Offer -- Consequences of Failure to
Exchange." The liquidity of the Old Notes could be adversely affected by the
Exchange Offer. Following consummation of the Exchange Offer, holders of the Old
Notes will have no further registration rights under the Registration Rights
Agreement.
USE OF PROCEEDS
There will be no proceeds to the Company from the Exchange Offer. The net
proceeds to the Company from the Private Placement were approximately $218.3
million, after deducting discounts and other offering expenses payable by the
Company. The Company plans to use the net proceeds from the Private Placement
for expansion of its voice and data network infrastructure, enhancement of its
operational support systems and sales and marketing services, deployment of
switching equipment, potential future acquisitions and general corporate
purposes.
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<PAGE> 25
CAPITALIZATION
The following table sets forth the total cash and cash equivalents and
capitalization of the Company (i) as of June 30, 1998, and (ii) as adjusted for
the Private Placement, the net proceeds to the Company of which were
approximately $218.3 million. This table should be read in conjunction with the
"Selected Consolidated Financial and Operating Data" and the Consolidated
Financial Statements and related notes thereto included in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 294,581 $ 512,916
Restricted cash and restricted investments in Marketable
Securities(1)............................................. 59,463 59,463
--------- ---------
Total cash and restricted assets.................. $ 354,044 $ 572,379
========= =========
Long term debt:
2005 Notes................................................ $ 135,026 $ 135,026
2006 Notes................................................ 85,368 85,368
2007 Notes................................................ 220,000 220,000
10.625% Senior Discount Notes due 2008.................... -- 224,959
Notes payable(2).......................................... 35,000 35,000
--------- ---------
Total long-term debt................................... 475,394 700,353
Capital lease obligation.................................... 30,949 30,949
Redeemable stock and options................................ 222,259 222,259
Stockholders' equity (deficit):
Common Stock, par value $0.01 per share, 125,000,000
shares authorized, 47,385,349 shares issued and
outstanding at June 30, 1998(3)........................ 474 474
Additional paid in capital................................ 261,069 261,069
Accumulated deficit....................................... (261,996) (261,996)
--------- ---------
Total stockholders' equity (deficit)................... (453) (453)
--------- ---------
Total capitalization................................... $ 728,149 $ 953,108
========= =========
</TABLE>
- ---------------
(1) Primarily represents cash and investments in marketable securities
sufficient to make the first five interest payments on the 2007 Notes. The
Company placed approximately $70.0 million of the net proceeds realized from
the offering of the 2007 Notes, representing funds, together with interest
thereon, sufficient to pay the first five interest payments on the 2007
Notes, into an escrow account. At June 30, 1998, the Company had
approximately $58.0 million remaining in the escrow account to fund the
remaining four interest payments of the 2007 Notes.
(2) Represents borrowings under the New AT&T Credit Facility. It is expected
that the Company will incur $75.0 million of indebtedness in connection with
the closing of the GSCP Credit Facilities and will refinance the
indebtedness then outstanding under the New AT&T Credit Facility with a
portion of the proceeds therefrom. See "Description of Certain
Indebtedness".
(3) Shares excluded for options and warrants.
21
<PAGE> 26
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The selected data presented below under the captions "Statement of
Operations Data", "Other Data", and "Balance Sheet Data" as of and for the years
ended June 30, 1995 and 1996, the six months ended December 31, 1996 and the
year ended December 31, 1997 are derived from and qualified by reference to the
audited Consolidated Financial Statements of the Company contained herein and
the related notes thereto, and should be read in conjunction therewith and in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations". The Company's Consolidated Financial Statements as
of and for the years ended June 30, 1995 and 1996, the six months ended December
31, 1996, and the year ended December 31, 1997 have been audited by KPMG Peat
Marwick LLP, independent auditors. Subsequent to June 30, 1996, the Company
changed its fiscal year-end from June 30 to December 31. Selected data presented
below under the captions "Statement of Operations Data", "Other Data" and
"Balance Sheet Data" as of and for the six months ended June 30, 1997 and 1998,
and for the year ended December 31, 1996, have been derived from the unaudited
consolidated financial statements of the Company which, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments which the Company considers necessary for a fair presentation of the
results of operations and the financial condition for that period. The results
for the six months ended June 30, 1998 are not necessarily indicative of the
results which may be expected for future periods, including for the year ending
December 31, 1998. Network and Selected Statistical Data are derived from the
Company's records.
22
<PAGE> 27
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS YEAR YEAR ENDED
JUNE 30, ENDED ENDED DECEMBER 31, 1997
------------------- DECEMBER 31, DECEMBER 31, --------------------------
1995 1996 1996(1) 1996(1) ACTUAL AS ADJUSTED(2)
-------- -------- ------------ ------------ --------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................... $ 389 $ 3,415 $ 6,990 $ 9,417 $ 59,000 $ 59,000
Operating expenses:
Network, development and
operations................. 3,282 5,265 8,703 11,046 52,881 52,881
Selling, general and
administrative............. 4,598 13,464 20,270 30,656 59,851 59,851
Non-cash stock
compensation............... 6,419 2,736 550 2,081 4,274 4,274
Depreciation and
amortization............... 498 3,078 4,911 7,228 24,131 24,131
-------- -------- -------- -------- --------- ---------
Total operating
expenses................ 14,797 24,543 34,434 51,011 141,137 141,137
-------- -------- -------- -------- --------- ---------
Loss from operations.......... (14,408) (21,128) (27,444) (41,594) (82,137) (82,137)
Interest and other income..... 218 4,410 2,757 6,390 8,686 8,686
Interest and other expense.... (170) (10,477) (10,390) (18,032) (41,565) (66,764)
Debt conversion expense....... (385) -- -- -- -- --
-------- -------- -------- -------- --------- ---------
Loss before minority
interest.................... (14,746) (27,195) (35,077) (53,236) (115,016) (140,215)
Minority interest(3).......... 48 413 160 417 -- --
-------- -------- -------- -------- --------- ---------
Net loss...................... $(14,698) $(26,782) $(34,917) $(52,819) $(115,016) $(140,215)
======== ======== ======== ======== ========= =========
Preferred stock dividends and
accretion................... (1,071) (3,871) (2,003) (4,021) (11,630) (11,630)
-------- -------- -------- -------- --------- ---------
Net loss to common
stockholders................ $(15,769) $(30,653) $(36,920) $(56,840) $(126,646) $(151,845)
======== ======== ======== ======== ========= =========
Basic and diluted net loss per
common share................ $ (3.30) $ (4.96) $ (5.48) $ (8.54) $ (4.65) $ (4.30)
======== ======== ======== ======== ========= =========
Weighted average shares
outstanding................. 4,772 6,185 6,734 6,653 27,234 35,334
OTHER DATA:
EBITDA(4)..................... $ (7,443) $(14,901) $(21,822) $(31,868) $ (53,732) $ (53,732)
Capital expenditures.......... 15,303 60,856 64,574 107,773 135,036 135,036
Deficiency of earnings to
cover fixed charges(5)...... -- -- -- -- -- --
Ratio of debt to capital(6)... .09 3.26 3.80 3.80 1.37 1.46
<CAPTION>
SIX MONTHS SIX MONTHS ENDED
ENDED JUNE 30, 1998
JUNE 30, ---------------------------
1997 ACTUAL AS ADJUSTED(2)
---------- ---------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................... $ 19,793 $ 63,221 $ 63,221
Operating expenses:
Network, development and
operations................. 19,640 43,597 43,597
Selling, general and
administrative............. 28,205 41,454 41,454
Non-cash stock
compensation............... 823 3,427 3,427
Depreciation and
amortization............... 9,457 17,383 17,383
-------- -------- ---------
Total operating
expenses................ 58,125 105,861 105,861
-------- -------- ---------
Loss from operations.......... (38,332) (42,640) (42,640)
Interest and other income..... 1,078 9,991 9,991
Interest and other expense.... (12,421) (31,891) (45,477)
Debt conversion expense....... -- -- --
-------- -------- ---------
Loss before minority
interest.................... (49,675) (64,540) (78,126)
Minority interest(3).......... -- -- --
-------- -------- ---------
Net loss...................... $(49,675) $(64,540) $ (78,126)
======== ======== =========
Preferred stock dividends and
accretion................... (1,095) (17,100) (17,100)
-------- -------- ---------
Net loss to common
stockholders................ $(50,770) $(81,640) $ (95,226)
======== ======== =========
Basic and diluted net loss per
common share................ $ (2.82) $ (1.97) $ (2.29)
======== ======== =========
Weighted average shares
outstanding................. 17,994 41,496 41,496
OTHER DATA:
EBITDA(4)..................... $(28,052) $(21,830) $ (21,830)
Capital expenditures.......... 73,213 79,752 79,752
Deficiency of earnings to
cover fixed charges(5)...... -- -- --
Ratio of debt to capital(6)... 1.94 1.05 1.51
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, 1998
------------------ DECEMBER 31, DECEMBER 31, JUNE 30, --------------------------
1995 1996 1996 1997 1997 ACTUAL AS ADJUSTED(7)
---- ---- ------------ ------------ -------- -------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents............. $20,351 $134,116 $ 78,619 $260,837 $ 8,499 $294,581 $ 512,916
Total assets.......................... 37,627 223,600 230,038 638,895 243,381 782,442 1,007,401
Working capital....................... 13,908 114,966 46,001 272,234 (13,274) 296,227 514,562
Property, plant and equipment, net.... 15,567 76,739 136,083 250,477 202,904 349,267 349,267
Long-term debt, including current
portion............................. 3,798 184,382 210,410 461,285 225,079 506,343 731,302
Long-term liabilities................. 4,723 189,072 216,484 461,321 224,562 499,634 724,593
Redeemable stock and options.......... 2,931 2,155 2,000 206,160 2,000 222,259 222,259
Stockholders' equity (deficit)........ 22,141 8,982 (27,038) (65,356) (18,226) (453) (453)
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1995 1996 1996 1997 1997 1998
-------- -------- ------------ ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
NETWORK AND SELECTED STATISTICAL DATA(8):
Networks in operation.................................. 5 15 21 32 31 32
Route miles............................................ 43 386 697 1,061 957 1,433
Fiber miles............................................ 1,754 28,476 48,792 92,528 82,693 123,982
Buildings connected.................................... 36 216 595 1,604 1,083 2,393
VGE circuits in service................................ 31,920 137,431 384,134 1,052,698 886,375 1,233,988
Voice switches installed............................... -- -- 1 16 8 17
Access lines sold...................................... -- -- -- 43,581 9,177 96,405
Employees.............................................. 74 199 322 803 559 979
</TABLE>
(see footnotes on following page)
23
<PAGE> 28
(footnotes to previous page)
- ---------------
(1) Subsequent to June 30, 1996, the Company changed its fiscal year-end from
June 30 to December 31.
(2) As adjusted for Private Placement, the net proceeds to the Company of which
were approximately $218.3 million, as if such transaction had occurred on
January 1, 1997. Includes interest expense on the Notes calculated at a rate
of 10.625% per annum, compounded semi-annually, applied to the $225.0
million gross proceeds of the Private Placement, plus amortization of debt
issuance costs, as if the Private Placement had occurred on January 1, 1997.
The ratio of debt to capital, however, is as adjusted as if such
transactions had occurred on December 31, 1997 and June 30, 1998,
respectively.
(3) Minority interest represents a 7.25% ownership of AT&T Credit Corporation in
the Company's subsidiaries that operate its networks in Louisville, Fort
Worth, Greenville, Columbia and El Paso. See "Description of Certain
Indebtedness." Such minority interest of AT&T in the Company's subsidiaries
was exchanged for 207,964 shares of Common Stock on December 30, 1997 in
connection with the Company entering into the New AT&T Credit Facility.
(4) EBITDA consists of net income (loss) before net interest, income taxes,
depreciation and amortization, noncash stock compensation and, in fiscal
year ended June 30, 1995, debt conversion expense of $0.4 million. It is a
measure commonly used in the telecommunications industry and is presented to
assist in understanding the Company's operating results. However, it is not
intended to represent cash flow or results of operations in accordance with
GAAP. Noncash compensation associated with employee stock and stock options
was $6.4 million, $2.7 million, $0.5 million, $2.1 million, $4.3 million,
$0.8 million and $3.4 million for the years ended June 30, 1995 and 1996,
the six months ended December 31, 1996, the years ended December 31, 1996
and 1997 and the six months ended June 30, 1997 and 1998, respectively. See
Note 7 of Notes to the Company's Consolidated Financial Statements.
(5) For purposes of calculating the ratio of earnings to cover fixed charges,
earnings (loss) consists of earnings (loss) before minority interest and
fixed charges. Fixed charges consists of interest, whether expensed or
capitalized, (including amortization of debt issuance costs). For the years
ended June 30, 1995 and 1996, the six months ended December 31, 1996, the
years ended December 31, 1996 and 1997 and the six months ended June 30,
1997 and 1998, the Company's earnings were insufficient to cover its fixed
charges by $15.3 million, $30.2 million, $37.3 million, $57.8 million,
$118.9 million, $52.3 million and $65.4 million, respectively. On a pro
forma basis for the year ended December 31, 1997 and the six months ended
June 30, 1998, assuming the Private Placement had occurred at the beginning
of each of those periods, the Company's earnings would have been
insufficient to cover its fixed charges by $144.1 million and $79.0 million,
respectively.
(6) The Debt to Capital Ratio is calculated as the ratio of (i) the amount of
Indebtedness of the Company on a consolidated basis to (ii) the capital of
the Company on a consolidated basis as at such date. For purposes of this
calculation, "capital" shall mean stockholders' equity (deficit), except
that all Preferred Stock shall be included and retained earnings (deficit)
shall be excluded, each as determined in accordance with GAAP.
(7) As adjusted for the Private Placement, as if such transaction had occurred
on June 30, 1998.
(8) Network and Selected Statistical Data are derived from the Company's
records.
24
<PAGE> 29
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were issued by e.spire on July 24, 1998 (the "Closing Date")
to the Initial Purchasers, pursuant to the Purchase Agreement. The Initial
Purchasers subsequently sold the Old Notes to qualified institutional buyers in
reliance on Rule 144A and to non-U.S. persons pursuant to Regulation S,
respectively, under the Securities Act. As a condition to the Purchase
Agreement, e.spire and the Initial Purchasers entered into the Registration
Rights Agreement on July 24, 1998. Pursuant to the Registration Rights
Agreement, e.spire agreed to file with the SEC a registration statement under
the Securities Act with respect to the Exchange Offer following the Closing
Date, (ii) to use its reasonable best efforts to cause such registration
statement to become effective under the Securities Act at the earliest possible
time thereafter, but in no event later than 120 days after the Closing Date, and
(iii) upon effectiveness of the registration statement, to commence the Exchange
Offer. A copy of the Registration Rights Agreement has been filed as an exhibit
to the Registration Statement of which this Prospectus is a part. The
Registration Statement is intended to satisfy e.spire's obligations under the
Registration Rights Agreement and the Purchaser Agreement.
As a result of the effectiveness of the Registration Statement of which
this Prospectus is a part, payment of certain liquidated damages provided for in
the Registration Rights Agreement will not occur. Following the consummation of
the Exchange Offer, holders of Old Notes will not have any further registration
rights and the Old Notes will continue to be subject to certain restrictions on
transfer. See "-- Consequences of Failure to Exchange." Accordingly, the
liquidity of the market for the Old Notes could be adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the applicable Letter of Transmittal, e.spire will accept any Old Notes
in principal amounts of $1,000 validly tendered and not withdrawn prior to the
Expiration Date. e.spire will issue (i) New Notes in principal amounts of $1,000
for each $1,000 principal amount outstanding of the Old Notes. Holders may
tender some or all of their Old Notes pursuant to the Exchange Offer.
The form and terms of the New Notes are the same as the form and terms of
the Old Notes except that the New Notes will have been registered under the
Securities Act and hence will not bear legends restricting their transfer
pursuant to the Securities Act.
As of the date of this Prospectus, $225.0 million principal amount of Old
Notes were outstanding. Only a registered holder of the Old Notes (or such
holder's legal representative or attorney-in-fact) reflected on the records of
the transfer agent and registrar for the Notes may participate in the Exchange
Offer. There will be no fixed record date for determining registered holders of
the Old Notes entitled to participate in the Exchange Offer.
Holders of the Old Notes do not have any appraisal or dissenters rights
under the General Corporation Law of Delaware in connection with the Exchange
Offer. e.spire intends to conduct the Exchange Offer in accordance with the
applicable requirements of the Exchange Act and the rules and regulations of the
Commission thereunder.
e.spire shall be deemed to have accepted validly tendered Old Notes when,
as and if e.spire has given oral or written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering holders of the Old
Notes for the purposes of receiving the New Notes from e.spire.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
25
<PAGE> 30
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the
applicable Letter of Transmittal, transfer taxes with respect to the exchange of
Old Notes pursuant to the Exchange Offer. e.spire will pay all charges and
expenses, other than certain applicable taxes, in connection with the Exchange
Offer. See "-- Fees and Expenses."
Each broker-dealer that receives New Notes for its own account in exchange
for Old Notes, where such New Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities must acknowledge
that it will deliver a prospectus in connection with any resale of such New
Notes. See "Plan of Distribution."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1998, unless e.spire, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended. The Company will not extend the
Exchange Offer beyond , 1998.
In order to extend the Exchange Offer, e.spire will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date.
e.spire reserves the right, (i) to delay accepting any Old Notes, (ii) to
extend the Exchange Offer, (iii) if any of the conditions set forth below under
"-- Conditions of the Exchange Offer" shall not have been satisfied, to
terminate the Exchange Offer, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent, or (iv) to amend the terms of
the Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by a public
announcement thereof. If the Exchange Offer is amended in a manner determined by
e.spire to constitute a material change, e.spire will promptly disclose such
amendments by means of a prospectus supplement that will be distributed to the
registered holders of the Old Notes, and e.spire will extend the Exchange Offer
for a period of five to ten business days depending upon the significance of the
amendment and the manner of disclosure to the registered holders, if the
Exchange Offer would otherwise expire during such five to ten business day
period.
Without limiting the manner in which e.spire may choose to make public
announcement of any delay, extension, termination or amendment of the Exchange
Offer, e.spire shall not have an obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
PROCEDURES FOR TENDERING
Only a registered holder (which term, for the purposes described herein,
shall include any participant in The Depository Trust Company (also referred to
as a book-entry transfer facility) whose name appears on a security listing as
the owner of the Old Notes) of Old Notes may tender such Old Notes in the
Exchange Offer. To tender in the Exchange Offer a holder must complete, sign and
date the applicable Letter of Transmittal, or a facsimile thereof, have the
signatures thereon guaranteed if required by the applicable Letter of
Transmittal and mail or otherwise deliver such Letter of Transmittal or such
facsimile, together with the Old Notes and any other required documents, to the
Exchange Agent at the appropriate address set forth below under "Exchange Agent"
for receipt prior to the Expiration Date (or comply with the procedure for
book-entry transfer described below).
The tender by a holder will constitute an agreement between such holder and
e.spire in accordance with the terms and subject to the conditions set forth
herein and in the applicable Letter of Transmittal.
26
<PAGE> 31
THE METHOD OF DELIVERY OF THE OLD NOTES AND THE APPLICABLE LETTER OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE
ELECTION AND RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED
THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE IN ALL CASES, SUFFICIENT
TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE
EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO
E.SPIRE. HOLDERS MY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS,
TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTION FOR SUCH HOLDERS.
The Exchange Agent will make a request promptly after the date of this
Prospectus to establish accounts with respect to the Old Notes at the book-entry
transfer facility for the purpose of facilitating the Exchange Offer, and
subject to the establishment thereof, any financial institution that is a
participant in the book-entry transfer facility's system may make book-entry
delivery of Old Notes by causing such book-entry transfer facility to transfer
such Old Notes into the Exchange Agent's account with respect to the Old Notes
in accordance with the book-entry transfer facility's procedures for such
transfer. Although delivery of Old Notes may be effected through book-entry
transfer into the Exchange Agent's accounts at the book-entry transfer facility,
a Letter of Transmittal with any required signature guarantee and all other
required documents must in each case be transmitted to and received or confirmed
by the Exchange Agent at its address set forth on the back cover page of this
Prospectus on or prior to the Expiration Date, or, if the guaranteed delivery
procedures described below are complied with, within the time period provided
under such procedures.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. See "Instruction
to Registered Holder from Beneficial Owner" included with the Letter of
Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Old Notes tendered pursuant thereto are tendered (i) by a registered
holder who has not completed the box entitled "Special Delivery Instructions" on
the appropriate Letter of Transmittal, or (ii) for the account of an Eligible
Institution. In the event that signatures on a Letter of Transmittal or a notice
of withdrawal, as the case may be, are required to be guaranteed, such guarantee
must be by a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc. a commercial bank or trust
company having an office or correspondent in the United States or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act
(each an "Eligible Institution").
If a Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by a properly completed stock power, signed by such registered
holder as such registered holder's name appears on such Old Notes.
If a Letter of Transmittal or Old Notes are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such persons should so
indicate when signing, and evidence satisfactory to e.spire of their authority
to so act must be submitted with such Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Notes will be determined by
e.spire in its sole discretion, which determination will be final and binding.
e.spire reserves the absolute right to reject any and all Old Notes not properly
tendered or any Old Notes e.spire's acceptance of which would, in the opinion of
counsel for e.spire, be unlawful. e.spire also reserves the right to waive any
defects, irregularities or
27
<PAGE> 32
conditions of tender as to particular Old Notes. e.spire's interpretation of the
terms and conditions of the Exchange Offer (including the instructions in the
Letter of Transmittal) will be final and binding on all parties. Unless waived,
any defects or irregularities in connection with tenders of Old Notes must be
cured within such time as e.spire shall determine. Although e.spire intends to
notify holders of defects or irregularities with respect to tenders of Old
Notes, neither e.spire, the Exchange Agent nor any other person shall incur why
liability for failure to give such notification. Tenders of Old Notes will not
be deemed to have been made until such defects or irregularities have been cured
or waived. Any Old Notes received by the Exchange Agent that are not validly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned by the Exchange Agent to the tendering holders, unless
otherwise provided in the applicable Letter of Transmittal, as soon as
practicable following the Expiration Date.
By tendering, each registered holder will represent to e.spire that, among
other things, (i) the New Notes to be acquired by the holder and any beneficial
owner(s) of the Old Notes ("Beneficial Owner(s)") in connection with the
Exchange Offer are being acquired by the holder and any Beneficial Owner(s) in
the ordinary course of business of the holder and any Beneficial Owner(s), (ii)
the holder and each Beneficial Owner are not participating, do not intend to
participate, and have no arrangement or understanding with any person to
participate, in the distribution of the New Notes, (iii) the holder and each
Beneficial Owner acknowledge and agree that any person participating in the
Exchange Offer for the purpose of distributing the New Notes, must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction of the New Notes acquired by such
person and cannot rely on the position of the Staff of the Commission set forth
in the no-action letters that are discussed herein under "-- Resales of the New
Notes", (iv) the holder and each Beneficial Owner understands that a secondary
resale transaction described in clause (iii) above should be covered by an
elective registration statement containing the selling securityholder
information required by Item 507 of Registration S-K of the Commission, and (v)
neither the holder nor any Beneficial Owner(s) is an "affiliate," as defined
under Rule 405 of the Securities Act, of e.spire except as otherwise disclosed
to e.spire in writing.
Each broker-dealer who holds Old Notes acquired for its own account as a
result of market-making activities or other trading activities and who receives
New Notes in the Exchange Offer may be a statutory underwriter and must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. By so acknowledging and by delivering a prospectus, a broker-
dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. e.spire will, for a period of 120 days
after the Expiration Date, make copies of this Prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, or (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date or complete the procedure for book-entry transfer on a timely
basis, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of Guaranteed
Delivery (by facsimile transmission, mail or hand delivery) setting forth the
name and address of the holder, the certificate number(s) of such Old Notes and
the principal amount of Old Notes being tendered, stating that the tender is
28
<PAGE> 33
being made thereby and guaranteeing that, within three business days after the
Expiration Date, the applicable Letter of Transmittal (or facsimile thereof)
together with the certificate(s) representing the Old Notes (or a confirmation
of book-entry transfer of such Old Notes into the Exchange Agent's account at
the book-entry transfer facility) and any other documents required by such
Letter of Transmittal will be deposited by the Eligible Institution with the
Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered Old
Notes in proper form for transfer and all other documents required by such
Letter of Transmittal are received by the Exchange Agent within three business
days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of the Old Notes may be
withdrawn at any time prior to the Expiration Date or, if tendered notes or
shares have not yet been accepted for exchange, after the expiration of forty
business days from the commencement of the Exchange Offer.
To withdraw a tender of Old Notes in the Exchange Offer, a written of
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Old Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to
be withdrawn (including the certificate number or numbers and principal amount
of Notes), and (iii) be signed by the holder in the same manner as the original
signature on the Letter of Transmittal by which such Old Notes were tendered
(including any required signature guarantees). If Old Notes have been tendered
pursuant to the procedure for book-entry transfer, any notice of withdrawal must
specify the name and number of the account at the book-entry transfer facility
to be credited with the withdrawn Old Notes or otherwise comply with the
book-entry facility procedure. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
e.spire in its sole discretion, which determination shall be final and binding
on all parties. Any Old Notes so withdrawn will be deemed not to have been
validly tendered for purposes of the Exchange Offer and no New Notes will be
issued with respect thereto unless the Old Notes so withdrawn are validly
retendered. Properly withdrawn Old Notes may be retendered by following one of
the procedures described above under "-- Procedures for Tendering" at any time
prior to the Expiration Date.
Any Old Notes which have been tendered but which are not accepted for
exchange due to rejection of tender or termination of the Exchange Offer, or
which have been validly withdrawn, will be returned as soon as practicable to
the holder thereof without cost to such holder.
CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or to issue New Notes in exchange for, any
Old Notes and may terminate or amend the Exchange Offer as provided herein
before the acceptance of such Old Notes, if because of any change in law, or
applicable interpretations thereof by the Commission, the Company determines
that it is not permitted to effect the Exchange Offer, and the Company has no
obligation to, and will not knowingly, accept tenders of Old Notes from
"affiliates" of the Company (within the meaning of Rule 405 under the Securities
Act) or from any other holder or holders who are not eligible to participate in
the Exchange Offer under applicable law or interpretations thereof by the
Commission, or if the New Notes to be received by such holder or holders of Old
Notes in the Exchange Offer, upon receipt, will not be tradeable by such holder
without restriction under the
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<PAGE> 34
Securities Act and the Exchange Act and without material restrictions under the
"blue sky" or securities laws of substantially all of the states.
EXCHANGE AGENT
The Chase Manhattan Bank has been appointed as Exchange Agent for the
Exchange Offer. Questions and requests for assistance, requests for additional
copies of this Prospectus or of the Letter of Transmittal and requests for
Notices of Guaranteed Delivery should be directed to the Exchange Agent
addressed as follows:
QUESTIONS AND REQUESTS RELATING TO THE EXCHANGE OFFER:
<TABLE>
<S> <C> <C>
By Mail/Overnight Delivery: Facsimile Transmissions: By Hand:
The Chase Manhattan Bank (212) 638-7380 The Chase Manhattan Bank
450 West 33rd Street (212) 638-7381 Corporate Trust -- Services
15th Floor Confirm by Telephone: Window
New York, New York 10001-2697 Sharon Lewis: (212) 638-0454 55 Water Street -- Room 234
Carlos Esteves: (212) 638-0828 North Building
New York, New York 10041
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by e.spire. The principal
solicitation is being made by mail; however, additional solicitation may be made
by telecopy, telephone or in person by officers and regular employees of e.spire
and its affiliates.
e.spire has not retained any dealer-manager in connection with the Exchange
Offer and will not make any payments to brokers, dealers or others soliciting
acceptance of the Exchange Offer. e.spire, however, will pay the Exchange Agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by e.spire and are estimated in the aggregate to be approximately
$300,000. Such expenses include fees and expenses of the Exchange Agent and
transfer agent and registrar, accounting and legal fees and printing costs,
among others.
e.spire will pay all transfer taxes, if any, applicable to the exchange of
the Old Notes pursuant to the Exchange Offer. If, however, a transfer tax is
imposed for any reason other than the exchange of the Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxpayers or exemption
therefrom is not submitted with the Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes which are not exchanged for New Notes pursuant to the
Exchange Offer will remain restricted securities within the meaning of Rule 144
of the Securities Act. Accordingly, such Old Notes may be resold only (i) to
e.spire, its subsidiaries or the Initial Purchasers, (ii) inside the United
States to a qualified institutional buyer in compliance with Rule 144A under the
Securities Act, (iii) inside the United States to an institutional accredited
investor that, prior to such transfer, furnishes to e.spire a signed letter
containing certain representations and agreements relating to the restrictions
on transfer of this security (the form of which letter can be obtained from
e.spire) and if such transfer is in respect of an aggregate liquidation
preference of securities at the time of transfer of less than $100,000 an
opinion of counsel acceptable to e.spire that such transfer is in compliance
with the Securities Act, (iv) outside the United States in an offshore
transaction in compliance with Rule 904 of Regulation S under the Securities
Act, (v) pursuant to the exemption from registration provided by Rule 144 under
the Securities Act (if available), or (vi) pursuant to an effective
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<PAGE> 35
registration statement under the Securities Act, in each case in accordance with
any applicable securities laws of any state of the United States and subject to
certain requirements of the transfer agent and registrar being met. The
liquidity of the Old Notes could be adversely affected by the Exchange Offer.
Following the consummation of the Exchange Offer, holders of the Old Notes will
have no further registration rights under the Registration Rights Agreement.
ACCOUNTING TREATMENT
The carrying value of the Old Notes is not expected to be materially
different from the fair value of the New Notes at the time of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized. The
expenses of the Exchange Offer associated with the New Notes will be reported as
a non-current asset and amortized over the term of the New Notes.
RESALES OF THE NEW NOTES
With respect to resales of the New Notes, based on interpretations by the
staff of the SEC set forth in no-action letters issued to third parties, e.spire
believes that a holder (other than a person that is an "affiliate" of e.spire
within the meaning of Rule 405 under the Securities Act) who exchanges Old Notes
for New Notes in the ordinary course of business and who is not participating,
does not intend to participate, and has no arrangement or understanding with any
person to participate, in the distribution of the New Notes, will be allowed to
resell the New Notes to the public without further registration under the
Securities Act and without delivering to the purchasers of the New Notes a
prospectus that satisfies the requirements of Section 10 thereof. However, if
any holder acquires New Notes in the Exchange Offer for the purpose of
distributing or participating in a distribution of the New Notes, such holder
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction, unless an
exemption from registration is otherwise available. Each broker-dealer that
receives New Notes for its own account in exchange for Old Notes, where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. See "Plan of
Distribution."
As contemplated by the above no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent to
e.spire in the applicable Letter of Transmittal that (i) the holder is not an
"affiliate" of e.spire within the meaning of Rule 405 of the Securities Act,
(ii) the New Notes are to be acquired by the holder in the ordinary course of
business, (iii) the holder is not engaging and does not intend to engage, in the
distribution of the New Notes and (iv) the holder acknowledges that if such
holder participates in such Exchange Offer for the purpose of distributing the
New Notes such holder must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale of the
New Notes; however, holders of the New Notes will have no registration rights
under the Registration Rights Agreement.
31
<PAGE> 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis contains certain statements of a
forward-looking nature relating to future events or the future financial
performance of the Company. Holders of Old Notes are cautioned that such
statements are only predictions and that actual events or results may differ
materially. In evaluating such statements, Holders of Old Notes should
specifically consider the various factors identified in this Prospectus,
including the matters set forth under the caption "Risk Factors," which could
cause actual results to differ materially from those indicated by such forward-
looking statements. The following discussion should be read in conjunction with
the consolidated financial statements and the related notes thereto included
elsewhere or incorporated by reference in this Prospectus.
e.spire Communications, Inc., formed in 1993, seeks to be a leading
facilities-based ICP to businesses primarily in major markets in the southern
half of the United States. By the end of 1997, the Company had become one of the
first CLECs to combine the provision of dedicated, local and long distance voice
services with frame relay, ATM and Internet services. Having established this
suite of telecommunications services which emphasizes data capabilities in
addition to traditional CLEC offerings, the Company has evolved into an ICP. The
Company seeks to provide customers with superior service and competitive prices
while offering a single source for integrated communications services designed
to meet its business customers' needs. The Company's facilities-based network
infrastructure is designed to provide services to customers on an end-to-end
basis, and, as of June 30, 1998, was comprised of 1,433 route miles of fiber in
its 32 local networks in 19 states, 44 Newbridge ATM switches, 17 Lucent 5ESS
switches and approximately 22,000 backbone longhaul miles in its coast-to-coast
broadband data network.
With the passage of the FTA, the Company has enhanced the scope of its
product offerings from dedicated services to a full range of switched voice,
data and Internet services in order to meet the needs of business end-users, and
is expanding its sales, marketing, customer care and OSS capabilities. The
Company introduced local switched voice services, including local exchange
services in late 1996 and long distance services in late 1997. By June 30, 1998,
e.spire had sold 96,405 customer access lines, of which 85,633 were installed,
representing a significant increase over the 9,177 access lines sold as of June
30, 1997.
The development of the Company's business and the construction, acquisition
and expansion of its networks require significant capital expenditures, a
substantial portion of which are incurred before realization of revenues. These
expenditures, together with the associated early operating expenses, result in
negative cash flow until an adequate customer base is established. However, as
the Company's customer base grows, the Company expects that incremental revenues
can be generated with decreasing incremental operating expenses, which may
provide positive contributions to cash flow. The Company has made specific
strategic decisions to build high capacity networks with broad market coverage,
which initially increases its level of capital expenditures and operating
losses. However, the Company believes that over the long term this strategy will
enhance the Company's financial performance by increasing the traffic flow over
its network. The Company also has entered into leased dark fiber and fiber
capacity arrangements, which allow the Company, by installing one or more
switches and related electronics, to enter a market prior to completion of its
own fiber optic network.
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<PAGE> 37
The following table presents key operating statistics for the Company for
the reporting periods.
<TABLE>
<CAPTION>
ACCESS
OPERATIONAL ROUTE FIBER LINES VOICE
AS OF DATE EMPLOYEES NETWORKS MILES MILES BLDGS VGES SOLD SWITCHES
---------- --------- ----------- ----- ----- ----- ---- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
June 30, 1998............. 979 32 1,433 123,982 2,393 1,233,988 96,405 17
March 31, 1998............ 834 32 1,314 112,086 1,912 1,059,601 71,581 17
December 31, 1997......... 803 32 1,061 92,528 1,604 1,052,698 43,581 16
September 30, 1997........ 699 32 977 85,976 1,239 989,285 28,394 9
June 30, 1997............. 559 31 957 82,693 1,083 886,375 9,177 8
March 31, 1997............ 502 28 908 75,867 858 554,883 360 5
December 31, 1996......... 322 21 697 48,792 595 384,134 0 1
September 30, 1996........ 272 19 543 32,774 532 267,894 0 0
June 30, 1996............. 199 15 386 28,476 216 137,431 0 0
March 31, 1996............ 142 10 200 9,466 133 125,208 0 0
December 31, 1995......... 111 9 136 5,957 100 82,055 0 0
September 30, 1995........ 100 5 92 4,373 79 50,303 0 0
June 30, 1995............. 74 5 43 1,754 36 31,920 0 0
</TABLE>
VGE represents voice grade equivalent circuits, a measure of service
equivalent to one telephone line actually billed to a customer. Access lines
represent business lines providing switched voice services.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
REVENUES
The Company reported an increase in revenues of $43.4 million, or 219%, to
$63.2 million for the six months ended June 30, 1998 compared with the revenues
of $19.8 million for the same period of 1997. The increase in revenues was
primarily attributable to the Company's greater presence and expansion in its 32
local fiber optic networks which is up from 31 markets at June 30, 1997. The
increase is also attributable to the increase in route miles, buildings
connected and voice and data switches deployed as well as revenues from ACSI
Network Technologies as described below. As of June 30, 1998, the Company had
installed 17 Lucent 5ESS switches, up from 8 Lucent 5ESS switches as of June 30,
1997. In addition, the Company has deployed 44 Newbridge ATM switches over its
coast-to-coast data network as of June 30, 1998. Also, access lines sold have
increased to 96,405 at June 30, 1998 from 9,177 at June 30, 1997.
For the six months ended June 30, 1998 and 1997, approximately 39% and 47%
respectively of the Company's revenues were derived from network services,
approximately 32% and 44%, respectively, were derived from data and Internet
services and approximately 30% and 9%, respectively, from switched local and
other services. The increase in switched revenue reflects the Company's
expansion of its facilities-based infrastructure and the Company's continued
sales and marketing efforts. Included in the network services category of
revenues are high capacity dedicated and special access services, and revenues
from ACSI Network Technologies for construction contracts and long term leases
of high capacity systems. For the six month period ended June 30, 1998,
approximately $8.1 million is included from these contracts, of which $4.6
million was derived from a contract with a single interexchange carrier.
OPERATING EXPENSES
Network Development and Operations
Network development and operating expenses for the six months ended June
30, 1998 increased $24.0 million, or 123%, to $43.6 million from $19.6 million
for the same period of 1997. Included in network development and operations
expenses are costs of telecommunications
33
<PAGE> 38
services paid to IXCs, ILECs and others for leased telecommunications
facilities, access charges and services. For the six months ended June 30, 1998,
these costs increased to approximately $38.0 million from $14.0 million for the
same period of 1997. Also, included in network, development and operations
expenses are network related personnel costs such as employee salaries and
benefits. For the six months ended June 30, 1998 and 1997, such costs were
approximately $5.6 million.
The increase in network development and operations costs was primarily due
to the Company's expansion of its facilities-based infrastructure which includes
the rapid deployment of operational networks and Lucent 5ESS switches as well as
the increase in access lines. Also, the increase was due to costs associated
with the Company's construction line of business which were approximately $1.8
million for the six months ended June 30, 1998.
Selling, General and Administrative
For the six months ended June 30, 1998, selling, general and administrative
expenses increased $13.2 million, or 47%, to $41.4 million from $28.2 million
for the same period of 1997. Included in selling, general and administrative
expenses are personnel costs such as employee salaries, benefits and
commissions. For the six months ended June 30, 1998 and 1997, these costs
increased to $15.0 million and $10.5 million, respectively. Also, included in
selling, general and administrative expenses are operating costs such as rent,
advertising and general administrative and office expenses. For the six months
ended June 30, 1998 and 1997, these costs increased to $26.4 million from $17.7
million.
The increase in selling, general and administrative expense is a result of
the Company's efforts to significantly expand its network sales, support,
marketing and administrative staff and facilities. A significant portion of this
increase is due to an increase in the sales and marketing costs which have
increased due to an expanded field sales force aimed at supporting the Company's
strategy of building market share through focused customer sales and support.
Non-Cash Compensation
Non-cash stock compensation expense increased $2.6 million, or 316%, to
$3.4 million from $0.8 million for the same period of 1997. Included in non-cash
compensation for 1998 are accruals for the issuance of common stock in
connection with 1998 performance bonuses. In addition, the stock option costs
associated with the settlement of a lawsuit with a former executive is included.
Depreciation and Amortization
Depreciation and amortization expenses for the six months ended June 30,
1998, increased by $7.9 million, or 84%, to $17.4 million from $9.5 million for
the same period of 1997. This increase was due to an increase in capital assets
to $397.5 million at June 30, 1998 compared with capital assets of $219.9 at
June 30, 1997 as well as an increased amount of network assets placed in
service.
INTEREST AND OTHER INCOME
Interest and other income for the six months ended June 30, 1998 increased
$8.9 million, or 827%, to $10.0 million from $1.1 million for the same period of
1997. The increase in interest and other income reflects the increase in
earnings from the proceeds received from the issuance of the 2007 Notes, the
14 3/4% Preferred Stock, the 12 3/4% Preferred Stock and the 1998 Common Stock
Offering which have been invested.
INTEREST AND OTHER EXPENSE
For the six months ended June 30, 1998, interest and other expense
increased $19.5 million, or 157%, to $31.9 million from $12.4 million for the
same period of 1997. The increase reflected the
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<PAGE> 39
accrual of interest related to the 2005 Notes, the 2006 Notes and the 2007 Notes
and the Company's increased borrowings under the credit facility with AT&T
Capital Corporation.
EBITDA
EBITDA increased $6.2 million, or 22%, to ($21.8) million, for the six
months ended June 30, 1998 from ($28.1) million for the same period of 1997. The
increase was due to the changes in revenues, network development and operations
and selling, general and administrative expense discussed above.
NET LOSS
As a result of the aforementioned increases in revenues, operating
expenses, depreciation and amortization, and interest income and expense, net
loss for the six months ended June 30, 1998 increased $14.9 million, or 30%, to
$64.5 million from $49.7 million for the six months ended June 30, 1997.
Further, for the six months ended June 30, 1998, net loss to common stockholders
increased $32.4 million, or 64% to $83.2 million from $50.8 million for the same
period of 1997. This increase is primarily attributable to the issuance of
14 1/4% Preferred Stock and the 12 1/4% Preferred Stock.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
REVENUES
Revenues for the year ended December 31, 1997, increased $49.6 million, or
527%, to $59.0 million from $9.4 million for the year ended December 31, 1996.
This increase was primarily attributable to the Company's rapid expansion of its
local fiber optic networks in 32 markets by the end of 1997 (up from 21 at the
end of 1996) and the increase in route miles, buildings connected and voice and
data switches deployed. In late 1996, the Company introduced its coast-to-coast
data network, deploying 39 Newbridge ATM switches by mid-1997. In addition, the
Company introduced local switched service on a resale basis in its markets, and
also provided facilities-based services in 16 of those markets by installing
Lucent 5ESS switches. Revenues also increased as a result of the Cybergate
Acquisition. For the year ended December 31, 1997, approximately 42% of the
Company's 1997 revenues were derived from special access and dedicated services,
approximately 38% from data and Internet services and approximately 20% from
switched local and other services. By contrast, 1996 revenues were derived
primarily from dedicated and special access services.
OPERATING EXPENSES
Network Development and Operations
Network development and operations expenses for the year ended December 31,
1997, increased $41.9 million, or 379%, to $52.9 million from $11.0 million for
the year ended December 31, 1996. Of these amounts, approximately $44.4 million
and $4.1 million, respectively, represented the cost of providing
telecommunications services paid to IXCs, ILECs and others for leased
telecommunications facilities and services. In addition, approximately $8.5
million and $6.9 million, respectively, represented network-related personnel
costs. The increase in costs was due primarily to the Company's rapid deployment
of operational networks, Lucent 5ESS switches and access lines.
Selling, General and Administrative
For the year ended December 31, 1997, selling, general and administrative
expenses increased $29.2 million, or 95%, to $59.9 million from $30.7 million
for the year ended December 31, 1996. Related personnel costs increased to $16.5
million for the year ended December 31, 1997 from $8.3
35
<PAGE> 40
million for the year ended December 31, 1996. Other sales and administrative
costs increased to $43.4 million for the year ended December 31, 1997 from $22.4
million for the year ended December 31, 1996. This increase reflected costs
associated with the Company's efforts to significantly expand its network
support, sales, marketing and administrative staff and facilities.
Non-Cash Compensation
Non-cash stock compensation expense increased $2.2 million, or 105%, to
$4.3 million for the year ended December 31, 1997 from $2.1 million for the year
ended December 31, 1996. Included in non-cash compensation for 1997 was
approximately $2.9 million accrued for the issuance of Common Stock to be issued
in connection with 1997 performance bonuses.
Depreciation and Amortization
Depreciation and amortization expenses increased $16.9 million, or 234%, to
$24.1 million for the year ended December 31, 1997 from $7.2 million for the
year ended December 31, 1996. This increase was due to an increase in capital
assets to $282.2 million at December 31, 1997 from $144.4 million at December
31, 1996.
INTEREST AND OTHER INCOME
Interest and other income increased $2.3 million, or 36%, to $8.7 million
for the year ended December 31, 1997 from $6.4 million for the year ended
December 31, 1996. The increase in interest and other income reflects the
increase in earnings from the proceeds received from the 2007 Notes, the 14 3/4%
Preferred Stock and the 12 3/4% Preferred Stock which have been invested.
INTEREST AND OTHER EXPENSE
Interest and other expense increased $23.6 million, or 131%, to $41.6
million for the year ended December 31, 1997 from $18.0 million for the year
ended December 31, 1996. The increase reflected the accrual of interest related
to the 2006 Notes and 2007 Notes and the Company's increased borrowings under
the Old AT&T Credit Facility.
EBITDA
EBITDA decreased $21.8 million, or 69%, to ($53.7) million for the year
ended December 31, 1997 from ($31.9) million for the year ended December 31,
1996. This decrease was due to the changes in revenues, network development and
operations and selling, general and administrative expenses discussed above.
NET LOSS
As a result of the aforementioned increases in revenues, operating
expenses, depreciation and amortization, and interest income and expense, net
loss increased $62.2 million, or 118%, to $115.0 million for the year ended
December 31, 1997, from $52.8 million for the year ended December 31, 1996.
Further, net loss to common stockholders increased to $126.6 million from $56.8
million for the same periods, due to the increase in preferred stock dividends
and accretion during 1997. This increase is primarily attributable to the
issuance of 14 3/4% Preferred Stock and the 12 3/4% Preferred Stock.
SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED TO SIX MONTHS ENDED
DECEMBER 31, 1995 (UNAUDITED)
REVENUES
During the six months ended December 31, 1996, the Company's revenues
increased $6.0 million, or 600%, to $7.0 million from $1.0 million during the
six months ended December 31, 1995. Four
36
<PAGE> 41
of the largest IXCs accounted for approximately $2.8 million, or 40%, of
revenues for the six months ended December 31, 1996.
OPERATING EXPENSES
Network Development and Operations
Network development and operating expenses for the six months ended
December 31, 1996 increased $5.8 million, or 200%, to $8.7 million from $2.9
million for the six months ended December 31, 1995, reflecting significant
increases in personnel, network development and non-payroll operating expenses.
Related personnel costs increased to $3.9 million in the fiscal period ended
December 31, 1996, from approximately $1.5 million in the six months ended
December 31, 1995. Other operating expenses related to the development of
prospective new markets, which include expenses such as contract labor and legal
expenses and certain franchise fees, travel expenses, rent, utilities, charges
and taxes increased to $4.8 million in the six months ended December 31, 1996
from approximately $1.4 million in the six months ended December 31, 1995.
Selling, General and Administrative
In the six months ended December 31, 1996, selling, general and
administrative expenses increased $17.2 million, or 555%, to $20.3 million from
$3.1 million in the six months ended December 31, 1995. Related personnel costs
increased to $6.6 million in the six months ended December 31, 1996 from $1.5
million in the six months ended December 31, 1995, and corresponding operating
costs increased to $13.7 million in the six months ended December 31, 1996 from
$1.6 million in the six months ended December 31, 1995. This increase reflected
costs associated with the Company's efforts in the rapid expansion of its
services offered, network deployment and geographic coverage as well as
significantly increasing its national and local city sales, marketing and
administrative staffs and increased legal and other consulting expenses
associated with its programs for obtaining regulatory approvals and
certifications and providing quality network services.
Non-Cash Stock Compensation
Non-cash stock compensation expense decreased $0.7 million, or 58%, to $0.5
million for the six months ended December 31, 1996 from $1.2 million for the six
months ended December 31, 1995. This expense reflects the Company's accrual of
non-cash costs for options granted to key executives, employees and others
arising from the difference between the exercise price and the valuation prices
used by the Company to record such costs and from the vesting of those options.
Certain of these options had put rights and other factors that required variable
plan accounting in both 1996 and 1995 but, on or about June 30, 1995, the
Company renegotiated contracts with certain of its officers, establishing a
limit of $2.5 million on the Company's "put right" obligations with respect to
those contracts. Between July 1, 1995 and June 30, 1996, the limit was further
reduced to $2.0 million.
Depreciation and Amortization
Depreciation and amortization expenses increased $4.1 million, or 513%, to
$4.9 million in the six months ended December 31, 1996 from $0.8 million in the
six months ended December 31, 1995. The Company's capital assets increased to
$144.4 million as of December 31, 1996, from $32.6 million in capital assets as
of December 31, 1995.
INTEREST AND OTHER INCOME
Interest and other income increased $2.0 million, or 250%, to $2.8 million
for the six months ended December 31, 1996 from $0.8 million in the six months
ended December 31, 1995. The increase in interest and other income reflects the
significant increase in available funds from the Company's sale of its 9% Series
B Preferred Stock in June and November 1995, the 2005 Notes in November 1995 and
the 2006 Notes in March 1996.
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<PAGE> 42
INTEREST AND OTHER EXPENSES
Interest and other expense increased $7.6 million, or 271%, to $10.4
million in the six months ended December 31, 1996 from $2.8 million in the six
months ended December 31, 1995. The increase reflected the accrual of interest
related to the 2005 Notes and 2006 Notes and the Company's increased borrowings
under the Old AT&T Credit Facility.
MINORITY INTEREST
AT&T Credit Corporation's minority interest in certain of the Company's
operating subsidiaries reduced operating losses by approximately $0.2 million
for each of the six months ended December 31, 1996, and 1995.
EBITDA
EBITDA decreased $16.9 million, or 345%, to ($21.8) million for the six
months ended December 31, 1996 from ($4.9) million for the six months ended
December 31, 1995. This decrease was due to the changes in revenues, network
development, operations and selling, general and administrative expenses
discussed above.
NET LOSS
As a result of the aforementioned increases in revenues, operating
expenses, depreciation and amortization, and interest income and expense, net
loss increased $26.0 million, or 292%, to $34.9 million for the fiscal period
ended December 31, 1996, from $8.9 million for the six months ended December 31,
1995. Further, net loss to common stockholders increased to $36.9 million from
$10.7 million for the same periods, due primarily to the increase in net loss,
accompanied by a slight increase in preferred stock dividends between periods.
FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1995
REVENUES
During the fiscal year ended June 30, 1996 ("fiscal 1996"), the revenues
increased $3.0 million, or 750%, to $3.4 million from $0.4 million during the
fiscal year ended June 30, 1995 ("fiscal 1995"). Four of the largest IXCs
accounted for approximately $2.1 million, or 60%, of revenues for fiscal 1996 as
compared to fiscal 1995, when three of the largest IXCs accounted for
approximately $0.3 million, or 85% of revenues for fiscal 1995, reflecting the
Company's increased sales to end-users during fiscal 1996.
OPERATING EXPENSES
Network Development and Operations
Network development and operations expenses for fiscal 1996 increased $2.0
million to $5.3 million from $3.3 million in fiscal 1995, reflecting significant
increases in personnel, network development and non-payroll operating expenses.
These increased costs were associated with developing and establishing
centralized engineering, circuit provisioning and network management functions,
constructing and initially operating the Company's competitive access networks
and performing market feasibility, engineering, rights-of-way and regulatory
evaluations in additional target cities. Related personnel costs increased to
$4.5 million in fiscal 1996 from approximately $1.3 million in fiscal 1995.
Other operating expenses related to the development of prospective new markets,
which include expenses such as contract labor and legal expenses and certain
franchise fees, travel expenses, rent, utilities, charges and taxes, decreased
to $0.8 million in fiscal 1996 from approximately $1.9 million in fiscal 1995.
Selling, General and Administrative
In fiscal 1996, selling, general and administrative expenses increased $8.9
million to $13.5 million from $4.6 million in fiscal 1995. Related personnel
costs increased to $3.2 million in fiscal 1996 from $2.0 million in fiscal 1995,
and corresponding operating costs increased to $10.2 million in
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fiscal 1996 from $2.2 million in fiscal 1995. This increase reflected costs
associated with the Company's efforts in expanding its national and local city
sales, marketing and administrative staffs, as well as increased legal and other
consulting expenses associated with its aggressive programs for obtaining
regulatory approvals and certifications and providing quality network services.
Non-Cash Compensation
Non-cash stock compensation expense decreased $3.7 million to $2.7 million
for fiscal 1996 from $6.4 million for fiscal 1995. This expense reflects the
Company's accrual of non-cash costs for options and warrants granted to key
executives, employees and others arising from the difference between the
exercise price and the valuation prices used by the Company to record such costs
and from the vesting of those options and warrants. Certain of these options had
put rights and other factors that required variable plan accounting in fiscal
1994 and fiscal 1995 but, at the end of fiscal 1995, the Company renegotiated
contracts with certain of its officers, establishing a limit of $2.5 million on
the Company's put right obligations with respect to those contracts. During
fiscal 1996, the limit was further reduced to $2.0 million.
Depreciation and Amortization
Depreciation and amortization expenses increased $2.6 million to $3.1
million in fiscal 1996 from $0.5 million in fiscal 1995. During fiscal 1996 the
Company increased its capital assets to approximately $80.2 million,
representing an increase from $15.9 million at the end of fiscal 1995.
INTEREST AND OTHER INCOME
Interest and other income increased $4.2 million to $4.4 million for fiscal
1996 from $0.2 million in fiscal 1995. The increase reflected the significant
increase in available funds from the Company's sale of its 9% Series B Preferred
Stock in June and November 1995 and the 2005 Notes in November 1995.
INTEREST AND OTHER EXPENSES
Interest and other expenses increased $10.3 million to $10.5 million in
fiscal 1996 from $0.2 million in fiscal 1995. The increase reflected the accrual
of interest related to the 2005 Notes and the Company's increased borrowings
under the Old AT&T Credit Facility.
DEBT CONVERSION EXPENSE AND MINORITY INTEREST
Debt conversion expense in fiscal 1995 totaled $0.4 million, reflecting
expenses incurred in connection with the conversion of certain of the Company's
debt to equity in September 1994. AT&T Credit Corporation's minority interest in
the Company's operating subsidiaries for which it provided funding reduced
operating losses by approximately $0.4 million for fiscal 1996, and by $48,055
for fiscal 1995.
EBITDA
EBITDA decreased $7.5 million to ($14.9) million at June 30, 1996 from
($7.4) million at June 30, 1995. This change was due to the changes in revenues,
network development, operations and selling, general and administrative expenses
discussed above.
NET LOSS
As a result of the aforementioned increases in revenues, operating
expenses, depreciation and amortization, and interest income and expense, net
loss increased $12.1 million to $26.8 million for the fiscal year ended June 30,
1996, from $14.7 million for the fiscal year ended June 30, 1995. Further, net
loss to common stockholders increased to $30.7 million from ($15.7) million for
the same periods, due primarily to the increase in net loss, accompanied by a
slight increase in preferred stock dividends between periods.
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CAPITAL EXPENDITURES; OPERATING CASH FLOW
As of June 30, 1998, the Company was operating 32 digital fiber optic
networks. The costs associated with the initial construction and operation of a
network may vary, primarily due to market variations in geographic and
demographic characteristics, and the types of construction technologies which
can be used to deploy the network. In addition, the Company has implemented
aggressive network expansion and optimization programs. This is evidenced by an
increase in fiber optic cable miles to 92,528 fiber miles at December 31, 1997
and 123,982 fiber miles at June 30, 1998, from 48,792 fiber miles at December
31, 1996 and 82,693 fiber miles at June 30, 1997. The Company also significantly
increased the number of buildings connected to its network to 1,604 at December
31, 1997 and 2,393 at June 30, 1998, from 595 at December 31, 1996 and 1,083 at
June 30, 1997.
As the Company develops, introduces and expands its high-speed data,
enhanced voice messaging and local switched services in each of its markets,
additional capital expenditures and net operating costs will be incurred. The
amount of these costs will vary, based on the number of customers served and the
actual services provided to the customers.
Although as of June 30, 1998, the Company was generating revenues from all
of its fiber optic networks, on a consolidated basis, it is still incurring
negative cash flows due, in part, to the funding requirements for continuing
network construction or development and to the roll-out of new data and switched
voice services. The Company expects it will continue to incur negative cash flow
for at least two more years. There can be no assurance that the Company's
networks or any of its other services will ever provide a revenue base adequate
to sustain profitability or generate positive cash flow. The Company estimates
that in 1998, capital required for implementation of its integrated networks and
its other services and to fund negative cash flow will be approximately $200
million. The Company anticipates that current cash resources are sufficient to
fund its continuing negative cash flow and required capital expenditures in the
near future.
LIQUIDITY AND CAPITAL RESOURCES
The Company's further development and enhancement of new services as well
as the continued development, construction, expansion, operation and potential
acquisition of networks, will require substantial capital expenditures. Prior to
July 1, 2003, the Company's interest expense on the Notes will be comprised
solely of the accretion of original issue discount. Thereafter, the Notes will
require annual cash interest payments of $39.8 million. The funding of these
expenditures is dependent upon the Company's ability to raise substantial
financing. As of June 30, 1998, the Company had raised approximately $759
million from debt and equity financings (approximately $977 million after giving
pro forma effect to the issuance of the Notes). The Company estimates that for
1998, capital required for expansion of its infrastructure and services and to
fund negative cash flow will be approximately $200 million. At June 30, 1998,
the Company had approximately $323.8 million of cash and cash equivalents
available for such purposes ($542.1 million after giving pro forma effect to the
Private Placement. The Company continues to consider potential acquisitions or
other arrangements that may fit the Company's strategic plan. Any such
acquisitions or arrangements that the Company might consider are likely to
require additional equity or debt financing, which the Company will seek to
obtain as required and may also require that the Company obtain the consent of
its debt holders.
Management anticipates that the Company's current cash resources are
sufficient to fund the Company's continuing negative cash flow and required
capital expenditures in the near future. To meet its additional remaining
capital requirements and to successfully implement its strategy, the Company
will be required to sell additional equity securities, increase its existing
credit facility, acquire additional credit facilities or sell additional debt
securities, certain of which would require the consent of the Company's debt
holders. Accordingly, there can be no assurance that the Company will be able to
obtain the additional financing necessary to satisfy its cash requirements or to
implement its strategy successfully, in which event the Company will be unable
to fund its ongoing
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operations, which would have a material adverse effect on its business, results
of operations and financial condition.
On November 14, 1995, the Company completed a private offering of the 2005
Notes and warrants from which the Company received approximately $96.1 million
in net proceeds. The 2005 Notes will accrue to an aggregate principal amount of
$190.0 million by November 1, 2000, after which cash interest will accrue and be
payable on a semi-annual basis.
The Company also received net proceeds of approximately $4.7 million from
the private sale of an additional 50,000 shares of its preferred stock to a
principal stockholder and the exercise by that stockholder of warrants to
purchase 214,286 shares of Common Stock acquired in the Company's June 1995
preferred stock private placement.
On March 21, 1996, the Company completed a private offering of the 2006
Notes from which the Company received net proceeds of approximately $61.8
million. The 2006 Notes will accrue to an aggregate principal amount of $120.0
million by April 1, 2001, after which cash interest will accrue and be payable
on a semi-annual basis.
On April 15, 1997, the Company completed the offering of 8,000,000 shares
of Common Stock. In connection therewith, the Company completed the sale of an
additional 660,000 shares on May 14, 1997 upon exercise of the underwriters'
over-allotment option and received aggregate net proceeds of approximately $40.0
million from the sale of these 8,660,000 shares.
On July 10, 1997, the Company completed the Unit Offering from which the
Company received net proceeds of approximately $70 million. Dividends on the
14 3/4% Preferred Stock accrue from the date of issuance, are cumulative and are
payable quarterly in arrears, at a rate per annum of 14 3/4% of the liquidation
preference per share. Dividends on the 14 3/4% Preferred Stock will be paid, at
the Company's option, either in cash or by the issuance of additional shares of
14 3/4% Preferred Stock; provided, however, that after June 30, 2002, to the
extent and for so long as the Company is not precluded from paying cash
dividends on the 14 3/4% Preferred Stock by the terms of any then outstanding
indebtedness or any other agreement or instrument to which the Company is then
subject, the Company shall pay dividends on the 14 3/4% Preferred Stock in cash.
On July 23, 1997, the Company completed the sale of the 2007 Notes. Of the
total net proceeds of $204.3 million, the Company placed $70.0 million
representing funds sufficient to pay the first five interest payments on the
2007 Notes into an escrow account for the benefit of the holders thereof.
Payments of interest on the 2007 Notes are payable semi-annually, and began in
January 1998.
In October 1997, the Company issued the 12 3/4% Preferred Stock from which
the Company received net proceeds of approximately $146.0 million. Dividends on
the 12 3/4% Preferred Stock accrue from the date of issuance, are cumulative and
are payable quarterly in arrears, at a rate per annum of 12 3/4% of the
liquidation preference per share. Dividends on the 12 3/4% Preferred Stock will
be paid, at the Company's option, either in cash or by the issuance of
additional shares of 12 3/4% Preferred Stock; provided, however, that after
October 15, 2002, to the extent and for so long as the Company is not precluded
from paying cash dividends on the 12 3/4% Preferred Stock by the terms of any
agreement or instrument governing any of its then outstanding indebtedness, the
Company shall pay dividends on the 12 3/4% Preferred Stock in cash.
The Company intends to use the remaining proceeds from the sale of the
Existing Notes, the 14 3/4% Preferred Stock and the 12 3/4% Preferred Stock
towards expansion and construction of local fiber optic networks, the further
expansion and introduction of services and to fund negative operating cash flow.
On December 30, 1997, the Company entered into the New AT&T Credit Facility
for the development and construction of fiber optic local networks. The Company
has financing commitments for $35.0 million under the New AT&T Credit Facility,
of which $35.0 million had been borrowed as of December 31, 1997. Payments of
interest on borrowings under the New AT&T Credit Facility are payable quarterly,
commencing in December 1998. It is expected that borrowings under
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the New AT&T Credit Facility will be repaid in connection with the closing of
the GSCP Credit Facilities. See "Description of Certain Indebtedness".
On February 26, 1998, the Company paid approximately $10.3 million to
effect the Amendments to the Existing Indentures in order to improve the ability
of the Company and its subsidiaries to incur additional indebtedness or make
certain investments or acquisitions. See "Description of Certain Indebtedness".
On March 23, 1998, the Company restructured certain leases resulting in a
change from operating to capital lease treatment. This transaction resulted in
capitalizing leases totaling $27.6 million.
On April 3, 1998, the Company completed the offering of 8,100,000 shares of
Common Stock at a price of $18.50 per share (the "1998 Common Stock Offering").
7,502,418 of such shares were issued and sold by the Company and 597,582 of such
shares were sold by certain stockholders of the Company. Total net proceeds to
the Company from the 1998 Common Stock Offering and the exercise of certain
options and warrants in connection therewith were approximately $134.2 million.
On July 8, 1998, the Company and GSCP signed a commitment letter in respect
of the GSCP Credit Facilities. It is expected that the GSCP Credit Facilities
will provide for up to $300.0 million in term loan and revolving credit
borrowings. See "Description of Certain Indebtedness -- GSCP Credit Facilities".
EFFECTS OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (FAS No. 130), "Reporting Comprehensive
Income." FAS No. 130 established standards for the reporting and display of
comprehensive income and its components in the financial statements. The Company
adopted the provisions of this Statement in the quarter ended March 31, 1998.
The adoption of this statement had no impact in the manner of the presentation
of the Company's financial statements as currently or previously reported.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (FAS No. 131), "Disclosure about Segments
of an Enterprise and Related Information." FAS No. 131 requires the Company to
present certain information about operating segments and related information,
including geographic and major customer data, in its annual financial statements
and in condensed financial statements for interim periods. The Company is
required to adopt the provisions of this Statement for fiscal years beginning
after December 15, 1997. Earlier application is permitted; however, upon
adoption the Company will be required to restate previously reported annual
segment and related information in accordance with the provisions of FAS No.
131. The Company has not completed its analysis of the impact on the financial
statements that will be caused by the adoption of this Statement.
On March 4, 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 ("SOP"), Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. This SOP provides guidance on
capitalizing certain costs related to computer software developed or obtained
for internal use. The SOP is effective for financial statements for fiscal years
beginning after December 15, 1998. The Company has not completed its analysis of
the impact on the financial statements that will be caused by the adoption of
this statement.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-up
Activities ("SOP 98-5"). This statement requires that the costs of start-up
activities, including organization costs, be expensed as incurred and is
effective for fiscal years beginning after December 31, 1998. The Company has
not completed its analysis of the impact on the financial statements that will
be caused by the adoption of this statement.
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SUBSEQUENT EVENT
On July 7, 1998, the Company signed a commitment letter with GSCP in
respect of the GSCP Credit Facilities. See "Description of Certain
Indebtedness -- GSCP Credit Facilities".
YEAR 2000 PROGRAM
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the Year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
Based upon a comprehensive systems assessment of its Year 2000 readiness,
which included hardware and software for the Company's telecommunications
network and information systems, the Company has determined that 71% of its
hardware and software is Year 2000 compliant. Accordingly, the Company believes
that it will not be required to modify or replace significant portions of its
software and hardware so that its computer systems will function properly with
respect to dates in the Year 2000 and thereafter. Additionally, because the
majority of the hardware and software in use by the Company is of the commercial
off-the-shelf variety and requires minimal customization, the Company expects
its efforts to bring 100% of the software and hardware into compliance to be
minimal. The Company has completed its overall planning phase, and currently is
beginning the execution phase, which includes verification and updating of its
initial assessment, and the development and execution of specific initiatives to
upgrade the remaining non-compliant hardware and software to Year 2000
compliance not later than October 31, 1999.
The Company is upgrading hardware and software in the normal course of
maintenance to make the installed base include only Year 2000 compliant
products. In addition to the Year 2000 effort, there is a major strategic
initiative underway which will replace much of the information technology of the
Company with new products that will be compliant upon implementation. The
Company has engaged an Information Technology Association of America Year 2000
certified consulting firm to help execute its Year 2000 readiness program in
conjunction with e.spire staff. The Company also has engaged a second
independent consulting firm to perform comprehensive testing of its systems.
Based upon the results of the comprehensive system assessment, the Company
believes that its risks of Year 2000 non-compliance (i.e., its "most reasonably
likely worst case scenario") are minimal and limited to replacement of a single
software product used to provision new customers, the remediation of the general
ledger of its subsidiary CyberGate, and the replacement of a small number of
personal computers. If the replacement software is not in place before the year
2000, the most likely worst case scenario is that e.spire would not be able to
add new customers to its network using an automated system, although it would be
able to add new customers manually for a limited time. If the remediation of
Cybergate's general ledger is not completed, it may have to resort to manual
reporting processes for that subsidiary.
The Company has initiated formal communications with all of its significant
hardware and software suppliers and plans to communicate with large customers
and suppliers to determine the extent to which the Company's interface systems
are vulnerable to those third parties' failure to remediate their own Year 2000
issues. The Company's total Year 2000 project cost and estimates to complete
include the estimated costs and time associated with the impact of third party
Year 2000 issues based on presently available information. However there can be
no guarantee that the systems of other companies on which the Company's systems
rely will be timely converted and would not have an adverse effect on the
Company's systems. The Company is working with its vendors to remove any
non-compliant installed hardware and software by October 31, 1999. If third
party vendors do not remediate prior to the Year 2000, the most reasonably
likely worst case
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scenario is that there may be problems associated with operating systems,
billing information, trouble reports and service orders. Contingency plans will
be developed as necessary if a vendor cannot provide the necessary Year 2000
compliant product on a timely basis for the Company to meet that date.
The Company anticipates completing the Year 2000 project not later than
October 31, 1999, which is prior to any anticipated impact on its operating
systems. Historical costs include $200,000 for the initial Year 2000 Assessment
Report and inventory database. The total cost of the Year 2000 project is
estimated to be $5-6 million and will be expensed as incurred and funded with
existing cash resources. The costs of the project and the date on which the
Company believes it will complete the Year 2000 modifications are based on
management's best estimates, which were derived from numerous assumptions of
future events, including the continued availability of certain resources, third
party modification plans and other factors. However, there can be no guarantee
that these estimates will be achieved and actual results could differ materially
from those anticipated.
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BUSINESS
THE COMPANY
e.spire Communications, Inc., formed in 1993, seeks to be a leading
facilities-based ICP to businesses in markets primarily in the southern half of
the United States. By the end of 1997, the Company had become one of the first
CLECs to combine the provision of dedicated, local and long distance voice
services with frame relay, ATM and Internet services. Having established this
suite of telecommunications services which emphasizes data capabilities in
addition to traditional CLEC offerings, the Company has evolved into an ICP.
e.spire seeks to provide customers with superior service and competitive prices
while offering a single source for integrated communications services designed
to meet its business customers' needs. The Company's facilities-based network
infrastructure is designed to provide services to customers on an end-to-end
basis, and, as of June 30, 1998, was comprised of 1,433 route miles of fiber in
its 32 local networks in 19 states, 44 Newbridge ATM switches, 17 Lucent 5ESS
switches and approximately 22,000 backbone longhaul miles in its leased
coast-to-coast broadband data network.
With the passage of the FTA, the Company has enhanced the scope of its
product offerings from dedicated services to a full range of switched voice,
data and Internet services in order to meet the needs of business end-users, and
is expanding its sales, marketing, customer care and OSS capabilities. The
Company introduced local switched voice services, including local exchange
services in late 1996 and long distance services in late 1997. By June 30, 1998,
e.spire had sold 96,405 customer access lines, of which 85,633 were installed,
representing a significant increase over the 9,177 access lines sold as of June
30, 1997.
The Company believes that there is significant unmet demand by businesses
for integrated voice and data services from a single-source communications
provider. In addition, the domestic market for Internet-related business
services is growing rapidly. The Company believes that, through its data
network, it is well positioned to satisfy these customer demands by providing
its suite of network solutions. This suite of services is integrated through the
Company's proprietary e.spire Internet access product, which combines its ISP
capabilities and ATM, frame relay, and IP services. The Company also provides
additional Internet-based and other data custom solutions and value-added
services such as web hosting, managed services and firewall services. The
Company's e.spire product currently is offered in its Florida markets and the
Company intends to offer it and the Company's other Internet-based services in
substantially all of its markets by the end of 1998 to complement its existing
data services.
For the year ended December 31, 1997 and the six months ended June 30,
1998, approximately 42% and 39%, respectively of the Company's revenues were
derived from network services, approximately 38% and 32%, respectively, were
derived from data and Internet services and approximately 20% and 30%,
respectively, from switched local and other services. Included in the network
services category of revenues are high capacity dedicated and special access
services, and revenues from ACSI Network Technologies for construction contracts
and long term leases of high capacity systems. For the year ended December 31,
1997 and the six month period ended June 30, 1998, approximately $1.7 million
and $8.1 million is included from these contracts, of which $4.6 million of 1998
revenues was derived from a contract with a single interexchange carrier.
Revenues for the year ended December 31, 1997, increased $49.6 million, or 527%,
to $59.0 million from $9.4 million for the year ended December 31, 1996.
Revenues for the six months ended June 30, 1998, increased $43.4 million, or
219% to $63.2 million from $19.8 million for the six months ended June 30, 1997.
As of June 30, 1998, the Company served over 10,400 telecommunications
customers, excluding internet dial-up customers.
The Company believes that a key factor in the successful implementation of
its strategy and its improved operating performance is the quality of its
management team. In the past twenty one months, the Company hired Jack E. Reich
as President and Chief Executive Officer and David L. Piazza as Chief Financial
Officer, complementing Anthony J. Pompliano, the Company's founder
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and Chairman, and Riley M. Murphy, the Company's General Counsel. In addition,
in February 1998, the Company hired Ronald E. Spears as Chief Operating Officer.
Collectively, these individuals have an average of 21 years of
telecommunications industry experience. The Company also has significantly
increased its marketing and sales forces during the past year by hiring an
additional 151 employees in such departments. As of June 30, 1998, the Company
had a total of 278 employees in its marketing and sales forces, an increase of
over 119% from June 30, 1997.
STRATEGY
The Company seeks to provide its customers a choice for local access,
utilizing its facilities-based network infrastructure to deliver both voice and
data solutions. In order to increase penetration in its target markets, build
brand recognition and achieve its strategic objectives, the Company seeks to:
PROVIDE "ONE-STOP" INTEGRATED COMMUNICATIONS SERVICES
To meet customer demand and to accelerate penetration in its markets, the
Company has broadened the range of voice, data and Internet services it offers
and has integrated these services into a bundled package offering a single
source solution designed to meet its customers' communications needs. In 1997,
the Company introduced new voice products such as local dial tone, long
distance, audio conferencing and voice messaging services. In addition, through
the 1997 Cybergate Acquisition, the Company also introduced its Internet
services and, as of June 30, 1998, served over 46,000 Internet customers. In
late 1997, the Company introduced its data and Internet products, which it
currently offers in all of its markets. In April 1998, the Company also
introduced its PLATINUM product, which offers customers integrated local, long
distance, toll free and dedicated Internet access using a single multi-purpose
T1. PLATINUM is available in 20 markets. The Company believes that its ability
to provide one-stop integrated communications services will enable it to capture
a larger portion of its customers' total expenditures on communication services,
and reduce customer turnover.
EXPLOIT RAPIDLY GROWING MARKET FOR DATA SERVICES
The Company believes that the market for data services is one of the
fastest growing segments of the communications market. The Company's suite of
data products consisting primarily of the e.spire family of high-speed Internet
and data products for small and medium-sized businesses, will be transported
over the Company's coast-to-coast, leased broadband data communications network.
ENHANCE FACILITIES-BASED INFRASTRUCTURE
Expansion of the Company's facilities-based infrastructure will increase
the proportion of communications traffic that is originated and/or terminated on
its network and switching facilities, which the Company believes will result in
higher long-term operating margins and greater control over its network
operations. The Company uses both an on-net and a resale strategy to capture new
customers, and intends to accelerate migration of traffic onto its own
facilities.
The Company will continue to install voice and data switches, construct
SONET digital local fiber networks and increase the reach of its data backbone.
The Company's expansion decisions are structured to efficiently deploy capital
and are based upon a number of economic factors, including customer demographics
in each market and anticipated cost savings associated with particular
installations. The Company's state-of-the-art infrastructure and high capacity
bandwidth facilitate efficient network expansion. The Company recently announced
plans to expand its local network infrastructure into six additional markets:
Atlanta, Washington, D.C., San Antonio, South Florida, New York and
Philadelphia. In addition, the Company plans to deploy a broadband long-haul
network between New York and Baltimore. Combined, these expansions are
anticipated to increase
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the network facilities to over 2200 route miles by year end. The Company also
installed 20 Lucent 5ESS switches as of August 20, 1998 and plans to install an
additional 5 by year end.
BUILD MARKET SHARE THROUGH FOCUSED CUSTOMER SALES AND SERVICE
The Company believes that its local, customer-oriented, single
point-of-service sales structure facilitates greater customer care in both the
sales and customer service processes and differentiates e.spire as a
customer-focused telecommunications services provider. In addition to its field
sales force, the Company's major account team targets large national accounts,
and its carrier sales group targets dedicated services to long distance carriers
and ISPs. As of June 30, 1998, the Company had 278 employees in its marketing
and sales forces, an increase of over 119% from June 30, 1997. The Company
supplements its internal marketing and sales force through alternative sales
channels, and had executed 117 sales agency agreements as of June 30, 1998.
The Company currently is implementing an integrated customer care strategy
that emphasizes infrastructure improvements, training of personnel, performance
monitoring and image/brand recognition. The customer care strategy is intended
to provide a heightened level of responsive and cost efficient customer service
across the Company's full range of existing and planned products and services,
with a particular emphasis on operational support and other
information/financial systems. The Company is in the process of supplementing
its customer service effort with an integrated customer care and billing
software platform, differentiating e.spire from its major competitors.
EXPAND THROUGH STRATEGIC ACQUISITIONS AND ALLIANCES
The Company believes that acquisitions of, and joint ventures and other
strategic alliances with, related or complementary businesses in its region will
enable it to more rapidly execute its business plan by providing additional
customers, new products and services, service and technical support and
additional cash flow. For example, the Cybergate Acquisition increased the
Company's penetration of its current markets and accelerated its entry into new
markets by expanding the scope of the Company's Internet product offerings. As
part of its expansion strategy the Company plans to consider additional
acquisitions, joint ventures and strategic alliances in communications, Internet
access and other related service areas.
COMPANY SERVICES
DEDICATED SERVICES. The Company's dedicated services provide high capacity
non-switched interconnections: (i) between POPs of the same IXC; (ii) between
POPs of different IXCs; (iii) between large business and government end-users
and their selected IXCs; (iv) between an IXC POP and an ILEC central office or
between two ILEC central offices; and (v) between different locations of
business or government end-users.
- SPECIAL ACCESS SERVICES. Special access services provide a link between
an end-user location and the POP of its IXC, or links between IXC POPs,
thus bypassing the facilities of the ILEC. These services, which may be
ordered by either the long distance customer or directly by its IXC,
typically provide the customer better reliability, shorter installation
intervals, and lower costs than similar services offered by the ILEC.
Customer charges are based on the number of channel terminations, fixed
and mileage-sensitive transport charges, and costs for any services
required to multiplex circuits.
- SWITCHED TRANSPORT SERVICES. Switched transport services are offered to
IXCs that have large volumes of long distance traffic aggregated by a
ILEC switch at a central office where the Company has collocated its
network. The Company provides dedicated facilities for transporting these
aggregated volumes of long distance traffic from the ILEC central office
to its POP or between ILEC central offices.
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- PRIVATE LINE SERVICES. Private line services provide dedicated
facilities between two end-user locations in the same metropolitan area
(e.g., a central banking facility and a branch office or a manufacturing
facility and its remote data processing center) and are priced like
special access services (channel termination charges plus transport and
any associated multiplexing charges). The Company expects the demand for
private line service to increase in conjunction with higher bandwidth
customer applications.
SWITCHED VOICE SERVICES. As of August 31, 1998, the Company had installed
20 Lucent 5ESS switches to provide facilities-based local exchange service in 20
of its markets. The Company also provides such services on a resale basis in 35
markets. As an adjunct to its local switched services, the Company provides long
distance, calling card and other interLATA services.
The Company's switched voice services include telephone exchange service,
including optional enhanced services such as call waiting, caller ID and
three-way conference calling; switching traffic between The Company's switch and
a business customer's PBX and routing local, intraLATA and interLATA phone calls
according to the customers' specific requirements; providing local dial tone
services with functionality such as free internal communications, call
forwarding, call transfer, conference call and speed dialing; ISDN data
services; and origination and termination of long distance traffic between a
customer premises and interexchange carrier via shared trunks utilizing the
Company's local switch.
HIGH SPEED INTERNET AND DATA SERVICES AND CYBERGATE ACQUISITION. In
January 1997, the Company consummated the Cybergate Acquisition. Cybergate, Inc.
("Cybergate"), an ISP, delivers high-speed data communications services,
including computer network connections and related infrastructure services, that
provide both commercial and residential customers access to the Internet through
their personal computers and the use of a modem. As of June 30, 1998, Cybergate
had over 46,000 customers. The Cybergate Acquisition enabled e.spire to become a
major provider of high-speed data communications services in the southern United
States.
In 1997, the Company introduced the e.spire family of high-speed Internet
and data services for businesses as well as government and educational
institutions, ISPs and carriers. The e.spire family of services operates over
the Company's coast-to-coast, leased broadband data communications network which
supports the following services:
- e.spire INTERNET ACCESS SERVICE. The data and Internet data backbone is
connected to the Global Internet via public and private peering
arrangements with Tier I-Internet backbone providers at strategic NAPs
across the United States. This enables the Company to provide
high-quality dedicated and dial-up Internet connectivity and IP transport
for the business and reseller community. The service is targeted to
consumers, local and regional ISPs and corporate Internet users requiring
dedicated access. The service operates at dedicated speeds ranging from
56 kbps to 45 Mbps and at industry-standard dial-up speeds.
- e.spire FRAME RELAY SERVICE. This service is designed for bandwidth
needs that vary, and for interconnecting geographically dispersed
networks and equipment. Businesses of any size can take advantage of
e.spire Frame Relay for internetworking, application sharing, e-mail,
file transfer, PC-to-PC and PC-to-Server communications. The Frame Relay
backbone is connected to frame relay networks of other key providers via
NNIs (Network-to-Network Interfaces) thus enabling the Company to offer
comprehensive solutions to local, regional, and national businesses
regardless of their location. This service supports standard multi-
protocol encapsulation which makes it easier to integrate new and legacy
systems. The service support user port connections ranging from 56 kbps
to 1.5 Mbps with a wide range of Committed Information Rates.
- e.spire ATM SERVICE. This service provides a solution to local, regional
and national businesses with highbandwidth, delay-sensitive data
communications applications. With e.spire ATM service, the performance
needs of complex, media-rich applications such as
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CAD/CAM, remote super-computing, medical imaging, video conferencing, and
voice calls are easily met. This service is also ideal for higher-volume
users of applications such as PC-to-server and file transfer. The service
supports both Constant Bit Rate and Variable Bit Rate service levels over
Permanent Virtual Circuits with user port speeds ranging from 2 Mbps to
45 Mbps.
- e.spire BUNDLED INTERNET SOLUTIONS. The Company also provides turnkey
business Internet solutions. These solutions include dedicated Internet
Access, pre-configured Customer Premises Equipment, web site hosting
account, domain name registration and maintenance, news feed, and
end-to-end service installation. These solutions enable businesses to
benefit from integrated billing and network management.
- e.spire CUSTOM NETWORK SERVICES. These services include design,
installation, maintenance, hardware (such as switches, routers and
modems) and configuration (such as maintaining consistent versions of the
router software and deploying consistent configurations) of a customer's
network. The Company's custom network services are designed to eliminate
many of the timing, coordination and inter-operability issues that arise
in installations requiring multiple vendors.
- e.spire MANAGED NETWORK SERVICE. This service provides complete
management and monitoring of all customer equipment and network elements
needed to operate dedicated Internet or frame relay services. Companies
of all sizes can enhance their competitive performance, eliminating the
need to commit their own resources to the costly, time-consuming job of
network management.
- e.spire PLATINUM SERVICE. This service provides integrated local, long
distance, toll free and Dedicated Internet Access using a single
multipurpose T1. Voice services come complete with a full range of
standard and optional custom features, and Internet access can be
provided up to 512Kbps. The Company believes PLATINUM provides an
unprecedented mix of voice and data services on a consolidated invoice.
SALES, MARKETING AND SERVICE DELIVERY
The Company seeks to provide its customers a choice for local access,
utilizing its facilities-based network infrastructure to deliver both voice and
data solutions. The Company's customers include corporations, financial services
companies, government departments and agencies, and academic, scientific and
other major institutions as well as ISPs, IXCs and other carriers.
The Company's sales and marketing approach is to build long-term business
relationships with its customers, with the intent of becoming the single source
provider of their telecommunications services. The Company's sales force
includes specialized professionals who focus on sales to retail, wholesale and
alternate channel (agents and value-added resellers) consumers of the Company's
telecommunications services. The Company's sales staff works to gain a better
understanding of the customer's operations in order to develop innovative,
application-specific solutions to each customer's needs. Sales personnel locate
potential business customers by several methods, including customer referral,
market research, cold calling and networking alliances.
Enhanced data services, like all other Company services, are sold through
the Company's existing sales force and supported by engineers and other sales
channels such as agents and value-added resellers, including independent
providers of communications hardware to customers. This approach enables the
Company to (i) emphasize the applications solutions aspects of enhanced data
services and (ii) utilize the expertise and resources of other vendors. The
Company intends to continue expanding its sales and engineering support staff
and other technical specialists in order to meet the growing demand for enhanced
data services. See "-- Network".
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Historically, the Company has established new customer relationships by
providing customers with local or data services and subsequently marketing
additional services to such customers. Having evolved into an ICP, however, the
Company intends to emphasize its ability to provide customers "one-stop"
integrated voice, data and Internet communications services in its sales and
marketing efforts.
The Company's service delivery staff is primarily responsible for
coordinating service and installation activities. Service delivery activities
include coordinating installation dates and equipment delivery and testing. The
Company's customer service and technical staff plans, engineers, monitors and
maintains the integrity, quality and availability of the Company's networks. The
Company's technical staff are available to customers 24 hours every day.
NETWORK
The Company has deployed its network infrastructure on a "smart-build"
approach, selecting the most economic alternative of constructing or leasing
facilities or a combination thereof. As of June 30, 1998, the Company had local
fiber optic networks in service in 32 markets. The Company continues to expand
those networks and will look to identify new markets for other network expansion
opportunities. The Company generally chooses to own facilities where (i) there
is no attractive fiber optic network alternative, (ii) ownership creates
strategic value for the Company and/or (iii) large concentrations of
telecommunications traffic are accessible, or have been secured, to justify
network construction. In addition to the "build" vs. "lease" decision for
network deployment, the Company also will consider potential network
acquisitions from time to time.
The Company also seeks to expand the reach of its backbone data network
through agreements with certain third parties to deliver enhanced data
communications services through a seamless data network. Often, the Company
offers data services in geographic markets where it has not deployed its own
local fiber optic network by leasing facilities from a variety of entities,
including ILECs, utilities, IXCs, cable companies and various transit/highway
authorities. In many cases, such capacity is obtained through the purchase of
"dark fiber." The combination of the Company's local networks and its broadband
data backbone network comprise the seamless network platform which the Company
utilizes to offer its broad array of telecommunications services to customers.
The Company utilizes Newbridge ATM networking technology on its data
backbone network, allowing its network capacity to be efficiently shared between
multiple platforms. The Company's local networks are comprised of fiber optic
cable, integrated switching facilities, advanced electronics, data switching
equipment (e.g., frame relay and ATM), transmission equipment and associated
wiring and equipment. By virtue of their state-of-the-art equipment and
ring-like architecture, the Company's networks offer electronic redundancy and
diverse access routing. Through automatic protection switching, if any
electrical component or fiber optic strand fails, the signal is instantaneously
switched to a "hot standby" component or fiber. Since network outages and
transmission errors can be very disruptive and costly to long distance carriers
and other customers, consistent reliability is critical to customers.
In those markets where the Company chooses to deploy broadband fiber
networks, the Company's strategy is to first develop the "carrier ring" portion
of its network, a high capacity network designed to be accessible to all the
major long distance carriers and key ILEC central offices in the area. This
portion of the network allows the Company to provide access to the ILEC central
offices, the IXC POPs and customer buildings. Second, the Company designs a
larger "backbone ring" extending from the carrier ring, with a view toward
making the network accessible to the largest concentration of
telecommunciations-intensive business and government customers in the area. Hubs
are strategically located on the backbone ring. Third, the Company concentrates
its sales and marketing efforts on adding business and government customers
located on or very near its backbone network and hub locations. Once the Company
determines that there is sufficient
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customer demand in a particular area, it extends "distribution rings" from the
backbone ring to reach specific business customers in that area. The Company's
emphasis is on the building and expansion of these local networks to reach end
user customers in buildings or office parks with substantial telecommunications
needs.
The Company's network management center in Annapolis Junction, Maryland
monitors all of the Company's networks from one central location. Centralized
electronic monitoring and control of the Company's networks allows the Company
to avoid duplication of this function in each city. This consolidated operations
center also helps make the Company's per customer monitoring and customer
service costs lower than if such costs were monitored on a single-city basis.
The Company also plans to enhance its use of this facility to monitor the
performance of data and switched voice services. During 1997, the Company
performed various network management services for other telecommunications
service providers and plans to continue to offer these services on a limited
basis.
INDUSTRY OVERVIEW
The continuing deregulation of the telecommunications industry and
technological change have resulted in an increasingly information-intensive
business environment. Regulatory, technological, marketing and competitive
trends have expanded substantially the Company's opportunities in the converging
voice and data communications services markets. Technological advances,
including rapid growth of the Internet, the increased use of packet switching
technology for voice communications and the growth of multimedia applications,
are expected to result in substantial growth in the high-speed data services
market.
DEDICATED SERVICES. Competition in the local exchange services market
began in the mid-1980s. In New York City, Chicago and Washington, D.C., newly
formed companies provided dedicated non-switched services by installing fiber
optic facilities connecting POPs of IXCs within a metropolitan area and, in some
cases, connecting business and government end-users with IXCs. Most of the early
competitors operated limited networks in the central business districts of major
cities in the U.S. where the highest concentration of voice and data traffic,
including IXC traffic, is typically found. CAPs used the substantial capacity
and economies of scale inherent in fiber optic cable to offer customers service
that was generally less expensive and of higher quality than could be obtained
from the ILECs due, in part, to antiquated copper-based facilities used in many
ILEC networks.
LOCAL SWITCHED VOICE SERVICES. The FCC Interconnection Decisions in 1992
and 1993 enabled CAPs to provide interstate switched access services in
competition with ILECs, which has encouraged the development of the competitive
interstate switched access market. Competition in this market was further
enhanced with the passage of the FTA, which requires (i) removal of state, local
and long distance entry barriers, (ii) ILECs to provide interconnections to
their facilities, and (iii) access to rights-of-way.
DATA COMMUNICATIONS SERVICES. The Company believes that high-speed data
communications services represent one of the fastest growing segments of the
telecommunications services market, due in part to the continuing proliferation
of computers and the increasing need to interconnect these computers via local
and wide area networks, the dramatic growth of the Internet and the emergence of
multimedia applications. Together, these applications have spawned numerous
network technologies and communications protocols to support legacy, current and
emerging needs. The domestic network infrastructure currently supporting both
voice and data transport requirements, which focuses on IP switching and framed
relay services, is being strained by the increasing demand for high-bandwidth
transport at both the local and national levels. The Company believes that the
increasing volume and complexity of high-speed applications will further strain
the domestic network infrastructure and create an opportunity for e.spire to
provide a single high-quality ATM-based network capable of consistently
supporting diverse data communications needs. In
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addition, businesses are increasingly using the Internet to transmit e-mail,
engage in commercial transactions (e.g., electronic commerce) and develop
internal communications networks, or "intranets." Increasing business
utilization of the Internet has added to the demand for higher-speed access
applications.
COMPETITION
The Company operates in a highly competitive environment and currently does
not have a significant market share in any of its markets. Most of its actual
and potential competitors have substantially greater financial, technical,
marketing and other resources (including brand name recognition) than the
Company. Also, the continuing trend toward business alliances in the
telecommunications industry and the absence of substantial barriers to entry in
the data and Internet services markets, could give rise to significant new
competition.
In each of its markets, the Company's primary competitor is the ILEC
serving that geographic area. ILECs are established providers of dedicated and
local telephone services to all or virtually all telephone subscribers within
their respective service areas. ILECs also have long-standing relationships with
regulatory authorities at the federal and state levels. While recent FCC
administrative decisions and initiatives provide increased business
opportunities to voice, data and Internet-service providers such as the Company,
they also provide the ILECs with increased pricing flexibility for their private
line and special access and switched access services. In addition, with respect
to competitive access services (as opposed to switched local exchange services),
the FCC recently proposed a rule that would provide for increased ILEC pricing
flexibility and deregulation for such access services either automatically or
after certain competitive levels are reached. If the ILECs are allowed
additional flexibility by regulators to offer discounts to large customers
through contract tariffs, engage in aggressive volume and term discount pricing
practices for their customers, and/or seek to charge competitors excessive fees
for interconnection to their networks, the income of competitors to the ILECs,
including the Company, could be materially adversely affected. If future
regulatory decisions afford the ILECs increased access services, pricing
flexibility or other regulatory relief, such decisions could also have a
material adverse effect on competitors to the ILEC, including the Company.
In the local exchange market, the Company also faces competition or
prospective competition from other carriers, many of which have significantly
greater financial resources than the Company. For example, AT&T, MCI and Sprint,
which historically have been purely long distance 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 addition
to these long distance service providers, entities that currently offer or are
potentially capable of offering local switched services include companies that
have previously been known purely as CAPs, cable television companies, electric
utilities, microwave carriers, wireless telephone system operators and large
customers who build private networks. These entities, upon entering into
appropriate interconnection agreements or resale agreements with ILECs,
including RBOCs, can offer single source local and long distance services, like
those offered by the Company. In addition, a continuing trend towards business
combinations and alliances in the telecommunications industry may create
significant new competitors to the Company. The proposed merger of WorldCom,
Inc. and MCI or AT&T's proposed acquisition of Teleport Communications Group,
Inc. and TCI Cable are examples of some of the alliances that are being formed.
Many 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.
The Company will also face competition from other fixed wireless services,
including MMDS, LMDS, 24 GHz 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
issued or is in the process of issuing licenses for these services to
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provide broadband integrated telecommunications services on a point-to-point
and/or point-to-multipoint basis. Many of these service providers have already
raised substantial capital and have commenced building their wide-area networks,
primarily in urban areas. Upon entering into appropriate interconnection
agreements with ILECs, these service providers are expected to provide
integrated voice and data services comparable to those the Company currently
offers or intends to offer. Many of these companies have announced plans to
target small and medium-sized businesses and may enjoy certain advantages over
the Company with respect to the speed with which they can deploy their own
facilities directly serving end user premises to the extent that they need not
lease or resell "last mile" facilities from the ILEC. In addition, 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.
With respect to mobile 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 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 providers of
other types of traditional wireless telephone service.
Section 271 of the FTA 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 denied all four
applications for such approval filed to date. The Company anticipates that a
number of RBOCs will file additional applications for in-region long distance
authority 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.
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. On December 31, 1997, a United States
District Court judge in Texas held unconstitutional certain sections of the FTA,
including Section 271. This decision would permit the three RBOCs that are
parties to the case immediately to begin offering widespread in-region long
distance services. The decision, however, was stayed on February 11, 1998 by the
Court upon motion from the defendants. Unless overturned on appeal, this
decision could have a material adverse effect on the Company. The FCC and
certain IXCs have filed 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 market for data communications and Internet access services, including
IP switching, is extremely competitive. There are no substantial barriers to
entry, and the Company expects that competition will intensify in the future. In
addition, new FCC rules went into effect in February 1998 which will make it
substantially easier for many non-U.S. telecommunications companies to enter the
U.S. market, thus potentially further increasing the number of competitors.
The Company believes that its ability to compete successfully depends on a
number of factors, including: market presence; the ability to execute a rapid
expansion strategy: the capacity, reliability and security of its network
infrastructure; ease of access to and navigation of the Internet; the pricing
policies of its competitors and suppliers; the timing of the introduction of new
services by the Company and its competitors; the Company's ability to support
industry standards; and general industry and economic trends. The Company's
success in this market will depend heavily upon its ability to provide high
quality Internet connectivity and value-added Internet services at competitive
prices.
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REGULATION
OVERVIEW
The Company's services are subject to federal, state and local regulation.
The FCC exercises jurisdiction over all facilities and services of
telecommunications common carriers to the extent those facilities are used to
provide, originate or terminate interstate or international communications.
State regulatory commissions retain jurisdiction over the Company's facilities
and services to the extent they are used to originate or terminate intrastate
communications. Local governments may require the Company to obtain licenses or
franchises regulating use of public rights-of-way necessary to install and
operate its networks.
THE FEDERAL TELECOMMUNICATIONS ACT OF 1996
STATUTORY REQUIREMENTS. On February 1, 1996, the U.S. Congress enacted
comprehensive telecommunications reform legislation, which the President signed
into law as the FTA on February 8, 1996. The Company believes that this
legislation is likely to enhance competition in the local telecommunications
marketplace because it (i) preempts state and local entry barriers and gives the
FCC authority to enforce such preemption, (ii) requires ILECs to provide
interconnection to their facilities, (iii) facilitates end-users' choice to
switch service providers from ILECs to CLECs and (iv) requires access to
rights-of-way.
The FTA requires all LECs (including ILECs and CLECs): (i) not to prohibit
or unduly restrict resale of their services; (ii) to provide number portability;
(iii) to provide dialing parity and nondiscriminatory access to telephone
numbers, operator services, directory assistance and directory listings; (iv) to
afford access to poles, ducts, conduits and rights-of-way; and (v) to establish
reciprocal compensation arrangements for the transport and termination of local
telecommunications traffic. It also requires ILECs to negotiate local
interconnection agreements in good faith and to provide interconnection (a) for
the transmission and routing of telephone exchange service and exchange access,
(b) at any technically feasible point within the ILEC's network, (c) that is at
least equal in quality to that provided by the ILEC to itself, its affiliates or
any other party to which the ILEC provides interconnection and (d) at rates,
terms and conditions that are just, reasonable and nondiscriminatory. ILECs also
are required under the new law to provide nondiscriminatory access to network
elements on an unbundled basis at any technically feasible point, to offer their
local telephone services for resale at wholesale rates, and to facilitate
collocation of equipment necessary for competitors to interconnect with or
access unbundled network elements.
In addition, Section 271 of the FTA requires RBOCs to comply with certain
safeguards and offer interconnection that satisfies a prescribed 14-point
competitive checklist before the RBOCs are permitted to provide in-region
interLATA (i.e. long distance) services. These safeguards are designed to ensure
that the RBOCs' competitors have access to local exchange and exchange access
services on nondiscriminatory terms and that subscribers of regulated
non-competitive RBOC services do not subsidize their provision of competitive
services. The safeguards also are intended to promote competition by preventing
RBOCs from using their market power in local exchange services to obtain an
anti-competitive advantage in the provision of other services.
Three RBOCs have filed applications with the FCC for authority to provide
in-region interLATA service in selected states. Requests by SBC Communications
Inc. in Oklahoma, by Ameritech in Michigan, and by BellSouth in South Carolina
and Louisiana to provide long distance, all were denied by the FCC. A second
request by BellSouth for authority to provide long distance in Louisiana remains
pending at the FCC. Other RBOCs have begun the process of applying to provide
in-region interLATA service by filing with state commissions notice of their
intent to file at the FCC.
In addition, several RBOCs challenged the constitutionality of certain
provisions of the FTA which bar the RBOCs from providing in-region interchange
and other services by filing a lawsuit in
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the U.S. District Court for the Northern District of Texas (captioned SBC
Communications, Inc. v. FCC, Civil Action No. 7:97-CV-163-X (Kendall, J.)). On
December 31, 1998, Judge Kendall released an order which invalidated Sections
271-275 of the FTA as they pertain to SBC, US West and Bell Atlantic, after
finding that these provisions violated the constitutional prohibition against
"bills of attainder." However, Judge Kendall's decision was reversed by the U.S.
Court of Appeals for the Fifth Circuit on September 4, 1998.
The FTA also granted important regulatory relief to industry segments which
compete with CLECs. ILECs were given substantial new pricing flexibility. RBOCs
have the ability to obtain authorization to provide long distance services under
prescribed circumstances and were granted new rights to provide certain cable TV
services. IXCs were permitted to construct their own local facilities and/or
resell local services. State laws no longer can require CATVs to obtain a
franchise before offering telecommunications services nor permit CATVs'
franchise fees to be based on their telecommunications revenues. In addition,
under the FTA all utility holding companies are permitted to diversify into
telecommunications services. See "Risk Factors -- Competition".
FCC RULES IMPLEMENTING THE LOCAL COMPETITION PROVISIONS OF THE FTA. On
August 8, 1996, the FCC released a First Report and Order, a Second Report and
Order and a Memorandum Opinion and Order in its CC Docket 96-98 (combined, the
"Interconnection Orders") that established a framework of minimum, national
rules enabling state Public Service Commissions ("PSC," or "State Commissions")
and the FCC to begin implementing many of the local competition provisions of
the FTA. In its Interconnection Orders, the FCC prescribed certain minimum
points of interconnection necessary to permit competing carriers to choose the
most efficient points at which to interconnect with the ILECs' networks. The FCC
also adopted a minimum list of unbundled network elements that ILECs must make
available to competitors upon request and a methodology for states to use in
establishing rates for interconnection and the purchase of unbundled network
elements. The FCC also adopted a methodology for states to use when applying the
FTA's "avoided cost standard" for setting wholesale prices with respect to
retail services.
The following summarizes the key issues addressed in the Interconnection
Orders.
- INTERCONNECTION. ILECs are required to provide interconnection for
telephone exchange or exchange access service, or both, to any requesting
telecommunications carrier at any technically feasible point. The
interconnection must be at least equal in quality to that provided by the
ILEC to itself or its affiliates and must be provided on rates, terms and
conditions that are just, reasonable and nondiscriminatory.
- ACCESS TO UNBUNDLED ELEMENTS. ILECs are required to provide requesting
telecommunications carriers with nondiscriminatory access to network
elements on an unbundled basis at any technically feasible point on
rates, terms, and conditions that are just, reasonable and
nondiscriminatory. At a minimum, ILECs must unbundle and provide access
to network interface devices, local loops, local and tandem switches
(including all software features provided by such switches), interoffice
transmission facilities, signaling and call-related database facilities,
operations support systems and information and operator and directory
assistance facilities. Further, ILECs may not impose restrictions,
limitations or requirements upon the use of any unbundled network
elements by other carriers.
- METHODS OF OBTAINING INTERCONNECTION AND ACCESS TO UNBUNDLED
ELEMENTS. ILECs are required to provide physical collocation of
equipment necessary for interconnection or access to unbundled network
elements at the ILEC's premises, except that the ILEC may provide virtual
collocation if it demonstrates to the PSC that physical collocation is
not practical for technical reasons or because of space limitations.
- TRANSPORT AND TERMINATION CHARGES. The FCC rules require that LEC
charges for transport and termination of local traffic delivered to them
by competing LECs must be cost-based and should be based on the LECs'
Total Element Long-Run Incremental Cost ("TELRIC") of
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providing that service. However, as discussed below, the FCC's pricing
and costing rules have been vacated by the U.S. Court of Appeals for the
Eighth Circuit.
- PRICING METHODOLOGIES. New entrants were required to pay for
interconnection and unbundled elements at rates based on the ILEC's
TELRIC of providing a particular network element plus a reasonable share
of forward-looking joint and common costs, and may include a reasonable
profit. However, as discussed below, these rules have been vacated by the
Eighth Circuit.
- RESALE. ILECs are required to offer for resale any telecommunications
service that they provide at retail to subscribers who are not
telecommunications carriers. PSCs were required to identify which
marketing, billing, collection and other costs will be avoided or that
are avoidable by ILECs when they provide services on a wholesale basis
and to calculate the portion of the retail rates for those services that
is attributable to the avoided and avoidable costs. However, as discussed
below, the specific federal pricing requirements have been vacated by the
Eighth Circuit.
- ACCESS TO RIGHTS-OF-WAY. The FCC established procedures and guidelines
designed to facilitate the negotiation and mutual provision of
nondiscriminatory access by telecommunications carriers and utilities to
their poles, ducts, conduits, and rights-of-way.
- UNIVERSAL SERVICE REFORM. All telecommunications carriers, including the
Company, are required to contribute funding for universal service
support, on an equitable and nondiscriminatory basis, in an amount
sufficient to preserve and advance universal service pursuant to a
specific or predictable universal service funding mechanism. On May 8,
1997, the FCC released an order implementing these requirements by
reforming its existing access charge and universal service rules. See
"-- Other Federal Regulation -- Universal Service Reform" below.
Most provisions of the Interconnection Orders were appealed. Numerous
appeals were consolidated for consideration by the Eighth Circuit (captioned
Iowa Utilities Board v. FCC). On July 18, 1997, the Court of Appeals released
its decision regarding issues raised in the consolidated appeals of the
Interconnection Orders. The Interconnection Orders were upheld in part and
reversed in part. A non-exclusive list of decisions rendered include that:
- The FCC exceeded its jurisdiction in establishing rules governing the
prices that ILECs may charge competitors for interconnection, unbundled
access and resale. The Court ruled that the authority to establish prices
for local communications facilities and services is reserved to the
States and, thus, vacated the FCC's pricing rules (except as they apply
to CMRS providers).
- The FCC's "pick and choose" rule, which allows competitors to select
individual terms of previously approved interconnection agreements for
their own use, conflicts with the purposes of the FTA, and also was
vacated.
- The FCC lacks authority to hear formal complaints which involve the
review and/or enforcement of certain terms of local interconnection
agreements approved by State commissions.
- The FCC lacks authority to require interconnection agreements which were
negotiated before the enactment of the FTA to be submitted for State
commission approval.
- The FCC may not adopt a blanket requirement that State interconnection
rules must be consistent with the FCC's regulations.
- The FCC correctly concluded that ILEC operations support systems,
operator services and vertical switching features qualify as network
elements that are subject to the unbundling requirements of the FTA.
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- The FCC's definition of "technically feasible" was upheld for purposes of
deciding where ILECs must permit interconnection by competitors, but the
FCC's use of this term to determine what elements must be unbundled was
rejected.
- The FCC erred in deciding that ILECs could be required by competitors to
provide interconnection and unbundled network elements at levels of
quality which exceed those levels at which ILECs provide such services to
themselves.
- The FCC cannot require ILECs to recombine network elements for
competitors, but competitors may recombine such network elements
themselves as necessary to provide telecommunications services.
- Claims that the unbundling rules constitute an unconstitutional taking
were not decided because they were either raised by parties which lacked
standing or were not ripe for review.
- FCC rules and policies regarding the ILECs' duty to provide for physical
collocation of equipment were upheld.
- The FCC's rules requiring ILECs to allow the resale of promotional prices
lasting more than 90 days were upheld.
The Interconnection Orders, and resulting local interconnection rules, were
vacated in part consistent with these decisions. The U.S. Supreme Court has
granted certiorari to review most aspects of the Eight Circuit decision
regarding the Interconnection Orders. The Company cannot predict the outcome of
this litigation or the requests for reconsideration that remain pending at the
FCC. Notably, the FCC made the use of forward looking, economic costs for the
pricing of local interconnection, transport and termination and unbundled
network elements, a temporary condition of its approval of the merger of Bell
Atlantic and NYNEX. However, after the FCC indicated in its denial of
Ameritech's application for in-region long distance authority that an RBOC's use
of such forward looking, economic costs is relevant to the issue of whether it
has satisfied the conditions necessary for approval of such an application, the
Eighth Circuit issued a mandamus order instructing the FCC not to enforce such a
requirement. On August 10, 1998, the Eighth Circuit issued a ruling in a related
appeal upholding the FCC's regulations that "shared transport" be made available
as an unbundled network element.
ADVANCED COMMUNICATIONS SERVICES. On August 6, 1998, the FCC took two
related actions regarding the deployment of advanced communications services.
"Advanced communications services" are wireline, broadband telecommunications
services, such as services that rely on digital subscriber line technology
(commonly referred to as xDSL) and packet-switched technology. In its first
action, the FCC issued a Notice of Inquiry (NOI) pursuant to Section 706 of the
FTA seeking information regarding whether advanced telecommunications capability
is being deployed to all Americans in a reasonable and timely fashion. Section
706 gives the FCC the right to forbear from regulating a market, including ILEC
activities, if the FCC concludes that such forbearance is necessary to encourage
the rapid deployment of advanced telecommunications capability. The Company
expects the FCC to conclude its inquiry in early 1999.
In its second action, the FCC issued a Memorandum Opinion and Order (Order)
and a Notice of Proposed Rulemaking (NPRM) which (i) clarified its views on the
applicability of existing statutory requirements in Sections 251 and 271 to
advanced services, and (ii) sought comment on a wide variety of issues
associated with the provision of advanced services by wireline carriers.
Generally, the FCC clarified that the Section 251 interconnection, unbundling
and resale obligations of ILECs extend to their provision of advanced services,
and proposed measures to promote the deployment of advanced services by both
ILECs and CLECs. Among the proposals which generally were favorable to CLECs are
those for expanded physical collocation rights and strengthened rights to order
unbundled network elements ("UNEs") required to provide advanced services.
However, the FCC also proposed to encourage ILEC deployment of advanced services
by permitting them to provide such services through a separate affiliate which
would not be regulated as an ILEC. Thus,
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such a separate affiliate of the ILEC would not be subject to Section 251
unbundling and resale obligations, and may be permitted to provide certain
interLATA services. The Company cannot predict the final outcome of these
proceedings.
OTHER FEDERAL REGULATION. In general, the FCC has a policy of encouraging
the entry of new competitors, such as the Company, in the telecommunications
industry and preventing anti-competitive practices. Therefore, the FCC has
established different levels of regulation for dominant carriers and nondominant
carriers. For domestic common carrier telecommunications regulation, large ILECs
such as GTE and the RBOCs are currently considered dominant carriers in their
local exchange markets, while CLECs such as the Company are considered
nondominant carriers.
- TARIFFS. As a nondominant carrier, the Company may install and operate
facilities for the transmission of domestic interstate communications
without prior FCC authorization. Services of nondominant carriers have
been subject to relatively limited regulation by the FCC, primarily
consisting of the filing of tariffs and periodic reports. However,
nondominant carriers like the Company must offer interstate services on a
nondiscriminatory basis, at just and reasonable rates, and remain subject
to FCC complaint procedures. With the exception of informational tariffs
for operator-assisted services and tariffs for interexchange casual
calling services, the FCC has ruled that IXCs must cancel their tariffs
for domestic, interstate interexchange services. Tariffs remain required
for international services. The effectiveness of those orders currently is
subject to a stay issued by the U.S. Court of Appeals for the District of
Columbia Circuit. The FCC also has issued an order providing CLECs the
option to cease filing tariffs for interstate interexchange access
services and has proposed to make the withdrawal of CLEC access service
tariffs mandatory. Pursuant to these FCC requirements, the Company has
filed and maintains tariffs for its interstate services with the FCC. All
of the interstate access and retail "basic" services (as defined by the
FCC) provided by the Company are described therein. "Enhanced" services
(as defined by the FCC) need not be tariffed. The Company believes that
its enhanced voice and Internet services are "enhanced" services that need
not be tariffed.
- INTERNATIONAL SERVICES. Nondominant carriers such as the Company also
are required to obtain FCC authorization pursuant to Section 214 of the
Communications Act and file tariffs before providing international
communications services. The Company has obtained authority from the FCC
to provide voice and data communications services between the United
States and all foreign points on a resale basis.
- ILEC PRICE CAP REGULATION REFORM. In 1991, the FCC replaced traditional
rate of return regulation for large ILECs with price cap regulation.
Under price caps, ILECs can only raise prices for certain interstate
services by a small percentage each year. In addition, there are
constraints on the pricing of ILEC services that are competitive with
those of CLECs. On September 14, 1995, the FCC proposed a three-stage
plan that would substantially reduce ILEC price cap regulation as local
markets become increasingly competitive and ultimately would result in
granting ILECs nondominant status. Adoption of the FCC's proposal to
reduce significantly its regulation of ILEC pricing would significantly
enhance the ability of ILECs to compete against the Company and could
have a material adverse effect on the Company. The FCC released an order
on December 24, 1996 which adopted certain of these proposals, including
the elimination of the lower service band index limits on price
reductions within the access service category. The FCC's December 1996
order also eased the requirements necessary for the introduction of new
services by ILECs. On May 7, 1997, the FCC took further action in its CC
Docket No. 94-1 updating and reforming its price cap plan for the ILECs.
Among other things, the changes require price cap LECs to reduce their
price cap indices by 6.5 percent annually, less an adjustment for
inflation. The FCC also eliminated rules that require ILECs earning more
than certain specified rates of return to "share" portions of the excess
with their access customers during the next year in the form of lower
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access rates. These actions could have a significant impact on the
interstate access prices charged by the ILECs with which the Company
competes.
- ACCESS CHARGES. Over the past few years, the FCC has granted ILECs
significant flexibility in pricing their interstate special and switched
access services. Under this pricing scheme, ILECs may establish pricing
zones based on access traffic density and charge different prices for
each zone. The Company anticipates that this pricing flexibility will
result in ILECs lowering their prices in high traffic density areas, the
probable area of competition with the Company. The Company also
anticipates that the FCC will grant ILECs increasing pricing flexibility
as the number of interconnections and competitors increases. On May 7,
1997, the FCC took action in its CC Docket No. 96-262 to reform the
current interstate access charge system. The FCC adopted an order which
makes various reforms to the existing rate structure for interstate
access that are designed to move access charges, over time, to more
economically efficient rate levels and structures. The following is a
nonexclusive list of actions announced by the FCC:
SUBSCRIBER LINE CHARGE ("SLC"). The maximum permitted amount which an
ILEC may charge for SLC's on certain lines was increased. Specifically,
the ceiling was increased significantly for second and additional
residential lines, and for multi-line business customers. SLC ceiling
increases began in July 1997 and will be phased-in over a two-year
period.
PRESUBSCRIBED INTEREXCHANGE CARRIER CHARGE ("PICC"). The FCC created a
new PICC access charge rate element. The PICC is a flat-rated, per-line
charge that is recovered by LECs from IXCs. The charge is designed to
recover common line revenues not recovered through SLCs. A schedule of
maximum permitted PICC charges was established. The rate ceilings will be
permitted to increase over time.
CARRIER COMMON LINE CHARGE ("CCL"). As the ceilings on the SLCs and
PICCs increase, the per-minute CCL charge will be eliminated. Until then,
the CCL will be assessed on originating minutes of use. Thus, ILECs will
charge lower rates for terminating then originating access. In addition,
Long Term Support ("LTS") payments for universal service were eliminated
from the CCL charge.
LOCAL SWITCHING. Effective January 1, 1998, ILECs subject to price-cap
regulation were required to move non-traffic-sensitive ("NTS") costs of
local switching associated with line ports to common line and recover
them through the common line charge discussed above. Local switching
costs attributable to dedicated trunk ports must be moved to the trunking
basket and recovered through flat-rate monthly charges.
TRANSPORT. The "unitary" rate structure option for tandem-switched
transport was eliminated effective July 1, 1998. For price cap LECs,
additional rate structure changes became effective on January 1, 1998,
which altered the recovery of certain NTS costs of tandem-switching and
multiplexing and the minutes-of-use assumption employed to determine
tandem-switched transport prices. Also effective January 1, 1998, certain
costs previously recovered through the Transport Interconnection Charge
("TIC") were reassigned to specified facilities charges. The reassignment
of tandem costs currently recovered through the TIC to the tandem
switching charge will be phased in evenly over a three-year period.
Residual TIC charges will be recovered in part through the PICC, and
price cap reductions will be targeted at the per-minute residual TIC
until it is eliminated.
In other actions, the FCC clarified that incumbent ILECs may not assess
interstate access charges on the purchasers of unbundled network elements
or information services providers (including ISPs). Further regulatory
actions affecting ISPs are being considered in various on-going FCC
proceedings. The FCC also decided not to adopt any regulations governing
the provision of terminating access by CLECs. ILECs also were ordered to
adjust their access
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charge rate levels to reflect contributions to and receipts from the new
universal service funding mechanisms.
The FCC also announced that it will, in a subsequent Report and Order,
provide detailed rules for implementing a market-based approach to
further access charge reform. That process will give ILECs progressively
greater flexibility in setting rates as competition develops, gradually
replacing regulation with competition as the primary means of setting
prices. The FCC also adopted a "prescriptive safeguard" to bring access
rates to competitive levels in the absence of competition. For all
services then still subject to price caps and not deregulated in response
to competition, the FCC required ILECs subject to price caps to file
Total Service Long Run Incremental Cost ("TSLRIC") costs studies no later
than February 8, 2001.
This series of decisions is likely to have a significant impact on the
operations, expenses, pricing and revenue of the Company. Appeals of the FCC's
access charge reform order were denied by the U.S. Court of Appeals for the
Eighth Circuit on August 18, 1998.
UNIVERSAL SERVICE REFORM. On May 8, 1997, the FCC released an order in its
CC Docket No. 96-45, which reforms the current system of interstate universal
service support and implements the universal service provisions of the FTA. The
FCC established a set of policies and rules that ensure that low-income
consumers and consumers that live in rural, insular and high cost areas receive
a defined set of local telecommunications services at affordable rates. This is
to be accomplished in part through expansion of direct consumer subsidy programs
and in part by ensuring that rural, small and high cost LECs continue to receive
universal service subsidy support. The FCC also created new programs to
subsidize connection of eligible schools, libraries and rural health care
providers to telecommunications networks. These programs will be funded by
assessment of eligible revenues of nearly all providers of interstate
telecommunications carriers, including ICPs such as the Company.
The Company, like other telecommunications carriers that provide interstate
telecommunications services, is required to contribute a portion of its end-user
telecommunications revenues to fund universal service programs. However, the
Company also is eligible to qualify as a recipient of universal service support
if it elects to provide facilities-based service to areas designated for
universal service support. The FCC's decisions in CC Docket No. 96-45 could have
a significant impact on future operations of the Company. Significant portions
of the FCC's order have been appealed and are under review by the U.S. Court of
Appeals for the Fifth Circuit, or are the subject of further proceedings by the
FCC. The Company cannot predict the outcome of these proceedings.
STATE REGULATION
The Company believes that most, if not all, states in which it proposes to
operate will require a certification or other authorization to offer intrastate
services. Many of the states in which the Company operates or intends to operate
are in the process of addressing issues relating to the regulation of CLECs.
Some states may also require authorization to provide enhanced services.
In some states, existing state statutes, regulations or regulatory policy
may preclude some or all forms of local service competition. However, Section
253 of the FTA prohibits states and localities from adopting or imposing any
legal requirement that may prohibit, or have the effect of prohibiting, the
ability of any entity to provide any interstate or intrastate telecommunications
services. The FCC has the authority to preempt any such state or local
requirements to the extent necessary to enforce the FTA's open market entry
requirements. States and localities may, however, continue to regulate the
provision of intrastate telecommunications services, and, presumably, require
carriers to obtain certificates or licenses before providing service.
Some states in which the Company operates are considering legislation which
could impede efforts by new entrants in the local services market to compete
effectively with ILECs. The Arkansas
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legislature, for example, has enacted legislation which curtails the ability of
the state PSC to make available additional network elements to CLECs or
authorize CLECs to receive universal service funding. On March 25, 1997, the
Company filed a petition for Declaratory Ruling with the FCC asking it to
preempt portions of the Arkansas statute.
The Company has obtained intrastate authority for the provision of
dedicated services and a full range of local switched services in each of the
states where it provides local telecommunications services. In addition, the
Company has obtained PSC certification to provide interexchange services in a
majority of these states and is in the process of obtaining such certification
in other states. There can be no assurance that the Company will receive the
authorizations it may seek in the future to the extent it expands into other
states or seeks additional services from the above-named PSCs. In most states,
the Company is required to file tariffs setting forth the terms, conditions and
prices for services that are classified as intrastate.
The Company believes that, as the degree of intrastate competition
increases, the states will offer the ILECs increasing pricing flexibility. This
flexibility may present the ILECs with an opportunity to subsidize services that
compete with the Company's services with revenues generated from other
competitive services, thereby allowing ILECs to offer services competing with
those of the Company at prices below the cost of providing the service. The
Company cannot predict the extent to which this may occur or its impact on the
Company's business.
Numerous states have adopted or are considering adoption of new programs to
fund state universal programs. The Company could be required to contribute a
significant portion of its intrastate end user revenues toward the funding of
such programs; and such a development could have a significant impact on future
operations of the Company.
LOCAL INTERCONNECTION. The FTA imposes a duty upon all ILECs to negotiate
in good faith with potential interconnectors to provide interconnection to ILEC
networks, exchange local traffic, make unbundled network elements available, and
permit resale of most local services. In the event that negotiations do not
succeed, the Company has a right to seek state PSC arbitration of any unresolved
issues. The Company has signed, negotiated or arbitrated interconnection
arrangements with each of the following: BellSouth (South Carolina, Georgia,
Florida, Alabama, Mississippi, Louisiana, Tennessee and Kentucky), Southwestern
Bell (Texas, Arkansas, Kansas, Missouri and Oklahoma), US West (Arizona, New
Mexico and Colorado), Bell Atlantic (Maryland, Virginia and the District of
Columbia), GTE (Texas, Kentucky and Florida) and Sprint/Central Telephone
(Nevada). Arbitration decisions involving the Company's interconnection
arrangements in several states have been challenged in lawsuits filed in U.S.
District Courts by the affected ILECs. In addition, the Company has filed a
lawsuit in U.S. District Court in Louisiana seeking review of the pricing of
interconnection and unbundled network elements approved by the Louisiana PSC.
Some of the Company's local interconnection agreements expire during 1998 and
will require renegotiation this year. Attempts by the Company to negotiate
interconnection of its frame relay services already have proven unsuccessful in
some areas, requiring the Company to seek state Commission arbitration in
Arizona, Colorado, New Mexico and California. There can be no assurance that
these negotiations and renegotiations of interconnection agreements will be
successful, or that state PSC arbitration of any unresolved issues will be
decided favorably to the Company.
The Company has experienced some difficulty in obtaining timely ILEC
implementation of local interconnection agreements. Delays encountered in
unbundled loop and number portability installation have caused the Company to
file complaints against BellSouth with the FCC and Georgia PSC. The Company is
considering the possibility of filing similar actions against other ILECs.
Under its local interconnection agreements, the Company has a right to
charge ILECs reciprocal compensation for the transport and termination of local
traffic routed from ILEC end users to end users of the Company's local exchange
services. Many CLECs, like the Company, have booked significant revenue based on
reciprocal compensation for the termination of calls placed to ISPs that are
business subscribers to the CLEC's local exchange services. Certain ILECs have
taken the
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position that calls placed to enhanced service providers, including ISPs, do not
terminate with the ISP and, therefore, are not "local traffic" for which the
CLEC is entitled to receive reciprocal compensation under these interconnection
agreements. Consequently, certain ILECs currently are refusing to pay reciprocal
compensation amounts for traffic attributable to calls placed to ISPs. Since a
significant amount of the Company's local traffic is generated from ISPs, a
failure by one or more ILECs to pay ISP-related reciprocal compensation could
have a significant impact on the Company's revenues. The obligation of ILECs to
remit such compensation currently is the subject of numerous proceedings at the
FCC and State Commissions and in Federal and state courts, including complaint
proceedings initiated by the Company at PSCs and through commercial arbitration
for collection of such compensation under its interconnection agreements. Any
final order by the FCC or a state PSC in a state in which the Company's
interconnection agreements entitle it to reciprocal compensation, or a final
determination by a Federal or applicable state court or arbitration panel that
no reciprocal compensation is owed for calls placed to ISPs could have a
material adverse effect on the Company.
LOCAL GOVERNMENT AUTHORIZATIONS. The Company is required to obtain street
use and construction permits and licenses and/or franchises to install and
expand its fiber optic networks using municipal rights-of-way. Termination of
the existing franchise or license agreements prior to their expiration dates
could have a materially adverse effect on the Company. In some municipalities
where the Company has installed or anticipates constructing networks, it will be
required to pay license or franchise fees based on a percentage of gross
revenues or on a per linear foot basis, as well as post performance bonds or
letters of credit. There can be no assurance that the Company will not be
required to post similar bonds in the future, nor is there any assurance that,
following the expiration of existing franchises, fees will remain at their
current levels. In many markets, the ILECs do not pay such franchise fees or pay
fees that are substantially less than those required to be paid by the Company.
To the extent that competitors do not pay the same level of fees as the Company,
the Company could be at a competitive disadvantage. However, the FTA provides
that any compensation extracted by states and localities for use of public
rights-of-way must be "fair and reasonable," applied on a "competitively neutral
and nondiscriminatory basis" and be "publicly disclosed" by such government
entity.
EMPLOYEES
As of June 30, 1998, the Company employed a total of 979 individuals full
time. The Company believes that its future success will depend on its continued
ability to attract and retain highly skilled and qualified employees. None of
the Company's employees is subject to a collective bargaining agreement. The
Company believes that its relations with its employees are good.
LEGAL PROCEEDINGS
The Company and its subsidiaries are currently parties to routine
litigation incidental to their business, none of which, individually or in the
aggregate, are expected to have a material adverse effect on the Company. The
Company and its subsidiaries are parties to various court appeals and regulatory
arbitration proceedings relating to certain of the Company's interconnection
agreements and continue to participate in regulatory proceedings before the FCC
and state regulatory agencies concerning the authorization of services and the
adoption of new regulations. See "-- Regulation".
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information as of the date of this
Prospectus regarding the directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES HELD
---- --- -------------------------
<S> <C> <C>
Anthony J. Pompliano...................... 59 Chairman of the Board of Directors
Jack E. Reich............................. 47 President and Chief Executive Officer and Director
Ronald E. Spears.......................... 50 Chief Operating Officer
Riley M. Murphy........................... 42 Executive Vice President -- Legal and Regulatory
Affairs, General Counsel and Secretary
David L. Piazza........................... 43 Chief Financial Officer
George M. Middlemas(1).................... 52 Director
Edwin M. Banks(2)......................... 35 Director
Christopher L. Rafferty(1)................ 50 Director
Benjamin P. Giess......................... 35 Director
Olivier L. Trouveroy(1)(2)................ 43 Director
Peter C. Bentz............................ 33 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Anthony J. Pompliano, Chairman of the Board of Directors, has more than 30
years of experience in the telecommunications industry. Mr. Pompliano was
elected a director of the Company in November 1993. He was co-founder and
President of Metropolitan Fiber Systems, the predecessor organization to MFS
Communications, a publicly-traded CLEC that was acquired by WorldCom, Inc. in
December 1996. Mr. Pompliano served as President, CEO and Vice Chairman of MFS
Communications from April 1988 until March 1991. He joined the Company in August
1993 after the expiration of his non-competition agreement with MFS
Communications. Before his association with MFS Communications and its
predecessor, he was Vice President -- Operations and Sales for MCI
Telecommunications International from 1981 to 1987, and prior thereto, was Vice
President -- National Operations for Western Union International, Inc. from 1960
to 1981.
Jack E. Reich, President and Chief Executive Officer, had 22 years of
telecommunications industry and management experience before joining the Company
in December 1996. Mr. Reich was elected to the Board of Directors on September
22, 1997. For two and one-half years prior to joining ACSI, Mr. Reich was
employed by Ameritech, Inc. as President of its Custom Business Service
Organization, where Mr. Reich was responsible for full business marketing to
Ameritech's largest customers for telecommunications services, advanced data
services, electronic commerce and managed services/outsource initiatives. Prior
thereto, he served as President of MCI's Multinational Accounts organization,
and also served as MCI's Vice President of Products Marketing. Mr. Reich has
also held sales and marketing positions at AT&T and ROLM Corp. Mr. Reich has a
B.S. degree from St. Louis University and an MBA from the University of Chicago.
Ronald E. Spears, Chief Operating Officer, joined the Company on February
2, 1998. Mr. Spears has over 20 years of experience in the telecommunications
industry. For two years prior to joining the Company, Mr. Spears served as
Corporate Vice President -- Telecommunications for Citizens Utilities where he
was responsible for the development and execution of communications for its
Citizens Communications subsidiary. While employed by Citizens Utilities, Mr.
Spears managed over 3500 employees, helped build a 5-market CLEC business and
developed and launched their long distance business. Prior thereto he served as
Chairman and Chief Executive Officer of Videocart Inc. and from 1984 until 1990,
as President of MCI Communications Corporation's Midwest operating
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division. He also serves on the Board of Directors of Hungarian Telephone and
Cable Corp. Mr. Spears has a B.S. degree in Electrical Engineering from the
United States Military Academy and a Masters degree in Public Service from
Western Kentucky University.
Riley M. Murphy, Executive Vice President -- Legal and Regulatory Affairs
and Secretary, had twelve years of experience in the private practice of
telecommunications regulatory law for interexchange, cellular, paging and other
competitive telecommunication services prior to joining the Company in 1994. She
is a director of COMPTEL and from February 1995 through 1997, she served as an
officer and director of the Association for Local Telecommunications Services.
Ms. Murphy was senior counsel to Locke Purnell Rain Harrell, a Dallas-based law
firm, from 1993 to 1994. From 1987 to 1992, Ms. Murphy was a partner of Wirpel
and Murphy, a telecommunications law firm she co-founded, and from 1992 to 1993
she was a sole practitioner. She holds a B.A. degree from the University of
Colorado and a J.D. from the Catholic University of America and is admitted to
practice law in the District of Columbia and Louisiana.
David L. Piazza, Chief Financial Officer, joined the Company on March 24,
1997. For ten years prior to joining the Company, Mr. Piazza was employed by MFS
Communications in a variety of finance and senior management positions, most
recently as the Senior Vice President and Chief Financial Officer of MFS
Telecom, Inc., a subsidiary of MFS Communications. Prior to his employment with
MFS Communications, Mr. Piazza was employed by AT&T for four years in its
finance and regulatory support divisions. He spent the first five years of his
career with Arthur Andersen & Co. in its regulated industries and public utility
practice. Mr. Piazza received his B.S. degree in Accountancy from the University
of Illinois and holds a CPA.
George M. Middlemas, Director, was elected a director of the Company in
December 1993. Mr. Middlemas is a general partner of Apex Management
Partnership, which is the general partner of Apex Investment Fund I, L.P. and
Apex Investment Fund II, L.P., both of which are venture capital funds, and
affiliates of First Analysis Corporation, a principal stockholder of the
Company. See "Principal Stockholders." From March 1991 to December 1991, Mr.
Middlemas acted as an independent consultant providing fund raising and other
advisory services. From 1985 until March 1991, Mr. Middlemas was a Senior Vice
President and Principal of Inco Venture Capital Management, a venture capital
firm. He also serves on the Board of Directors of PureCycle Corporation,
Security Dynamics Technologies, Inc. and several privately held companies.
Edwin M. Banks, Director, was elected a director of the Company in October
1994. Since 1988, Mr. Banks has been employed by W. R. Huff Asset Management
Co., L.L.C. and currently serves as a portfolio manager concentrating in the
healthcare, communications, food and food services industries. From 1985 until
he joined W.R. Huff Asset Management Co., L.L.C., Mr. Banks was employed by
Merrill Lynch & Co. Mr. Banks received his B.A. degree from Rutgers College and
his MBA degree from Rutgers University. Mr. Banks also serves as a director of
Magellan Health Services.
Christopher L. Rafferty, Director, was elected a director of the Company in
October 1994. Mr. Rafferty has been employed by WRH Partners, L.L.C., the
general partner of Huff since June 1994. From January 1993 to February 1994, Mr.
Rafferty was Vice President -- Acquisitions for Windsor Pet Care, Inc., a
venture capital-backed firm focusing on consolidating the pet care services
industry. From October 1990 to January 1993, Mr. Rafferty was a consultant
specializing in merchant banking, leveraged acquisitions and venture capital
transactions. From June 1987 to the time he started his consulting business, Mr.
Rafferty was a Managing Director of Chase Manhattan Capital Corporation, the
merchant banking and private equity investment affiliate of Chase Manhattan
Corporation. Mr. Rafferty received his undergraduate degree from Stanford
University and his law degree from Georgetown University.
Benjamin P. Giess, Director, was elected a director of the Company in June
1995. Since 1992, Mr. Giess has been employed by ING and its predecessors and
affiliates and currently serves as a Partner responsible for originating,
structuring and managing equity and debt investments. From
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1991 to 1992, Mr. Giess worked in the Corporate Finance Group of ING Capital.
From 1990 to 1991, Mr. Giess was employed by the Corporate Finance Group of
General Electric Capital Corporation where he worked in the media and
entertainment group. Prior to attending business school, from 1986 to 1988, Mr.
Giess was the Credit Department Manager of the Boston Branch of ABN Amro North
America, Inc. From 1984 to 1986, Mr. Giess was employed at the Shawmut Bank of
Boston. Mr. Giess also serves as a director of Matthews Studio Equipment Group,
CMI Holding Corp. and TransCare Corporation. Mr. Giess received his
undergraduate degree from Dartmouth College and his MBA from the Wharton School
of the University of Pennsylvania.
Olivier L. Trouveroy, Director, was elected a director of the Company in
June 1995. Since 1992, Mr. Trouveroy has been employed by ING and its
predecessors and affiliates and currently serves as a Managing Partner
responsible for originating, structuring and managing equity and debt
investments. From 1990 to 1992, Mr. Trouveroy was a Managing Director in the
Corporate Finance Group ("CFG") of General Electric Capital Corporation in
charge of CFG's office in Paris, France. From 1984 to 1990, Mr. Trouveroy held
various positions in the Mergers and Acquisitions department of Drexel Burnham
Lambert in New York. Mr. Trouveroy also serves as a director of AccessLine
Technologies, Inc., Cost Plus, Inc., Kasper A.S.L., Ltd. and TransCare
Corporation. Mr. Trouveroy holds B.S. and Masters degrees in Economics from the
University of Louvain in Belgium, as well as an MBA from the University of
Chicago.
Peter C. Bentz, Director, was elected a director of the Company in June
1995. Since 1992, Mr. Bentz has been employed by W. R. Huff Asset Management
Co., L.L.C. as a research analyst specializing in telecommunications, media and
healthcare. Mr. Bentz received his Bachelor of Science degree from Boston
College in 1987 and his MBA from the Wharton School of the University of
Pennsylvania in 1992.
The Board is comprised of eight members who were elected by the holders of
the Common Stock. All directors of the Company hold office until the next annual
meeting of stockholders and until their successors are duly elected and
qualified.
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PRINCIPAL STOCKHOLDERS
The following table sets forth as of June 30, 1998, certain information
regarding the beneficial ownership of the Common Stock outstanding (assuming the
exercise of options and warrants exercisable on or within 60 days of such date)
by (i) each person who is known to the Company to own 5% or more of the Common
Stock, (ii) each director of the Company, (iii) each executive officer of the
Company and (iv) all executive officers and directors of the Company as a group.
Unless otherwise indicated, the named persons exercise sole voting and
investment power over the shares that are shown as beneficially owned by them.
<TABLE>
<CAPTION>
SHARES OWNED
--------------------------
NAME OF BENEFICIAL OWNER(1) NUMBER PERCENT(2)
- --------------------------- ------ ----------
<S> <C> <C>
Anthony J. Pompliano........................................ 1,649,999(3) 3.4%
Jack E. Reich............................................... 320,722(4) *
Ronald E. Spears............................................ 20,021(5) *
Riley M. Murphy............................................. 300,871(6) *
David L. Piazza............................................. 57,380(7) *
George M. Middlemas......................................... 1,699,499(8) 3.6
Christopher Rafferty(9)..................................... 8,000 *
Edwin M. Banks(9)........................................... -- --
Peter C. Bentz(9)........................................... -- --
Olivier L. Trouveroy(10).................................... -- --
Benjamin P. Giess(10)....................................... -- --
The Huff Alternative Income Fund, L.P....................... 15,090,140(11) 31.2
ING Equity Partners, L.P. I................................. 7,946,828(12) 16.7
First Analysis.............................................. 3,202,233(13) 6.3
All executive officers and directors as a group (11
persons).................................................. 4,056,492 8.2
</TABLE>
- ---------------
* Less than one percent.
(1) The addresses of all officers and directors listed above are in the care of
the Company.
(2) The percentage of total outstanding stock for each stockholder is based on
the number of shares outstanding as of June 30, 1998.
(3) Includes currently exercisable options to purchase 1,649,899 shares of
common stock.
(4) Includes currently exercisable options to purchase 300,000 shares, 2,272
shares of Common Stock purchased through the 1996 Employee Stock Purchase
Plan and 18,450 shares of common stock awarded for 1997 bonuses pursuant to
the Company's Annual Performance Plan.
(5) Includes currently exercisable options to purchase 20,000 shares and 21
shares of common stock purchased through the 1996 Employer Stock Purchase
Plan.
(6) Includes currently exercisable options to purchase 290,002 shares, 3,379
shares of Common Stock purchased through the 1996 Employee Stock Purchase
Plan and 7,490 shares of common stock awarded for 1997 bonuses pursuant to
the Company's Annual Performance Plan.
(7) Includes currently exercisable options to purchase 50,000 shares of common
stock and 7,380 shares of common stock awarded for 1997 bonuses pursuant to
the Company's Annual Performance Plan.
(8) Includes 20,000 shares owned directly, 8,000 shares owned through an
individual retirement account and currently exercisable options to purchase
30,000 shares. Also includes 1,222,702 shares of Common Stock owned by Apex
II and 418,797 shares of Common Stock owned by Apex I. Mr. Middlemas is a
general partner of Apex Management Partnership which is the general partner
of Apex I and Apex II. Mr. Middlemas disclaims beneficial ownership of the
shares owned by Apex I and Apex II, except to the extent of his ownership
in the general partner of Apex I and in the general partner of Apex II.
(9) Messrs. Banks and Bentz are employees of W.R. Huff Asset Management Co.,
L.L.C., an affiliate of Huff. Mr. Rafferty is an employee of WRH Partners,
L.L.C., the general partner of Huff. Messrs. Rafferty, Bentz and Banks
disclaim beneficial ownership of all shares held by Huff.
(10) Mr. Trouveroy is a Managing Partner of ING and Mr. Giess is a Partner of
ING. Messrs. Trouveroy and Giess disclaim beneficial ownership of all
shares held by ING.
(11) Includes currently exercisable warrants to purchase 200,000 shares. The
address for Huff is 1776 On the Green, 67 Park Place, Morristown, NJ 07960.
(12) Includes currently exercisable warrants to purchase 100,000 shares. The
address for ING is 135 East 57th Street, 16th Floor, New York, NY 10022.
(13) Includes 1,222,702 shares of Common Stock owned by Apex II. Includes
418,797 shares of Common Stock owned by Apex I. Includes 780,883 shares of
Common Stock owned by The Productivity Fund II, L.P. ("Productivity").
Includes 779,855 shares of Common Stock owned by Environmental Private
Equity Fund II, L.P. ("EPEF"). First Analysis Corporation ("FAC") is an
ultimate general partner of Apex I, Apex II, Productivity and EPEF and may
be deemed to be the beneficial owner of the shares owned by them. FAC
disclaims beneficial ownership of these shares. This information was
obtained from a Schedule 13D filed with the SEC on May 6, 1997, as amended
from time to time. The address for FAC is 233 South Wacker Drive, Suite
9600, Chicago, IL 60093.
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DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 128,000,000 shares of
capital stock, consisting of 125,000,000 shares of Common Stock, par value $.01
per share, and 3,000,000 shares of Preferred Stock, par value $1.00 per share.
On June 30, 1998, there were 47,385,349 shares of Common Stock issued and
outstanding and held of record by approximately 276 persons, including 116,400
shares issued in connection with conversion of 2,910 shares of Preferred Stock
and 17,260,864 shares issued in connection with the conversion of 461,254 shares
of Preferred Stock.
1998 COMMON STOCK OFFERING. On April 3, 1998, the Company completed the
1998 Common Stock Offering. 7,502,418 of such shares were issued and sold by the
Company and 597,582 of such shares were sold by certain stockholders of the
Company. Total net proceeds to the Company from the 1998 Common Stock Offering
were approximately $134.2 million.
JUNIOR PREFERRED STOCK OFFERING. On October 16, 1997, the Company
consummated the sale of 150,000 shares (the "Junior Preferred Stock Offering"
and, together with the Unit Offering and the Debt Offering, each as defined
below, the "Recent Offerings"), consisting of its 12 3/4% Junior Redeemable
Preferred Stock due 2009 (the "12 3/4% Preferred Stock"). Total net proceeds to
the Company from the Junior Preferred Stock Offering were approximately $146.0
million.
UNIT OFFERING. On July 10, 1997, the Company consummated the issuance and
sale of 75,000 units (the "Unit Offering"), consisting of its 14 3/4% Redeemable
Preferred Stock due 2008 (the "14 3/4% Preferred Stock" and, together with the
12 3/4% Preferred Stock, the "Preferred Stock") and warrants (the "Unit
Warrants" and together with the 14 3/4% Preferred Stock, the "Units") to
purchase approximately 6,023,800 shares (subject to adjustment) of its Common
Stock). Total net proceeds to the Company from the Unit Offering were
approximately $70 million.
COMMON STOCK OFFERING. On April 15, 1997, the Company consummated (i) the
issuance and sale of 5,060,000 shares of Common Stock (inclusive of the May 14,
1997 exercise by the underwriters of their over-allotment option) at a price per
share of $5.00 in an underwritten public offering and (ii) the issuance and sale
directly to certain of its principal stockholders of 3,600,000 shares of Common
Stock at a purchase price of $4.70 per share (together, the "Common Stock
Offering"). Total net proceeds to the Company from the Common Stock Offering
were approximately $40 million.
PREFERRED STOCK
The authorized but unissued Preferred Stock may be issued by the Board of
Directors of the Company from time to time in one or more series with such
preferences, terms and rights as the Board of Director 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.
It is not possible to state the actual effect of the authorization of any
particular series of Preferred Stock upon the rights of holders of the Common
Stock until the Board of Directors determines the specific rights of the holder
of Preferred Stock of any further series. The issuance of Preferred Stock may
have the effect of delaying, deferring or preventing a change in control of the
Company without further action by the stockholders.
COMMON STOCK
The Company is authorized to issue 125,000,000 shares of Common Stock.
Under the Company's By-Laws, at least a majority of the issued and outstanding
voting securities of the Company present at a duly called stockholders' meeting
constitutes a quorum. Generally, if a quorum is present the affirmative vote of
the majority of the voting securities represented at the meeting constitutes an
act of the stockholders.
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Subject to the rights of holders of the Preferred Stock, certain covenants
contained in the Indentures which restrict the Company's ability to declare
dividends on its Common Stock, the restrictions on dividends contained in the
New AT&T Credit Facility and the restrictive covenants which are expected to be
contained in the GSCP Credit Facilities, holders of the Common Stock are
entitled to receive dividends, on a pro rata basis, as may from time to time be
declared by the Board of Directors. The holders of Common Stock are entitled to
one vote per share, voting together with the holders of Preferred Stock (voting
on an as-converted basis) as a single class (except with respect to the election
of directors and certain transactions and matters), on every question submitted
to them at a meeting of shareholders. In the event of liquidation, dissolution
or winding up, the holders of Common Stock are, subject to the liquidation,
dissolution or winding up, the holders of Common Stock are, subject to the
liquidation preference of the holders of Preferred Stock, entitled to share
ratably in all assets of the Company available for distribution to stockholders
along with the holders of the Preferred Stock.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
GSCP CREDIT FACILITIES
GSCP has entered into a commitment letter with the Company to provide the
$300.0 million GSCP Credit Facilities, which are expected to close in the third
quarter of 1998. GSCP Credit Facilities are expected to consist of (i) the $35.0
million Series A Facility, the proceeds of which will be used to refinance the
New AT&T Credit Facility and (ii) the $265.0 million Series B Facility, $40.0
million of which would be in the form of the Series B Term Facility and $225.0
million of which would be in the form of the Series B Revolving Facility). The
proceeds of the Series B Facility would be available to the Company only to
provide purchase money financing for the acquisition, construction and
improvement of telecommunications assets of the Company's operating
subsidiaries.
An intermediate holding company (the "Finance Sub") which will be wholly
owned by the Company would own all of the capital stock of the Company's
operating subsidiaries and would be the borrower under the Series A Facility.
The Company would be the borrower under the Series B Facility. The Finance Sub
is expected to enter into a secured intercompany note (the "Master Note")
pursuant to which the Company would loan proceeds of the Series B Facility to
the Finance Sub, which in turn would provide intercompany loans to the operating
subsidiaries. Intercompany loans made by the Finance Sub to the operating
subsidiaries would be made pursuant to intercompany notes which would be secured
by all of the assets of such subsidiaries. Such intercompany notes and security
interests would be pledged by the Finance Sub to secure the Master Note. The
Master Note, together with all security therefor, would be pledged by the
Company to secure the loans made under the Series B Facility. The Series A
Facility is expected to be secured by a first priority security interest in 100%
of the capital stock of certain subsidiaries of the Company, including the
Finance Sub, and substantially all other assets of the Finance Sub and such
other subsidiaries.
The GSCP Credit Facilities are expected to have an eight-year maturity
subject to acceleration upon the occurrence of certain events. The Series A
Facility and Series B Term Facility are expected to be fully drawn at closing
and amounts repaid thereunder (in accordance with scheduled amortization and
otherwise) may not be reborrowed. It is expected that, commencing on the fifth
year following the closing of the GSCP Credit Facilities, borrowings will be
amortized and there will be corresponding commitment reductions. At the request
of the Company and subject to requisite lender consent, an incremental senior
secured credit facility of up to $100.0 million may be furnished to the Company
at such time that there are no more than $25.0 million of unfunded commitments
under the GSCP Credit Facilities. Certain operating subsidiaries of the Company
are expected to guarantee the obligations of the Finance Sub under the Series A
Facility. All amounts outstanding under the GSCP Credit Facilities are expected
to bear interest at a base rate or reserve adjusted eurodollar rate plus an
applicable margin based on performance. The GSCP Credit Facilities will be
subject to certain representations, warranties, covenants and events of default
customary for credits of this nature and otherwise agreed upon by the parties
thereto.
GSCP intents to syndicate the GSCP Credit Facilities to a group of lenders
selected in consultation with the Company and to identify a lender to act as
administrative agent for the lenders.
NEW AT&T CREDIT FACILITY
On December 30, 1997, the Company entered into the New AT&T Credit Facility
pursuant to which AT&T Commercial Finance Corporation has provided up to $35.0
million in financing in order to effect the Refinancing and for general
corporate purposes. It is expected that amounts outstanding under the New AT&T
Credit Facility will be repaid in connection with the closing of the GSCP Credit
Facilities. See "-- GSCP Credit Facilities" above.
The loans under the New AT&T Credit Facility are secured by the capital
stock of the material subsidiaries of the Company and the promissory notes (the
"Intercompany Notes") of certain subsidiaries of the Company evidencing debt
provided by the Company pursuant to the Refinancing. The aggregate outstanding
principal balance of the loans is payable in twenty-four (24) consecutive
quarterly installments beginning on December 31, 1998 and continuing on each of
the last calendar
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days (or the next succeeding business day if such date is not a business day) of
March, June, September and December in each calendar year thereafter through and
including September 30, 2004. The principal of borrowed amounts may be prepaid
in certain circumstances and must be prepaid, without premium or penalty, in
other circumstances. Interest is due quarterly. Interest is variable based on
the three-month Commercial Paper Rate or LIBOR Rate plus 4.5% per annum, at the
Company's option, and is compounded quarterly. Upon certain events of default,
additional interest at a rate of 2% will become payable. In addition, the New
AT&T Credit Facility includes covenants, some of which impose certain
restrictions on the Company and its material subsidiaries including restrictions
on the declaration or payment of dividends, the conduct of certain activities,
certain investments, the creation of additional liens or indebtedness, the
disposition of assets, transactions with affiliates and extraordinary corporate
transactions.
In connection with the New AT&T Credit Facility, the Company issued to AT&T
Credit Corporation 207,964 shares of its common stock in exchange for AT&T
Credit Corporation conveying to the Company (i) 145 shares of common stock of
American Communication Services of Columbia, Inc., (ii) 14.5 shares of common
stock of American Communication Services of El Paso, Inc., (iii) 145 shares of
common stock of American Communication Services of Fort Worth, Inc., (iv) 145
shares of common stock of American Communication Services of Greenville, Inc.,
and (v) 156.3 shares of common stock of American Communication Services of
Louisville, Inc. The Company was required to pledge to AT&T Commercial Finance
Corporation (i) all of its shares (present and future) of capital stock in its
material subsidiaries, along with all options and warrants therein, (ii) the
Intercompany Notes and (iii) any proceeds of any of the foregoing. Under certain
circumstances, the pledge agreement governing such pledge also restricts the
Company's ability to receive and retain dividends in respect of the pledged
collateral.
THE EXISTING NOTES
The terms of the Existing Notes include those stated in the applicable
indenture and those made a part of the applicable indenture by reference to the
Trust Indenture Act of 1939, as in effect on the date of such indenture. The
terms of the Existing Notes are substantially similar. The following summaries
of certain provisions of those indentures do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all of the
provisions of the indentures.
The Existing Notes are general unsubordinated and unsecured senior
obligations of the Company and rank pari passu with all other unsubordinated and
unsecured indebtedness of the Company. As a holding company that conducts
virtually all of its business through subsidiaries, the Company currently has no
source of operating cash flow other than from dividends and distributions from
its subsidiaries. The Company's subsidiaries have no obligation to pay amounts
due on the Existing Notes and do not guarantee the Existing Notes. Therefore,
the rights of the holders of the Existing Notes are effectively subordinated to
all liabilities of the Company's subsidiaries, including trade payables. Any
rights of the Company and its creditors, including the holders of the Existing
Notes, to participate in the assets of any of the Company's subsidiaries upon
any liquidation or reorganization of any such subsidiary are subject to the
prior claims of that subsidiary's creditors (including trade creditors).
Upon a Change of Control (as defined in the indentures), each holder of the
Existing Notes will have the right to require the Company to repurchase all or
any part of such holder's Existing Notes at 101% of the respective Accreted
Value (as defined in the indentures) thereof, or, in the case of any such
repurchase on or after November 1, 2000 in the case of the 2005 Notes, on or
after April 1, 2001 in the case of the 2006 Notes and on or after January 15,
2002 in the case of the 2007 Notes, 101% of the respective principal amount
thereof, plus accrued and unpaid interest, if any, thereon, to the date of
repurchase. A Change of Control would occur if, among other things, any person
or group, other than Mr. Pompliano, certain affiliates of FAC, ING or Huff and,
in the case of the 2005 Indenture and 2006 Indenture, Mr. Kozak, acquires more
than 35% of the total voting power of the Company. See "Risk Factors -- Change
of Control Risk."
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Each of the indentures contains certain covenants which, among other
things, restrict the ability of the Company and certain of its subsidiaries to
incur additional indebtedness, pay dividends or make distributions in respect of
the Company's capital stock or make certain other restricted payments, create
restrictions on the ability of certain subsidiaries to make distributions on
their capital stock, create liens, enter into transactions with affiliates or
related persons, sell assets, or consolidate, merge or sell all or substantially
all of their assets.
On June 11, 1997, the Company notified the trustee under each of the
indentures governing the 2005 Notes and 2006 Notes that, as of June 10, 1997, it
had approximately $13.0 million in the aggregate of ordinary course trade
accounts payable that were more than 60 days overdue. As of June 30, 1997, the
Company had approximately $17.4 million in the aggregate of ordinary course
trade accounts payable that were more than 60 days overdue. These overdue
amounts constituted Indebtedness of the Company, as that term is defined in each
such indenture governing the 2005 Notes and 2006 Notes. The incurrence by the
Company of such Indebtedness was not permitted under the 2005 Indenture and 2006
Indenture and, therefore, constituted an Event of Default (as defined under each
of those indentures). The Company used a portion of the proceeds of the Unit
Offering to pay in full all ordinary course trade accounts payable that were
more than 60 days overdue to cure such Event of Default.
AMENDMENT OF EXISTING INDENTURES
The Company paid approximately $10.3 million to effect the amendments to
the Existing Indentures (the "Amendments") on February 26, 1998. The Amendments
amended certain covenants which significantly limited the ability of the Company
and its subsidiaries to incur additional indebtedness, issue disqualified stock
or make investments or acquisitions. The previous limitations on indebtedness
(the "Previous Debt Covenants") prohibited the incurrence of indebtedness (with
certain exceptions) unless, after giving effect to such incurrence, the Debt to
EBITDA Ratio of the Company was no more than 5.5x until November 1, 1998 or 5.0x
thereafter. The Amendments provide an alternative test which, when combined with
existing provisions, permits the incurrence of additional indebtedness if the
Company satisfies either the Debt to EBITDA Ratio test in the Previous Debt
Covenants or a new test whereby the Debt to Capital Ratio does not exceed 2.0x;
provided, that in determining the amount of indebtedness the Company may incur
in reliance on the new Debt to Capital Ratio test, $100,000,000 shall be
subtracted from the amount that may be incurred, which will have the effect of
reducing the amount of indebtedness that could otherwise have been incurred.
Debt to Capital Ratio is, as of any date of determination, the ratio of (i) the
amount of indebtedness of the Company and its Restricted Subsidiaries then
outstanding on a consolidated basis to (ii) the capital of the Company and its
restricted subsidiaries on a consolidated basis. For purposes of this
calculation, "capital" means stockholders' equity (deficit), except that all
Preferred Stock is included and retained earnings (deficit) is excluded, each as
determined in accordance with GAAP.
The Previous Debt Covenants also contained, among other exceptions, an
allowance for new indebtedness not subject to restriction in an aggregate amount
not to exceed $428,634. The Amendments increased this allowance to $10,000,000.
The Amendments also permit, subject to the limitations described below, the
incurrence of purchase money debt which is issued for the construction,
acquisition and improvement of telecommunications assets; provided, that the
amount of such purchase money debt does not exceed the cost of the construction,
acquisition or improvement of the applicable telecommunications assets.
Purchase money debt may only be incurred under this exemption so long as
all purchase money debt does not exceed 50% of the amount of accreted unsecured
indebtedness of the Company and its restricted subsidiaries on a consolidated
basis as of such date; provided, that in calculating the purchase money debt
allowance, incurrences of purchase money debt consisting of (A) capital lease
obligations resulting from the conversion of operating leases in an amount not
to exceed
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<PAGE> 76
$36,000,000 and (B) up to $35,000,000 of indebtedness incurred pursuant to the
New AT&T Credit Facility shall not be counted.
The existing definitions of "Permitted Investments" and "Permitted Liens"
were amended to permit investments in telecommunications assets and the creation
of liens in connection with the purchase money debt exemption.
THE 2005 NOTES
The 2005 Notes mature on November 1, 2005. The yield on the 2005 Notes
equals 13% per annum, computed on a semi-annual bond equivalent basis and
calculated from November 9, 1995. The 2005 Notes will accrete at a rate of 13%,
compounded semi-annually, to an aggregate principal amount of $190,000,000 by
November 1, 2000. Cash interest will not accrue on the 2005 Notes prior to
November 1, 2000. Thereafter, interest on the 2005 Notes will accrue at the rate
of 13% per annum and will be payable in cash semi-annually on May 1 and November
1, commencing May 1, 2001. The 2005 Notes will be redeemable, at the option of
the Company at any time, in whole or in part, on or after November 1, 2000, at
110%, 106 2/3% and 103 1/3% of the principal amount for the twelve months
following November 1, 2000, 2001 and 2002, respectively, plus accrued and unpaid
interest, if any, to the date of redemption.
THE 2006 NOTES
The 2006 Notes mature on April 1, 2006. The yield on the 2006 Notes equals
12 3/4% per annum, computed on a semi-annual bond equivalent basis and
calculated from March 21, 1996. The 2006 Notes will accrete at a rate of
12 3/4%, compounded semi-annually, to an aggregate principal amount of
$120,000,000 by April 1, 2001. Cash interest will not accrue on the 2006 Notes
prior to April 1, 2001. Thereafter, interest on the 2006 Notes will accrue at
the rate of 12 3/4% per annum and will be payable in cash semi-annually on April
1 and October 1, commencing October 1, 2001. The 2006 Notes will be redeemable,
at the option of the Company at any time, in whole or in part, on or after April
1, 2001 at 106 3/8%, 104 1/4% and 102 1/8% of the principal amount for the
twelve months following April 1, 2001, 2002 and 2003, respectively, plus accrued
and unpaid interest, if any, thereon, to the date of repurchase.
THE 2007 NOTES
On July 23, 1997, the Company consummated the sale of $220 million
aggregate principal amount of the 2007 Notes. Of the total net proceeds of $204
million, the Company placed approximately $70 million representing funds
sufficient to pay the first five semi-annual interest payments on the 2007
Notes, into an escrow account for the benefit of the holders thereof.
The 2007 Notes mature on July 15, 2007. The 2007 Notes bear interest at a
rate of 13 3/4% per annum from July 23, 1997 payable semi-annually in cash on
January 15, and July 15, commencing January 15, 1998. The Company placed
approximately $70.0 million of the proceeds from the sale of the 2007 Notes,
representing funds, together with interest thereon, sufficient to pay the first
five semi-annual interest payments on the 2007 Notes, into an escrow account to
be held by the escrow agent for the benefit of the holders of the 2007 Notes.
The 2007 Notes are redeemable, at the option of the Company, in whole or in
part, on or after July 15, 2002 at 106.875%, 105.156%, 103.438%, 101.719% and
100% of their principal amount for the twelve months following July 15, 2002,
2003, 2004, 2005 and 2006, respectively, plus accrued and unpaid interest, if
any, thereon, to the date of repurchase. In addition, at any time on or prior to
July 15, 2000, the Company may, at its option, redeem up to 35% of the aggregate
principal amount at maturity of the 2007 Notes with the net cash proceeds of one
or more Equity Offerings (as defined in the related indenture), at a redemption
price equal to 113.75% of the principal amount thereof; provided, however, that
after giving effect to any such redemption, at least $143.0 million aggregate
principal amount of the 2007 Notes remains outstanding.
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DESCRIPTION OF THE NOTES
GENERAL
The Old Notes were and the New Notes will be issued under an indenture,
dated as of July 24, 1998 (the "Indenture"), between the Company and The Chase
Manhattan Bank, as trustee under the Indenture (the "Trustee"). For purposes of
this Description of the Notes, the term "Company" refers to e.spire
Communications, Inc. and does not include its subsidiaries except for purposes
of financial data determined on a consolidated basis.
The terms of the New Notes include those stated in the Indenture and those
made a part of the Indenture by reference to the Trust Indenture Act of 1939 as
in effect on the date of the Indenture (the "Trust Indenture Act"). The
following summaries of certain provisions of the Indenture do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all of the provisions of the Indenture. A copy of the Indenture is available
from the Company upon request. Whenever particular defined terms of the
Indenture not otherwise defined herein are referred to, such defined terms are
incorporated herein by reference. The New Notes are subject to all such terms,
and holders of the New Notes are referred to the Indenture and the Trust
Indenture Act for a complete statement of such terms. Certain terms used herein
are defined below under "-- Certain Definitions".
The New Notes will rank pari passu in right of payment with all existing
and future senior unsecured indebtedness of the Company, including the 2005
Notes, the 2006 Notes and the 2007 Notes and will be senior in right of payment
to all existing and future subordinated indebtedness of the Company. As of June
30, 1998, the total outstanding indebtedness of the Company that would rank pari
passu with the New Notes was approximately $440.4 million.The New Notes will not
be secured by any assets and will be effectively subordinated to any secured
indebtedness of the Company to the extent of the value of the assets securing
such indebtedness. As of June 30, 1998, the Company, on a consolidated basis,
had approximately $35.0 million outstanding of secured indebtedness. It is
expected that the Company's obligations under the GSCP Credit Facilities will be
secured by a pledge of substantially all of the capital stock of the Company's
subsidiaries, and the tangible and intangible assets of the Company and its
subsidiaries. See "Risk Factors -- Ranking of the Notes; Asset Encumbrances" and
"Description of Certain Indebtedness".
The operations of the Company are conducted through its subsidiaries and,
therefore, the Company is dependent upon cash flow from those entities to meet
its obligations. The Company's subsidiaries will have no direct obligation to
pay amounts due on the New Notes and will not guarantee the New Notes. As a
result, the New Notes effectively will be subordinated to all existing and
future third-party indebtedness and other liabilities of the Company's
subsidiaries (including trade payables). None of the indebtedness was secured by
first priority liens on all the assets of the borrowing subsidiaries. See
"Description of Certain Indebtedness". Any rights of the Company and its
creditors, including the holders of New Notes, to participate in the assets of
any of the Company's subsidiaries upon any liquidation or reorganization of any
such subsidiary will be subject to the prior claims of that subsidiary's
creditors (including trade creditors).
PRINCIPAL, MATURITY AND INTEREST
The Notes will be limited in aggregate principal amount to $375.0 million
and will mature on July 1, 2008. The New Notes will be issued in denominations
of $1,000 and integral multiples thereof. The Old Notes were offered at a
discount from their principal amount at maturity, with the initial Accreted
Value per $1,000 in principal amount of Old Notes equal to $599.89 (representing
the original price at which the Notes are being offered). The New Notes will
accrete (representing the amortization of original issue discount) on a
semi-annual bond equivalent basis using a 360-day year comprised of twelve
30-day months such that the Accreted Value shall be equal to the full principal
amount at maturity of the New Notes on July 1, 2003 (the "Full Accretion Date").
See
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<PAGE> 78
"Certain Federal Income Tax Considerations." No interest is payable in cash on
the New Notes prior to the Full Accretion Date. Beginning on the Full Accretion
Date the New Notes will accrue interest at the rate of 10.625% per annum, which
will be payable in cash semi-annually in arrears on January 1 and July 1 of each
year, commencing January 1, 2004, to the Person in whose name the New Note (or
any predecessor Note) is registered at the close of business on the immediately
preceding December 15 or June 15, as the case may be. The New Notes bear
interest on overdue principal and premium, if any, and, to the extent permitted
by law, overdue interest at the rate of 11.625% per annum. Interest on the New
Notes is computed on the basis of a 360-day year comprised of twelve 30-day
months.
Principal and interest will be payable at the office of the Paying Agent
but, at the option of the Company, interest may be paid by check mailed to the
registered holders at their registered addresses. The New Notes will be issued
without coupons and in fully registered form, in denominations of $1,000 and
integral multiples thereof. Unless otherwise designated by the Company, the
Company's office or agency in New York is the office of the Trustee maintained
for such purpose.
OPTIONAL REDEMPTION
The New Notes will not be redeemable at the option of the Company prior to
July 1, 2003. Thereafter, the New Notes will be subject to redemption at the
option of the Company, in whole or in part, upon not less than 30 nor more than
60 days' notice, at the redemption prices (expressed as percentages of principal
amount) set forth below, plus accrued and unpaid interest thereon (if any), if
redeemed during the twelve months beginning July 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003........................................................ 105.312%
2004........................................................ 103.542%
2005........................................................ 101.771%
2006 and thereafter......................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to July 1, 2001, the
Company may redeem up to 35% of the Accreted Value on the date of redemption
with the net proceeds from one or more Equity Offerings of the Company at a
redemption price equal to 110.625% of the aggregate principal amount thereof on
the date of redemption; provided, however, that, after giving effect to any such
redemption, at least 65% of the original principal amount of the New Notes
remain outstanding. In order to effect the foregoing redemption with the
proceeds of any Equity Offering, the Company shall make such redemption not more
than 60 days after the consummation of any such Equity Offering.
MANDATORY REDEMPTION
Except as set forth under "-- Repurchase at the Option of Holders Upon a
Change of Control" and "-- Asset Sales," the Company is not required to make
mandatory redemption payments or sinking fund payments with respect to the New
Notes.
REPURCHASE AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of New Notes shall
have the right to require the Company to repurchase all or any part (equal to
$1,000 principal amount or an integral multiple thereof) of such holder's New
Notes pursuant to the offer described below (the "Change of Control Offer") at a
purchase price (the "Change of Control Purchase Price") equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest, if any, to
any Change of Control Payment Date (as defined below), or, if such Change of
Control Offer is to be consummated
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prior to the Full Accretion Date, 101% of the Accreted Value thereof to any
Change of Control Payment Date.
Within 30 days following any Change of Control, the Company or the Trustee
(at the expense of the Company) shall mail a notice to each holder stating: (1)
that a Change of Control Offer is being made pursuant to the covenant in the
Indenture entitled "Repurchase at the Option of Holders upon a Change of
Control" and that all New Notes timely tendered will be accepted for payment;
(2) the Change of Control Purchase Price and the purchase date (the "Change of
Control Payment Date"), which shall be no earlier than 30 days nor later than 40
days from the date such notice is mailed; (3) that any New Notes or portions
thereof not tendered or accepted for payment will continue to accrete in value
or accrue interest, as the case may be; (4) that, unless the Company defaults in
the payment of the Change of Control Purchase Price, all New Notes or portions
thereof accepted for payment pursuant to the Change of Control Offer shall cease
to accrue interest, from and after the Change of Control Payment Date; (5) that
holders electing to have any New Notes or portions thereof purchased pursuant to
a Change of Control Offer will be required to surrender the New Notes, with the
form entitled "Option of Holder to Elect Purchase" on the reverse of the New
Notes completed, to the Paying Agent at the address specified in the notice
prior to the close of business on the third Business Day preceding the Change of
Control Payment Date; (6) that holders will be entitled to withdraw their
election if the Paying Agent receives, not later than the close of business on
the second Business Day preceding the Change of Control Payment Date, a
telegram, telex, facsimile transmission or letter setting forth the name of the
holder, the principal amount of New Notes delivered for purchase, and a
statement that such holder is withdrawing his election to have such New Notes or
portions thereof purchased; and (7) that holders whose New Notes are being
purchased only in part will be issued New Notes equal in principal amount to the
unpurchased portion of the New Note or New Notes surrendered, which unpurchased
portion must be equal to $1,000 in principal amount or an integral multiple
thereof.
The Company will comply with the requirements of Section 14(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and any other
securities laws and regulations, to the extent such laws and regulations are
applicable, in connection with the repurchase of New Notes pursuant to a Change
of Control Offer.
On the Change of Control Payment Date, the Company will (1) accept for
payment New Notes or portions thereof properly tendered pursuant to the Change
of Control Offer; (2) irrevocably deposit with the Paying Agent in immediately
available funds an amount equal to the Change of Control Purchase Price in
respect of all New Notes or portions thereof so tendered; and (3) deliver, or
cause to be delivered, to the Trustee the New Notes so accepted together with an
Officers' Certificate listing the New Notes or portions thereof tendered to the
Company and accepted for payment. The Paying Agent shall promptly mail to each
holder of New Notes so accepted payment in an amount equal to the Change of
Control Purchase Price for such New Notes, and the Trustee shall promptly
authenticate and mail to each holder a New Note equal in principal amount to any
unpurchased portion of the New Notes surrendered, if any; provided that each
such New Note shall be in a principal amount of $1,000 or any integral multiple
thereof.
The existence of the holders' right to require, subject to certain
conditions, the Company to repurchase New Notes upon a Change of Control may
deter a third party from acquiring the Company in a transaction that constitutes
a Change of Control. If a Change of Control Offer is made, there can be no
assurance that the Company will have sufficient funds to pay the Change of
Control Purchase Price for all New Notes tendered by holders seeking to accept
the Change of Control Offer. In addition, instruments governing other
indebtedness of the Company may prohibit the Company from purchasing any New
Notes prior to their stated maturity, including pursuant to a Change of Control
Offer. See "Description of Certain Indebtedness." In the event that a Change of
Control Offer occurs at a time when the Company does not have sufficient
available funds to pay the Change of Control Purchase Price for all New Notes
tendered pursuant to such offer or a time when the Company is prohibited from
purchasing the New Notes (and the Company is unable either to
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<PAGE> 80
obtain the consent of the holders of the relevant indebtedness or to repay such
indebtedness), an Event of Default would occur under the Indenture. In addition,
one of the events that constitutes a Change of Control under the Indenture is a
sale, conveyance, transfer or lease of all or substantially all of the property
of the Company. The Indenture is governed by New York law, and there is no
established definition under New York law of "substantially all" of the assets
of a corporation. Accordingly, if the Company were to engage in a transaction in
which it disposed of less than all of its assets, a question of interpretation
could arise as to whether such disposition was of "substantially all" of its
assets and whether the Company was required to make a Change of Control Offer.
Except as described herein with respect to a Change of Control, the
Indenture does not contain any other provisions that permit holders of New Notes
to require that the Company repurchase or redeem New Notes in the event of a
takeover, recapitalization or similar restructuring.
ASSET SALES
The Company will not, and will not permit any Restricted Subsidiary 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 delivered to the Trustee) of the Property or assets sold or
otherwise disposed of; (iii) at least 75% of the consideration received by the
Company or such Restricted Subsidiary for such Property or assets consists of
Cash Proceeds or Telecommunications Assets; 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 the next paragraph.
Within 270 days after any Asset Sale, the Company or such Restricted
Subsidiary, as the case may be, may at its option (i) reinvest (or enter a
binding agreement to reinvest, provided that such reinvestment is completed
within 180 days of the date of such agreement) an amount equal to the Net Cash
Proceeds (or any portion thereof) from such Asset Sale in Telecommunications
Assets and/or (ii) apply an amount equal to such Net Cash Proceeds (or remaining
Net Cash Proceeds) to the permanent reduction of Indebtedness of the Company
(other than Indebtedness to a Restricted Subsidiary) that is pari passu with the
New Notes or to the permanent reduction of Indebtedness or preferred stock of
any Restricted Subsidiary (other than Indebtedness to, or preferred stock owned
by, the Company or another Restricted Subsidiary); provided, however, that any
Net Cash Proceeds applied to the reduction of Indebtedness represented by the
2005 Notes, 2006 Notes and 2007 Notes shall be in accordance with the next
paragraph. Any Net Cash Proceeds from any Asset Sale that are not used to
reinvest in Telecommunications Assets and/or reduce pari passu Indebtedness of
the Company or Indebtedness or preferred stock of its Restricted Subsidiaries
shall constitute Excess Proceeds.
If at any time the aggregate amount of Excess Proceeds (including any Net
Cash Proceeds applied to the permanent reduction of Indebtedness represented by
the 2005 Notes, 2006 Notes and 2007 Notes) calculated as of such date exceeds
$10 million, the Company shall, within 30 days of the date the amount of Excess
Proceeds exceeds $10 million, use such Excess Proceeds to make an offer to
purchase (an "Asset Sale Offer") on a pro rata basis, from all holders,
outstanding New Notes, 2005 Notes, 2006 Notes and 2007 Notes in an aggregate
principal amount equal to the maximum principal amount that may be purchased out
of Excess Proceeds, at a purchase price (the "Offer Purchase Price") in cash
equal to (a) with respect to the 2005 Notes, the 2006 Notes and the New Notes,
100% of the Accreted Value thereof (as defined in the relevant indenture) and
(b) with respect to the 2007 Notes, 100% of the principal amount thereof, plus,
in each case, accrued and unpaid interest, if any, to the purchase date, in
accordance with the procedures set forth in the relevant indenture. Upon
completion of an Asset Sale Offer (including payment of the Offer Purchase
Price), any surplus Excess Proceeds that were the subject of such offer shall
cease to be Excess Proceeds, and the Company may then use such amounts for
general corporate purposes.
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<PAGE> 81
The Company will comply with the requirements of Section 14(e) under the
Exchange Act and any other securities laws and regulations, to the extent such
laws and regulations are applicable, in connection with the repurchase of New
Notes pursuant to an Asset Sale Offer.
REGISTRATION COVENANT; EXCHANGE OFFER
In connection with the Private Placement, the Company and the Initial
Purchasers entered into the Registration Rights Agreement, pursuant to which the
Company agreed to file with the Commission the Exchange Offer Registration
Statement on the appropriate form under the Securities Act for the benefit of
the Holders of Old Notes. Upon the effectiveness of the Exchange Offer
Registration Statement, the Company will offer to the Holders of Old Notes
pursuant to the Exchange Offer who are able to make certain representations the
opportunity to exchange their Old Notes for New Notes. If (i) the Company is not
permitted to consummate the Exchange Offer because the Exchange Offer is not
permitted by applicable law or Commission policy or (ii) any Holder of Old Notes
notifies the Company prior to the 20th day following consummation of the
Exchange Offer that (A) it is prohibited by law or Commission policy from
participating in the Exchange Offer or (B) that it may not resell the New Notes
acquired by it in the Exchange Offer to the public without delivering a
prospectus and the prospectus contained in the Exchange Offer Registration
Statement is not appropriate or available for such resales or (C) that it is a
broker-dealer and owns Notes acquired directly from the Company or an affiliate
of the Company, the Company will file with the Commission a Shelf Registration
Statement to cover resales of the Notes by the Holders thereof who satisfy
certain conditions relating to the provisions of information in connection with
the Shelf Registration Statement. The Company will use its reasonable best
efforts to cause the applicable registration statement to be declared effective
as promptly as possible by the Commission and to keep the Shelf Registration
Statement continuously effective until the earlier of the second anniversary of
the Closing Date or such time as there are no Old Notes outstanding. The Company
shall be deemed not to have used its reasonable best efforts to keep the Shelf
Registration Statement effective for the requisite period if, as a result of
voluntary action taken by the Company, Holders covered thereby are unable to
offer and sell the Old Notes, unless (i) such action is required by applicable
law or (ii) such action is taken by the Company in good faith and for valid
business reasons involving a material undisclosed event; provided, that in the
case of clause (ii), such period shall not exceed 60 days in any 12-month period
(a "Suspension Period").
The Registration Rights Agreement provides that (i) the Company will file
an Exchange Offer Registration Statement with the Commission on or prior to 75
days after the Closing Date, (ii) the Company will use its reasonable best
efforts to have the Exchange Offer Registration Statement declared effective by
the Commission on or prior to 120 days after the Closing Date, (iii) unless the
Exchange Offer would not be permitted by applicable law or commission policy,
the Company will commence the Exchange Offer and use its best efforts to issue
on or prior to 30 business days after the date on which the Exchange Offer
Registration Statement was declared effective by the Commission New Notes in
exchange for all Old Notes tendered prior thereto in the Exchange Offer and (iv)
if obligated to file the Shelf Registration Statement, the Company will use its
best efforts to file the Shelf Registration Statement with the Commission on or
prior to 45 days after such filing obligation arises and to cause the Shelf
Registration Statement to be declared effective by the Commission on or prior to
90 days after such obligation arises. If (a) the Company fails to file any of
the Registration Statements required by the Registration Rights Agreement on or
before the date specified for such filing, (b) any of such Registration
Statements is not declared effective by the Commission on or prior to the date
specified for such effectiveness (the "Effectiveness Target Date"), or (c) the
Company fails to consummate the Exchange Offer within 30 business days of the
date of effectiveness of the Exchange Offer Registration Statement, or (d) the
Shelf Registration Statement or the Exchange Offer Registration Statement is
declared effective but thereafter ceases to be effective or usable (other than
in connection with a permissible Suspension Period) in connection with resales
of the Old Notes or the New Notes, as the case may be, during the periods
specified in the Registration Rights Agreement (each such event referred to in
clauses (a) through
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<PAGE> 82
(d) above a "Registration Default"), then the Company will pay Liquidated
Damages to each Holder of Notes, with respect to the first 90-day period
immediately following the occurrence of the first Registration Default in an
amount equal to $.05 per week per $1,000 principal amount of Notes held by such
Holder. The amount of the Liquidated Damages will increase by an additional $.05
per week per $1,000 principal amount of Notes with respect to each subsequent
90-day period until all Registration Defaults have been cured, up to a maximum
amount of Liquidated Damages for all Registration Defaults of $.50 per week per
$1,000 principal amount of Notes. All accrued Liquidated Damages will be paid by
the Company on each January 1 and July 1 to the Global Note Holder by wire
transfer of immediately available funds or by federal funds check and to Holders
of Certificated Securities by wire transfer to the accounts specified by them or
by mailing checks to their registered addresses if no such accounts have been
specified. Following the cure of all Registration Defaults, the accrual of
Liquidated Damages will cease.
Holders of Old Notes will be required to make certain representations to
the Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver certain
information to be used in connection with the Shelf Registration Statement and
to provide comments on the Shelf Registration Statement within the time periods
set forth in the Registration Rights Agreement in order to have their Old Notes
included in the Shelf Registration Statement and benefit from the provisions
regarding Liquidated Damages set forth above.
CERTAIN COVENANTS
Set forth below are certain covenants contained in the Indenture:
Limitation on Indebtedness
The Company will not, and shall not permit its Restricted Subsidiaries to,
directly or indirectly, incur any Indebtedness (including Acquired
Indebtedness), and the Company shall not issue any Disqualified Stock or permit
any of its Restricted Subsidiaries to issue any Disqualified Stock or Preferred
Stock; provided that the Company may incur Indebtedness or issue Disqualified
Stock if, after giving effect to such issuance or incurrence on a pro forma
basis, (i) the Debt to EBITDA Ratio of the Company does not exceed 5.5x in the
case of any issuance or incurrence on or before November 1, 1998, or 5.0x in the
case of any issuance or incurrence thereafter or (ii) the Debt to Capital Ratio
as of the most recent available quarterly or annual balance sheet, after giving
pro forma effect to the incurrence of such Indebtedness and any other
Indebtedness incurred since such balance sheet date and the receipt and
application of the proceeds thereof, does not exceed 2.0x; provided that in
determining the amount of Indebtedness the Company may incur in reliance upon
the alternative set forth in clause (ii), $100,000,000 shall be subtracted from
such amount.
The foregoing limitation will not apply to: (a) the incurrence by the
Company or any of its Restricted Subsidiaries of Indebtedness under the Secured
Credit Facility; provided that the aggregate principal amount of Indebtedness
under such facility does not exceed $35 million at any one time outstanding; (b)
the Existing Indebtedness; (c) the incurrence by the Company or any of its
Restricted Subsidiaries of intercompany Indebtedness between or among the
Company and any of its Restricted Subsidiaries; (d) the incurrence by the
Company or any of its Restricted Subsidiaries of Interest Hedging Obligations
with respect to any floating rate Indebtedness that is permitted by the covenant
described in this paragraph; (e) the incurrence by the Company of any Exchange
Rate Obligations, provided that such Exchange Rate Obligations were entered into
in connection with transactions in the ordinary course of business or the
incurrence of Indebtedness that is permitted by the covenant described in this
paragraph; (f) the incurrence by the Company of Indebtedness represented by the
Existing Notes and the New Notes; (g) Indebtedness of the Company in connection
with one or more standby letters of credit issued in the ordinary course of
business; (h) Indebtedness in respect of performance, surety or appeal bonds
provided by the Company in the ordinary course of business; (i) Purchase Money
Debt, provided that the amount of
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such Purchase Money Debt does not exceed the cost of the construction,
acquisition or improvement of the applicable Telecommunications Assets;
provided, however that the Company may not incur, as of any date of
determination, Purchase Money Debt in excess of 50% of the amount of accreted
unsecured Indebtedness of the Company and its Restricted Subsidiaries on a
consolidated basis as at such date (the "Purchase Money Debt Allowance");
provided further, however that in calculating such Purchase Money Debt
Allowance, incurrences of Purchase Money Debt consisting of (A) Capital Lease
Obligations resulting from the conversion of operating leases in an amount not
to exceed $36,000,000 and (B) Indebtedness incurred pursuant to clause (a) of
this paragraph shall not be included; (j) the incurrence by the Company or any
of its Restricted Subsidiaries of Refinancing Indebtedness issued in exchange
for, or the proceeds of which are used to refinance, repurchase, replace, refund
or defease ("Refinance" and, correlatively, "Refinanced" and "Refinancing")
Indebtedness permitted pursuant to clause (b) or (f) of this paragraph; provided
that (i) the amount of such Refinancing Indebtedness shall not exceed the
principal amount of, premium, if any, and accrued interest on the Indebtedness
so Refinanced (or if such Indebtedness was issued with original issue discount,
the original issue price plus amortization of the original issue discount at the
time of the repayment of such Indebtedness) plus the fees, expenses and costs of
such Refinancing and reasonable prepayment premiums, if any, in connection
therewith; (ii) such Refinancing Indebtedness shall have a stated maturity no
earlier than the Indebtedness being Refinanced; (iii) such Refinancing
Indebtedness shall have an Average Life equal to or greater than the Average
Life of the Indebtedness being Refinanced; (iv) if the Indebtedness being
Refinanced is subordinated in right of payment to the New Notes, such
Refinancing Indebtedness shall be subordinated in right of payment to the New
Notes on terms at least as favorable to the holders of New Notes as those
contained in the documentation governing the Indebtedness being so Refinanced;
and (v) no Restricted Subsidiary shall incur Refinancing Indebtedness to
Refinance Indebtedness of the Company or another Subsidiary; (k) the incurrence
by the Company or any of its Restricted Subsidiaries of Indebtedness of any
Person which incurrence resulted directly from an Investment described in clause
(ix) of the definition of "Permitted Investments" herein; provided that, (i)
immediately after giving effect to such Investment on a pro forma basis (and
treating any Indebtedness which becomes, or is anticipated to become, an
obligation of the Company or any Restricted Subsidiary as a result of such
Investment as having been incurred by the Company or such Restricted Subsidiary
at the time of such Investment), the Company would (A) be permitted to incur
$1.00 of additional Indebtedness under the immediately preceding paragraph or
(B) have a Debt to EBITDA Ratio which is equal to or not worse than the Debt to
EBITDA Ratio of the Company immediately prior to such Investment or (ii) such
incurrence is otherwise permitted; provided further that Indebtedness incurred
by the Company and its Restricted Subsidiaries under this clause (k) as a result
of any such Investment does not exceed 50 percent of the Fair Market Value of
the Qualified Stock used as consideration in such Investment; provided further
that the aggregate principal amount of Indebtedness incurred under this clause
(k) does not exceed $50,000,000; (l) the incurrence by the Company of Permitted
Subordinated Financing; and (m) Indebtedness not otherwise permitted to be
incurred pursuant to the covenant described in this paragraph in an aggregate
amount not to exceed $10,000,000.
Limitation on Issuances of Guarantees by Restricted Subsidiaries
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company ("Guaranteed
Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to the Indenture providing for a Guarantee
(a "Subsidiary Guarantee") of payment of the New 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 as a result of any payment by such Restricted
Subsidiary under its Subsidiary Guarantee. If the Guaranteed Indebtedness is (i)
pari passu with the New Notes then the Guarantee of such Guaranteed Indebtedness
shall be pari passu
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with, or subordinated to, the Subsidiary Guarantee or (ii) subordinated to the
New Notes, then the Guarantee of such Guaranteed Indebtedness shall be
subordinated to the Subsidiary Guarantee at least to the extent that the
Guaranteed Indebtedness is subordinated to the New Notes.
Notwithstanding the foregoing, any Subsidiary 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 Subsidiary Guarantee, except a
discharge or release by, or as a result of, payment under such Guarantee.
Limitation on Liens
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into, create, incur, assume or
suffer to exist any Liens of any kind, other than Permitted Liens, on or with
respect to any of its Property or assets now owned or hereafter acquired, or any
interest therein or any income or profits therefrom, without effectively
providing that the New Notes shall be secured equally and ratably with (and
provided the New Notes shall be secured prior to any secured obligation that is
subordinated in right of payment to the New Notes) the obligations so secured
for so long as such obligations are so secured.
Limitation on Sale and Leaseback Transactions
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into, assume, Guarantee or
otherwise become liable with respect to any Sale and Leaseback Transaction,
unless (i) the Company or such Restricted Subsidiary, as the case may be,
receives consideration at the time of such Sale and Leaseback Transaction at
least equal to the Fair Market Value (as evidenced by a Board Resolution
delivered to the Trustee) of the Property or assets subject to such transaction;
(ii) the Attributable Indebtedness of the Company or such Restricted Subsidiary
with respect thereto is included as Indebtedness and would be permitted by the
covenant described under " -- Limitation on Indebtedness"; (iii) the Company or
such Restricted Subsidiary would be permitted to create a Lien on such Property
or assets without securing the New Notes by the covenant described under
" -- Limitation on Liens"; and (iv) the Net Cash Proceeds from such transaction
are applied in accordance with the covenant described under "-- Asset Sales".
Restricted Payments
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, make any Restricted Payment unless, at
the time of and after giving effect to such proposed Restricted Payment, (i) no
Default or Event of Default shall have occurred and be continuing or shall occur
as a consequence thereof; (ii) after giving effect, on a pro forma basis, to
such Restricted Payment and the incurrence of any Indebtedness the net proceeds
of which are used to finance such Restricted Payment, the Company could incur at
least $1.00 of additional Indebtedness pursuant to the first paragraph of
"-- Limitation on Indebtedness"; and (iii) after giving effect to such
Restricted Payment on a pro forma basis, the aggregate amount expended or
declared for all Restricted Payments after the Issue Date does not exceed the
sum of (A) 50% of the Consolidated Net Income of the Company (or, if
Consolidated Net Income shall be a deficit, minus 100% of such deficit) for the
period (taken as one accounting period) beginning on the last day of the fiscal
quarter immediately preceding the Issue Date and ending on the last day of the
fiscal quarter immediately preceding the date of such Restricted Payment, plus
(B) 100% of the aggregate Net Cash Proceeds received by the Company subsequent
to March 31, 1998 from the issuance or sale (other than to a Restricted
Subsidiary) of shares of its Qualified Stock, including Qualified Stock issued
upon the exercise of options, warrants or rights to purchase Qualified Stock,
plus (C) 100% of the amount of any Indebtedness of the Company or any of its
Restricted Subsidiaries (as expressed on the face of a balance sheet in
accordance with GAAP), or the carrying value of any Disqualified Stock, which
has been converted into, exchanged for or satisfied
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by the issuance of shares of Qualified Stock of the Company subsequent to the
Issue Date, less the amount of any cash, or the value of any other Property
distributed by the Company or its Restricted Subsidiaries upon such conversion,
exchange or satisfaction, plus (D) 100% of the net reduction in Investments,
subsequent to the Issue Date, in any Person, resulting from payments of interest
on Indebtedness, dividends, repayments of loans or advances, or other transfers
of Property (but only to the extent such interest, dividends, repayments or
other transfers of Property are not included in the calculation of Consolidated
Net Income), in each case to the Company or any Restricted Subsidiary from any
Person (including, without limitation, from Unrestricted Subsidiaries) or from
redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries (valued
in each case as provided in the definition of "Investments"), not to exceed in
the case of any Person the amount of Investments previously made by the Company
or any Restricted Subsidiary in such Person and which was treated as a
Restricted Payment, minus (E) 100% of the amount of Investments made pursuant to
clause (vii) of the following paragraph subsequent to the Issue Date.
The foregoing limitations shall not prevent the Company from (i) paying a
dividend on its Capital Stock at any time within 60 days after the declaration
thereof if, on the declaration date, the Company could have paid such dividend
in compliance with the Indenture; (ii) retiring (A) any Capital Stock of the
Company or any Restricted Subsidiary of the Company or (B) Indebtedness of the
Company that is subordinate to the New Notes or (C) Indebtedness of a Restricted
Subsidiary of the Company, in exchange for, or out of the proceeds of, the
substantially concurrent sale of Qualified Stock of the Company; (iii) retiring
any Indebtedness of the Company subordinated in right of payment to the New
Notes in exchange for, or out of the proceeds of, the substantially concurrent
incurrence of Indebtedness of the Company (other than Indebtedness to a
Subsidiary of the Company), provided that such new Indebtedness (A) is
subordinated in right of payment to the New Notes at least to the same extent
as, (B) has an Average Life at least as long as, and (C) has no scheduled
principal payments due in any amount earlier than, any equivalent amount of
principal under the Indebtedness so retired; (iv) retiring any Indebtedness of a
Restricted Subsidiary of the Company in exchange for, or out of the proceeds of,
the substantially concurrent incurrence of Indebtedness of the Company or any
Restricted Subsidiary that is permitted under the covenant described under
" -- Limitation on Indebtedness" and that (A) is not secured by any assets of
the Company or any Restricted Subsidiary to a greater extent than the retired
Indebtedness was so secured, (B) has an Average Life at least as long as the
retired Indebtedness and (C) is subordinated in right of payment to the New
Notes at least to the same extent as the retired Indebtedness; (v) retiring any
Capital Stock of the Company or any Restricted Subsidiary of the Company held by
any member of the Company's (or any of its Subsidiaries') management pursuant to
any management equity subscription agreement or stock option plan in effect on
the Issue Date or upon the death or termination of such member, provided that
the aggregate price paid for all such retired Capital Stock shall not exceed, in
the aggregate, the sum of $2.0 million plus the aggregate cash proceeds received
by the Company subsequent to the Issue Date from any reissuance of Capital Stock
by the Company to members of management of the Company and its Subsidiaries;
(vi) making loans to members of management of the Company as required pursuant
to employment agreements with such members, provided that the aggregate amount
of all such loans shall not exceed $2.2 million; (vii) making Investments in an
aggregate amount not to exceed $20,000,000 in joint ventures or other risk
sharing arrangements (which may include partnerships, limited liability
companies, corporations or other arrangements) (each a "Joint Venture Entity")
the purpose of which is to engage in the same or complementary lines of business
as the Company or a Restricted Subsidiary or in businesses consistent with the
fundamental nature of the operating business of the Company or a Restricted
Subsidiary; provided the management and operations of any such Joint Venture
Entity are controlled by the Company pursuant to (a) the charter documents of
such Joint Venture Entity, or (b) an agreement between or among the holders of
the Voting Stock of such Joint Venture Entity, or (c) a management agreement of
a minimum duration of three or more years between the Company and such Joint
Venture Entity; (viii) permitting a Restricted Subsidiary which became a
Restricted Subsidiary as a result of an Investment by the Company or a
Restricted
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Subsidiary described in clause (vii) of this paragraph to declare or pay any
dividend or distribution on any Capital Stock of such Subsidiary to all holders
of Capital Stock of such Subsidiary on a pro rata basis; and (ix) permitting a
Restricted Subsidiary to pay a dividend with respect to any shares of Capital
Stock of such Subsidiary held by a lender, which shares of Capital Stock were
acquired by such lender in connection with the Secured Credit Facility.
Not later than the date of making any Restricted Payment (including any
Restricted Payment Permitted to be made pursuant to the previous paragraph), the
Company shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
required calculations were computed, which calculations may be based upon the
Company's latest available financial statements.
Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, cause or suffer to exist or become effective, or enter
into, any encumbrance or restriction (other than pursuant to law or regulation)
on the ability of any Restricted Subsidiary (i) to pay dividends or make any
other distributions in respect of its Capital Stock or pay any Indebtedness or
other obligation owed to the Company or any Restricted Subsidiary of the
Company; (ii) to make loans or advances to the Company or any Restricted
Subsidiary of the Company; or (iii) to transfer any of its Property or assets to
the Company or any other Restricted Subsidiary of the Company, except: (a) any
encumbrance or restriction existing as of the Issue Date pursuant to an
agreement relating to the Secured Credit Facility or the Existing Indebtedness;
(b) any encumbrance or restriction pursuant to an agreement relating to an
acquisition of assets or Property, so long as the encumbrances or restrictions
in any such agreement relate solely to the assets or Property so acquired; (c)
any encumbrance or restriction relating to any Indebtedness of any Restricted
Subsidiary existing on the date on which such Restricted Subsidiary is acquired
by the Company or any Restricted Subsidiary (other than Indebtedness issued by
such Restricted Subsidiary in connection with or in anticipation of its
acquisition), provided that the EBITDA of such Restricted Subsidiary is not
taken into account in determining whether such acquisition is permitted by the
terms of the Indenture; (d) any encumbrance or restriction pursuant to an
agreement effecting a permitted Refinancing of Indebtedness issued pursuant to
an agreement referred to in the foregoing clauses (a) through (c), so long as
the encumbrances and restrictions contained in any such Refinancing agreement
are not materially more restrictive than the encumbrances and restrictions
contained in such agreements; (e) customary provisions restricting subletting or
assignment of any lease of the Company or any Restricted Subsidiary or customary
provisions in certain agreements that restrict the assignment of such agreement
or any rights thereunder; (f) any temporary encumbrance or restriction with
respect to a Restricted Subsidiary pursuant to an agreement that has been
entered into for the sale or disposition of all or substantially all of the
Capital Stock of, or Property and assets of, such Restricted Subsidiary; and (g)
any restriction on the sale or other disposition of assets or Property securing
Indebtedness as a result of a Permitted Lien on such assets or Property
permitted by the covenant described under "-- Limitation on Liens".
Limitation on Issuance and Sale of Capital Stock of Restricted Subsidiaries
The Company (i) shall not permit any Restricted Subsidiary to issue any
Capital Stock other than to the Company or a Restricted Subsidiary and (ii)
shall not permit any Person other than the Company or a Restricted Subsidiary to
own any Capital Stock of any Restricted Subsidiary (other than directors'
qualifying shares), except for (a) a sale of 100% of the Capital Stock of a
Restricted Subsidiary sold in a transaction not prohibited by the covenant
described under "-- Asset Sales"; (b) Capital Stock of a Restricted Subsidiary
issued and outstanding on the Issue Date and held by Persons other than the
Company or any Restricted Subsidiary; (c) Capital Stock of a Restricted
Subsidiary issued and outstanding prior to the time that such Person becomes a
Restricted Subsidiary so long as such Capital Stock was not issued in
contemplation of such Person's
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becoming a Restricted Subsidiary or otherwise being acquired by the Company; (d)
any Disqualified Stock permitted to be issued under "Limitation on
Indebtedness"; (e) Capital Stock of a Subsidiary issued to a lender or lenders
under the Secured Credit Facility in an aggregate amount not to exceed 7.25% of
the outstanding Capital Stock of such Subsidiary; and (f) Capital Stock of a
Person which became or will become a Restricted Subsidiary as a result of an
Investment by the Company or a Restricted Subsidiary described in clause (vii)
of the second paragraph of the covenant described under "Restricted Payments"
herein, provided that, (A) the Company or such Restricted Subsidiary, as the
case may be, receives net consideration at the time of such issuance at least
equal to the Fair Market Value (as evidenced by a Board Resolution delivered to
the Trustee) of the Capital Stock issued, (B) any consideration received by the
Company or such Restricted Subsidiary in respect of such issuance consist of
Cash Proceeds and/or Telecommunications Assets and (C) the Company or such
Restricted Subsidiary, as the case may be, within 270 days of such issuance,
uses the Net Cash Proceeds from such issuance to (1) reinvest (or enters a
binding agreement to reinvest, provided that such reinvestment is completed
within 180 days of the date of such agreement) an amount equal to the Net Cash
Proceeds (or any portion thereof) from such issuance in Telecommunications
Assets and/or (2) apply an amount equal to such Net Cash Proceeds (or remaining
Net Cash Proceeds) from such issuance to repurchase or redeem New Notes or to
permanently reduce Indebtedness of the Company (other than Indebtedness to a
Restricted Subsidiary) that is pari passu with the New Notes or to permanently
reduce Indebtedness or preferred stock of any Restricted Subsidiary (other than
Indebtedness to, or preferred stock owned by, the Company or another Restricted
Subsidiary).
Transactions with Affiliates
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, sell, lease, transfer, or otherwise
dispose of any of its Properties or assets to, or purchase any Property or
assets from, or enter into any contract, agreement, understanding, loan, advance
or Guarantee with or for the benefit of, any Affiliate (each of the foregoing,
an "Affiliate Transaction"), unless (a) such Affiliate Transaction is on terms
that are no less favorable to the Company or such Restricted Subsidiary than
those that would have been obtained in a comparable arm's-length transaction by
the Company or such Restricted Subsidiary with a Person that is not an Affiliate
and (b) the Company delivers to the Trustee (i) with respect to any Affiliate
Transaction involving aggregate payments in excess of $1.0 million, a Board
Resolution certifying that such Affiliate Transaction complies with clause (a)
above and that such Affiliate Transaction has been approved by a majority of the
Independent Directors, who have determined that such Affiliate Transaction is in
the best interests of the Company or such Restricted Subsidiary and (ii) with
respect to any Affiliate Transaction (other than Permitted Subordinated
Financing) involving aggregate payments in excess of $5.0 million, an opinion as
to the fairness from a financial point of view to the Company or such Restricted
Subsidiary issued by an investment banking firm of national standing together
with an Officers' Certificate to the effect that such opinion complies with this
clause (ii); provided that the following shall not be deemed Affiliate
Transactions: (i) any employment agreement entered into by the Company or any of
its Restricted Subsidiaries in the ordinary course of business and consistent
with industry practice; (ii) any agreement or arrangement with respect to the
compensation of a director of the Company or any Restricted Subsidiary approved
by the Board of Directors and consistent with industry practice; (iii)
transactions between or among the Company and its Restricted Subsidiaries; (iv)
transactions permitted by the covenant described under "-- Restricted Payments";
(v) transactions pursuant to contracts existing on the Issue Date and listed in
a schedule to the Indenture; and (vi) loans and advances to employees and
officers of the Company or a Restricted Subsidiary in the ordinary course of
business and consistent with the past practice of the Company or such Restricted
Subsidiary, provided that the aggregate principal amount of all such loans and
advances shall not exceed $3.0 million at any one time outstanding, and
provided, further, that in the event the aggregate principal amount of all such
loans or advances exceeds $1.0 million
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at any one time outstanding, the Company shall, within 180 days of the date such
amount first exceeds $1.0 million, reduce such amount to an amount less than
$1.0 million.
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 if such Subsidiary does not have any obligations
which, if in Default, would result in a cross default on Indebtedness of the
Company or a Restricted Subsidiary (other than Indebtedness to the Company or a
Restricted Subsidiary), and (i) such subsidiary has total assets of $1,000 or
less or (ii) such designation is effective immediately upon such Person becoming
a Subsidiary. Unless so designated as an Unrestricted Subsidiary, any Person
that becomes a Subsidiary of the Company or any of its Restricted Subsidiaries
shall be classified as a Restricted Subsidiary thereof. Except as provided in
clause (a)(i), no Restricted Subsidiary may be redesignated as an Unrestricted
Subsidiary.
(b) The Company will not, and will not permit any of its Restricted
Subsidiaries to, take any action or enter into any transaction or series of
transactions that would result in a Person (other than a newly formed Subsidiary
having no outstanding Indebtedness other than Indebtedness to the Company or a
Restricted Subsidiary at the date of determination) becoming a Restricted
Subsidiary (whether through an acquisition, the redesignation of an Unrestricted
Subsidiary or otherwise) unless, after giving effect to such action, transaction
or series of transactions, on a pro forma basis, (i) the Company could incur at
least $1.00 of additional Indebtedness pursuant to the first paragraph of
"-- Limitation on Indebtedness" and (ii) no Default or Event of Default would
occur; provided, however,that the foregoing restriction shall not apply to a
Person which becomes a Restricted Subsidiary as a result of (a) an Investment
described in clause (ix) of the definition of "Permitted Investments" herein or
(b) an Investment described in clause (vii) of the second paragraph of the
covenant described under "Restricted Payments" herein. Subject to this clause
(b), an Unrestricted Subsidiary may be redesignated as a Restricted Subsidiary.
(c) The designation of a Subsidiary as an Unrestricted Subsidiary or the
designation of an Unrestricted Subsidiary as a Restricted Subsidiary in
compliance with clause (b) shall be made by the Board of Directors pursuant to a
Board Resolution delivered to the Trustee and shall be effective as of the date
specified in such Board Resolution, which shall not be prior to the date such
Board Resolution is delivered to the Trustee.
Reports
Whether or not the Company is subject to Section 13(a) or 15(d) of the
Exchange Act, or any successor provision thereto, the Company shall file with
the SEC the annual reports, quarterly reports and other documents which the
Company would have been required to file with the SEC pursuant to such Section
13(a) or 15(d) or any successor provision thereto if the Company were subject
thereto, such documents to be filed with the SEC 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 SEC), within 30 days of each Required Filing Date, (i)
transmit by mail to all holders of Notes, as their names and addresses appear in
the Security Register and to any Persons that request such reports in writing,
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 SEC pursuant to Section
13(a) or 15(d) of the Exchange Act, any successor provisions thereto or this
covenant. The Company shall not be required to file any report with the SEC if
the SEC does not permit such filing. In addition to the foregoing, the Company
will file with the SEC and will thereafter transmit by mail to the Holders and
file with the Trustee within the same time periods as set forth in the second
next preceding sentence, unaudited information, on an aggregate Fiber Network
basis (before headquarter allocations) segmented by the calendar year in which
each
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such Fiber Network became operational, setting forth the investment in plant,
property and equipment to date, revenue, EBITDA, EBIT, access lines, fiber
miles, route miles, buildings connected and voice grade equivalents; provided,
however, that the Company will provide such unaudited information with respect
to (i) all Fiber Networks that were initially operational at any time prior to
December 31, 1995 (all such Fiber Networks shall be deemed to have become
operational in calendar year 1995) and (ii) all Fiber Networks that were
initially operational in each succeeding calendar year (including all or any
portion of the then current year); and provided, further, that the Company need
no longer comply with the information requirements of this sentence after four
consecutive fiscal quarters for which the ratio of EBITDA of the Company to
Consolidated Interest Expense (other than dividends or distributions with
respect to preferred stock or Disqualified Stock of the Company) of the Company
is greater than 1.0 or after the occurrence of a Change of Control.
Limitation on Construction of Fiber Networks
The Company may construct Fiber Networks in no more than 45 Metropolitan
Areas until the earlier of such time as (i) the ratio of EBITDA of the Company
to Consolidated Interest Expense (other than dividends or distributions with
respect to preferred stock or Disqualified Stock of the Company) of the Company
is greater than 1.0 for four consecutive fiscal quarters and (ii) the occurrence
of a Change of Control.
CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER
The Company will not, in any transaction or series of transactions,
consolidate with, or merge with or into, any other Person (other than a merger
of a Restricted Subsidiary into the Company in which the Company is the
continuing corporation), or sell, convey, assign, transfer, lease or otherwise
dispose of all or substantially all of the Property and assets of the Company
and the Restricted Subsidiaries taken as a whole to any other Person, unless:
(i) either (a) the Company shall be the continuing corporation or (b)
the corporation (if other than the Company) formed by such consolidation or
into which the Company is merged, or the Person which acquires, by sale,
assignment, conveyance, transfer, lease or disposition, all or
substantially all of the Property and assets of the Company and the
Restricted Subsidiaries taken as a whole (such corporation or Person, the
"Surviving Entity"), shall be a corporation organized and validly existing
under the laws of the United States of America, any political subdivision
thereof, any state thereof or the District of Columbia, and shall expressly
assume, by a supplemental indenture, the due and punctual payment of the
principal of (and premium, if any) and interest on all the Notes and the
performance of the Company's covenants and obligations under the Indenture;
(ii) immediately after giving effect to such transaction or series of
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
Event of Default or Default shall have occurred and be continuing or would
result therefrom; and
(iii) 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), the
Company (or the Surviving Entity, if the Company is not continuing) would
(A) be permitted to incur $1.00 of additional Indebtedness pursuant to the
first paragraph of "-- Limitation on Indebtedness" or (B) have a Total
Market Capitalization of at least $1.0 billion and total Indebtedness in an
amount less than 40% of its Total Market Capitalization.
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EVENTS OF DEFAULT
Each of the following is an "Event Of Default" under the Indenture:
(a) default in the payment of interest on any New Note when the same
becomes due and payable, and the continuance of such default for a period
of 30 days;
(b) default in the payment of the principal of (or premium, if any,
on) any New Note at its maturity, upon optional redemption, required
repurchase (including pursuant to a Change of Control Offer or an Asset
Sale Offer) or otherwise or the failure to make an offer to purchase any
New Note as required;
(c) the Company fails to comply with any of its covenants or
agreements contained in "-- Limitation on Indebtedness," "-- Limitation on
Sale and Leaseback Transactions" or "-- Restricted Payments," or fails to
perform or comply with the provisions described under "-- Repurchase at the
Option of the Holders Upon a Change of Control," "-- Asset Sales" or
"-- Consolidation, Merger, Conveyance, Lease or Transfer";
(d) default in the performance, or breach, of any covenant or warranty
of the Company in the Indenture (other than a covenant or warranty
addressed in (a), (b) or (c) above) and continuance of such Default or
breach for a period of 30 days after written notice thereof has been given
to the Company by the Trustee or to the Company and the Trustee by holders
of at least 25% of the aggregate principal amount of the outstanding New
Notes;
(e) Indebtedness of the Company or any Restricted Subsidiary is not
paid when due within the applicable grace period, if any, or is accelerated
by the holders thereof and, in either case, the principal amount of such
unpaid or accelerated Indebtedness exceeds $10 million;
(f) the entry by a court of competent jurisdiction of one or more
final judgments against the Company or any Restricted Subsidiary in an
uninsured or unindemnified aggregate amount in excess of $10 million which
is not discharged, waived, appealed, stayed, bonded or satisfied for a
period of 60 consecutive days;
(g) the entry by a court having jurisdiction in the premises of (i) a
decree or order for relief in respect of the Company or any Significant
Restricted Subsidiary in an involuntary case or proceeding under U.S.
bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal, state or foreign bankruptcy, insolvency or other similar law or
(ii) a decree or order adjudging the Company or any Significant Restricted
Subsidiary a bankrupt or insolvent, or approving as properly filed a
petition seeking reorganization, arrangement, adjustment or composition of
or in respect of the Company or any Significant Restricted Subsidiary under
U.S. bankruptcy laws, as now or hereafter constituted, or any other
applicable Federal, state or foreign bankruptcy, insolvency or similar law,
or appointing a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or any Significant
Restricted Subsidiary or of any substantial part of the Property or assets
of the Company or any Significant Restricted Subsidiary, or ordering the
winding up or liquidation of the affairs of the Company or any Significant
Restricted Subsidiary, and the continuance of any such decree or order for
relief or any such other decree or order unstayed and in effect for a
period of 60 consecutive days; or
(h) (i) the commencement by the Company or any Significant Restricted
Subsidiary of a voluntary case or proceeding under U.S. bankruptcy laws, as
now or hereafter constituted, or any other applicable Federal, state or
foreign bankruptcy, insolvency or other similar law or of any other case or
proceeding to be adjudicated a bankrupt or insolvent; or (ii) the consent
by the Company or any Significant Restricted Subsidiary to the entry of a
decree or order for relief in respect of the Company or any Significant
Restricted Subsidiary in an involuntary case or proceeding under U.S.
bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal, state or foreign bankruptcy, insolvency or other similar law or to
the commence-
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ment of any bankruptcy or insolvency case or proceeding against the Company
or any Significant Restricted Subsidiary; or (iii) the filing by the
Company or any Significant Restricted Subsidiary of a petition or answer or
consent seeking reorganization or relief under U.S. bankruptcy laws, as now
or hereafter constituted, or any other applicable Federal, state or foreign
bankruptcy, insolvency or other similar law; or (iv) the consent by the
Company or any Significant Restricted Subsidiary to the filing of such
petition or to the appointment of or taking possession by a custodian,
receiver, liquidator, assignee, trustee, sequestrator or similar official
of the Company or any Significant Restricted Subsidiary or of any
substantial part of the Property or assets of the Company or any
Significant Restricted Subsidiary, or the making by the Company or any
Significant Restricted Subsidiary of an assignment for the benefit of
creditors; or (v) the admission by the Company or any Significant
Restricted Subsidiary in writing of its inability to pay its debts
generally as they become due; or (vi) the taking of corporate action by the
Company or any Significant Restricted Subsidiary in furtherance of any such
action.
If any Event of Default (other than an Event of Default specified in clause
(g) or (h) above) occurs and is continuing, then and in every such case the
Trustee or the holders of not less than 25% of the outstanding aggregate
principal amount of New Notes may declare all unpaid principal of, and any
accrued and unpaid interest on, all New Notes then outstanding to be immediately
due and payable by a notice in writing to the Company (and to the Trustee if
given by holders of the New Notes), and upon any such declaration, such amount
will become and be immediately due and payable. If any Event of Default
specified in clause (g) or (h) above occurs, all unpaid principal of, and any
accrued and unpaid interest on, the New Notes then outstanding shall become
immediately due and payable without any declaration or other act on the part of
the Trustee or any holder of New Notes. In the event of a declaration of
acceleration because an Event of Default set forth in clause (e) above has
occurred and is continuing, such declaration of acceleration shall be
automatically rescinded and annulled if the event of default triggering such
Event of Default pursuant to clause (e) shall be remedied, or cured or waived by
the holders of the relevant Indebtedness, within 60 days after such event of
default. Under certain circumstances, the holders of a majority in principal
amount of the outstanding New Notes by notice to the Company and the Trustee may
rescind an acceleration and its consequences.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required, within 30
days after becoming aware of any Default or Event of Default, to deliver to the
Trustee a statement describing such Default or Event of Default, its status and
what action the Company is taking or proposes to take with respect thereto.
AMENDMENT, SUPPLEMENT AND WAIVER
The Company and the Trustee may, at any time and from time to time, without
notice to or consent of any holder of New Notes, enter into one or more
indentures supplemental to the Indenture (1) to evidence the succession of
another Person to the Company and the assumption by such successor of the
covenants of the Company in the Indenture and the New Notes; (2) to add to the
covenants of the Company, for the benefit of the holders, or to surrender any
right or power conferred upon the Company by the Indenture; (3) to add any
additional Events of Default; (4) to provide for uncertificated New Notes in
addition to or in place of certificated New Notes; (5) to evidence and provide
for the acceptance of appointment under the Indenture of a successor Trustee;
(6) to secure the New Notes; (7) to cure any ambiguity in the Indenture, to
correct or supplement any provision in the Indenture which may be inconsistent
with any other provision therein or to add any other provisions with respect to
matters or questions arising under the Indenture; provided such actions shall
not adversely affect the interests of the holders in any material respect; or
(8) to comply with the requirements of the Commission in order to effect or
maintain the qualification of the Indenture under the Trust Indenture Act.
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With the consent of the holders of not less than a majority in principal
amount of the outstanding New Notes, the Company and the Trustee may enter into
one or more indentures supplemental to the Indenture for the purpose or adding
any provisions to or changing in any manner or eliminating any of the provisions
of the Indenture or modifying in any manner the rights of the holders; provided
that no such supplemental indenture shall, without the consent of the holders of
not less than 75% in principal amount of the outstanding New Notes, modify the
obligations of the Company to make offers to purchase New Notes upon a Change of
Control or from the proceeds of Asset Sales; and, provided, further, that no
such supplemental indenture shall, without the consent of the holder of each
outstanding New Note: (1) change the stated maturity of the principal of, or any
installment of interest on, any New Note, or reduce the principal amount thereof
(or premium, if any), or the interest thereon that would be due and payable upon
maturity thereof, or change the place of payment where, or the coin or currency
in which, any New 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 maturity thereof; (2) reduce the percentage in principal amount of the
outstanding New Notes, the consent of whose holders is necessary for any such
supplemental indenture or required for any waiver of compliance with certain
provisions of the Indenture or certain Defaults thereunder; (3) subordinate in
right of payment, or otherwise subordinate, the New Notes to any other
Indebtedness; or (4) modify any provision of this paragraph (except to increase
any percentage set forth herein).
The holders of not less than a majority in principal amount of the
outstanding New Notes may, on behalf of the holders of all the New Notes, waive
any past Default under the Indenture and its consequences, except Default (1) in
the payment of the principal of (or premium, if any) or interest on any New
Note, or (2) in respect of a covenant or provision hereof which under the first
proviso to the prior paragraph cannot be modified or amended without the consent
of the holders of not less than 75% in principal amount of the outstanding New
Notes, or (3) in respect of a covenant or provision hereof which under the
second proviso to the prior paragraph cannot be modified or amended without the
consent of the holder of each outstanding New Note affected; provided with
respect to any past Default referred to in clause (2) of this paragraph, the
holders of not less than 75% in principal amount of the outstanding New Notes
may waive such Default.
SATISFACTION AND DISCHARGE OF THE INDENTURE, DEFEASANCE
The Company may terminate its obligations under the Indenture when (i)
either (A) all outstanding New Notes have been delivered to the Trustee for
cancellation or (B) all such New Notes not theretofore delivered to the Trustee
for cancellation have become due and payable, will become due and payable within
one year or are to be called for redemption within one year under irrevocable
arrangements satisfactory to the Trustee for the giving of notice of redemption
by the Trustee in the name and at the expense of the Company, and the Company
has irrevocably deposited or caused to be deposited with the Trustee funds in an
amount sufficient to pay and discharge the entire indebtedness on the New Notes,
not theretofore delivered to the Trustee for cancellation, for principal of
(premium, if any, on) and interest to the date of deposit or maturity or date of
redemption; (ii) the Company has paid or caused to be paid all sums payable by
the Company under the Indenture; and (iii) the Company has delivered an
Officers' Certificate and an Opinion of Counsel relating to compliance with the
conditions set forth in the Indenture.
The Company, at its election, shall (a) be deemed to have paid and
discharged its debt on the New Notes and the Indenture shall cease to be of
further effect as to all outstanding New Notes (except as to (i) rights of
registration of transfer, substitution and exchange of New Notes and the
Company's right of optional redemption, (ii) rights of holders to receive
payments of principal of, premium, if any, and interest on the New Notes (but
not the Change of Control Purchase Price or the Offer Purchase Price) and any
rights of the holders with respect to such amounts, (iii) the rights,
obligations and immunities of the Trustee under the Indenture and (iv) certain
other specified provisions in the Indenture) or (b) cease to be under any
obligation to comply with certain
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restrictive covenants including those described under "-- Certain Covenants,"
after the irrevocable deposit by the Company with the Trustee, in trust for the
benefit of the holders, at any time prior to the maturity of the New Notes, of
(A) money in an amount, (B) U.S. Government Obligations which through the
payment of interest and principal will provide, not later than one day before
the due date of payment in respect of the New Notes, money in an amount, or (C)
a combination thereof, sufficient to pay and discharge the principal of, and
interest on, the New Notes then outstanding on the dates on which any such
payments are due in accordance with the terms of the Indenture and of the New
Notes. Such defeasance or covenant defeasance shall be deemed to occur only if
certain conditions are satisfied, including, among other things, delivery by the
Company to the Trustee of an opinion of outside counsel acceptable to the
Trustee to the effect that (i) such deposit, defeasance and discharge will not
be deemed, or result in, a taxable event for federal income tax purposes with
respect to the holders; and (ii) the Company's deposit will not result in the
trust or the Trustee being subject to regulation under the Investment Company
Act of 1940.
THE TRUSTEE
The Chase Manhattan Bank is the Trustee under the Indenture.
The holders of not less than a majority in principal amount of the
outstanding Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. Except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. The Indenture provides that in case an Event of Default shall
occur (which shall not be cured or waived), the Trustee will be required, in the
exercise of its rights and powers under the Indenture, to use the degree of care
of a prudent person in the conduct of such person's own affairs. Subject to such
provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any of the holders of the
New Notes, unless such holders shall have offered to the Trustee indemnity
satisfactory to it against any loss, liability or expense.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes or the Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation, solely by reason of such person's or
entity's status as a director, officer, employee, incorporator or stockholder of
the Company. By accepting a Note each holder waives and releases all such
liability (but only such liability). The waiver and release are part of the
consideration for issuance of the Notes. Nonetheless, such waiver may not be
effective to waive liabilities under the federal securities laws and it has been
the view of the SEC that such a waiver is against public policy.
TRANSFER AND EXCHANGE
A holder may transfer or exchange Notes in accordance with the Indenture.
The Company, the Registrar and the Trustee may require a holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a holder to pay any taxes and fees required by law or
permitted by the Indenture.
BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the New Notes will be issued in fully
registered form, without coupons. The New Notes will be deposited with, or on
behalf of DTC and registered in the name of Cede & Co. ("Cede") as DTC's
nominee, in the form of one or more global New Notes.
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CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any capitalized terms used herein for which no definition
is provided.
"Accreted Value" means, as of any date prior to July 1, 2003, an amount per
$1,000 principal amount at maturity of Notes that is equal to the sum of (a) the
initial offering price ($599.89 per $1,000 principal amount at maturity of
Notes) of such Notes and (b) the portion of the excess of the principal amount
of such Notes over such initial offering price which shall have been amortized
through such date, such amount to be so amortized on a daily basis and
compounded semi-annually on each January 1 and July 1 at the rate of 10.625% per
annum from the date of original issue of the Notes through the date of
determination computed on the basis of a 360-day year of twelve 30-day months,
and as of any date on or after July 1, 2003 the principal amount of each Note.
"Acquired Indebtedness" means, with respect to any specified Person,
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Subsidiary of such specified Person, including
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a Subsidiary of such specified Person,
but excluding Indebtedness which is extinguished, retired or repaid in
connection with such other Person merging with or into or becoming a Subsidiary
of such specified Person.
"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,
further, neither the Company nor any of its Restricted Subsidiaries shall be
deemed to be Affiliates of each other; and provided, further, any lender under
the Secured Credit Facility and its Affiliates shall not be deemed to be
Affiliates of the Company or any Restricted Subsidiary solely as a result of the
existence of the Secured Credit Facility or their holdings of Capital Stock of
the Company or any Restricted Subsidiary acquired in connection with the Secured
Credit Facility. For purposes of this definition, "control" (including, with
correlative meanings, the terms "controlling," "under common control with" and
"controlled by"), and as used with respect to any Person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of Voting Stock, by agreement or otherwise; provided that beneficial
ownership of 10% or more of the Voting Stock of a Person shall be deemed to be
control.
"Asset Sale" means, with respect to any Person, any transfer, conveyance,
sale, lease or other disposition (including, without limitation, by way of
consolidation or merger, but excluding by means of any Sale and Leaseback
Transaction or by the granting of a Lien permitted under "-- Limitation on
Liens") by such Person or any of its Restricted Subsidiaries to any Person other
than the Company or a Restricted Subsidiary of the Company, in one transaction,
or a series of related transactions (each hereinafter referred to as a
"Disposition"), of Property or assets of such Person or any of its Restricted
Subsidiaries, the Fair Market Value of which exceeds $2 million, other than (i)
a Disposition of Property in the ordinary course of business consistent with
industry practice, (ii) a Disposition that constitutes a Restricted Payment
permitted under "-- Restricted Payments" and (iii) a Disposition by the Company
in connection with a transaction permitted under "-- Consolidation, Merger,
Conveyance, Lease or Transfer."
"Attributable Indebtedness" means, with respect to any Sale and Leaseback
Transaction of any Person, as at the time of determination, the greater of (i)
the capitalized amount in respect of such transaction that would appear on the
balance sheet of such Person in accordance with GAAP and (ii) the present value
(discounted at a rate consistent with accounting guidelines, as determined in
good faith by such Person) of the payments during the remaining term of the
lease (including any period for which such lease has been extended or may, at
the option of the lessor, be extended) or
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until the earliest date on which the lessee may terminate such lease without
penalty or upon payment of a penalty (in which case the rental payments shall
include such penalty).
"Average Life" means, as of any date, with respect to any debt security or
Disqualified Stock, the quotient obtained by dividing (i) the sum of the
products of (x) the number of years from such date to the dates of each
scheduled principal payment or redemption payment (including any sinking fund or
mandatory redemption payment requirements) of such debt security or Disqualified
Stock multiplied in each case by (y) the amount of such principal or redemption
payment, by (ii) the sum of all such principal or redemption payments.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board of Directors.
"Board Resolution" means a duly adopted resolution of the Board of
Directors in full force and effect at the time of determination and certified as
such.
"Capital Lease Obligation" of any Person means the obligation to pay rent
or other payment amounts under a lease of (or other Indebtedness arrangement
conveying the right to use) real or personal property of such Person which is
required to be classified and accounted for as a capital lease or a liability on
the face of a balance sheet of such Person in accordance with GAAP and the
stated maturity thereof shall be the date of the last payment of rent or any
amount due under such lease prior to the first date upon which such lease may be
terminated by the lessee without payment of a penalty.
"Capital Stock" in any Person means any and all shares, interests,
participations or other equivalents in the equity interest (however designated)
in such Person and any rights (other than Indebtedness convertible into an
equity interest), warrants or options to acquire an equity interest in such
Person.
"Cash Proceeds" means, with respect to any Asset Sale or issuance or sale
of Capital Stock by any Person, the aggregate consideration received in respect
of such sale or issuance by such Person in the form of cash or Eligible Cash
Equivalents.
"Change of Control" shall be deemed to occur if (i) the sale, conveyance,
transfer or lease of all or substantially all of the assets of the Company 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) (other
than any Permitted Holder or any Restricted Subsidiary of the Company) shall
have occurred; (ii) any "Person" or "group" (within the meaning of Sections
13(d)(3) and 14(d)(2) of the Exchange Act or any successor provision to either
of the foregoing, including any group acting for the purpose of acquiring,
holding or disposing of securities within the meaning of Rule 13d-5(b)(i) under
the Exchange Act), other than any Permitted Holder, becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act) of more than 35% of the
total voting power of all classes of the Voting Stock of the Company and/or
warrants or options to acquire such Voting Stock, calculated on a fully diluted
basis, and such voting power percentage is greater than or equal to the total
voting power percentage then beneficially owned by the Permitted Holders in the
aggregate; or (iii) during any period of two consecutive years, individuals who
at the beginning of such period constituted the Board of Directors (together
with any new directors whose election or appointment by such board or whose
nomination for election by the shareholders 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 then in office.
"Consolidated Interest Expense" means, with respect to any Person for any
period, without duplication, (A) the sum of (i) the aggregate amount of cash and
non-cash interest expense (including capitalized interest) of such Person and
its Restricted Subsidiaries for such period as
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determined on a consolidated basis in accordance with GAAP in respect of
Indebtedness (including, without limitation, (v) any amortization of debt
discount, (w) net costs associated with Interest Hedging Obligations (including
any amortization of discounts), (x) the interest portion of any deferred payment
obligation, (y) all accrued interest and (z) all commissions, discounts and
other fees and charges owed with respect to letters of credit, bankers'
acceptances or similar facilities) paid or accrued, or scheduled to be paid or
accrued, during such period; (ii) dividends or distributions with respect to
preferred stock or Disqualified Stock of such Person (and of its Restricted
Subsidiaries if paid to a Person other than such Person or its Restricted
Subsidiaries) declared and payable in cash; (iii) the portion of any rental
obligation of such Person or its Restricted Subsidiaries in respect of any
Capital Lease Obligation allocable to interest expense in accordance with GAAP;
(iv) the portion of any rental obligation of such Person or its Restricted
Subsidiaries in respect of any Sale and Leaseback Transaction allocable to
interest expense (determined as if such were treated as a Capital Lease
Obligation); and (v) to the extent any Indebtedness of any other Person is
Guaranteed by such Person or any of its Restricted Subsidiaries, the aggregate
amount of interest paid, accrued or scheduled to be paid or accrued, by such
other Person during such period attributable to any such Indebtedness, less (B)
to the extent included in (A) above, amortization or write-off of deferred
financing costs of such Person and its Restricted Subsidiaries during such
period and any charge related to any premium or penalty paid in connection with
redeeming or retiring any Indebtedness of such Person and its Restricted
Subsidiaries prior to its stated maturity; in the case of both (A) and (B)
above, after elimination of intercompany accounts among such Person and its
Restricted Subsidiaries and as determined in accordance with GAAP.
"Consolidated Net Income" of any Person means, for any period, the
aggregate net income (or net loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis determined in accordance
with GAAP; provided that there shall be excluded therefrom, without duplication,
(i) all items classified as extraordinary, (ii) any net income of any Person
other than such Person and its Restricted Subsidiaries, except to the extent of
the amount of dividends or other distributions actually paid to such Person or
its Restricted Subsidiaries by such other Person during such period; (iii) the
net income of any Person acquired by such Person or any of its Restricted
Subsidiaries in a pooling-of-interests transaction for any period prior to the
date of the related acquisition; (iv) any gain or loss, net of taxes, realized
on the termination of any employee pension benefit plan; (v) net gains (but not
net losses) in respect of Asset Sales by such Person or its Restricted
Subsidiaries; (vi) the net income (but not net loss) of any Restricted
Subsidiary of such Person to the extent that the payment of dividends or other
distributions to such Person is restricted by the terms of its charter or any
agreement, instrument, contract, judgment, order, decree, statute, rule,
governmental regulation or otherwise, except for any dividends or distributions
actually paid by such Restricted Subsidiary to such Person; (vii) with regard to
a non-wholly owned Restricted Subsidiary, any aggregate net income (or loss) in
excess of such Person's or such Restricted Subsidiary's pro rata share of such
non-wholly owned Restricted Subsidiary's net income (or loss); and (viii) the
cumulative effect of changes in accounting principles.
"Consolidated Tangible Assets" of any Person means, as of any date, the sum
for such Person and its Restricted Subsidiaries (after eliminating intercompany
items) of the net book value of all Property and assets of such Person and its
Restricted Subsidiaries reflected on a balance sheet of such Person or such
Restricted Subsidiary, as the case may be, prepared in accordance with GAAP,
less the net book value of all items that would be classified as intangibles
under GAAP, including, without limitation, (i) licenses, patents, patent
applications, copyrights, trademarks, trade names, goodwill, noncompete
agreements and organizational expenses, and (ii) un-amortized deferred financing
costs, debt discount and expenses.
"Debt to Capital Ratio" means, as at any date of determination, the ratio
of (i) the amount of Indebtedness of the Company and its Restricted Subsidiaries
then outstanding on a consolidated basis as at the date of determination to (ii)
the capital of the Company and its Restricted
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Subsidiaries on a consolidated basis as at such date. For purposes of this
calculation, "capital" shall mean stockholders' equity (deficit), except that
all Preferred Stock shall be included and retained earnings (deficit) shall be
excluded, each as determined in accordance with GAAP.
"Debt to EBITDA Ratio" means, as at any date of determination, the ratio of
(i) the aggregate amount of Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis as at the date of determination to (ii) the
aggregate amount of EBITDA of the Company and its Restricted Subsidiaries for
the four preceding fiscal quarters for which financial information is available
immediately prior to the date of determination; provided that any Indebtedness
incurred or retired by the Company or any of its Restricted Subsidiaries during
the fiscal quarter in which the date of determination occurs shall be calculated
as if such Indebtedness was so incurred or retired on the first day of the
fiscal quarter in which the date of determination occurs; and provided, further,
that (x) if the transaction giving rise to the need to calculate the Debt to
EBITDA Ratio would have the effect of increasing or decreasing Indebtedness or
EBITDA in the future, Indebtedness or EBITDA shall be calculated on a pro forma
basis as if such transaction had occurred on the first day of such four fiscal
quarter period preceding the date of determination and (y) if during such four
fiscal quarter period the Company or any of its Restricted Subsidiaries shall
have engaged in any Asset Sale, EBITDA for such period shall be reduced by an
amount equal to the EBITDA (if positive), or increased by an amount equal to the
EBITDA (if negative), directly attributable to the assets which are the subject
of such Asset Sale and any related retirement of Indebtedness as if such Asset
Sale and related retirement of Indebtedness had occurred on the first day of
such period or (z) if during such four fiscal quarter period the Company or any
of its Restricted Subsidiaries shall have acquired any material assets outside
the ordinary course of business, EBITDA shall be calculated on a pro forma basis
as if such asset acquisition and related financing had occurred on the first day
of such period.
"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" means, until July 1, 2003, the Accreted Value, and on or
after July 1, 2003, 100% of the principal amount of the Notes.
"Disqualified Stock" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, or otherwise, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, or is exchangeable for
Indebtedness at any time, in whole or in part, on or prior to the date on which
the Notes mature.
"EBIT" means the amount calculated in the same manner as EBITDA, but not
including clauses (iii) and (iv) of the definition thereof.
"EBITDA" means, with respect to any Person for any period, the sum for such
Person for such period of Consolidated Net Income plus, to the extent reflected
in the income statement of such Person for such period from which Consolidated
Net Income is determined, without duplication, (i) Consolidated Interest
Expense, (ii) income tax expense, (iii) depreciation expense, (iv) amortization
expense, (v) any non-cash expense related to the issuance to employees of such
Person of options to purchase Capital Stock of such Person and (vi) any charge
related to any premium or penalty paid in connection with redeeming or retiring
any Indebtedness prior to its stated maturity and minus, to the extent reflected
in such income statement, any non-cash credits that had the effect of increasing
Consolidated Net Income of such Person for such period. This definition of
EBITDA is used only for the purpose of this Description of the Notes and the
Indenture.
"Eligible Cash Equivalents" means (i) securities issued or directly and
fully guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof), (ii) time deposits and
certificates of deposit of any commercial bank organized in the United States
having capital and
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surplus in excess of $500 million with a maturity date not more than one year
from the date of acquisition, (iii) repurchase obligations with a term of not
more than seven days for underlying securities of the types described in clause
(i) above entered into with any bank meeting the qualifications specified in
clause (ii) above, (iv) direct obligations issued by any state of the United
States of America or any political subdivision of any such state or any public
instrumentality thereof maturing, or subject to tender at the option of the
holder thereof within ninety days after the date of acquisition thereof and, at
the time of acquisition, having a rating of A or better from Standard & Poor's
Ratings Group ("Standard & Poor's") or A-2 or better from Moody's Investors
Service, Inc. ("Moody's"), (v) commercial paper issued by the parent corporation
of any commercial bank organized in the United States having capital and surplus
in excess of $500 million and commercial paper issued by others having one of
the two highest ratings obtainable from either Standard & Poor's or Moody's and
in each case maturing within ninety days after the date of acquisition, (vi)
overnight bank deposits and bankers' acceptances at any commercial bank
organized in the United States having capital and surplus in excess of $500
million, (vii) deposits available for withdrawal on demand with a commercial
bank organized in the United States having capital and surplus in excess of $500
million and (viii) investments in money market funds substantially all of whose
assets comprise securities of the types described in clauses (i) through (vi).
"Eligible Institution" means a commercial banking institution that has
combined capital and surplus of not less than $500 million or its equivalent in
foreign currency, whose debt is rated "A" (or higher) according to Standard &
Poor's or Moody's at the time as of which any investment or rollover therein is
made.
"Equity Offering" means an offering of Common Stock of the Company
resulting in net proceeds to the Company in excess of $20 million.
"Exchange Rate Obligation" means, with respect to any Person, any currency
swap agreements, forward exchange rate agreements, foreign currency futures or
options, exchange rate collar agreements, exchange rate insurance and other
agreements or arrangements, or combination thereof, designed to provide
protection against fluctuations in currency exchange rates.
"Existing Indebtedness" means Indebtedness outstanding on the date of the
Indenture (other than under the Secured Credit Facility), including the 2005
Notes, the 2006 Notes and the 2007 Notes, and disclosed in a schedule attached
to the Indenture, and the incurrence by the Company of Indebtedness represented
by the 2005 Notes, the 2006 Notes and the 2007 Notes.
"Fair Market Value" means, with respect to any asset or Property, the sale
value that would be obtained in an arm's-length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing buyer
under no compulsion to buy, as determined in good faith by the Board of
Directors.
"Fiber Network" means a digital fiber optic telecommunications network
wholly owned by the Company that serves a Metropolitan Area.
"GAAP" means United States generally accepted accounting principles,
consistently applied, as set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board, or in such other statements by such other entity as may be
approved by a significant segment of the accounting profession of the United
States, that are applicable to the circumstances as of the date of
determination; provided that, except as otherwise specifically provided, all
calculations made for purposes of determining compliance with the terms of the
provisions of the Indenture shall utilize GAAP as in effect on the Issue Date.
"Guarantee" means any direct or indirect obligation, contingent or
otherwise, of a Person guaranteeing or having the economic effect of
guaranteeing any Indebtedness of any other Person in any manner (and
"Guaranteed," "Guaranteeing" and "Guarantor" shall have meanings correlative to
the foregoing).
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"incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), extend,
assume, Guarantee or otherwise become liable in respect of such Indebtedness or
other obligation or the recording, as required pursuant to GAAP or otherwise, of
any such Indebtedness or obligation on the balance sheet of such Person (and
"incurrence," "incurred," "incurrable" and "incurring," shall have meanings
correlative to the foregoing); provided that a change in GAAP that results in an
obligation of such Person that exists at such time becoming Indebtedness shall
not be deemed an incurrence of such Indebtedness. Indebtedness otherwise
incurred by a Person before it becomes a Subsidiary of the Company shall be
deemed to have been incurred at the time at which it becomes a Subsidiary.
"Indebtedness" means at any time (without duplication), with respect to any
Person, whether recourse is to all or a portion of the assets of such Person,
and whether or not contingent, (i) any obligation of such Person for money
borrowed, (ii) any obligation of such Person evidenced by bonds, debentures,
notes, Guarantees or other similar instruments, including, without limitation,
any such obligations incurred in connection with acquisition of Property, assets
or businesses, excluding trade accounts payable made in the ordinary course of
business, (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 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 60 days overdue or which are
being contested in good faith), (v) any Capital Lease Obligation of such Person,
(vi) the maximum fixed redemption or repurchase price of Disqualified Stock of
such Person and, to the extent held by other Persons, the maximum fixed
redemption or repurchase price of Disqualified Stock of such Person's Restricted
Subsidiaries, at the time of determination, (vii) the notional amount of any
Interest Hedging Obligations or Exchange Rate Obligations of such Person at the
time of determination, (viii) any Attributable Indebtedness with respect to any
Sale and Leaseback Transaction to which such Person is a party and (ix) any
obligation of the type referred to in clauses (i) through (viii) of this
definition of another Person and all dividends and distributions of another
Person the payment of which, in either case, such Person has Guaranteed or is
responsible or liable for, directly or indirectly, as obligor, Guarantor or
otherwise. For purposes of the preceding sentence, the maximum fixed repurchase
price of any Disqualified Stock that does not have a fixed repurchase price
shall be calculated in accordance with the terms of such Disqualified Stock as
if such Disqualified Stock were repurchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture; provided that if
such Disqualified Stock is not then permitted to be repurchased, the repurchase
price shall be the book value of such Disqualified Stock. The amount of
Indebtedness of any Person at any date shall be the outstanding balance at such
date of all unconditional obligations as described above and the maximum
liability of any Guarantees at such date; provided that for purposes of
calculating the amount of the 2005 Notes, 2006 Notes or the Notes outstanding at
any date, the amount of such 2005 Notes, 2006 Notes or Notes shall be the
Accreted Value (as defined in the relevant indenture) thereof as of such date
unless cash interest has commenced to accrue pursuant to the relevant indenture,
in which case the amount of the 2005 Notes, 2006 Notes or Notes outstanding will
be determined pursuant to the relevant indenture and will not include any
accrued and unpaid cash interest which would otherwise be included in Accreted
Value because of clause (iii) of the definition thereof in the relevant
indenture.
"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 Subsidiaries'
exposure to fluctuations in interest rates.
"Investment" in any Person means any direct, indirect or contingent (i)
advance or loan to, Guarantee of any Indebtedness of, extension of credit or
capital contribution to such Person, (ii) the acquisition of any shares of
Capital Stock, bonds, notes, debentures or other securities of such
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Person, or (iii) the 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
commercially reasonable extensions of trade credit. The amount of any 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
other than cash, such Property shall be valued at its Fair Market Value at the
time of such transfer.
"Issue Date" means the date on which the Notes were first authenticated and
delivered under the Indenture.
"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 kind or 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).
"Marketable Securities" means (i) U.S. Government Securities maturing not
more than two years after the date of acquisition; (ii) any certificate of
deposit maturing not more than 270 days after the date of acquisition issued by
or time deposit of an Eligible Institution; (iii) commercial paper maturing not
more than 270 days after the date of acquisition issued by a corporation (other
than an Affiliate of the Company) with a rating, at the time as of which any
investment therein is made, of "A-1" (or higher) according to Standard & Poor's
or "P-1" (or higher) according to Moody's; (iv) any banker's acceptances or
money market deposit accounts issued or offered by an Eligible Institution; and
(v) any fund investing exclusively in investments of the types described in
clauses (i) through (iv) above.
"Maturity" means, when used with respect to a Note, the date on which the
principal of such Note becomes due and payable as provided therein or in the
Indenture, whether on the date specified in such Note as the fixed date on which
the principal of such Note is due and payable, on the Change of Control Payment
Date or purchase date established pursuant to the terms of the Indenture with
regard to a Change of Control Offer or an Asset Sale Offer, as applicable, or by
declaration of acceleration, call for redemption or otherwise.
"Metropolitan Area" means the 32 metropolitan areas in which the Company,
as of March 31, 1998, has a Fiber Network and other metropolitan areas deemed in
the reasonable business judgment of the management of the Company to provide an
opportunity for the building and operation of such a Fiber Network with the
reasonable potential to produce financial results for the Company at least
substantially comparable to the metropolitan areas in which the Company has such
operational Fiber Networks.
"Net Cash Proceeds" means, with respect to the sale of any Property or
assets by any Person or any of its Restricted Subsidiaries, Cash Proceeds
received net of (i) all reasonable out-of-pocket expenses of such Person or such
Restricted Subsidiary incurred in connection with such sale, including, without
limitation, all legal, title and recording tax expenses, commissions and other
fees and expenses incurred (but excluding any finder's fee or broker's fee
payable to any Affiliate of such Person) and all federal, state, foreign and
local taxes arising in connection with such sale that are paid or required to be
accrued as liability under GAAP by such Person or its Restricted Subsidiaries,
(ii) all payments made or required to be made by such Person or its Restricted
Subsidiaries on any Indebtedness which is secured by such Properties or other
assets in accordance with the terms of any Lien upon or with respect to such
Properties or other assets or which must, by the terms of such Lien, or in order
to obtain a necessary consent to such transaction or by applicable law, be
repaid in connection with such sale and (iii) all contractually required
distribu-
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tions and other payments made to minority interest holders (but excluding
distributions and payments to Affiliates of such Person) in Restricted
Subsidiaries of such Person as a result of such transaction; provided that, in
the event that any consideration for a transaction (which would otherwise
constitute Net Cash Proceeds) is required to be held in escrow pending
determination of whether a purchase price adjustment will be made, such
consideration (or any portion thereof) shall become Net Cash Proceeds only at
such time as it is released to such Person or its Restricted Subsidiaries from
escrow; provided, further, that any non-cash consideration received in
connection with any transaction, which is subsequently converted to cash, shall
be deemed to be Net Cash Proceeds at such time, and shall thereafter be applied
in accordance with the Indenture.
"Officers' Certificate" means a certificate signed by the Chairman of the
Board, a Vice Chairman of the Board, the President or a Vice President, and by
the Chief Financial Officer, the Chief Accounting Officer, the Treasurer, an
Assistant Treasurer, the Secretary or an Assistant Secretary of the Company and
delivered to the Trustee, which shall comply with the Indenture.
"Permitted Holders" means The Huff Alternative Income Fund, L.P., ING
Equity Partners, L.P.I., Apex Investment Fund I, L.P., Apex Investment Fund II,
L.P., The Productivity Fund II, L.P. and Anthony J. Pompliano and the respective
Affiliates (other than the Company and the Restricted Subsidiaries) of each of
the foregoing.
"Permitted Investments" means (i) Eligible Cash Equivalents; (ii)
Investments in Property used in the ordinary course of business; (iii)
investments in any Person as a result of which such Person becomes a Restricted
Subsidiary in compliance with the Indenture; (iv) Investments pursuant to
certain agreements or obligations of the Company or a Restricted Subsidiary, in
effect an the Issue Date, to make such Investments, and disclosed in a Schedule
attached to the Indenture; (v) Investments in prepaid expenses, negotiable
instruments held for collection and lease, utility and workers' compensation,
performance and other similar deposits; (vi) Interest Hedging Obligations with
respect to any floating rate Indebtedness that is permitted by the terms of the
Indenture to be outstanding; (vii) Exchange Rate Obligations; provided that such
Exchange Rate Obligations were entered into in connection with transactions in
the ordinary course of business or the incurrence of Indebtedness that is
permitted by the terms of the Indenture to be outstanding; (viii) bonds, notes,
debentures or other debt securities received as a result of Asset Sales
permitted under the covenant described under "-- Asset Sales"; (ix) Investments
by the Company or a Restricted Subsidiary in or in respect of a Person to the
extent the consideration for such Investment consists of shares of Qualified
Stock of the Company; (x) Investments funded or financed with Purchase Money
Debt; and (xi) Investments in existence at the Issue Date.
"Permitted Liens" means (i) Liens on Property or assets of a Person
existing at the time such Person is merged into or consolidated with the Company
or any Subsidiary of the Company, provided that such Liens were in existence
prior to the contemplation of such merger or consolidation and do not secure any
Property or assets of the Company or any of its Subsidiaries other than the
Property or assets subject to the Liens prior to such merger or consolidation;
(ii) Liens on Telecommunications Assets existing during the time of the
construction thereof; (iii) Liens incurred or deposits made to secure the
performance of tenders, bids, leases, statutory or regulatory obligations,
surety or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business consistent with industry practice;
(iv) Liens existing as of the Issue Date; (v) Liens to secure borrowings
permitted under clause (a) or clause (i) of the second paragraph of
"-- Limitation on Indebtedness"; (vi) any Lien on Property of the Company in
favor of the United States of America or any state thereof, or any
instrumentality of either, to secure certain payments pursuant to any contract
or statute; (vii) any Lien for taxes or assessments or other governmental
charges or levies not then due and payable (or which, if due and payable, are
being contested in good faith and for which adequate reserves are being
maintained, to the extent required by GAAP); (viii) easements, rights-of-way,
licenses and other similar restrictions on the use of Properties or minor
imperfections of title that, in the aggregate, are not material in amount and do
not in any case materially detract from the Properties subject thereto or
interfere with the
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ordinary conduct of the business of the Company or its Subsidiaries; (ix) any
Lien to secure obligations under workmen's compensation laws or similar
legislation, including any Lien with respect to judgments which are not
currently dischargeable; (x) any statutory warehousemen's, materialmen's or
other similar Liens for sums not then due and payable (or which, if due and
payable, are being contested in good faith and with respect to which adequate
reserves are being maintained, to the extent required by GAAP); (xi) any
interest or title of a lessor in Property subject to a Capital Lease Obligation;
(xii) Liens to secure any Vendor Financing Indebtedness; provided that such
Liens do not extend to any Property or assets other than the Property or assets
the acquisition of which was financed by such Indebtedness; (xiii) Liens in
favor of the Company or any Restricted Subsidiary; (xiv) Liens on Property or
assets of a Person existing prior to the time such Person is acquired by the
Company as a result of (a) an Investment described in clause (ix) of the
definition of "Permitted Investments" herein or (b) an Investment described in
clause (vii) of the second paragraph of the covenant described under "Restricted
Payments" herein; provided that such Liens were in existence prior to the
contemplation of such Investment and do not secure any Property or assets of the
Company or any of its Subsidiaries other than the Property or assets subject to
the Liens prior to such Investment; (xv) Liens securing reimbursement
obligations with respect to letters of credit that encumber documents and other
Property relating to such letters of credit and the products and proceeds
thereof; and (xvi) Liens to secure any permitted extension, renewal, refinancing
or refunding (or successive extensions, renewals, refinancings or refundings),
in whole or in part, of any Indebtedness secured by Liens referred to in the
foregoing clauses (i) through (v) and (xii), provided that such Liens do not
extend to any other Property or assets and the principal amount of the
Indebtedness secured by such Liens is not increased.
"Permitted Subordinated Financing" means Indebtedness or preferred stock of
the Company issued to a Permitted Holder on terms specified in the Indenture,
provided that (i) in the case of Permitted Subordinated Financing that
constitutes Indebtedness, such Indebtedness is subordinated in right of payment
to the Notes and has a maturity of 180 days or less and (ii) in the case of
Permitted Subordinated Financing that constitutes preferred stock, such
preferred stock is retired within 180 days of issuance.
"Person" means any individual, corporation, partnership, joint venture,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Property" means, with respect to any Person, any interest of such Person
in any kind of property or asset, whether real, personal or mixed, or tangible
or intangible, excluding Capital Stock in any other Person.
"Purchase Money Debt" means Indebtedness of the Company (including Acquired
Indebtedness and Indebtedness represented by Capital Lease Obligations, mortgage
financings and purchase money obligations) incurred for the purpose of financing
all or any part of the cost of construction, acquisition or improvement by the
Company or any Subsidiary of the Company or any joint venture of any
Telecommunications Assets of the Company, any Subsidiary of the Company or any
joint venture, and including any related notes, Guarantees, collateral
documents, instruments and agreements executed in connection therewith, as the
same may be amended, supplemented, modified or restated from time to time.
"Qualified Stock" of any Person means a class of Capital Stock other than
Disqualified Stock.
"Refinancing Indebtedness" means any Indebtedness incurred in connection
with the Refinancing of other Indebtedness.
"Restricted Payment" means (i) a dividend or other distribution declared or
paid on the Capital Stock of the Company or to the Company's stockholders (in
their capacity as such), or declared or paid to any Person other than the
Company or a Restricted Subsidiary of the Company on the Capital Stock of any
Restricted Subsidiary of the Company, in each case, other than dividends,
distributions or payments made solely in Qualified Stock of the Company or such
Restricted
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Subsidiary, (ii) a payment made by the Company or any of its Restricted
Subsidiaries (other than to the Company or any Restricted Subsidiary) to
purchase, redeem, acquire or retire any Capital Stock of the Company or of a
Restricted Subsidiary, (iii) a payment made by the Company or any of its
Restricted Subsidiaries (other than a payment made solely in Qualified Stock of
the Company) to redeem, repurchase, defease (including an in-substance or legal
defeasance) or otherwise acquire or retire for value (including pursuant to
mandatory repurchase covenants), prior to any scheduled maturity, scheduled
sinking fund or mandatory redemption payment, Indebtedness of the Company or
such Restricted Subsidiary which is subordinate (whether pursuant to its terms
or by operation of law) in right of payment to the Notes and which was scheduled
to mature on or after the maturity of the Notes or (iv) an Investment in any
Person, including an Unrestricted Subsidiary or the designation of a Subsidiary
as an Unrestricted Subsidiary, other than (a) a Permitted Investment, (b) an
Investment by the Company in a Restricted Subsidiary or (c) an Investment by a
Restricted Subsidiary in the Company or a Restricted Subsidiary.
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been classified as an "Unrestricted Subsidiary."
"Sale and Leaseback Transaction" means, with respect to any Person, any
direct or indirect arrangement pursuant to which Property is sold or transferred
by such Person or a Restricted Subsidiary of such Person and is thereafter
leased back from the purchaser or transferee thereof by such Person or one of
its Restricted Subsidiaries.
"Secured Credit Facility" means the AT&T Credit Facility as in effect on
the Issue Date and additional secured credit agreements to which the Company is
or becomes a party, in an aggregate amount not to exceed $35 million, and all
related amendments, notes, collateral documents, guarantees, instruments and
other agreements executed in connection therewith, as the same may be amended,
modified, supplemented, restated, renewed, extended, refinanced, substituted or
replaced from time to time.
"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.
"Subsidiary" means, with respect to any Person, (i) any corporation more
than 50% of the outstanding shares of Voting Stock of which is owned, directly
or indirectly, by such Person, or by one or more other Subsidiaries of such
Person, or by such Person and one or more other Subsidiaries of such Person,
(ii) any general partnership, joint venture or similar entity, more than 50% of
the outstanding partnership or similar interests of which are owned, directly or
indirectly, by such Person, or by one or more other Subsidiaries of such Person,
or by such Person and one or more other Subsidiaries of such Person and (iii)
any limited partnership of which such Person or any Subsidiary of such Person is
a general partner.
"Telecommunications Assets" means, with respect to any Person, assets
(including, without limitation, rights-of-way, trademarks and licenses to use
copyrighted material), that are utilized by such Person, directly or indirectly,
in a Telecommunications Business. Telecommunications Assets shall include stock,
joint venture or partnership interests in another Person, provided that
substantially all of the assets of such other Person consist of
Telecommunications Assets, and provided, further, that if such stock, joint
venture or partnership interests are held by the Company or a Restricted
Subsidiary, such other Person either is, or immediately following the relevant
transaction shall become, a Restricted Subsidiary of the Company pursuant to the
Indenture. 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
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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.
"Telecommunications Company" means any Person substantially all of the
assets of which consist of Telecommunications Assets.
"Total Market Capitalization" of any Person means, at the time of
determination, the product of (i) the aggregate amount of outstanding shares of
common stock of such Person (which shall not include any common stock issuable
upon the exercise of options or warrants on, or securities convertible or
exchangeable into, shares of common stock of such Person) and (ii) the average
closing price of such common stock over the preceding 20 consecutive Trading
Days. If no such closing price exists with respect to shares of any such class,
the value of such shares shall be determined by the Board of Directors in good
faith as evidenced by a Board Resolution delivered to the Trustee.
"Trading Day" means, with respect to a security traded on a securities
exchange, automated quotation system or market, a day on which such exchange,
system or market is open for a full day of trading.
"U.S. Government Obligations" means (x) securities that are (i) direct
obligations of the United States of America for the payment of which the full
faith and credit of the United States of America is pledged or (ii) obligations
of a Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the United
States of America, which, in either case, are not callable or redeemable at the
option of the issuer thereof, and (y) depository receipts issued by a bank (as
defined in Section 3(a)(2) of the Securities Act) as custodian with respect to
any U.S. Government Obligation which is specified in clause (x) above and held
by such bank for the account of the holder of such depository receipt, or with
respect to any specific payment of principal or interest on any U.S. Government
Obligation which is so specified and held, provided that (except as required by
law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received by the
custodian in respect of the U.S. Government Obligation or the specific payment
of principal or interest of the U.S. Government Obligation evidenced by such
depository receipt.
"Unrestricted Subsidiary" means any Subsidiary of the Company that the
Company has classified as an "Unrestricted Subsidiary" and that has not been
reclassified as a Restricted Subsidiary, pursuant to the terms of the Indenture.
"Vendor Financing Indebtedness" of any Person means an obligation owed by
such Person to a vendor of any Telecommunications Assets solely in respect of
the purchase price of such assets, provided that the amount of such Indebtedness
does not exceed the Fair Market Value of such assets, and provided, further,
that such Indebtedness is incurred within 180 days of the acquisition of such
assets.
"Voting Stock" means, with respect to any Person, securities of any class
or classes of Capital Stock in such Person entitling the holders thereof
(whether at all times or at the times that such class of Capital Stock has
voting power by reason of the happening of any contingency) to vote in the
election of members of the board of directors or comparable body of such Person.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes the material United States federal income
tax consequences of the purchase, ownership and disposition of Notes as of the
date hereof. Except where noted, the following discussion deals only with Notes
held as capital assets by initial purchasers that purchased the Notes at their
original "issue price" (as described below) and does not deal with special
situations, such as those of dealers in securities or currencies, financial
institutions, tax-
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exempt entities, life insurance companies, persons holding Notes as a part of a
hedging, conversion or constructive sale transaction or a straddle or holders of
Notes whose "functional currency" is not the U.S. dollar. Furthermore, the
discussion below is based upon the provisions of the Internal Revenue Code of
1986, as amended (the "Code"), and regulations, rulings and judicial decisions
thereunder as of the date hereof, and such authorities may be repealed, revoked
or modified so as to result in United States federal income tax consequences
different from those discussed below. PERSONS CONSIDERING THE EXCHANGE OF OLD
NOTES FOR NEW NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE UNITED
STATES FEDERAL INCOME TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS
AS WELL AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING
JURISDICTION.
As used herein, a "United States Holder" of a Note means a holder that is
(i) a citizen or resident of the United States, (ii) a corporation or
partnership created or organized in or under the laws of the United States or
any political subdivision thereof, (iii) an estate the income of which is
subject to United States federal income taxation regardless of its source or
(iv) a trust which is subject to the supervision of a court within the United
States and the control of a United States person as described in section
7701(a)(30) of the Code. A "Non-United States Holder" is a holder that is not a
United States Holder.
ORIGINAL ISSUE DISCOUNT
The Notes were issued with original issue discount ("OID") in an amount
equal to the difference between their stated redemption price at maturity (the
sum of all payments of principal and interest due on the Note) and their "issue
price." United States Holders should be aware that they must include OID in
gross income on a daily economic accrual basis (as described more fully below),
regardless of their regular method of tax accounting and in advance of receipt
of the cash attributable to that income. However, United States Holders of such
Notes generally will not be required to include separately in income cash
payments received on the Notes, even if denominated as interest.
This summary is based upon final Treasury regulations addressing debt
instruments issued with OID (the "OID Regulations").
The "issue price" of each Note will be the first price at which a
substantial amount of that particular offering is sold (other than to an
underwriter, placement agent or wholesaler).
The amount of OID includible in income by the initial United States Holder
of a Note is the sum of the "daily portions" of OID with respect to the Note for
each day during the taxable year or portion of the taxable year in which such
United States Holder held such Note ("accrued OID"). The daily portion is
determined by allocating to each day in any "accrual period" a pro rata portion
of the OID allocable to that accrual period. The "accrual period" for a Note may
be of any length and may vary in length over the term of the Note, provided that
each accrual period is no longer than one year and each scheduled payment of
principal or interest occurs on the first day or the final day of an accrual
period. The amount of OID allocable to any accrual period is an amount equal to
the product of the Note's adjusted issue price at the beginning of such accrual
period and its yield to maturity (determined on the basis of compounding at the
close of each accrual period and properly adjusted for the length of the accrual
period). OID allocable to a final accrual period is the difference between the
amount payable at maturity and the adjusted issue price at the beginning of the
final accrual period. The "adjusted issue price" of a Note at the beginning of
any accrual period is equal to its issue price increased by the accrued OID for
each prior accrual period and reduced by any payments made on such Note on or
before the first day of the accrual period. Under these rules, a United States
Holder will have to include in income increasingly greater amounts of OID in
successive accrual periods. The Company is required to provide information
returns stating the amount of OID accrued on Notes held of record by persons
other than corporations and other exempt holders.
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SALE, EXCHANGE AND RETIREMENT OF NOTES
A United States Holder's tax basis in a Note will, in general, be the
United States Holder's cost therefor, increased by OID and reduced by any cash
payments received in respect of the Note. Upon the sale, exchange, retirement or
other disposition of a Note, a United States Holder will recognize gain or loss
equal to the difference between the amount realized upon the sale, exchange,
retirement or other disposition and the adjusted tax basis of the Note. Such
gain or loss will be capital gain or loss. Capital gains of individuals derived
in respect of capital assets held for more than one year are eligible for
reduced rates of taxation. The deductibility of capital losses is subject to
limitations.
NON-UNITED STATES HOLDERS
Under present United States federal income and estate tax law, and subject
to the discussion below concerning backup withholding:
(a) no withholding of United States federal income tax will be required
with respect to the payment by the Company or any paying agent of principal or
interest (which for purposes of this discussion includes OID) on a Note owned by
a Non-United States Holder, provided (i) that the beneficial owner does not
actually or constructively own 10% or more of the total combined voting power of
all classes of stock of the Company entitled to vote within the meaning of
section 871(h)(3) of the Code and the regulations thereunder, (ii) the
beneficial owner is not a controlled foreign corporation that is related to the
Company through stock ownership, (iii) the beneficial owner is not a bank whose
receipt of interest on a Note is described in section 881(c)(3)(A) of the Code
and (iv) the beneficial owner satisfies the statement requirement (described
generally below) set forth in section 871(h) and section 881(c) of the Code and
the regulations thereunder;
(b) no withholding of United States federal income tax will be required
with respect to any gain or income realized by a Non-United States Holder upon
the sale, exchange, retirement or other disposition of a Note; and
(c) a Note beneficially owned by an individual who at the time of death is
a Non-United States Holder will not be subject to United States federal estate
tax as a result of such individual's death, provided that such individual does
not actually or constructively own 10% or more of the total combined voting
power of all classes of stock of the company entitled to vote within the meaning
of section 871(h)(3) of the Code and provided that the interest payments with
respect to such Note would not have been, if received at the time of such
individual's death, effectively connected with the conduct of a United States
trade or business by such individual.
To satisfy the requirement referred to in (a)(iv) above, the beneficial
owner of such Note, or a financial institution holding the Note on behalf of
such owner, must provide, in accordance with specified procedures, a paying
agent of the Company with a statement to the effect that the beneficial owner is
not a United States person. Currently, these requirements will be met if (1) the
beneficial owner provides his name and address, and certifies, under penalties
of perjury, that he is not a United States person (which certification may be
made on an Internal Revenue Service ("IRS") Form W-8 (or successor form)) or (2)
a financial institution holding the Note on behalf of the beneficial owner
certifies, under penalties of perjury, that such statement has been received by
it and furnishes a paying agent with a copy thereof. Under recently finalized
Treasury regulations (the "Final Regulations"), the statement requirement
referred to in (a)(iv) above may also be satisfied with other documentary
evidence for interest paid after December 31, 1999 with respect to an offshore
account or through certain foreign intermediaries.
If a Non-United States Holder cannot satisfy the requirements of the
"portfolio interest" exception described in (a) above, payments of interest
(including OID) made to such Non-United States Holder will be subject to a 30%
withholding tax unless the beneficial owner of the Note
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provides the Company or its paying agent, as the case may be, with a properly
executed (1) IRS Form 1001 (or successor form) claiming an exemption from (or
reduction in) withholding under the benefit of an applicable tax treaty or (2)
IRS Form 4224 (or successor form) stating that interest paid on the Note is not
subject to withholding tax because it is effectively connected with the
beneficial owner's conduct of a trade or business in the United States. Under
the Final Regulations, Non-United States Holders will generally be required to
provide IRS Form W-8 in lieu of IRS Form 1001 and IRS Form 4224, although
alternative documentation may be applicable in certain situations.
If a Non-United States Holder is engaged in a trade or business in the
United States and interest (including OID) on the Note is effectively connected
with the conduct of such trade or business, the Non-United States Holder,
although exempt from the withholding tax discussed above, will be subject to
United States federal income tax on such interest and OID on a net income basis
in the same manner as if it were a United States Holder. In addition, if such
holder is a foreign corporation, it may be subject to a branch profits tax equal
to 30% or lower rate under an applicable tax treaty of its effectively connected
earnings and profits for the taxable year, subject to adjustments. For this
purpose, interest (including OID) on a Note will be included in such foreign
corporation's earnings and profits.
Any gain or income realized upon the sale, exchange, retirement or other
disposition of a Note generally will not be subject to United States federal
income tax unless (i) such gain or income is effectively connected with a trade
or business in the United States of the Non-United States Holder, or (ii) in the
case of a Non-United States Holder who is an individual, such individual is
present in the United States for 183 days or more in the taxable year of such
sale, exchange, retirement or other disposition, and certain other conditions
are met.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to certain
payments of principal, interest and OID paid on a Note and to the proceeds upon
the sale of a Note made to United States Holders other than certain exempt
recipients (such as corporations). A 31% backup withholding tax will apply to
such payments if the United States Holder fails to provide a taxpayer
identification number or certification of foreign or other exempt status or
fails to report in full dividend and interest income.
In general, no information reporting or backup withholding will be required
with respect to payments made by the Company or any paying agent to Non-United
States Holders if a statement described in (a)(iv) under "Non-United States
Holders" has been received (and the payor does not have actual knowledge that
the beneficial owner is a United States person).
In addition, backup withholding and information reporting may apply to the
proceeds of the sale of a Note within the United States or conducted through
certain U.S. related financial intermediaries unless the statement described in
(a)(iv) under "Non-United States Holders" has been received (and the payor does
not have actual knowledge that the beneficial owner is a United States person)
or the holder otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against such holder's United States federal income tax
liability provided the required information is furnished to the IRS.
EXCHANGE OF NOTES
The exchange of Old Notes for New Notes in the Exchange Offer will not
constitute a taxable event to holders. Consequently, no gain or loss will be
recognized by a holder upon receipt of a New Note, the holding period of the New
Note will include the holding period the Old Note and the basis of the New Note
will be the same as the basis of the Old Note immediately before the exchange.
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IN ANY EVENT, PERSONS CONSIDERING THE EXCHANGE OF OLD NOTES FOR NEW NOTES
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS AS WELL AS ANY
CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that for a period of 120 days after
the Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or purchasers of any such New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 120 days after the Expiration Date the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer and will indemnify the holders of the Notes
(including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
VALIDITY OF THE NOTES
The validity of the New Notes will be passed upon for the Company by its
counsel, Riley M. Murphy, Annapolis Junction, Maryland.
EXPERTS
The consolidated financial statements of e.spire Communications, Inc. as of
June 30, 1996, December 31, 1996 and December 31, 1997, and for the years ended
June 30, 1995 and 1996, the six months ended December 31, 1996 and the year
ended December 31, 1997, have been included herein and in the Registration
Statement in reliance upon the report 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.
104
<PAGE> 109
GLOSSARY
ACCESS CHARGES -- The fees paid by an interexchange carrier (IXC) to a LEC
for originating and terminating long distance calls on their local networks.
ATM (ASYNCHRONOUS TRANSFER MODE) -- A recently commercialized switching and
transmission technology that is one of a general class of packet technologies
that relay traffic by way of an address contained within the first five bits of
a standard fifty-three bit-long packet or cell. ATM switching was specifically
developed to allow switching and transmission of mixed voice, data and video
(sometimes referred to as "multi-media" information) at varying rates. The ATM
format can be used by many different information systems, including LANs.
BROADBAND -- Broadband communications systems can transmit large quantities
of voice, data and video by way of digital or analog signals. Examples of
broadband communication systems include DS-3 fiber optic systems, which can
transmit 672 simultaneous voice conversations, or a broadcast television station
that transmits high resolution audio and video signals into the home. Broadband
connectivity is also an essential element for interactive multimedia
applications.
CAP (COMPETITIVE ACCESS PROVIDER) -- A name for a category of local service
provider that appeared in the late 1980's, who competed with local telephone
companies by placing its own fiber optic cables in a city and sold various
private line telecommunications services in direct competition to the local
telephone company. CAPs are also referred to in the industry as alternative
local telecommunications service providers (ALTs) and metropolitan area network
providers (MANs) and were formerly referred to as alternative access vendors
(AAVs).
CATVS -- Cable television service providers.
CENTRAL OFFICES -- The switching centers or central switching facilities of
the LECs.
CENTREX -- Centrex is a service that offers features similar to those of a
Private Branch Exchange (PBX), except the equipment is located at the carrier's
premises and not at the premises of the customer. These features include direct
dialing within a given phone system, direct dialing of incoming calls, and
automatic identification of outbound calls. This is a value-added service that
carriers can provide to a wide range of customers who do not have the size or
the funds to support their own on-site PBX.
CLEC (COMPETITIVE LOCAL EXCHANGE CARRIER) -- A category of telephone
service provider (carrier) that offers services similar to the former monopoly
local telephone company, as recently allowed by changes in telecommunications
law and regulation. A CLEC may also provide other types of telecommunications
services (long distance, etc.).
CO-CARRIER STATUS -- A relationship between a CLEC and an ILEC that affords
the same access and rights to the other's network, and provides access and
services on an equal basis.
COLLOCATION -- The ability to connect a network to the ILEC's central
offices. Physical collocation occurs upon placement of network connection
equipment inside the ILEC's central offices. Virtual collocation is an
alternative to physical collocation pursuant to which the ILEC permits
connection to its network through the ILEC's central offices at competitive
prices, even though the network connection equipment is not physically located
inside the central offices of the ILEC.
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 generally offered by CAPs, including the Company.
DIGITAL -- A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary code digits 0 and 1. Digital transmission
G-1
<PAGE> 110
and switching technologies employ a sequence of these pulses to represent
information as opposed to the continuously variable analog signal. Digital
transmission and switching technologies offer a threefold improvement in speed
and capacity over analog techniques, allowing much more efficient and
cost-effective transmission of voice, video and data.
DS-0, DS-1, DS-3 -- Standard telecommunications industry digital signal
formats, which are distinguishable by bit rate (the number of binary digits (0
and 1) transmitted per second). DS-0 service has a bit rate of 64 kilobits per
second. DS-1 service has a bit rate of 1.544 megabits per second and DS-3
service has a bit rate of 45 megabits per second.
FCC (FEDERAL COMMUNICATIONS COMMISSION) -- The US Government organization
charged with the oversight of all public communications media.
FIBER MILES -- The number of route miles installed (excluding pending
installations) along a telecommunications path multiplied by the number of
fibers along that path. See the definition of "Route Miles" below.
FIBER OPTICS -- Fiber optic cable is the medium of choice for the
telecommunications and cable industries. Fiber is immune to electrical
interference and environmental factors that affect copper wiring and satellite
transmission. Fiber optic technology involves sending laser light pulses across
glass strands in order to transmit digital information. A strand of fiber optic
cable is as thick as a human hair yet has significantly greater bandwidth
capacity than copper cable, which is many times greater in size.
FIBER OPTIC RING NETWORK -- Most CAPs have built their networks in ring
configurations in order to ensure that, if one segment of a network is damaged
or cut, the traffic is simply re-routed and sent to its destination in the
opposite direction. The Company uses a "self-healing" optical fiber ring
architecture in its networks.
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.
ICP (INTEGRATED COMMUNICATIONS PROVIDER) -- A telecommunications carrier
that provides packaged or integrated services from among a broad range of
categories, including local exchange service, long distance service, enhanced
data service, cable TV service, and other communications services.
ILEC (INCUMBENT LOCAL EXCHANGE CARRIER) -- The local exchange carrier that
was the monopoly carrier, prior to the opening of local exchange services to
competition.
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 CAP, long distance carrier or
end-user seeking such interconnection for the provision of interstate special
access and switched access transport services.
INTERNET PROTOCOL (IP) -- A compilation of network- and transport-level
protocols that allow computers with different architectures and operating system
software to communicate with other computers on the Internet.
ISDN (INTEGRATED SERVICES DIGITAL NETWORK) -- An internationally agreed
upon standard which, through special equipment, allows two-way, simultaneous
voice and data transmission in digital formats over the same transmission line.
ISDN permits video-conferencing over a single line, for example, and also
supports a multitude of value-added networking capabilities, reducing costs for
end-users and results in more efficient use of available facilities. ISDN
combines standards for highly flexible customers to network signaling with both
voice and data within a common facility.
G-2
<PAGE> 111
ISP (INTERNET SERVICE PROVIDER) -- An Internet service provider provides
customers with access to the Internet, normally for dial access customers, by
linking its network directly or through other ISPs to the Internet backbone
network.
IXC (INTEREXCHANGE CARRIERS) -- See Long Distance Carrier.
LANS (LOCAL AREA NETWORKS) -- The interconnection of computers for the
purpose of sharing files, programs and various devices such as work stations,
printers and high-speed modems. LANs may include dedicated computers or file
servers that provide a centralized source of shared files and programs.
LATAS (LOCAL ACCESS AND TRANSPORT AREAS) -- The geographically defined
areas in which LECs are authorized to provide local switched services.
LEC (LOCAL EXCHANGE CARRIER) -- A company providing local telephone
services.
LOCAL EXCHANGE AREAS -- A geographic area determined by the appropriate
state regulatory authority in which local calls generally are transmitted
without toll charges to the calling or called party.
LONG DISTANCE CARRIERS OR IXCS (INTEREXCHANGE CARRIERS) -- Long distance
carriers provide services between local exchanges on an interstate or intrastate
basis. A long distance carrier may offer services over its own or another
carrier's facilities. Long distance carriers include, among others, AT&T, MCI,
Sprint, WorldCom and LCI, as well as resellers of long distance capacity.
NAP -- Network Access Points are points where the national ISPs
interconnect their networks, allowing a multitude of local and regional ISPs to
exchange data and access the Internet globally.
NODE -- An individual point of origination and termination of data on the
network transported using frame relay or similar technology.
OFF-NET -- A customer that is not physically connected to one of the
Company's networks but who is accessed through interconnection with a LEC
network.
ON-NET -- A customer that is physically connected to one of the Company's
networks.
PBX (PRIVATE BRANCH EXCHANGE) -- A switching system within an office
building which allows calls from outside to be routed directly to the individual
instead of through a central number. This PBX also allows for calling within an
office by way of four digit extensions. Centrex is a service which can simulate
this service from an outside switching source, thereby eliminating the need for
a large capital expenditure on a PBX.
PCS (PERSONAL COMMUNICATIONS SERVICE) -- A type of wireless telephone
system that uses light, inexpensive handheld sets and communicates via low power
antennas.
POPS (POINTS OF PRESENCE) -- Locations where a long distance carrier has
installed transmission equipment in a service area that serves as, or relays
calls to, a network switching center of that long distance carrier.
PRIVATE LINE -- A private, dedicated telecommunications connection between
end-user locations (excluding long distance carrier POPs).
RBOCS (REGIONAL BELL OPERATING COMPANIES) -- The seven regional local
telephone holding companies established by the modification of final judgment in
U.S. v. AT&T. These RBOCs are prohibited from providing interLATA services and
from manufacturing telecommunications equipment.
ROUTE MILES -- The number of miles of the telecommunications path in which
fiber optic cables are installed as it would appear on a network map.
G-3
<PAGE> 112
SONET (SYNCHRONOUS OPTICAL NETWORK) -- A transmission technology that is
used by carriers in both local and long distance telecommunications networks to
provide efficient, highly reliable communications channels.
SPECIAL ACCESS SERVICES -- The lease of private, dedicated
telecommunications lines or "circuits" along the network of a ILEC or a CAP
(such as the Company), whose lines or circuit 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 an end-user 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 IXC POPs.
SWITCHED TRAFFIC -- Telecommunications traffic along a switched network.
VGE (VOICE GRADE EQUIVALENT CIRCUITS) -- A measure of service equivalent to
one telephone line (64 kilobits of bandwidth) actually billed to a customer.
G-4
<PAGE> 113
e.spire COMMUNICATIONS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996, DECEMBER 31, 1996 AND 1997 AND
JUNE 30, 1997 AND 1998 (UNAUDITED)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of June 30, 1996 and December
31, 1996 and 1997......................................... F-3
Consolidated Statements of Operations for the years ended
June 30, 1995 and 1996, the six months ended December 31,
1996, and the year ended December 31, 1997................ F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended June 30, 1995 and 1996, the six months
ended December 31, 1996, and the year ended December 31,
1997...................................................... F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 1995 and 1996, the six months ended December 31,
1996, the year ended December 31, 1997.................... F-7
Notes to Consolidated Financial Statements.................. F-9
Condensed Consolidated Balance Sheets as of December 31,
1997 and June 30, 1998 (unaudited)........................ F-26
Condensed Consolidated Statements of Operations (unaudited)
for the three months and six months ended June 30, 1997
and 1998.................................................. F-27
Condensed Consolidated Statements of Cash Flow (unaudited)
for the six months ended June 30, 1997 and 1998........... F-28
Notes to Unaudited Condensed Consolidated Interim Financial
Statements................................................ F-29
</TABLE>
F-1
<PAGE> 114
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
e.spire Communications, Inc.:
We have audited the accompanying consolidated balance sheets of e.spire
Communications, Inc. and subsidiaries as of June 30, 1996 and December 31, 1996
and 1997, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for the years ended June 30, 1995 and 1996, the
six months ended December 31, 1996, and the year ended December 31, 1997. 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 audits 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.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of e.spire
Communications, Inc. and subsidiaries as of June 30, 1996 and December 31, 1996
and 1997, and the results of their operations and their cash flows for the years
ended June 30, 1995 and 1996, the six months ended December 31, 1996, and the
year ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Washington, D.C.
February 12, 1998
F-2
<PAGE> 115
e.spire COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------------
1996 1996 1997
-------- ---- ----
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (note 1)........................ $134,115,981 $ 78,618,544 $ 260,836,929
Restricted cash and investments (note 1).................. 2,342,152 2,342,152 26,525,516
Trade accounts receivable, net of allowance for doubtful
accounts of $190,000, $432,000, and $1,921,000 at June
30, 1996, December 31, 1996, and December 31, 1997,
respectively (note 1)................................... 735,260 2,429,077 15,514,278
Other current assets...................................... 1,003,465 1,202,711 6,127,267
------------ ------------ -------------
Total current assets........................................ 138,196,858 84,592,484 309,003,990
Networks, equipment and furniture, gross (note 2)........... 80,147,964 144,403,123 282,152,543
Less: accumulated depreciation and amortization........... (3,408,698) (8,320,372) (31,675,227)
------------ ------------ -------------
76,739,266 136,082,751 250,477,316
Deferred financing fees, net of accumulated amortization of
$773,000, $1,071,000, and $3,649,000 at June 30, 1996,
December 31, 1996, and December 31, 1997, respectively.... 8,334,183 8,380,283 25,031,409
Intangible assets, net of accumulated amortization of
$776,000 (notes 1 and 13)................................. -- -- 8,132,191
Restricted cash and investments (note 1).................... -- -- 45,375,000
Other assets................................................ 329,584 982,649 875,466
------------ ------------ -------------
Total assets........................................ $223,599,891 $230,038,167 $ 638,895,372
============ ============ =============
LIABILITIES, REDEEMABLE STOCK AND OPTIONS, MINORITY INTEREST, AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable -- current portion (note 6)................. $ 252,809 $ 872,031 $ 437,500
Accounts payable.......................................... 21,317,346 33,587,407 18,308,370
Accrued interest.......................................... -- -- 13,360,415
Accrued employee costs.................................... 774,262 2,057,187 2,353,247
Other accrued liabilities................................. 886,692 2,074,945 2,310,664
------------ ------------ -------------
Total current liabilities................................... 23,231,109 38,591,570 36,770,196
Long-term liabilities:
Notes payable, less current portion (note 6).............. 184,129,361 209,538,226 460,847,677
Other long-term liabilities............................... -- -- 473,693
Dividends payable (note 3)................................ 4,942,313 6,945,943 --
------------ ------------ -------------
Total liabilities................................... 212,302,783 255,075,739 498,091,566
============ ============ =============
Redeemable stock and options:
Redeemable options (note 7)............................... 2,155,025 2,000,000 1,000,000
14 3/4% Redeemable Preferred Stock due 2008 (note 5)...... -- -- 55,060,661
12 3/4% Junior Redeemable Preferred Stock due 2009 (note
5)...................................................... -- -- 150,098,992
------------ ------------ -------------
Total redeemable stock and options.......................... 2,155,025 2,000,000 206,159,653
------------ ------------ -------------
Minority interest (note 6).................................. 160,270 -- --
------------ ------------ -------------
Stockholders' equity (deficit) (notes 3, 4, 5, 6 and 7):
Preferred stock, $1.00 par value, 186,664 shares
designated as 9% Series A-1 Convertible Preferred Stock
authorized, issued and outstanding at June 30, 1996 and
December 31, 1996, respectively, no shares issued and
outstanding at December 31, 1997........................ 186,664 186,664 --
Preferred stock, $1.00 par value, 277,500 shares
authorized and designated as 9% Series B Convertible
Preferred Stock; 277,500 and 227,500 shares issued and
outstanding at June 30, 1996 and December 31, 1996,
respectively, no shares issued and outstanding at
December 31, 1997....................................... 277,500 277,500 --
Common stock, $.01 par value, 75,000,000 shares
authorized, 6,645,691, 6,784,996, and 37,219,419 shares
issued and outstanding at June 30, 1996, December 31,
1996 and 1997, respectively............................. 65,837 67,850 372,194
Additional paid-in capital................................ 55,975,078 54,870,194 131,728,166
Accumulated deficit....................................... (47,523,266) (82,439,780) (197,456,207)
------------ ------------ -------------
Total stockholders' equity (deficit)........................ 8,981,813 (27,037,572) (65,355,847)
------------ ------------ -------------
Commitments and contingencies (notes 1, 6, 9 and 10)
Total liabilities, redeemable stock and options,
minority interest, and stockholders' equity
(deficit)......................................... $223,599,891 $230,038,167 $ 638,895,372
============ ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 116
e.spire COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE YEAR ENDED FOR THE YEAR ENDED MONTHS ENDED FOR THE YEAR ENDED
JUNE 30, 1995 JUNE 30, 1996 DECEMBER 31, 1996 DECEMBER 31, 1997
------------------ ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Revenues (note 1)............ $ 388,887 $ 3,415,137 $ 6,990,452 $ 59,000,450
------------ ------------ ------------ -------------
Operating expenses:
Network development and
operations............... 3,282,183 5,264,570 8,703,057 52,881,173
Selling, general, and
administrative........... 4,597,615 13,463,775 20,269,991 59,850,690
Non-cash stock compensation
(note 7)................. 6,419,412 2,735,845 549,645 4,273,669
Depreciation and
amortization............. 497,811 3,078,426 4,911,674 24,131,317
------------ ------------ ------------ -------------
Total operating expenses..... 14,797,021 24,542,616 34,434,367 141,136,849
Nonoperating income
(expenses):
Interest and other
income................... 217,525 4,409,733 2,757,461 8,685,473
Interest and other
expense.................. (170,095) (10,476,904) (10,390,330) (41,565,501)
Debt conversion expense.... (385,000) -- -- --
------------ ------------ ------------ -------------
Loss before minority
interest................... (14,745,704) (27,194,650) (35,076,784) (115,016,427)
Minority interest............ 48,055 412,606 160,270 --
------------ ------------ ------------ -------------
Net loss..................... (14,697,649) (26,782,044) (34,916,514) (115,016,427)
Preferred stock dividends and
accretion (notes 3 and
5)......................... (1,070,985) (3,871,328) (2,003,630) (11,629,712)
------------ ------------ ------------ -------------
Net loss to common
stockholders............... $(15,768,634) $(30,653,372) $(36,920,144) $(126,646,139)
============ ============ ============ =============
Basic and diluted net loss
per common share (note
8)......................... $ (3.30) $ (4.96) $ (5.48) $ (4.65)
============ ============ ============ =============
Weighted average number of
common shares
outstanding................ 4,771,689 6,185,459 6,733,759 27,233,642
============ ============ ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 117
e.spire COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996, THE SIX MONTHS ENDED DECEMBER 31,
1996, AND THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
SERIES A-1 SERIES B
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
-------------------- -------------------- -------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ----------- -------- --------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1994......... 1,700 $ 1,700,000 -- $ -- -- $ -- 2,755,005 $ --
Preferred Stock exchange......... (1,700) (1,700,000) -- -- -- -- 548,387 --
Set par value for common stock... -- -- -- -- -- -- -- 33,033
Acquisition of Piedmont Teleport,
Inc............................ -- -- -- -- -- -- 62,000 --
Write-off of note receivable for
common stock................... -- -- -- -- -- -- -- --
Series A Preferred private
placement, net of related costs
(note 3)....................... -- -- 186,664 186,664 -- -- -- --
Series B Preferred private
placement, net of related costs
(note 3)....................... -- -- -- -- 227,500 227,500 -- --
Issuance of put right
obligations.................... -- -- -- -- -- -- -- --
Cancellation of put right
obligation..................... -- -- -- -- -- -- -- --
Warrant and stock option
exercises and stock grant...... -- -- -- -- -- -- 2,379,390 23,794
Establish limitation on common
stock put right obligation..... -- -- -- -- -- -- -- --
Series A Preferred Stock
dividends accrued (note 3)..... -- -- -- -- -- -- -- --
Net loss......................... -- -- -- -- -- -- -- --
------ ----------- -------- --------- -------- --------- ---------- --------
Balances at June 30, 1995......... -- -- 186,664 186,664 227,500 227,500 5,744,782 56,827
Issuance of Series B-4 Preferred
Stock (note 3)................. -- -- -- -- 50,000 50,000 -- --
Issuance of detachable warrants
(note 6)....................... -- -- -- -- -- -- -- --
Warrants and stock options
exercised...................... -- -- -- -- -- -- 900,909 9,010
Series A and B Preferred Stock
dividends accrued (note 3)..... -- -- -- -- -- -- -- --
Cancellation of and adjustments
to put right obligations....... -- -- -- -- -- -- -- --
Stock compensation expense....... -- -- -- -- -- -- -- --
Net loss......................... -- -- -- -- -- -- -- --
------ ----------- -------- --------- -------- --------- ---------- --------
Balances at June 30, 1996......... -- -- 186,664 186,664 277,500 277,500 6,645,691 65,837
Warrants and stock options
exercised...................... -- -- -- -- -- -- 139,305 1,393
Series A and B Preferred Stock
dividends accrued (note 3)..... -- -- -- -- -- -- -- --
Accretion of consulting agreement
credit to exercise price of
warrants (note 11)............. -- -- -- -- -- -- -- --
Cancellation of and adjustments
to put right obligations....... -- -- -- -- -- -- -- 620
Stock compensation expense....... -- -- -- -- -- -- -- --
Net loss......................... -- -- -- -- -- -- -- --
------ ----------- -------- --------- -------- --------- ---------- --------
Balances December 31, 1996........ -- -- 186,664 186,664 277,500 277,500 6,784,996 67,850
Shares issued to CyberGate (note
13)............................ -- -- -- -- -- -- 1,030,000 10,300
Series A and B Preferred Stock
dividends (note 3)............. -- -- -- -- -- -- -- --
Issuance of common stock (note
4)............................. -- -- -- -- -- -- 8,660,000 86,600
Conversion of preferred shares
(note 3)....................... -- -- (186,664) (186,664) (277,500) (277,500) 17,377,275 173,773
Preferred dividends paid in stock
(note 4)....................... -- -- -- -- -- -- 1,650,207 16,502
<CAPTION>
NOTES TOTAL
ADDITIONAL RECEIVABLE STOCKHOLDERS'
PAID-IN ON SALE OF ACCUMULATED EQUITY
CAPITAL COMMON STOCK DEFICIT (DEFICIT)
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Balances at June 30, 1994......... 1,080,566 (2,750) (6,043,573) (3,265,757)
Preferred Stock exchange......... 1,700,000 -- -- --
Set par value for common stock... (33,033) -- -- --
Acquisition of Piedmont Teleport,
Inc............................ -- -- -- --
Write-off of note receivable for
common stock................... (2,750) 2,750 -- --
Series A Preferred private
placement, net of related costs
(note 3)....................... 15,009,461 -- -- 15,196,125
Series B Preferred private
placement, net of related costs
(note 3)....................... 20,434,000 -- -- 20,661,500
Issuance of put right
obligations.................... (53,303) -- -- (53,303)
Cancellation of put right
obligation..................... 487,500 -- -- 487,500
Warrant and stock option
exercises and stock grant...... 349,030 -- -- 372,824
Establish limitation on common
stock put right obligation..... 4,510,962 -- -- 4,510,962
Series A Preferred Stock
dividends accrued (note 3)..... (1,070,985) -- -- (1,070,985)
Net loss......................... -- -- (14,697,649) (14,697,649)
----------- ------- ------------ ------------
Balances at June 30, 1995......... 42,411,448 -- (20,741,222) 22,141,217
Issuance of Series B-4 Preferred
Stock (note 3)................. 4,950,000 -- -- 5,000,000
Issuance of detachable warrants
(note 6)....................... 8,684,000 -- -- 8,684,000
Warrants and stock options
exercised...................... 289,360 -- -- 298,370
Series A and B Preferred Stock
dividends accrued (note 3)..... (3,871,328) -- -- (3,871,328)
Cancellation of and adjustments
to put right obligations....... 775,753 -- -- 775,753
Stock compensation expense....... 2,735,845 -- -- 2,735,845
Net loss......................... -- -- (26,782,044) (26,782,044)
----------- ------- ------------ ------------
Balances at June 30, 1996......... 55,975,078 -- (47,523,266) 8,981,813
Warrants and stock options
exercised...................... 175,945 -- -- 177,338
Series A and B Preferred Stock
dividends accrued (note 3)..... (2,003,630) -- -- (2,003,630)
Accretion of consulting agreement
credit to exercise price of
warrants (note 11)............. 18,750 -- -- 18,750
Cancellation of and adjustments
to put right obligations....... 154,406 -- -- 155,026
Stock compensation expense....... 549,645 -- -- 549,645
Net loss......................... -- -- (34,916,514) (34,916,514)
----------- ------- ------------ ------------
Balances December 31, 1996........ 54,870,194 -- (82,439,780) (27,037,572)
Shares issued to CyberGate (note
13)............................ 8,744,700 -- -- 8,755,000
Series A and B Preferred Stock
dividends (note 3)............. (1,113,744) -- -- (1,113,744)
Issuance of common stock (note
4)............................. 39,866,172 -- -- 39,952,772
Conversion of preferred shares
(note 3)....................... 290,391 -- -- --
Preferred dividends paid in stock
(note 4)....................... 7,790,716 -- -- 7,807,218
</TABLE>
F-5
<PAGE> 118
<TABLE>
<CAPTION>
SERIES A-1 SERIES B
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
-------------------- -------------------- -------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ----------- -------- --------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Warrants and stock options
exercised...................... -- -- -- -- -- -- 1,367,460 13,674
Expiration of put right
obligation (note 7)............ -- -- -- -- -- -- -- --
Stock compensation expense....... -- -- -- -- -- -- -- --
Warrants issued (note 7)......... -- -- -- -- -- -- -- --
Redeemable Preferred Warrants
(note 5)....................... -- -- -- -- -- -- -- --
Preferred stock
dividends/accretion (note 5)... -- -- -- -- -- -- -- --
NetRunner acquisition (note
13)............................ -- -- -- -- -- -- 51,166 511
Shares issued to AT&T (note 6)... -- -- -- -- -- -- 207,964 2,080
Shares issued under employee
stock purchase plan............ -- -- -- -- -- -- 90,351 904
Accretion of consulting agreement
credit to exercise price of
warrants (note 11)............. -- -- -- -- -- -- -- --
Net loss......................... -- -- -- -- -- -- -- --
------ ----------- -------- --------- -------- --------- ---------- --------
Balance at December 31, 1997...... -- -- -- $ -- -- $ -- 37,219,419 $372,194
====== =========== ======== ========= ======== ========= ========== ========
<CAPTION>
NOTES TOTAL
ADDITIONAL RECEIVABLE STOCKHOLDERS'
PAID-IN ON SALE OF ACCUMULATED EQUITY
CAPITAL COMMON STOCK DEFICIT (DEFICIT)
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Warrants and stock options
exercised...................... 3,254,481 -- -- 3,268,155
Expiration of put right
obligation (note 7)............ 1,000,000 -- -- 1,000,000
Stock compensation expense....... 4,273,669 -- -- 4,273,669
Warrants issued (note 7)......... 480,144 -- -- 480,144
Redeemable Preferred Warrants
(note 5)....................... 21,603,854 -- -- 21,603,854
Preferred stock
dividends/accretion (note 5)... (10,515,968) -- -- (10,515,968)
NetRunner acquisition (note
13)............................ 628,608 -- -- 629,119
Shares issued to AT&T (note 6)... (2,080) -- -- --
Shares issued under employee
stock purchase plan............ 538,279 -- -- 539,183
Accretion of consulting agreement
credit to exercise price of
warrants (note 11)............. 18,750 -- -- 18,750
Net loss......................... -- -- (115,016,427) (115,016,427)
----------- ------- ------------ ------------
Balance at December 31, 1997...... 131,728,166 -- (197,456,207) (65,355,847)
=========== ======= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 119
e.spire COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE SIX FOR THE
YEAR ENDED YEAR ENDED MONTHS ENDED YEAR ENDED
JUNE 30, 1995 JUNE 30, 1996 DECEMBER 31, 1996 DECEMBER 31, 1997
------------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.......................... $(14,697,649) $(26,782,044) $(34,916,514) $(115,016,427)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization... 497,811 3,078,426 4,911,674 23,525,781
Interest deferral and
accretion..................... -- 10,447,687 10,041,189 41,032,473
Amortization of deferred
financing fees................ 323,900 668,317 334,671 2,578,675
Provision for doubtful
accounts...................... 8,570 180,940 242,915 1,438,193
Loss from impairment of
assets........................ -- -- 318,737 --
Loss attributed to minority
interest...................... (48,055) (412,606) (160,270) --
Noncash compensation,
consultants, and other
expenses...................... 6,419,412 2,735,845 549,645 4,273,669
Accretion of consulting
agreement credit to exercise
price of warrants............. -- -- 18,750 18,750
Noncash debt conversion
expense....................... 385,000 -- -- --
Issuance of warrants under the
preferred provider
agreement..................... -- -- -- 480,144
Changes in operating assets and
liabilities:
Trade accounts receivable..... (359,007) (565,764) (1,936,732) (14,396,963)
Restricted cash related to
operating activities........ 200,000 -- -- --
Other current assets.......... (92,325) (911,140) (199,246) (4,887,960)
Other assets.................. (26,545) (107,574) (653,065) 126,026
Accounts payable.............. 3,170,885 17,474,179 12,270,061 (19,232,343)
Accrued financing fees........ 1,542,255 (1,542,255) -- --
Accrued employee costs........ 719,333 (62,247) 1,282,925 296,060
Other accrued liabilities..... 1,055,673 (382,792) 1,188,253 3,410,960
------------ ------------ ------------ -------------
Net cash (used in) provided by
operating activities.............. (900,742) 3,818,972 (6,707,007) (76,352,962)
------------ ------------ ------------ -------------
Cash flows from investing
activities:
Purchase of net assets of Piedmont
Teleport, Inc................... (19,135) -- -- --
Purchase of equipment and
furniture....................... (306,454) (2,966,987) (1,827,119) (7,575,081)
Restricted cash related to network
activities...................... (752,000) (1,590,152) -- (1,119,152)
Network development costs......... (14,996,303) (57,889,227) (62,746,777) (127,460,581)
------------ ------------ ------------ -------------
Net cash used in investing
activities........................ (16,073,892) (62,446,366) (64,573,896) (136,154,814)
------------ ------------ ------------ -------------
Cash flows from financing
activities:
Issuance of notes payable......... 3,510,349 166,888,210 16,329,923 223,697,586
Payment of deferred financing
fees............................ (310,175) (8,710,387) (380,771) (19,229,801)
Warrant and stock option
exercises....................... 372,824 298,370 177,338 3,268,155
Issuances of Series A Preferred
Stock, net of offering costs and
conversion of bridge
financing....................... 10,962,046 -- -- --
Issuances of Series B Preferred
Stock, net of offering costs.... 20,661,500 5,000,000 -- --
Issuance of warrants with 2005
Notes........................... -- 8,684,000 -- --
Issuance of notes payable --
stockholders.................... 250,000 -- -- --
Proceeds from sale of minority
interest in subsidiaries........ 242,457 378,474 -- --
</TABLE>
F-7
<PAGE> 120
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE SIX FOR THE
YEAR ENDED YEAR ENDED MONTHS ENDED YEAR ENDED
JUNE 30, 1995 JUNE 30, 1996 DECEMBER 31, 1996 DECEMBER 31, 1997
------------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Payment of equipment financing.... $ -- $ -- $ (343,024) $ --
Payments of notes payable --
stockholders.................... (481,692) (146,083) -- (494,724)
Payments of bridge notes.......... (1,000,000) -- -- --
Payments of secured note.......... (75,000) -- -- --
Payments of secured convertible
note............................ (77,281) -- -- --
Other long-term liabilities....... -- -- -- (562,914)
Restricted cash related to notes
payable......................... -- -- -- (68,439,212)
Shares issued under the Employee
Stock Purchase Plan............. -- -- -- 539,183
Issuance of common stock.......... -- -- -- 39,952,772
Payment of dividends.............. -- -- -- (252,423)
Issuance of redeemable preferred
stock........................... -- -- -- 216,247,539
------------ ------------ ------------ -------------
Net cash provided by financing
activities........................ 34,055,028 172,392,584 15,783,466 394,726,161
------------ ------------ ------------ -------------
Net (decrease) increase in cash and
cash equivalents.................. 17,080,394 113,765,190 (55,497,437) 182,218,385
Cash and cash equivalents, beginning
of year........................... 3,270,397 20,350,791 134,115,981 78,618,544
------------ ------------ ------------ -------------
Cash and cash equivalents, end of
year.............................. $ 20,350,791 $134,115,981 $ 78,618,544 $ 260,836,929
============ ============ ============ =============
Supplemental disclosure of cash flow
information -- interest paid on
all debt obligations.............. $ 219,554 $ 29,217 $ 14,470 $ 2,085,380
============ ============ ============ =============
Supplemental disclosure of noncash
investing and financing
activities:
Equipment financing............... $ -- $ 343,024 $ -- $ --
Dividends declared in connection
with Series A and B Preferred
Stock........................... $ 1,070,985 $ 3,871,328 $ 2,003,630 $ 1,113,744
============ ============ ============ =============
Bridge financing, secured
convertible notes and notes
payable -- stockholders converted
to equity in connection with
private placements................ $ 4,080,079 $ -- $ -- $ --
============ ============ ============ =============
Cancellation of and adjustments to
put right obligations............. $ (487,500) $ (775,753) $ (155,025) $ (1,000,000)
============ ============ ============ =============
Write off of note receivable from
sale of common stock.............. $ 2,750 $ -- $ -- $ --
============ ============ ============ =============
Preferred stock exchange............ $ 1,700,000 $ -- $ -- $ --
============ ============ ============ =============
Purchase of Piedmont Teleport, Inc.
for common stock and related put
right obligation.................. $ 192,303 $ -- $ -- $ --
============ ============ ============ =============
Negotiation of right-of-way
agreement for option discount..... $ 201,000 $ -- $ -- $ --
============ ============ ============ =============
Purchase of CyberGate, Inc. --
1,030,000 shares.................. $ -- $ -- $ -- $ 8,755,000
============ ============ ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 121
e.spire COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997
(1) BASIS OF PRESENTATION AND RELATED MATTERS
ORGANIZATION
The consolidated financial statements include the accounts of e.spire
Communications, Inc. and its wholly-owned subsidiaries (ESPI or the Company).
All material intercompany accounts and transactions have been eliminated in
consolidation.
Effective December 31, 1996, the Company changed its fiscal year from a
twelve-month period ending June 30 to a twelve-month period ending December 31.
The consolidated statements of operations, stockholders' equity (deficit) and
cash flows are presented for the twelve month periods ended June 30, 1995 and
1996, the six month period ended December 31, 1996, and the twelve month period
ended December 31, 1997.
BUSINESS AND OPERATING ENVIRONMENT
ESPI is an integrated communications provider. The Company owns and
operates digital fiber optic networks and offers a variety of telecommunications
services to long distance companies and business and government end users in
selected target markets, principally in the southern United States. The Company
provides nonswitched dedicated services, including special access, switched
transport, and private line services, as well as high speed data services, local
switched voice services and long-distance services using its own facilities and
on a resale basis.
To date, the Company has funded the construction of its networks and its
operations with external financing. Prior to November 1995, the primary sources
of funds were two Preferred Stock private offerings completed in October 1994
and June 1995 (see note 3), and a credit facility from AT&T Credit Corporation
(see note 6). During the fiscal year ended June 30, 1996, the Company raised
additional funds through an additional sale of Preferred Stock (see note 3), two
private offerings of Senior Notes, one of which included detachable warrants and
further borrowings under the AT&T Credit Corporation Credit Facility. During the
year ended December 31, 1997, the Company raised additional funds through the
sale of Common Stock, two Preferred Stock offerings, one of which included
detachable warrants, and an offering of Senior Notes (see notes 3, 5 and 6). As
a result of the above described debt offerings, the Company will be required to
satisfy substantially higher periodic cash debt service obligations in the
future. There can be no assurance that the Company will be able to generate
sufficient cash flow or otherwise obtain funds to cover interest and principal
payments associated with currently outstanding and future debt obligations.
The Company has never been profitable, has never generated positive cash
flow from consolidated operations and, since its inception has incurred
significant net operating losses and negative cash flow. In accordance with the
terms of its debt facilities, the Company has also deferred payment of most of
its interest charges. The Company's continued development, construction,
expansion, operation and potential acquisition of local networks, as well as the
further development of additional services, including local switched voice and
high-speed data services, will require substantial capital expenditures. The
Company's ability to fund these expenditures is dependent upon the Company
raising substantial financing. To meet its remaining capital requirements and to
fund operations and cash flow deficiencies, the Company will be required to sell
additional equity securities, increase its existing credit facility, acquire
additional credit facilities or sell additional debt securities, certain of
which would require the consent of the Company's bondholders. Before incurring
additional indebtedness, the Company may be required to seek additional equity
financing to maintain balance sheet and liquidity ratios under certain of its
debt instruments. There can be no assurance that the Company will be able to
obtain the additional
F-9
<PAGE> 122
e.spire COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
financing necessary to satisfy its cash requirements or to successfully
implement its growth strategy. Failure to raise sufficient capital could compel
the Company to delay or abandon some or all of its plans or expenditures, which
could have a material adverse effect on its business, results of operations, and
financial condition. Management believes that the Company's current cash
resources will be sufficient to fund the Company's continuing negative cash flow
and required capital expenditures during 1998.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturity
dates of three months or less to be cash equivalents. The Company's investments
consist of commercial paper, US Government Securities and money market
instruments, all with original maturities of 90 days or less. The fair market
value of such securities approximates amortized cost.
RESTRICTED CASH AND INVESTMENTS
The Company has provided performance bonds and letters of credit in various
cities in connection with its operations, resulting in a restriction to cash
amounting to approximately $2,342,000, $2,342,000, and $1,223,000 at June 30,
1996, December 31, 1996, and December 31, 1997, respectively. The face amount of
all bonds and letters of credit is approximately $6,300,000 as of December 31,
1997. In addition, the Company has placed approximately $70,677,000 into an
escrow account to fund the first five interest payments of its 13 3/4% senior
notes due 2007 (see note 6). Approximately $25,302,000 of the escrow account is
classified as current. The escrow account is invested in cash equivalents
consisting of government and commercial securities.
Pursuant to SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities, the Company's short- and long-term debt securities and
marketable equity securities are accounted for at market value. The fair market
value of short- and long-term investments is determined based on quoted market
prices. The Company's marketable securities have been classified as available
for sale and are recorded at current market value with an offsetting adjustment
to stockholders' equity (deficit). At June 30, 1996 and December 31, 1996 and
1997, fair market value approximated amortized cost.
NETWORKS, EQUIPMENT, AND FURNITURE
Networks, equipment, and furniture are stated at cost less accumulated
depreciation and amortization. Costs capitalized during the network development
stage include expenses associated with network engineering, design and
construction, negotiation of rights-of-way, obtaining legal and regulatory
authorizations and the amount of interest costs associated with the network
development.
Provisions for depreciation of networks, equipment, and furniture is
computed using the straight-line method over the estimated useful lives of the
assets beginning in the month a network is substantially complete and available
for use and equipment and furniture are acquired.
F-10
<PAGE> 123
e.spire COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
The estimated useful lives of the Company's principal classes of assets are
as follows:
<TABLE>
<S> <C>
Networks:
Fiber optic cables and installation costs................. 20 years
Telecommunications equipment.............................. 3-10 years
Interconnection and collocation costs..................... 3-10 years
Leasehold improvements...................................... Life of lease
Furniture and fixtures...................................... 5 years
Capitalized network development costs....................... 3-20 years
</TABLE>
INTANGIBLE ASSETS
Intangible assets include customer lists and goodwill. Goodwill is being
amortized on a straight-line basis over the period of expected benefit of ten
years. Amortization expense related to goodwill for the year ended December 31,
1997 was approximately $726,000.
The costs of purchased customer lists are amortized on a straight-line
basis over their estimated useful lives, generally over eighteen months. The
Company determines the useful lives of customer lists based upon the estimated
length of the acquired customers' future service. Amortization expense related
to purchased customer lists was approximately $50,000 for the year ended
December 31, 1997.
VALUATION OF LONG-LIVED ASSETS
The Company accounts for the valuation of long-lived assets under SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of. This statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the estimated fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
DEFERRED FINANCING FEES
Deferred financing fees include commitment fees and other costs related to
certain debt financing transactions and are being amortized using the effective
interest method over the initial term of the related debt. Deferred finance fees
also include payments to bondholders for debt modifications that do not result
in debt extinguishment.
REVENUE RECOGNITION
Revenue from telecommunications services is recognized as services are
provided. Billings to customers for services in advance of providing such
services are deferred and recognized as revenue when earned. The Company also
enters into managed services agreements with certain customers. Under such
agreements the Company provides use of Company owned equipment, collocation, and
network access services. Revenue is recognized on a monthly basis as these
services are provided to the customer.
F-11
<PAGE> 124
e.spire COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
The Company recognizes revenue associated with engineering and construction
contracts using the percentage-of-completion method, based primarily on contract
costs incurred to date compared with total estimated contract costs. Changes to
total estimated contract costs or losses, if any, are recognized in the period
in which they are determined.
EARNINGS (LOSS) PER COMMON SHARE
During 1997, the Company adopted the provisions of SFAS No. 128, Earnings
Per Share. The computations of basic and diluted earnings (loss) per common
share are based upon the weighted average number of common shares outstanding
and potentially dilutive securities. Potentially dilutive securities include
convertible preferred stock, stock options and warrants.
INCOME TAXES
Deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities and loss
carryforwards and tax credit carryforwards for which income tax benefits are
expected to be realized in future years. A valuation allowance is established to
reduce deferred tax assets if it is more likely than not that all, or some
portion, of such deferred tax assets will not be realized. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date.
RECLASSIFICATIONS
Certain reclassifications have been made to the June 30, 1995 and 1996 and
December 31, 1996 consolidated financial statements to conform to the December
31, 1997 presentation. Such reclassifications had no effect on net loss or total
stockholders' equity (deficit).
STOCK OPTION PLAN
Prior to July 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
July 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock Based
Compensation, which permits entities to recognize as expense over the vesting
period the fair value of all stock based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosure for employee stock option grants as if the
fair-value based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
USE OF ESTIMATES
The preparation of the consolidated 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 dates of the consolidated
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results may differ from those estimates.
F-12
<PAGE> 125
e.spire COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
RISKS AND UNCERTAINTIES
The Company receives a significant portion of its revenues from a small
number of major customers, particularly the long distance telecommunications
companies that service the Company's markets. For the years ended June 30, 1995
and 1996, the six months ended December 31, 1996, and the year ended December
31, 1997 approximately 85%, 60%, 40%, and 20% of the Company's revenues were
attributable to services provided to three, four, four and five, respectively,
of the largest long distance telecommunications companies, respectively. The
loss of any one of these customers could have an adverse material impact on the
Company's results of operations.
The Company provides services to certain Internet Service Providers (ISPs).
Such companies operate in a highly competitive and uncertain environment.
Approximately 19% and 20% of the Company's revenues for the six months ended
December 31, 1996 and the year ended December 31, 1997, respectively, were
attributed to these companies. At December 31, 1996 and 1997, the Company had
trade accounts receivable of $923,000 and $5.0 million, respectively, from ISPs.
At December 31, 1997, the Company also has equipment with a carrying value of
approximately $11.7 million that is dedicated to providing service to these
ISPs. The Company believes that, if necessary, this equipment could be
redeployed throughout the Company's data network.
The Company has recorded revenues of approximately $1.6 million in 1997 for
reciprocal compensation relating to the transport and termination of Internet
traffic for local exchange carriers pursuant to various interconnection
agreements. These local exchange carriers have not paid and have disputed these
charges based on the belief that such charges are not local traffic as defined
by the various agreements. The resolution of these disputes will be based on
rulings by state public utility commissions and/or by the Federal Communications
Commission (FCC). To date, there have been no unfavorable final rulings by any
state public utility commission or the FCC that would indicate that calls placed
by end users to ISPs would not qualify as local traffic subject to the payment
of reciprocal compensation.
(2) NETWORKS, EQUIPMENT, AND FURNITURE
Networks, equipment, and furniture consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1996 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Networks and telecommunications equipment........ $76,853,865 $139,129,495 $269,213,500
Furniture and fixtures........................... 1,982,910 3,334,147 5,799,262
Computer software................................ 948,848 1,558,384 5,954,662
Leasehold improvements........................... 362,341 381,097 1,185,119
----------- ------------ ------------
80,147,964 144,403,123 282,152,543
Less -- accumulated depreciation and
amortization................................... 3,408,698 8,320,372 31,675,227
----------- ------------ ------------
Total, net of accumulated depreciation and
amortization................................... $76,739,266 $136,082,751 $250,477,316
=========== ============ ============
</TABLE>
For the years ended June 30, 1995 and 1996, the Company capitalized
interest of approximately $536,000 and $3,051,000, respectively. For the six
months ended December 31, 1996 and the year ended December 31, 1997, the Company
capitalized interest of approximately $2,268,000 and $3,933,000, respectively.
F-13
<PAGE> 126
e.spire COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
(3) PRIVATE PLACEMENTS
In October 1994, the Company completed a private placement of its 9 percent
Series A Convertible Preferred Stock, $1.00 par value (the "Series A Preferred
Stock"). There were 138,889 shares issued for cash at $90 per share resulting in
proceeds of $10,962,046, net of placement agent commissions and related
placement fees and costs. In addition, bridge financing was converted and
several other obligations were retired with proceeds of the offering. A total of
186,664 shares of the Series A Preferred Stock were issued. Further, as
discussed in note 7 to the consolidated financial statements, certain parties
obtained warrants to purchase shares of the Company's common stock. In June
1995, the Series A Preferred Stock was exchanged for an identical number of 9
percent Series A-1 Convertible Preferred Stock, $1.00 par value (the "Series A-1
Preferred Stock").
In June 1995, the Company completed a private placement of its 9 percent
Series B-1 Convertible Preferred Stock (the "Series B-1 Preferred"), 9 percent
Series B-2 Convertible Preferred Stock (the "Series B-2 Preferred") and 9
percent Series B-3 Convertible Preferred Stock (the "Series B-3 Preferred"),
each having a par value of $1.00 per share. There were 227,500 shares issued for
cash at $100 per share with proceeds of $20,661,500, net of placement agent
commissions and related placement fees and costs. In November 1995, 50,000
shares of 9 percent Series B-4 Convertible Preferred Stock (the "Series B-4
Preferred") were issued for cash of $100 per share resulting in proceeds of
$5,000,000. The Series B-1 Preferred, the Series B-2 Preferred, the Series B-3
Preferred and the Series B-4 Preferred are hereafter collectively referred to as
the "Series B Preferred Stock." The Series A-1 Preferred Stock and the Series B
Preferred Stock are hereafter collectively referred to as the "Preferred Stock."
Further, as discussed in note 7 to the consolidated financial statements,
certain parties obtained warrants to purchase shares of the Company's common
stock.
During 1997, the Preferred Stock was converted into 17,377,275 shares of
common stock. In connection with its Series A-1 and Series B Preferred Stock,
the Company has recorded approximately $1,071,000, $3,871,000, $2,004,000 and
$1,114,000 for the years ended June 30, 1995 and 1996, the six months ended
December 31, 1996 and the year ended December 31, 1997, respectively, as a
reduction in additional paid-in capital, for the payment of anticipated
dividends. The Company's certificate of incorporation required the Company to
accrue dividends, on a quarterly basis, at an annual rate of 9 percent of the
face value of the Series A-1 and B Preferred Stock. These dividends were paid
during 1997 in connection with the conversion of the Preferred Stock.
(4) COMMON STOCK OFFERING
During 1997, the Company issued 8,660,000 shares of common stock for net
proceeds of approximately $40 million, net of underwriters discounts and other
expenses of the offering. Concurrently with this transaction, 186,664 shares of
the Company's Series A-1 Preferred Stock and 277,500 shares of the Company's
Series B Preferred Stock were converted into 17,377,275 shares of the Company's
Common Stock (see note 3). In addition, of the approximately $8,000,000 of
dividends accrued on the Preferred Stock prior to conversion, approximately
$7,750,000 was paid with 1,650,207 shares of the Company's common stock. The
remaining accrued dividends were paid in cash.
F-14
<PAGE> 127
e.spire COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
(5) REDEEMABLE PREFERRED STOCK
On July 10, 1997, the Company consummated the sale of 75,000 units
consisting of its 14 3/4% Redeemable Preferred Stock due 2008 (the "Redeemable
Preferred Stock due 2008") and warrants to purchase approximately 6,023,800
shares of its Common Stock yielding net proceeds to the Company of approximately
$70.2 million, net of underwriters fees and other related expenses. The value
attributed to the warrants was approximately $21.6 million. The number of shares
the warrants are exercisable into are subject to an increase of 1,698,375 in the
event the Company fails to raise net cash proceeds of at least $50 million
through the issuance and sale of the Company's common stock by December 31,
1998. The Company will be required to redeem all outstanding shares of the
14 3/4% Preferred Stock on June 30, 2008 at a price equal to $1,000 per share
plus any accrued and unpaid dividends.
The Redeemable Preferred Stock due 2008 may be redeemed, in whole or in
part, at the option of the Company, at any time after January 1, 2003, at the
redemption prices set forth below, plus any accrued and unpaid dividends as of
that date. The redemption prices, expressed in percentages, are as follows:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003........................................................ 107.375%
2004........................................................ 104.917%
2005........................................................ 102.458%
2006 and thereafter......................................... 100.000%
</TABLE>
On October 6, 1997, the Company consummated the sale of 150,000 shares of
its 12 3/4% Junior Redeemable Preferred Stock due 2009 (the "Junior Redeemable
Preferred Stock due 2009") for proceeds of approximately $146.0 million, net of
underwriters fees and other related expenses. The Company will be required to
redeem all outstanding shares of the Junior Redeemable Preferred Stock due 2009
on October 15, 2009 at $1,000 per share plus any accrued and unpaid dividends.
The Junior Redeemable Preferred Stock due 2009 may be redeemed, in whole or
in part, at the option of the Company, at any time after October 15, 2003 at the
redemption prices set forth below, plus any accrued and unpaid dividends as of
that date. The redemption prices, expressed in percentages, are as follows:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003........................................................ 106.375%
2004........................................................ 104.781%
2005........................................................ 103.188%
2006........................................................ 101.594%
2007 and thereafter......................................... 100.000%
</TABLE>
Dividends on the Redeemable Preferred Stock due 2008 and Junior Redeemable
Preferred Stock due 2009 (collectively "the Redeemable Preferred Stock") may be
paid, at the Company's option, either in cash or by the issuance of additional
shares of Redeemable Preferred Stock; provided, however, that after June 30,
2002, to the extent and so long as the Company is not precluded from paying cash
dividends on the Redeemable Preferred Stock by the terms of any then outstanding
indebtedness, the Company is required to pay dividends on the Redeemable
Preferred Stock in cash.
F-15
<PAGE> 128
e.spire COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
The holders of the Redeemable Preferred Stock are not entitled to vote on
any matter required or permitted to be voted upon by the stockholders of the
Company. If, however, after June 30, 2002, the Company violates certain
covenants, including the payment of dividends, the Redeemable Preferred
Stockholders are permitted to vote as a single class to elect not less than 25%
of the members of the Board of Directors.
A summary of the changes in the Redeemable Preferred Stock is as follows:
<TABLE>
<CAPTION>
JUNIOR
REDEEMABLE REDEEMABLE
PREFERRED PREFERRED
STOCK STOCK
DUE 2008 DUE 2009
----------- ------------
<S> <C> <C>
Balance at issuance, net of underwriters fees and
other related expenses.............................. $48,598,386 $146,045,299
Payment of dividends in shares of Redeemable Preferred
Stock............................................... 5,348,738 --
Accrued dividends..................................... -- 3,984,375
Accretion to redemption value......................... 1,113,537 69,318
----------- ------------
Balance at December 31, 1997.......................... $55,060,661 $150,098,992
=========== ============
</TABLE>
(6) DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1996 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
AT&T Credit Corporation equipment and
working capital financing facility..... $ 14,971,122 $ 30,183,264 $ 35,000,000
2005 Senior Discount notes, interest at
13%, maturing November 1, 2005......... 102,432,137 109,402,071 126,043,037
2006 Senior Discount notes, interest at
12 3/4%, maturing April 1, 2006........ 66,635,887 70,824,922 80,242,140
2007 Senior Notes, interest at 13 3/4%,
maturing July 15, 2007................. -- -- 220,000,000
Secured equipment note payable, interest
of 9.98%, payable in 36 equal monthly
installments of $2,766, including
interest commencing March 1, 1996...... 343,024 -- --
------------ ------------ ------------
Total long-term debt..................... 184,382,170 210,410,257 461,285,177
Less current portion..................... 252,809 872,031 437,500
------------ ------------ ------------
$184,129,361 $209,538,226 $460,847,677
============ ============ ============
</TABLE>
F-16
<PAGE> 129
e.spire COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
Principal payments for each of the years from 1998 to 2002 and thereafter,
are due as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1998....................................................... $ 437,500
1999....................................................... 2,187,500
2000....................................................... 3,937,500
2001....................................................... 5,687,500
2002....................................................... 7,437,500
Thereafter................................................. 441,597,677
------------
$461,285,177
============
</TABLE>
AT&T CREDIT CORPORATION EQUIPMENT AND WORKING CAPITAL FINANCING FACILITY
In October 1994, the Company entered into the AT&T Credit Facility pursuant
to which AT&T Credit Corporation agreed to provide financing for the development
and construction of fiber optic networks by certain of the Company's
subsidiaries. Pursuant to the AT&T Credit Facility, during 1996 the Company's
subsidiaries in Louisville, Fort Worth, Greenville, Columbia, and El Paso
entered into loan agreements with AT&T Credit Corporation providing for up to
$31.2 million in loans collateralized by the assets of such subsidiaries.
Pursuant to the AT&T Credit Facility, AT&T Credit Corporation purchased 7.25% of
the outstanding capital stock of each of the Company's operating subsidiaries
for which it provided financing.
On December 30, 1997, the Company and AT&T Credit Corporation agreed to
amend the terms of the facility increasing the facility to $35 million and
transferring the loan agreements from the Company's five subsidiaries to the
Company as a whole. The amendment also changed the interest rates on the
outstanding loans from a range of 11.93% to 14.47% to a variable rate equal to
the three-month Commercial Paper Rate or LIBOR Rate plus 4.5 percent (10.35
percent at December 31, 1997). In addition, as part of the modification, the
Company issued 207,964 shares of common stock in exchange for all of AT&T Credit
Corporation's 7.25% ownership interest in the five subsidiaries. The Company has
pledged all of its shares of capital stock in its material subsidiaries and
Intercompany Notes to AT&T Credit Corporation. Under certain circumstances, the
pledge agreement also restricts the Company's ability to receive and retain
dividends in respect of the pledged collateral.
The AT&T Credit Facility includes covenants which impose certain
restrictions on the Company, including restrictions on the declaration or
payment of dividends, the conduct of certain activities, certain capital
expenditures, the creation of additional liens or indebtedness, the disposition
of assets, transactions with affiliates and extraordinary corporate
transactions.
SENIOR NOTES
On November 14, 1995, the Company completed an offering of 190,000 Units
(the "Units") consisting of $190,000,000 principal amount of 13% Senior Discount
Notes due 2005 (the "2005 Notes") and warrants to purchase 2,432,000 shares of
the Company's common stock at a price of $7.15 per share (the "Warrants"). The
2005 Notes will accrete at a rate of 13% compounded semi-annually to an
aggregate principal amount of $190,000,000 by November 1, 2000. Thereafter,
interest on the 2005 Notes will accrue at the annual rate of 13% and will be
payable in cash semi-annually. The 2005 Notes will mature November 1, 2005. The
Company received net proceeds of
F-17
<PAGE> 130
e.spire COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
approximately $96.1 million from the sale of the Units. The value ascribed to
the Warrants was $8,684,000.
On March 21, 1996, the Company completed an offering of $120,000,000 of
12 3/4% Senior Discount Notes due 2006 (the "2006 Notes") resulting in net
proceeds of approximately $61.8 million. The 2006 Notes will accrete at a rate
of 12 3/4% compounded semi-annually to an aggregate principal amount of
$120,000,000 by April 1, 2001. Thereafter, interest on the 2006 Notes will
accrue at the annual rate of 12 3/4% and will be payable in cash semi-annually.
The 2006 Notes will mature on April 1, 2006.
On July 23, 1997, the Company completed the sale of $220 million aggregate
principal amount of 13 3/4% Senior Notes due 2007 (the "2007 Notes"). Of the
total net proceeds of approximately $204.3 million, the Company placed
approximately $70 million, representing funds, together with interest thereon,
sufficient to pay the first five semi-annual interest payments on the 2007
Notes, into an escrow account for the benefit of the holders. The 2007 Notes
accrue interest at a rate of 13 3/4%, payable in cash semi-annually, on January
15 and July 15, commencing January 15, 1998. The 2007 Notes will mature on July
15, 2007.
The 2005 Notes, 2006 Notes, and 2007 Notes (collectively the "Notes") are
general, unsubordinated and unsecured senior obligations of the Company. The
Company's subsidiaries have no obligation to pay amounts due on the Notes and do
not guarantee the notes. Therefore, the Notes are effectively subordinated to
all liabilities of the Company's subsidiaries, including trade payables. Any
rights of the Company and its creditors, including the holders of the Notes, to
participate in the assets of any of the Company's subsidiaries upon any
liquidation or reorganization of any such subsidiaries will be subject to the
prior claims of that subsidiary's creditors.
The Notes are subject to certain covenants which, among other things
restrict the ability of the Company and certain of its subsidiaries to incur
additional indebtedness, pay dividends, or make distributions.
In June of 1997, the Company notified the trustee of the 2005 and 2006
Notes that the Company had approximately $17.4 million of trade accounts payable
that were more than 60 days overdue. These overdue amounts constituted
indebtedness of the Company as defined by the 2005 Note Indenture and 2006 Note
Indenture. The incurrence of such indebtedness constituted an event of default
under each indenture. The Company cured such event of default during July of
1997.
(7) STOCK COMPENSATION AND STOCK PURCHASE WARRANTS
The Company has a stock option plan which provides for the granting of
options to officers, employees, directors, and consultants of the Company to
purchase shares of its common stock within prescribed periods.
In 1994, the Company entered into employment agreements with five executive
officers. Pursuant to the agreements, as amended, such officers were granted
options to purchase shares of Common Stock of the Company. In accordance with
their employment agreements, these individuals had the right to sell certain of
their shares to the Company (the put right) for a price equal to fair market
value. On June 26, 1995, the employment agreements were amended to limit the
purchase price paid by the Company pursuant to the put right to a maximum of
$2,500,000, which amount is subject to further reductions based on the
employees' sales of stock. During the year ended June 30, 1996, the limit was
further reduced to $2,000,000. During the year ended December 31, 1997, put
rights related to $1,000,000 expired without exercise.
F-18
<PAGE> 131
e.spire COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
On March 6, 1997, the Company entered into a preferred provider agreement
with MCIMetro Access Transmission Services, Inc. In connection with the
agreement, the Company issued warrants to purchase 620,000 shares of the
Company's Common Stock at $9.86 per share. 360,000 of these warrants vested
during 1997. The value attributed to the vested warrants was approximately $1.3
million, which is being recognized as network cost over the five year term of
the agreement. During 1997, the Company recognized approximately $215,000 in
network expense related to these warrants. The Company also agreed to issue
warrants to purchase up to an aggregate of approximately 1.7 million additional
shares of the Company's Common Stock at fair market value on the date of grant
in tranches every six months subject to certain increases in revenue to the
Company generated under the agreement. At December 31, 1997, the Company had
issued 37,582 of such warrants with an exercise price of $9.503 per share. The
value attributed to these warrants was approximately $265,000 which was
recognized as network cost in 1997.
The Company applies APB Opinion 25 and related Interpretations in
accounting for its plans. Accordingly, compensation cost has been recognized for
its stock option plans based on the intrinsic value of the option at the date of
grant. The compensation cost that has been charged against income for stock
option plans was approximately $6.4 million, $2.7 million, $550,000, and $1.4
million for the years ended June 30, 1995 and 1996, the six months ended
December 31, 1996, and the year ended December 31, 1997, respectively. Had
compensation cost for the Company's plan been determined based on the fair value
at the grant dates consistent with the method of FASB Statement 123 for all
options granted after June 30, 1995, and the intrinsic value for all options
granted prior to July 1, 1995, the Company's net loss and loss per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1996 DECEMBER 31, 1996 DECEMBER 31, 1997
------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net loss................... As reported: $(26,782,044) $(34,916,514) $(115,016,427)
Pro forma: (27,533,636) (36,828,677) (120,394,471)
Loss per common share...... As reported: (4.96) (5.48) (4.65)
Pro forma: (5.08) (5.77) (4.85)
</TABLE>
Pro forma net loss reflects compensation cost under SFAS No. 123 only for
options granted for the year ended June 30, 1996, the six months ended December
31, 1996, and the year ended December 31, 1997. Therefore, the full impact of
calculating compensation cost for stock options under SFAS No. 123 is not
reflected in the pro forma net loss amounts presented above because compensation
cost is reflected over the vesting period and compensation cost under SFAS No.
123 for options granted prior to July 1, 1995 is not considered.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in the year ended June 30, 1996, the six months
ended December 31, 1996, and the year ended December 31, 1997, respectively:
dividend yield of 0% for all periods; expected volatility of 50%, 50%, and 50%,
risk-free interest rates of 5.97%, 6.4%, and 6.0% and expected lives of 4.74,
4.37, and 4.06 years.
F-19
<PAGE> 132
e.spire COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
A summary of the status of the Company's stock options as of June 30, 1995
and 1996, December 31, 1996, and December 31, 1997 and changes during the
periods ending on those dates is presented below:
<TABLE>
<CAPTION>
JUNE 30, 1995 JUNE 30, 1996 DECEMBER 31, 1996 DECEMBER 31, 1997
------------------ ------------------ ------------------ ------------------
WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000) PRICE (000) PRICE (000) PRICE (000) PRICE
------ --------- ------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year.... 859 $2.22 5,042 $1.72 6,095 $2.21 7,457 $3.60
Granted................ 4,283 1.64 1,228 4.30 1,433 9.45 2,141 8.25
Exercised.............. -- 0.00 (105) 2.46 (48) 2.02 (926) 2.39
Forfeited.............. (100) 2.51 (70) 3.57 (23) 3.54 (845) 6.60
----- ----- ----- -----
Outstanding at end of
year................. 5,042 1.72 6,095 2.21 7,457 3.60 7,827 4.69
Options exercisable at
year-end............. 2,387 3,461 4,140 4,379
Weighted-average fair
value of options
granted during the
year................. $1.16 $3.35 $5.95 $4.96
</TABLE>
The following table summarizes information about fixed stock options at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------ ------------------------------
NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICE AT 12/31/97 CONTRACTUAL LIFE PRICE 12/31/97 PRICE
- ---------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.875 to 0.875 2,067,000 2.31 years $0.875 2,057,000 $0.875
2.25 to 3.10 1,995,000 3.98 2.50 1,574,000 2.46
3.27 to 8.50 1,964,000 5.92 6.36 526,000 5.67
9.00 to 11.64 1,801,000 6.47 9.70 222,000 9.37
--------- ---------- ------ --------- ------
$0.875 to 11.64 7,827,000 4.60 $4.69 4,379,000 $2.45
========= ========== ====== ========= ======
</TABLE>
During fiscal years ended June 30, 1995 and 1996, in connection with the
Series A-1 and Series B Preferred Stock private placements and related bridge
note conversions, warrants for 4,367,078 shares of common stock were issued at
prices ranging from $.01 to $3.10. In fiscal 1996, as part of the issuance of
the 2005 Notes, detachable warrants to purchase 2,432,000 shares of the
Company's common stock at a price of $7.15 per share were issued. During 1997,
as part of the issuance of the Redeemable Preferred Stock due 2008, the Company
issued warrants to purchase 6,023,850 shares of Common Stock $7.15 per share.
The Company also issued 657,582 warrants to MCIMetro Access Transmission
Services, Inc. during 1997. These warrants include certain anti-dilution
provisions.
F-20
<PAGE> 133
e.spire COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
At December 31, 1997, unexercised warrants outstanding are as follows:
<TABLE>
<CAPTION>
NUMBER PRICE PER SHARE
---------- ----------------
<S> <C> <C>
Series A and Series B Preferred Stock placements....... 1,346,726 $0.01 -- 3.10
2005 Senior Discount Notes offering.................... 2,604,207 6.47
Redeemable Preferred Stock due 2008 offering........... 6,023,850 7.15
Other.................................................. 1,292,582 0.01 -- 9.86
---------- -------------
Total........................................ 11,267,365 $0.01 -- 9.86
========== =============
</TABLE>
The gross proceeds that would be received by the Company on the exercise of
all outstanding options and warrants is approximately $108 million.
The Company's Board of Directors has adopted an Annual Performance Plan,
through which it will award its 1997 performance bonuses to management and
employees. The Company has accrued approximately $2.9 million in non-cash
compensation cost at December 31, 1997, related to the future issuance of up to
213,000 shares of the Company's Common Stock for this purpose.
(8) BASIC AND DILUTED EARNINGS PER SHARE
The following tables present the computation of basic and diluted earnings
per share as defined under SFAS No. 128:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30, 1995
-----------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Net loss.................................... (14,697,649)
Less: Preferred stock dividends/accretion... (1,070,985)
-----------
Basic and diluted earnings per share:
Net loss to common stockholders........... (15,768,634) 4,771,689 (3.30)
</TABLE>
Convertible Preferred Stock outstanding as of June 30, 1995, convertible
into 15,591,563 shares of Common Stock, and options and warrants to purchase
5,042,189 and 3,019,235 shares of Common Stock, respectively, were not included
in the computation of diluted earnings per share for the year ended June 30,
1995 as their inclusion would be anti-dilutive.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30, 1996
-----------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Net loss.................................... (26,782,044)
Less: Preferred stock dividends/accretion... (3,871,328)
-----------
Basic and diluted earnings per share:
Net loss to common stockholders........... (30,653,372) 6,185,459 (4.96)
</TABLE>
Convertible Preferred Stock outstanding as of June 30, 1996, convertible
into 17,377,264 shares of Common Stock, and options and warrants to purchase
6,094,814 and 4,367,394 shares of Common Stock, respectively, were not included
in the computation of diluted earnings per share for the year ended June 30,
1996 as their inclusion would be anti-dilutive.
F-21
<PAGE> 134
e.spire COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
--------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ -------------- ----------
<S> <C> <C> <C>
Net loss.................................... (34,916,514)
Less: Preferred stock dividends/accretion... (2,003,630)
-----------
Basic and diluted earnings per share:
Net loss to common stockholders........... (36,920,144) 6,733,759 (5.48)
</TABLE>
Convertible Preferred Stock outstanding as of December 31, 1996,
convertible into 17,377,264 shares of Common Stock, and options and warrants to
purchase 7,457,085 and 4,771,836 shares of Common Stock, respectively, were not
included in the computation of diluted earnings per share for the six months
ended December 31, 1996 as their inclusion would be anti-dilutive.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- ---------
<S> <C> <C> <C>
Net loss.................................. (115,016,427)
Less: Preferred stock
dividends/accretion..................... (11,629,712)
------------
Basic and diluted earnings per share:
Net loss to common stockholders......... (126,646,139) 27,233,642 (4.65)
</TABLE>
Options and warrants to purchase 7,827,318 and 11,267,365 shares of Common
Stock, respectively, were not included in the computation of diluted earnings
per share for the year ended December 31, 1997 as their inclusion would be
anti-dilutive.
(9) COMMITMENTS AND CONTINGENCIES
RETIREMENT PLAN
On February 1, 1996, the Company began sponsoring the e.spire
Communications, Inc. 401(k) Plan (the "Plan"), a defined contribution plan. All
individuals employed on February 1, 1996 were eligible to participate.
Participation to all other employees is available after three months of full-
time equivalent service. The Company contributions under the Plan are
discretionary and may be as much as 6% of an employee's gross compensation
subject to certain limits. Total expense under the Plan amounted to
approximately $30,000, $95,000, and $1,580,000 for the year ended June 30, 1996,
the six months ended December 31, 1996, and the year ended December 31, 1997,
respectively.
LEGAL PROCEEDINGS
A former employee of e.spire has initiated litigation against the Company
for damages in excess of $5 million, and the right to exercise options to
purchase 100,000 shares of Common Stock at $4.25 per share. The lawsuit alleges
four different counts: breach of contract; breach of the covenant of good faith
and fair dealing; negligent misrepresentation; and specific performance. The
Company believes it has meritorious defenses to this complaint and intends to
defend this lawsuit vigorously.
The Company is a party to certain litigation and regulatory proceedings
arising in the ordinary course of business. In the opinion of management, based
upon the advice of counsel, the ultimate disposition of these matters will not
have a material adverse effect on the Company's consolidated financial position
or results of operations.
F-22
<PAGE> 135
e.spire COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
(10) LEASES
The Company is obligated under various noncancelable operating leases for
office and node space, telecommunications equipment, and office furniture. The
minimum future lease obligations under these noncancelable operating leases as
of December 31, 1997 are approximately as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ -----------
<S> <C>
1998........................................................ $10,466,000
1999........................................................ 10,638,000
2000........................................................ 9,075,000
2001........................................................ 6,393,000
2002........................................................ 6,416,000
Thereafter.................................................. 13,983,000
-----------
$56,971,000
===========
</TABLE>
Rent expense for the years ended June 30, 1995 and 1996, the six months
ended December 31, 1996, and the year ended December 31, 1997 was approximately
$200,000, $1,166,000, $1,700,000, and $6,111,000, respectively.
(11) RELATED-PARTY TRANSACTIONS
Effective July 1, 1994, the Company engaged SGC Advisory Services, Inc.
("SGC") as a financial and business consultant for three years. SGC is an
affiliate of a former director of the Company. Pursuant to the agreement, the
Company will compensate SGC as follows: (1) a monthly fee of $5,000; and (2)
options to purchase up to 50,000 shares of the Company's Common Stock which
vested on July 1, 1997, and are exercisable on or before July 1, 1999. During
the term of the agreement, SGC earned a credit for the full exercise price of
those options.
(12) INCOME TAXES
Temporary differences and carryforwards that give rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1996 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Deferred tax assets:
Capitalized start-up and other costs..... $ 3,733,898 $ 3,972,981 $ --
Stock options -- noncash compensation.... 3,848,128 4,085,146 3,681,305
Net operating loss carryforwards......... 8,791,091 23,659,463 72,279,998
Bond discounts........................... 3,390,071 7,651,263 17,195,346
Other accrued liabilities................ 496,634 964,786 940,269
----------- ----------- -----------
Total gross deferred assets................ 20,259,822 40,333,639 94,096,918
Less: valuation allowance................ 18,304,754 31,990,518 81,050,070
----------- ----------- -----------
Net deferred tax assets.................... 1,955,068 8,343,121 13,046,848
Deferred tax liabilities -- fixed assets
depreciation and amortization............ 1,955,068 8,343,121 13,046,848
----------- ----------- -----------
Net deferred tax assets (liabilities)...... $ -- $ -- $ --
=========== =========== ===========
</TABLE>
F-23
<PAGE> 136
e.spire COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
The net change in the total valuation allowance for the year ended June 30,
1996, the six months ended December 31, 1996, and the year ended December 31,
1997 was an increase of $10,013,374, $13,685,764, and $49,059,552, respectively.
The valuation allowances at June 30, 1996 and December 31, 1996 and 1997 are a
result of the uncertainty regarding the ultimate realization of the tax benefits
related to the deferred tax assets. The utilization of the tax benefits
associated with net operating losses of approximately $184 million at December
31, 1997 is dependent upon the Company's ability to generate future taxable
income. The net operating loss carryforward period expires commencing in 2008
through the year 2012. Further, as a result of certain financing and capital
transactions, an annual limitation on the future utilization of the net
operating loss carryforward may have occurred.
No income tax provision has been provided for the year ended June 30, 1996,
the six months ended December 31, 1996, and the year ended December 31, 1997 as
the aforementioned deferred tax assets have provided no tax benefit.
(13) ACQUISITIONS
On January 17, 1997, the Company acquired 100% of the outstanding capital
stock of CyberGate, Inc. in exchange for 1,030,000 shares of common stock plus
up to an additional 150,000 shares if certain performance goals are achieved for
an aggregate purchase price of approximately $8.8 million. CyberGate, a Florida
based ISP, delivers high-speed data communications services. The acquisition has
been accounted for using the purchase method and, therefore, the Company's
consolidated financial statements include the results of operations of CyberGate
from the date of acquisition. The purchase price of $8,755,000 plus transaction
expenses of approximately $500,000 has been allocated to assets and liabilities
acquired based on their fair values and goodwill of approximately $8,400,000 has
been recorded. The goodwill is being amortized on a straight line basis over a
ten year period.
On October 3, 1997, the Company acquired the customers and receivables of
NetRunner, Inc., a Florida based ISP. In conjunction with this acquisition, the
Company placed 181,871 shares of the Company's Common Stock in escrow. As of
December 31, 1997, 51,166 of these shares had been released. The Company
recorded an intangible asset of approximately $685,000, which is being amortized
over 18 months.
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following notes summarize the major methods and assumptions used in
estimating the fair value of financial instruments:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value due to the relatively short
period to maturity of these instruments.
The Company's short- and long-term debt securities are carried at fair
market value as determined by quoted market prices.
LETTERS OF CREDIT
The fair value of the letters of credit is based on fees currently charged
for similar agreements.
F-24
<PAGE> 137
e.spire COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 AND 1997 -- (CONTINUED)
LONG-TERM DEBT AND REDEEMABLE PREFERRED STOCK
The fair value of the Company's long-term debt and redeemable preferred
stock is estimated based on the quoted market prices for the same or similar
issues if available or based on the present value of expected cash flows at
rates currently available to the Company for borrowings with similar terms.
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1997 were:
<TABLE>
<CAPTION>
CARRYING ESTIMATED
VALUE FAIR VALUE
------------ ------------
<S> <C> <C>
Cash and cash equivalents (including restricted
cash).............................................. $332,737,445 $332,737,445
Letters of credit.................................... -- 15,000
Redeemable preferred stock........................... 205,159,653 242,625,000
Long-term debt....................................... 461,285,177 539,500,000
============ ============
</TABLE>
F-25
<PAGE> 138
E.SPIRE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 260,837 $ 294,581
Restricted cash and investments........................... 26,526 29,213
Trade accounts receivable, net............................ 15,514 28,638
Other current assets...................................... 6,127 4,797
--------- ---------
Total current assets.............................. 309,004 357,229
--------- ---------
Networks, equipment and furniture, gross.................... 282,152 397,459
Less: accumulated depreciation and amortization........... (31,675) (48,192)
--------- ---------
250,477 349,267
Deferred financing fees, net of accumulated amortization of
$5,405 and $3,649 at June 30, 1998 and December 31, 1997,
respectively.............................................. 25,031 37,155
Intangible assets, net of accumulated amortization of $1,182
and $776 at June 30, 1998 and December 31, 1997,
respectively.............................................. 8,132 7,499
Restricted cash and investments............................. 45,375 30,250
Other assets................................................ 876 1,042
--------- ---------
Total assets...................................... $ 638,895 $ 782,442
========= =========
LIABILITIES, REDEEMABLE STOCK AND OPTIONS,
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Notes payable -- current portion.......................... $ 438 $ 1,312
Accounts payable.......................................... 18,308 29,231
Accrued interest.......................................... 13,360 14,907
Accrued employee costs.................................... 2,353 2,093
Lease obligation.......................................... 0 7,353
Other accrued liabilities................................. 2,311 6,106
--------- ---------
Total current liabilities......................... 36,770 61,002
--------- ---------
Long Term Liabilities
Notes payable, less current portion....................... 460,848 474,082
Other long-term liabilities............................... 474 1,956
Lease obligation.......................................... 0 23,596
--------- ---------
Total liabilities................................. 498,092 560,636
--------- ---------
Redeemable stock and options:
Redeemable options........................................ 1,000 0
14 3/4% Redeemable Preferred Stock due 2008............... 55,060 62,272
12 3/4% Junior Redeemable Preferred Stock due 2009........ 150,099 159,987
--------- ---------
Total redeemable stock and options................ 206,159 222,259
Stockholders Equity:
Common Stock, $0.01 par value, 75,000,000 shares
authorized, 47,385,349 and 37,219,419 shares,
respectively, issued and outstanding................... 372 474
Additional paid-in capital................................ 131,728 261,069
Accumulated deficit....................................... (197,456) (261,996)
--------- ---------
Total stockholders' deficit................................. (65,356) (453)
--------- ---------
Total liabilities, redeemable stock and options and
stockholders' deficit..................................... $ 638,895 $ 782,442
========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements.
F-26
<PAGE> 139
E.SPIRE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ ------------------------
1997 1998 1997 1998
---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues............................. $ 11,616 $ 35,752 $ 19,793 $ 63,221
Operating Expenses
Network, development and
operations...................... 10,400 23,344 19,640 43,597
Selling, general and
administrative.................. 14,851 21,648 28,205 41,454
Non-cash compensation expense...... 584 1,794 823 3,427
Depreciation and amortization...... 5,339 9,777 9,457 17,383
---------- ---------- ---------- ----------
Total Operating Expenses............. 31,174 57,563 58,125 105,861
Loss from Operations................. (19,558) (21,811) (38,332) (42,640)
Non-operating income/expenses
Interest and other income.......... (194) (5,615) (1,078) (9,991)
Interest and other expense......... 6,288 16,249 12,421 31,891
---------- ---------- ---------- ----------
Net loss............................. (25,652) (32,445) (49,675) (64,540)
Preferred stock
dividends/accretion................ 106 8,607 1,095 17,100
---------- ---------- ---------- ----------
Net loss to common stockholders...... $(25,758) $(41,052) $(50,770) $(81,640)
========== ========== ========== ==========
Basic and Diluted Loss per Share..... $(0.92) $(0.91) $(2.82) $(1.97)
========== ========== ========== ==========
Average number of common/common
equivalent shares outstanding...... 28,025,238 45,281,794 17,994,161 41,495,538
========== ========== ========== ==========
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements.
F-27
<PAGE> 140
e.spire COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
--------------------
1997 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities
Net Loss.................................................... $(49,675) $(64,540)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization............................. 9,456 17,383
Interest deferral and accretion........................... 12,239 14,108
Amortization of deferred financing fees................... 474 1,756
Noncash compensation...................................... 823 3,427
In-kind revenue........................................... -- (4,606)
Changes in operating assets and liabilities:
Restricted cash related to operating activities........ (2,814) --
Trade accounts receivable.............................. (4,224) (13,124)
Other current assets................................... (259) 1,330
Other assets........................................... 365 (166)
Accounts payable....................................... (4,162) 10,923
Other accrued liabilities.............................. 965 4,234
-------- --------
Net cash used in operating activities....................... (36,812) (29,275)
Cash flows from investing activities
Networks, equipment and furniture......................... (73,213) (79,752)
-------- --------
Net cash used in investing activities....................... (73,213) (79,752)
Cash flows from financing activities
Issuance of common stock.................................. 40,702 135,227
Payment of deferred financing fees........................ (3,299) (14,669)
Restricted cash related to financing activities........... -- 12,438
Exercise of warrants, options and other................... 2,502 9,775
-------- --------
Net cash provided by financing activities................... 39,905 142,771
Net (decrease) increase in cash & cash equivalents.......... (70,120) 33,744
Cash and cash equivalents -- beginning of period............ 78,619 260,837
-------- --------
Cash and cash equivalents -- end of period.................. $ 8,499 $294,581
======== ========
Supplemental disclosure of cash flow information
Interest paid............................................. $ -- $ 14,453
Assets acquired under capital lease....................... $ -- $ 37,045
Accrual of stock bonuses.................................. $ -- $ 1,859
Dividends declared with preferred stock................... $ 1,095 $ --
Increase in goodwill...................................... $ (8,119) $ --
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements.
F-28
<PAGE> 141
E.SPIRE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
e.spire Communications, Inc. ("e.spire" or the "Company") and its wholly-owned
subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation.
The condensed consolidated balance sheet as of June 30, 1998, the condensed
consolidated statements of operations for the three and six months ended June
30, 1998 and 1997, and the condensed consolidated statements of cash flows for
the six months ended June 30, 1998 and 1997 have been prepared by the Company,
without audit. In the opinion of management, all adjustments, which include
normal recurring adjustments necessary to present fairly the financial position,
results of operations and cash flows at June 30, 1998, and for all periods
presented, have been made. Certain amounts in the 1997 consolidated statements
have been reclassified to conform to the 1998 presentation. Operating results
for the three and six months ended June 30, 1998 are not necessarily indicative
of the operating results for the full year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The Company believes that the disclosures
provided are adequate to make the information presented not misleading. These
financial statements should be read in conjunction with the audited financial
statements and the related notes included in the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1997.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
RESTRICTED CASH AND INVESTMENTS
The Company has provided performance bonds and letters of credit in various
cities in connection with its operations, resulting in a restriction to cash
amounting to approximately $1,213,000 at June 30, 1998 and $1,223,000 at
December 31, 1997. The face amount of all bonds and letters of credit is
approximately $6,769,000 as of June 30, 1998 and $6,300,000 as of December 31,
1997. In addition, as of June 30, 1998, the Company currently has approximately
$58,244,000 in an escrow account to be used to fund the next four interest
payments of its 13 3/4 percent senior notes due 2007. Approximately $27,994,000
of the escrow account is classified as current. The escrow account is invested
in cash equivalents consisting of government and commercial securities.
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 115,
Accounting for Certain Investments in Debt and Equity Securities, the Company's
short- and long-term debt securities and marketable equity securities are
accounted for at market value. The fair market value of short- and long-term
investments is determined based on quoted market prices. The Company's
marketable securities have been classified as available for sale and are
recorded at current market value with an offsetting adjustment to stockholders'
equity (deficit). At June 30, 1998 and December 31, 1997, fair market value
approximated amortized cost.
USE OF ESTIMATES
The preparation of the condensed consolidated 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 dates of
the consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results may differ from those
estimates.
F-29
<PAGE> 142
E.SPIRE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
RISKS AND UNCERTAINTIES
The Company receives a significant portion of its revenues from a small
number of major customers, particularly the long distance telecommunications
companies that service the Company's markets. The loss of any one of these
customers could have an adverse material impact on the Company's results of
operations.
The Company provides services to certain Internet Service Providers (ISPs).
Such companies operate in a highly competitive and uncertain environment.
Approximately 7% and 11% of the Company's revenues for the three and six months
ended June 30, 1998 was attributed to these companies. At June 30, 1998, the
Company had trade accounts receivable of $4.7 million from ISPs. At June 30,
1998, the Company also had equipment with a carrying value of approximately
$13.3 million that is dedicated to providing service to these ISPs. The Company
believes that, if necessary, this equipment could be redeployed throughout the
Company's data network.
The Company has recorded revenues of approximately $4.1 million and $6.6
million for the three and six months ended June 30, 1998 for reciprocal
compensation relating to the transport and termination of Internet traffic for
incumbent local exchange carriers ("ILECs") pursuant to various interconnection
agreements. To date, one ILEC has begun to make payments, and three ILECs have
agreed to pay these amounts subject to record verifications pursuant to the
governing interconnection agreements with the Company. Historically, these ILECs
have not paid and have disputed these charges based on the belief that such
charges are not local traffic as defined by the various agreements. The
resolution of these disputes will be based on rulings by state public utility
commissions and/or by the Federal Communications Commission (FCC). To date,
there have been no unfavorable final rulings by any state public utility
commission in a state in which the Company provides switched services or the FCC
that would indicate that calls placed by end users to ISPs would not qualify as
local traffic subject to the payment of reciprocal compensation. At June 30,
1998, the Company had approximately $8.2 million in trade accounts receivable
related to these interconnection agreements.
NOTE 3: FINANCING ACTIVITIES
To date, the Company has funded the construction of its networks and its
operations with external financings, as described in the Liquidity and Capital
Resources section of Management's Discussion and Analysis of Financial Condition
and Results of Operations.
NOTE 4: NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 (FAS No. 130), "Reporting
Comprehensive Income." FAS No. 130 established standards for the reporting and
display of comprehensive income and its components in the financial statements.
The Company adopted the provisions of this Statement in the quarter ended March
31, 1998. The adoption of this statement had no impact in the manner of the
presentation of the Company's financial statements as currently or previously
reported.
In June 1997, the FASB issued Statement No. 131, Disclosures About Segments
of an Enterprise and Related Information ("SFAS 131"). This statement
establishes additional standards for segment reporting in the financial
statements and is effective for fiscal years beginning after December 15, 1997.
The Company has not completed its analysis of the impact on the financial
statements that will be caused by the adoption of this statement.
F-30
<PAGE> 143
E.SPIRE COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
On March 4, 1998, the American Institute of Certified Public Accountants
Issued Statement of Position 98-1 ("SOP"), Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. This SOP provides guidance on
capitalizing certain costs related to computer software developed or obtained
for internal use. The SOP is effective for financial statements for fiscal years
beginning after December 15, 1998. The Company has not completed its analysis of
the impact on the financial statements that will be caused by the adoption of
this statement.
In April 1998, the Accounting Standards Executive Committee (AcSEC) of the
AICPA issued Statement of Position ("SOP") 98-5, Reporting on the Costs of
Start-up Activities ("SOP 98-5"). This statement requires that the costs of
start-up activities, including organization costs, be expensed as incurred and
is effective for fiscal years beginning after December 31, 1998. The Company has
not completed its analysis of the impact on the financial statements that will
be caused by the adoption of this statement.
F-31
<PAGE> 144
Internet Access Service
Frame Relay Service
ATM Service
Bundled Internet Solutions
Custom Network Services
Managed Network Service
<PAGE> 145
THE CHASE MANHATTAN BANK
EXCHANGE OFFER
<TABLE>
<S> <C> <C>
By Mail/Overnight Delivery: Facsimile Transmissions: By Hand:
The Chase Manhattan Bank (Eligible Institutions Only) The Chase Manhattan Bank
450 West 33rd Street (212) 815-6339 Corporate Trust -- Services
15th Floor Window
New York, New York 10001-2697 Confirm by Telephone: 55 Water Street -- Room 234
Sharon Lewis: (212) 638-0454 North Building
Carlos Esteves: (212) 638-0828 New York, New York 10041
Confirm Facsimile by Telephone:
(For Confirmation Only)
(800) 507-9357
</TABLE>
<PAGE> 146
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE SECURITIES TO WHICH IT RELATES, NOR DOES IT CONSTITUTE
AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES OR IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF NOR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information............... i
Documents Incorporated by Reference.. i
Summary.............................. 1
Risk Factors......................... 10
Use of Proceeds...................... 20
Capitalization....................... 21
Selected Consolidated Financial
Data............................... 22
Exchange Offer....................... 25
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 32
Business............................. 45
Management........................... 63
Principal Stockholders............... 66
Description of Capital Stock......... 67
Description of Certain
Indebtedness....................... 69
Description of the Notes............. 73
Certain Federal Income Tax
Considerations..................... 100
Plan of Distribution................. 104
Validity of the Notes................ 104
Experts.............................. 104
Glossary............................. G-1
Index to Financial Statements........ F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
---------------------------------------------
PROSPECTUS
---------------------------------------------
[ESPIRE LOGO]
OFFER TO EXCHANGE ITS
10.625% SENIOR DISCOUNT NOTES
DUE 2008, WHICH HAVE BEEN
REGISTERED UNDER THE
SECURITIES ACT OF 1933,
AS AMENDED, FOR ITS
OUTSTANDING 10.625% SENIOR
DISCOUNT NOTES DUE 2008
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 147
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Third Amended and Restated 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.
The Third Amended and Restated Certificate of Incorporation and the Amended
and Restated By-laws further provide that directors and officers of the Company
(as well as agents and employees of the Company at the discretion of the Board)
shall, to the fullest extent authorized by the DGCL or any other applicable laws
then in effect, be indemnified against liabilities arising from their service as
directors and officers. The Company has entered into indemnification agreements
with each of its executive officers and directors to reimburse them for certain
liabilities incurred in connection with the performance of their fiduciary
duties.
Section 145 of the DGCL empowers a corporation to indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Section 145 also empowers a corporation to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that such person acted in any of the
capacities set forth above, against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted under similar standards, except
that no indemnification may be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the corporation
unless, and only to the extent that, the Delaware 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 Delaware Court of Chancery or such other court shall deem
proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to above or in the defense of any claim,
issue or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith, that indemnification provided for by Section 145 shall not be deemed
exclusive of any other rights to which the indemnified party may be entitled;
and that the corporation is empowered to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation against any liability asserted against him in any such capacity or
arising out of his status as such, whether or not the corporation would have the
power to indemnify him against such liability under Section 145.
Insofar as indemnification for liabilities arising under the Securities Act
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 SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnifica-
II-1
<PAGE> 148
tion 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
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
INCORPORATION
BY
EXHIBIT NO. DESCRIPTION REFERENCE
- ----------- ----------- -------------
<C> <S> <C>
3.1 Third Amended and Restated Certificate of Incorporation of
the Company. ............................................... (ooo)
3.2 Certificate of Designation of the Company's 14.75%
Redeemable Preferred Stock due 2008. ....................... --
3.3 Certificate of Amendment of the Certificate of Designation
of the Company's 14.75% Redeemable Preferred Stock due
2008. ...................................................... --
3.4 Amended and Restated By-Laws of the Company. ............... *****
3.5 Governance Agreement dated November 8, 1995, between the
Company and the holders of its Preferred Stock. ............ ++
3.6 Certificate of Designation of the Company's 12 3/4% Junior
Redeemable Preferred Stock due 2009. ....................... *****
3.7 Certificate of Correction dated March 11, 1996. ............ -
3.8 Supplemental Governance Agreement dated February 26,
1996. ...................................................... -
4.1 Specimen Certificate of the Company's Common Stock. ........ *
4.2 Indenture dated November 14, 1995, between the Company and
Chemical Bank, as trustee, relating to $190,000,000 in
principal amount of 13% Senior Discount Notes due 2005,
including the form of global note (the "1995
Indenture"). ............................................... ++
4.3 March 11, 1996 Supplement to 1995 indenture. ............... ++++
4.4 Initial Global Note dated November 14, 1995. ............... ++
4.5 Warrant Agreement dated November 14, 1995, between the
Company and Smith Barney Inc. and Salomon Brothers Inc. .... +++
4.6 Initial Global Warrant dated November 14, 1995. ............ +++
4.7 Indenture dated March 21, 1996, between the Company and
Chemical Bank, as trustee, relating to $120,000,000 in
principal amount of 12 3/4% Senior Discount Notes due 2006,
including the form of global note (the "1996
Indenture"). ............................................... +++++
4.8 Supplemental Indenture dated as of January 13, 1997, between
the Company and The Chase Manhattan Bank, as trustee, to the
Indenture dated November 14, 1995, as amended, relating to
the Company's 13% Senior Discount Notes due 2005. .......... ++++
4.9 Supplemental Indenture dated as of January 13, 1997, between
the Company and The Chase Manhattan Bank, as trustee, to the
Indenture dated March 26, 1996, as amended, relating to the
Company's 12 3/4% Senior Discount Notes due 2006. .......... ++++
4.10 Supplemental Indenture dated as of July 7, 1997, between the
Company and The Chase Manhattan Bank, as trustee, to the
Indenture dated November 14, 1995, as amended, relating to
the Company's 13% Senior Discount Notes due 2005. .......... --
4.11 Supplemental Indenture dated as of July 7, 1997, between the
Company and The Chase Manhattan Bank, as trustee, to the
Indenture dated March 26, 1996, as amended, relating to the
Company's 12 3/4% Senior Discount Notes due 2006. .......... --
4.12 Specimen Certificate of the Company's 14.75% Redeemable
Preferred Stock due 2008. .................................. --
</TABLE>
II-2
<PAGE> 149
<TABLE>
<CAPTION>
INCORPORATION
BY
EXHIBIT NO. DESCRIPTION REFERENCE
- ----------- ----------- -------------
<C> <S> <C>
4.13 Warrant Agreement dated as of July 10, 1997, between the
Company and The Chase Manhattan Bank, as warrant agent. .... --
4.14 Form of Warrant. ........................................... --
4.15 Indenture dated as of July 23, 1997, between the Company and
The Chase Manhattan Bank, as trustee, relating to the
Company's 13 3/4% Senior Notes due 2007. ................... --
4.16 Escrow and Disbursement Agreement dated as of July 23, 1997,
among the Company, The Bank of New York, as escrow agent,
and The Chase Manhattan Bank, as trustee, relating to the
Company's 13 3/4% Senior Notes due 2007. ................... --
4.17 Specimen Certificate of the Company's 12 3/4% Junior
Redeemable Preferred Stock due 2009......................... *****
4.18 Supplemental Indenture dated February 27, 1998, between the
Company and The Chase Manhattan Bank, as trustee, to the
Indenture dated November 14, 1995, as amended, relating to
the Company's 13% Senior Discount Notes due 2005. .......... (oooo)
4.19 Supplemental Indenture dated February 27, 1998, between the
Company and The Chase Manhattan Bank, as trustee, to the
Indenture dated March 26, 1996, as amended, relating to the
Company's 12 3/4% Senior Discount Notes due 2006. .......... (oooo)
4.20 Supplemental Indenture dated February 27, 1998, between the
Company and The Chase Manhattan Bank, as trustee, to the
Indenture dated July 23, 1997, as amended, relating to the
Company's 13 3/4% Senior Discount Notes due 2007. .......... (oooo)
4.21 Indenture dated as of July 24, 1998, between the Company and
The Chase Manhattan Bank, as trustee, relating to the
Company's 10.625% Senior Discount Notes due July 1, 2008,
including the form of global note........................... ---
5 Opinion of Riley M. Murphy. ................................ ---
9.1 Standstill Agreement dated June 26, 1995, between the
Company and certain of its Preferred Stockholders. ......... ****
9.2 Standstill Agreement dated November 8, 1995, between the
Company and certain of its Preferred Stockholders. ......... ++
9.3 Voting Rights Agreement dated November 8, 1995, between the
Company and certain of its Preferred Stockholders. ......... ++
9.4 Amendment to Voting Rights Agreement dated December 14,
1995. ...................................................... -
10.1 Exchange Agreement, dated June 1, 1994, between the Company
and certain of its Preferred Shareholders. ................. *
10.2 Exchange Agreement, dated June 26, 1995, between the Company
and its 9% Series A Preferred Shareholders. ................ **
10.3 Company's Amended 1994 Stock Option Plan. .................. ++
10.4 Company's Employee Stock Purchase Agreement. ............... ++++
10.5 Registration Rights Agreement dated July 1, 1992, between
American Lightwave, Inc. and persons named therein. ........ *
10.6 Supplemental Registration Rights Agreement dated June 26,
1995. ...................................................... ****
10.7 Management Registration Rights Agreement dated June 30,
1995. ...................................................... ****
10.8 Registration Rights Agreement dated June 26, 1995, between
the Company and certain Preferred Stockholders. ............ **
10.9 Form of Warrant Agreement issued to certain Preferred
Stockholders on June 26, 1995. ............................. ****
10.10 Form of $.01 Warrant Agreement. ............................ ****
10.11 Form of $1.79 Warrant Agreement. ........................... ****
10.12 Form of $2.25 Warrant Agreement. ........................... ****
10.13 Stockholders Agreement dated June 26, 1995, between the
Company and certain Preferred Stockholders. ................ ****
</TABLE>
II-3
<PAGE> 150
<TABLE>
<CAPTION>
INCORPORATION
BY
EXHIBIT NO. DESCRIPTION REFERENCE
- ----------- ----------- -------------
<C> <S> <C>
10.14 Third Amended and Restated Employment Agreement between the
Company and Anthony J. Pompliano. .......................... ****
10.15 Third Amended and Restated Employment Agreement between the
Company and Riley M. Murphy. ............................... ****
10.16 Employment Agreement between the Company and Jack E.
Reich. ..................................................... ****
10.17 Employment Agreement between the Company and David L.
Piazza. .................................................... ++++
10.18 Form of Stock Option Certificates, as amended, issued to
executive officers under employment agreements. ............ ****
10.19 Agreement, dated October 19, 1994, between the Company and
Marvin Saffian & Company. .................................. *
10.20 Lease Agreement for the Company's executive offices at 131
National Business Parkway, Suite 100, Annapolis Junction,
Maryland, as amended........................................ ****
10.21 Consulting Agreement, dated October 25, 1993, between the
Company and Thurston Partners, Inc. ........................ *
10.22 Consulting Agreement, dated June 16, 1994, between the
Company and Thurston Partners, Inc. and Global Capital,
Inc. ....................................................... *
10.23 Note Purchase Agreement, dated June 28, 1994................ *
10.24 Stock Purchase Agreement dated December 17, 1996 by and
between the Company and Cybergate, Inc. .................... ++++
10.25 Stock Purchase Agreement, dated May 12, 1995, by and among
the Company, Piedmont Teleport, Inc., Randal Holcombe and
Karen Holcombe, as amended.................................. ****
10.26 Stock and Warrant Purchase Agreement, dated June 26, 1995,
between the Company and the Purchasers named therein........ **
10.27 Form of Indemnity Agreement between the Company and its
Directors, as amended....................................... ****
10.28 Assignment and Assumption Agreement dated June 21, 1995,
between the Company and Apex Investment Fund II, L.P. ...... ****
10.29 Letter Agreement dated November 14, 1995, between the
Company and ING Equity Partners, L.P. I, with respect to the
purchase of 50,000 shares of the Company's 9% Series B-4
Convertible Preferred Stock and warrants to purchase 214,286
shares of Common Stock. .................................... ++
10.30 Warrant to Purchase Shares of American Communications
Services, Inc. Common Stock dated December 28, 1995, between
the Company and Gerard Klauer, Mattison & Co. ("GKM Warrant
I"). ....................................................... ++
10.31 Warrant to Subscribe For and Purchase Common Stock of
American Communications Services, Inc. dated December 28,
1995, between the Company and Gerard Klauer, Mattison & Co.
("GKM Warrant II"). ........................................ ++
10.32 Amendment to Amended 1994 Stock Option Plan of the
Company. ................................................... (o)
10.33 Registration Rights Agreement dated as of July 10, 1997,
among the Company, BT Securities Corporation, Alex. Brown &
Sons Incorporated, The Huff Alternative Income Fund, L.P.,
General Motors Domestic Group Pension Trust, Societe
Generale Securities Corporation, ING Baring (U.S.)
Securities, Inc. and McDermott Inc. Master Trust............ --
10.34 Registration Rights Agreement dated as of July 23, 1997
among the Company and BT Securities Corporation as
representatives of the Initial Purchasers named therein..... --
10.35 Supplemental Registration Rights Agreement, dated as of July
10, 1997, among the Company, The Huff Alternative Income
Fund, L.P., General Motors Domestic Group Pension Trust and
McDermott Inc. Master Trust. ............................... (oo)
10.36 Loan and Security Agreement dated December 30, 1997 between
the Company and AT&T Commercial Finance Corporation.........
----
10.37 Employment Agreement between the Company and Ronald E.
Spears. .................................................... (oooo)
10.38 Lease Agreement for the Company's executive offices at 133
National Business Parkway, Suite 200, Annapolis Junction,
Maryland.................................................... (oooo)
</TABLE>
II-4
<PAGE> 151
<TABLE>
<CAPTION>
INCORPORATION
BY
EXHIBIT NO. DESCRIPTION REFERENCE
- ----------- ----------- -------------
<C> <S> <C>
10.39 Registration Rights Agreement, dated as of July 24, 1998,
between the Company and Goldman Sachs & Co., Bear, Stearns &
Co. Inc. and ING Furman Selz LLC............................
---
11.1 Statement re: computation of per share earnings (loss). .... (ooooo)
12.1 Statement re: Ratio of Earnings to Fixed Charges............
---
16.1 Letter re: change in certifying accountant. ................ ***
21.1 Subsidiaries of the Registrant. ............................
---
23.1 Consent of KPMG Peat Marwick LLP. ..........................
---
23.2 Consent of Riley M. Murphy (included in Exhibit 5). ........
---
24.1 Power of Attorney (included in signature pages). ...........
---
25.1 Statement of Eligibility and Qualification on Form T-1 of
The Chase Manhattan Bank under the Indenture dated July 24,
1998. ......................................................
---
99.1 Form of Letter of Transmittal. .............................
---
99.2 Form of Notice of Guaranteed Delivery. .....................
---
99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees. ..............................
---
99.4 Form of Letter to Clients. .................................
---
99.5 Form of Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9. ..............
---
</TABLE>
- ---------------
* Previously filed as an exhibit to the Company's Registration
Statement on Form SB-2 (File No. 33-87200) and incorporated herein by
reference thereto.
** Previously filed as an exhibit to the Company's Current Report on Form
8-K dated June 26, 1995, and incorporated herein by reference thereto.
*** Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the fiscal quarter ended March 31, 1995, and
incorporated herein by reference thereto.
**** Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1995, and incorporated herein
by reference thereto.
***** Previously filed as an exhibit to the Company's Registration Statement
on Form S-4 (File No. 333-34395)
+ Previously filed as an exhibit to the Company's Transition Report on
Form 10-KSB for the transition period from July 1, 1996 to December
31, 1996, and the Company's Quarterly Report on Form 10-QSB for the
fiscal quarter ended June 30, 1997, both of which are incorporated
herein by reference thereto.
++ Previously filed as an exhibit to the Company's Registration Statement
on Form S-4 (File No. 33-80305) and incorporated herein by reference
thereto.
+++ Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (File No. 33-80673) and incorporated herein by reference
thereto.
++++ Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (File No. 333-20867) and incorporated herein by reference
thereto.
+++++ Previously filed as an exhibit to the Company's Current Report on Form
8-K dated March 26, 1996 and incorporated herein by reference thereto.
++++++ Previously filed as an exhibit to the Company's Current Report on Form
8-K dated January 17, 1997 and incorporated herein by reference
thereto.
- Previously filed as an exhibit to the Company's Registration
Statement on Form S-4 (File No. 333-3632) and incorporated herein by
reference thereto.
-- Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the fiscal quarter ended June 30, 1997 and
incorporated by reference hereto.
--- Filed herewith.
---- Previously filed as an exhibit to the Company's Current Report on 8-K
dated January 20, 1998 and incorporated herein by reference thereto.
( )(o) Previously filed as an exhibit to the Company's Definitive Proxy
Statement filed on October 14, 1996 and incorporated herein by
reference thereto.
II-5
<PAGE> 152
( )(oo) Previously filed as an exhibit to the Company's Registration
Statement on Form S-3 (File No. 333-35925)
( )(ooo) Previously filed as an exhibit to the Company's Registration
Statement on Form S-8 (File No. 333-58457), and incorporated
herein by reference thereto.
( )(oooo) Previously filed as an exhibit to the Company's Form 10-KSB for
the fiscal year ended December 31, 1997, and incorporated herein
by reference thereto.
( )(ooooo) Previously filed as an exhibit to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1997, and the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 1998, both of which are incorporated herein by
reference thereto.
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
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 Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this Registration Statement when it became effective.
For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant under rule 424(b)(1), or (4) or 497(h) under
the Securities Act shall be deemed to be a part of this registration statement
as of the time it was declared it effective.
For purposes of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
The undersigned hereby undertakes that, for purposes of determining any
liability under the Securities Act, each filing of the registrant's annual
report pursuant to Section 13(a) or 15(d) of the Exchange Act that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-6
<PAGE> 153
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF ANNAPOLIS JUNCTION, STATE
OF MARYLAND, ON THIS 23RD DAY OF SEPTEMBER, 1998.
e.spire COMMUNICATIONS, INC.,
Registrant
By: /s/ JACK E. REICH
------------------------------------
Jack E. Reich
Director, President and
Chief Executive Officer
The undersigned, directors and officers of e.spire Communications, Inc., do
hereby severally constitute and appoint each and any of Jack E. Reich and David
L. Piazza, as attorneys-in-fact for the undersigned, with full power of
substitution and resubstitution, for, and in the name, place and stead of the
undersigned, to sign and file with the Securities Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended, any and all
amendments (including post-effective amendments) and exhibits to this
Registration Statement and any and all applications and other documents to be
filed with the Commission pertaining to registration of the securities covered
hereby, with full power and authority to do and perform each and every act and
thing requisite and necessary or desirable, hereby ratifying and confirming all
that said attorneys-in-fact, or either of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ANTHONY J. POMPLIANO Chairman of the September 23, 1998
- ------------------------------------------------ Board of Directors
Anthony J. Pompliano
/s/ JACK E. REICH Director, President and September 23, 1998
- ------------------------------------------------ Chief Executive Officer
Jack E. Reich (Principal Executive Officer)
/s/ DAVID L. PIAZZA Chief Financial Officer September 23, 1998
- ------------------------------------------------ (Principal Financial and
David L. Piazza Accounting Officer)
/s/ GEORGE M. MIDDLEMAS Director September 23, 1998
- ------------------------------------------------
George M. Middlemas
Director
- ------------------------------------------------
Edwin M. Banks
/s/ CHRISTOPHER L. RAFFERTY Director September 23, 1998
- ------------------------------------------------
Christopher L. Rafferty
Director
- ------------------------------------------------
Benjamin P. Giess
</TABLE>
II-7
<PAGE> 154
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ OLIVIER L. TROUVEROY Director September 23, 1998
- ------------------------------------------------
Olivier L. Trouveroy
Director
- ------------------------------------------------
Peter C. Bentz
</TABLE>
II-8
<PAGE> 155
EXHIBIT INDEX
<TABLE>
<CAPTION>
INCORPORATION SEQUENTIALLY
BY NUMBERED
EXHIBIT NO. DESCRIPTION REFERENCE PAGE
- ----------- ----------- ------------- ------------
<C> <S> <C> <C>
3.1 Third Amended and Restated Certificate of Incorporation of
the Company. ............................................. (ooo)
3.2 Certificate of Designation of the Company's 14.75%
Redeemable Preferred Stock due 2008. ..................... --
3.3 Certificate of Amendment of the Certificate of Designation
of the Company's 14.75% Redeemable Preferred Stock due
2008. .................................................... --
3.4 Amended and Restated By-Laws of the Company. ............. *****
3.5 Governance Agreement dated November 8, 1995, between the
Company and the holders of its Preferred Stock. .......... ++
3.6 Certificate of Designation of the Company's 12 3/4% Junior
Redeemable Preferred Stock due 2009. ..................... *****
3.7 Certificate of Correction dated March 11, 1996. .......... -
3.8 Supplemental Governance Agreement dated February 26,
1996. .................................................... -
4.1 Specimen Certificate of the Company's Common Stock. ...... *
4.2 Indenture dated November 14, 1995, between the Company and
Chemical Bank, as trustee, relating to $190,000,000 in
principal amount of 13% Senior Discount Notes due 2005,
including the form of global note (the "1995
Indenture"). ............................................. ++
4.3 March 11, 1996 Supplement to 1995 indenture. ............. ++++
4.4 Initial Global Note dated November 14, 1995. ............. ++
4.5 Warrant Agreement dated November 14, 1995, between the
Company and Smith Barney Inc. and Salomon Brothers Inc. .. +++
4.6 Initial Global Warrant dated November 14, 1995. .......... +++
4.7 Indenture dated March 21, 1996, between the Company and
Chemical Bank, as trustee, relating to $120,000,000 in
principal amount of 12 3/4% Senior Discount Notes due
2006, including the form of global note (the "1996
Indenture"). ............................................. +++++
4.8 Supplemental Indenture dated as of January 13, 1997,
between the Company and The Chase Manhattan Bank, as
trustee, to the Indenture dated November 14, 1995, as
amended, relating to the Company's 13% Senior Discount
Notes due 2005. .......................................... ++++
4.9 Supplemental Indenture dated as of January 13, 1997,
between the Company and The Chase Manhattan Bank, as
trustee, to the Indenture dated March 26, 1996, as
amended, relating to the Company's 12 3/4% Senior Discount
Notes due 2006. .......................................... ++++
4.10 Supplemental Indenture dated as of July 7, 1997, between
the Company and The Chase Manhattan Bank, as trustee, to
the Indenture dated November 14, 1995, as amended,
relating to the Company's 13% Senior Discount Notes due
2005. .................................................... --
4.11 Supplemental Indenture dated as of July 7, 1997, between
the Company and The Chase Manhattan Bank, as trustee, to
the Indenture dated March 26, 1996, as amended, relating
to the Company's 12 3/4% Senior Discount Notes due
2006. .................................................... --
4.12 Specimen Certificate of the Company's 14.75% Redeemable
Preferred Stock due 2008. ................................ --
</TABLE>
<PAGE> 156
<TABLE>
<CAPTION>
INCORPORATION SEQUENTIALLY
BY NUMBERED
EXHIBIT NO. DESCRIPTION REFERENCE PAGE
- ----------- ----------- ------------- ------------
<C> <S> <C> <C>
4.13 Warrant Agreement dated as of July 10, 1997, between the
Company and The Chase Manhattan Bank, as warrant
agent. ................................................... --
4.14 Form of Warrant. ......................................... --
4.15 Indenture dated as of July 23, 1997, between the Company
and The Chase Manhattan Bank, as trustee, relating to the
Company's 13 3/4% Senior Notes due 2007. ................. --
4.16 Escrow and Disbursement Agreement dated as of July 23,
1997, among the Company, The Bank of New York, as escrow
agent, and The Chase Manhattan Bank, as trustee, relating
to the Company's 13 3/4% Senior Notes due 2007. .......... --
4.17 Specimen Certificate of the Company's 12 3/4% Junior
Redeemable Preferred Stock due 2009....................... *****
4.18 Supplemental Indenture dated February 27, 1998, between
the Company and The Chase Manhattan Bank, as trustee, to
the Indenture dated November 14, 1995, as amended,
relating to the Company's 13% Senior Discount Notes due
2005. .................................................... (oooo)
4.19 Supplemental Indenture dated February 27, 1998, between
the Company and The Chase Manhattan Bank, as trustee, to
the Indenture dated March 26, 1996, as amended, relating
to the Company's 12 3/4% Senior Discount Notes due
2006. .................................................... (oooo)
4.20 Supplemental Indenture dated February 27, 1998, between
the Company and The Chase Manhattan Bank, as trustee, to
the Indenture dated July 23, 1997, as amended, relating to
the Company's 13 3/4% Senior Discount Notes due 2007. .... (oooo)
4.21 Indenture dated as of July 24, 1998, between the Company
and The Chase Manhattan Bank, as trustee, relating to the
Company's 10.625% Senior Discount Notes due July 1, 2008,
including the form of global note.........................
---
5 Opinion of Riley M. Murphy. ..............................
---
9.1 Standstill Agreement dated June 26, 1995, between the
Company and certain of its Preferred Stockholders. ....... ****
9.2 Standstill Agreement dated November 8, 1995, between the
Company and certain of its Preferred Stockholders. ....... ++
9.3 Voting Rights Agreement dated November 8, 1995, between
the Company and certain of its Preferred Stockholders. ... ++
9.4 Amendment to Voting Rights Agreement dated December 14,
1995. .................................................... -
10.1 Exchange Agreement, dated June 1, 1994, between the
Company and certain of its Preferred Shareholders. ....... *
10.2 Exchange Agreement, dated June 26, 1995, between the
Company and its 9% Series A Preferred Shareholders. ...... **
10.3 Company's Amended 1994 Stock Option Plan. ................ ++
10.4 Company's Employee Stock Purchase Agreement. ............. ++++
10.5 Registration Rights Agreement dated July 1, 1992, between
American Lightwave, Inc. and persons named therein. ...... *
10.6 Supplemental Registration Rights Agreement dated June 26,
1995. .................................................... ****
10.7 Management Registration Rights Agreement dated June 30,
1995. .................................................... ****
10.8 Registration Rights Agreement dated June 26, 1995, between
the Company and certain Preferred Stockholders. .......... **
</TABLE>
<PAGE> 157
<TABLE>
<CAPTION>
INCORPORATION SEQUENTIALLY
BY NUMBERED
EXHIBIT NO. DESCRIPTION REFERENCE PAGE
- ----------- ----------- ------------- ------------
<C> <S> <C> <C>
10.9 Form of Warrant Agreement issued to certain Preferred
Stockholders on June 26, 1995. ........................... ****
10.10 Form of $.01 Warrant Agreement. .......................... ****
10.11 Form of $1.79 Warrant Agreement. ......................... ****
10.12 Form of $2.25 Warrant Agreement. ......................... ****
10.13 Stockholders Agreement dated June 26, 1995, between the
Company and certain Preferred Stockholders. .............. ****
10.14 Third Amended and Restated Employment Agreement between
the Company and Anthony J. Pompliano. .................... ****
10.15 Third Amended and Restated Employment Agreement between
the Company and Riley M. Murphy. ......................... ****
10.16 Employment Agreement between the Company and Jack E.
Reich. ................................................... ****
10.17 Employment Agreement between the Company and David L.
Piazza. .................................................. ++++
10.18 Form of Stock Option Certificates, as amended, issued to
executive officers under employment agreements. .......... ****
10.19 Agreement, dated October 19, 1994, between the Company and
Marvin Saffian & Company. ................................ *
10.20 Lease Agreement for the Company's executive offices at 131
National Business Parkway, Suite 100, Annapolis Junction,
Maryland, as amended...................................... ****
10.21 Consulting Agreement, dated October 25, 1993, between the
Company and Thurston Partners, Inc. ...................... *
10.22 Consulting Agreement, dated June 16, 1994, between the
Company and Thurston Partners, Inc. and Global Capital,
Inc. ..................................................... *
10.23 Note Purchase Agreement, dated June 28, 1994.............. *
10.24 Stock Purchase Agreement dated December 17, 1996 by and
between the Company and Cybergate, Inc. .................. ++++
10.25 Stock Purchase Agreement, dated May 12, 1995, by and among
the Company, Piedmont Teleport, Inc., Randal Holcombe and
Karen Holcombe, as amended................................ ****
10.26 Stock and Warrant Purchase Agreement, dated June 26, 1995,
between the Company and the Purchasers named therein...... **
10.27 Form of Indemnity Agreement between the Company and its
Directors, as amended..................................... ****
10.28 Assignment and Assumption Agreement dated June 21, 1995,
between the Company and Apex Investment Fund II, L.P. .... ****
10.29 Letter Agreement dated November 14, 1995, between the
Company and ING Equity Partners, L.P. I, with respect to
the purchase of 50,000 shares of the Company's 9% Series
B-4 Convertible Preferred Stock and warrants to purchase
214,286 shares of Common Stock. .......................... ++
10.30 Warrant to Purchase Shares of American Communications
Services, Inc. Common Stock dated December 28, 1995,
between the Company and Gerard Klauer, Mattison & Co.
("GKM Warrant I"). ....................................... ++
10.31 Warrant to Subscribe For and Purchase Common Stock of
American Communications Services, Inc. dated December 28,
1995, between the Company and Gerard Klauer, Mattison &
Co. ("GKM Warrant II"). .................................. ++
</TABLE>
<PAGE> 158
<TABLE>
<CAPTION>
INCORPORATION SEQUENTIALLY
BY NUMBERED
EXHIBIT NO. DESCRIPTION REFERENCE PAGE
- ----------- ----------- ------------- ------------
<C> <S> <C> <C>
10.32 Amendment to Amended 1994 Stock Option Plan of the
Company. ................................................. (o)
10.33 Registration Rights Agreement dated as of July 10, 1997,
among the Company, BT Securities Corporation, Alex. Brown
& Sons Incorporated, The Huff Alternative Income Fund,
L.P., General Motors Domestic Group Pension Trust, Societe
Generale Securities Corporation, ING Baring (U.S.)
Securities, Inc. and McDermott Inc. Master Trust.......... --
10.34 Registration Rights Agreement dated as of July 23, 1997
among the Company and BT Securities Corporation as
representatives of the Initial Purchasers named therein... --
10.35 Supplemental Registration Rights Agreement, dated as of
July 10, 1997, among the Company, The Huff Alternative
Income Fund, L.P., General Motors Domestic Group Pension
Trust and McDermott Inc. Master Trust. ................... (oo)
10.36 Loan and Security Agreement dated December 30, 1997
between the Company and AT&T Commercial Finance
Corporation...............................................
----
10.37 Employment Agreement between the Company and Ronald E.
Spears. .................................................. (oooo)
10.38 Lease Agreement for the Company's executive offices at 133
National Business Parkway, Suite 200, Annapolis Junction,
Maryland.................................................. (oooo)
10.39 Registration Rights Agreement, dated as of July 24, 1998,
between the Company and Goldman Sachs & Co., Bear, Stearns
& Co. Inc. and ING Furman Selz LLC........................
---
11.1 Statement re: computation of per share earnings
(loss). .................................................. (ooooo)
12.1 Statement re: Ratio of Earnings to Fixed Charges..........
---
16.1 Letter re: change in certifying accountant. .............. ***
21.1 Subsidiaries of the Registrant. ..........................
---
23.1 Consent of KPMG Peat Marwick LLP. ........................
---
23.2 Consent of Riley M. Murphy (included in Exhibit 5). ......
---
24.1 Power of Attorney (included in signature pages). .........
---
25.1 Statement of Eligibility and Qualification on Form T-1 of
The Chase Manhattan Bank under the Indenture dated July
24, 1998. ................................................
---
99.1 Form of Letter of Transmittal. ...........................
---
99.2 Form of Notice of Guaranteed Delivery. ...................
---
99.3 Form of Letter to Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees. ......................
---
99.4 Form of Letter to Clients. ...............................
---
99.5 Form of Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9. ............
---
</TABLE>
- ---------------
* Previously filed as an exhibit to the Company's Registration
Statement on Form SB-2 (File No. 33-87200) and incorporated herein by
reference thereto.
** Previously filed as an exhibit to the Company's Current Report on Form
8-K dated June 26, 1995, and incorporated herein by reference thereto.
*** Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the fiscal quarter ended March 31, 1995, and
incorporated herein by reference thereto.
**** Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1995, and incorporated herein
by reference thereto.
<PAGE> 159
***** Previously filed as an exhibit to the Company's Registration Statement
on Form S-4 (File No. 333-34395)
+ Previously filed as an exhibit to the Company's Transition Report on
Form 10-KSB for the transition period from July 1, 1996 to December
31, 1996, and the Company's Quarterly Report on Form 10-QSB for the
fiscal quarter ended June 30, 1997, both of which are incorporated
herein by reference thereto.
++ Previously filed as an exhibit to the Company's Registration Statement
on Form S-4 (File No. 33-80305) and incorporated herein by reference
thereto.
+++ Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (File No. 33-80673) and incorporated herein by reference
thereto.
++++ Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (File No. 333-20867) and incorporated herein by reference
thereto.
+++++ Previously filed as an exhibit to the Company's Current Report on Form
8-K dated March 26, 1996 and incorporated herein by reference thereto.
++++++ Previously filed as an exhibit to the Company's Current Report on Form
8-K dated January 17, 1997 and incorporated herein by reference
thereto.
- Previously filed as an exhibit to the Company's Registration
Statement on Form S-4 (File No. 333-3632) and incorporated herein by
reference thereto.
-- Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the fiscal quarter ended June 30, 1997 and
incorporated by reference hereto.
--- Filed herewith.
---- Previously filed as an exhibit to the Company's Current Report on 8-K
dated January 20, 1998 and incorporated herein by reference thereto.
( )(o) Previously filed as an exhibit to the Company's Definitive Proxy
Statement filed on October 14, 1996 and incorporated herein by
reference thereto.
( )(oo) Previously filed as an exhibit to the Company's Registration
Statement on Form S-3 (File No. 333-35925)
( )(ooo) Previously filed as an exhibit to the Company's Registration
Statement on Form S-8 (File No. 333-58457), and incorporated
herein by reference thereto.
( )(oooo) Previously filed as an exhibit to the Company's Form 10-KSB for
the fiscal year ended December 31, 1997, and incorporated herein
by reference thereto.
( )(ooooo) Previously filed as an exhibit to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1997, and the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 1998, both of which are incorporated herein by
reference thereto.
<PAGE> 1
Exhibit 4.21
e.spire COMMUNICATIONS, INC.
$375,000,000
10.625% SENIOR DISCOUNT NOTES DUE JULY 1, 2008
INDENTURE
Dated as of July 24, 1998
THE CHASE MANHATTAN BANK,
Trustee
<PAGE> 2
CROSS-REFERENCE TABLE
Reconciliation and tie between the Trust Indenture Act of
1939, as amended, and the Indenture, dated as of July 24, 1998.
<TABLE>
<CAPTION>
TRUST
INDENTURE
ACT INDENTURE
SECTION SECTION
- ---------------------------------------------------------------------------
<S> <C>
Section 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.
Section 311 (a) ........................................7.11
(b) ........................................7.11
(c) ........................................N.A.
Section 312 (a) ............................7.06(a); 7.06(b)
(b) .....................................7.06(c)
(c) .....................................7.06(d)
Section 313 (a) .....................................7.06(e)
(b) ........................................N.A.
(c) ............................7.06(e); 7.06(f)
(d) ........................................7.06
Section 314 (a) ..................................4.18; 4.19
(b) ........................................N.A.
(c)(1) .......................................10.03
(c)(2) .......................................10.03
(c)(3) ........................................N.A.
(d) ........................................N.A.
(e) .......................................10.04
(f) ........................................4.19
Section 315 (a) .....................................7.01(b)
(b) .....................................7.05(a)
(c) .....................................7.01(a)
(d) .....................................7.01(c)
(e) ........................................6.10
</TABLE>
ii
<PAGE> 3
<TABLE>
TRUST
INDENTURE
ACT INDENTURE
SECTION SECTION
- ------------------------------------------------------------------------
<S> <C>
Section 316 (a) ........................................2.08
(a)(1)(A) ........................................6.05
(a)(1)(B) ........................................6.04
(a)(2) ........................................N.A.
(b) ........................................6.07
(c) ........................................9.05
Section 317 (a)(1) ........................................N.A.
(a)(2) ........................................6.08
(b) ........................................2.04
Section 318 (a) .......................................10.01
</TABLE>
NOTE: THIS RECONCILIATION AND TIE SHALL NOT, FOR ANY PURPOSE, BE
DEEMED TO BE PART OF THE INDENTURE.
iii
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION.............................. 1
SECTION 1.01 Definitions.................................................... 1
SECTION 1.02 Incorporation by Reference of Trust Indenture Act.............. 28
SECTION 1.03 Rules of Construction.......................................... 28
SECTION 1.04 Form of Documents Delivered to Trustee......................... 29
SECTION 1.05 Acts of Holders................................................ 30
SECTION 1.06 Satisfaction and Discharge..................................... 30
ARTICLE II THE NOTES................................ 31
SECTION 2.01 Form and Dating................................................ 31
SECTION 2.02 Execution and Authentication................................... 35
SECTION 2.03 Registrar and Paying Agent..................................... 36
SECTION 2.04 Paying Agent to Hold Money in Trust............................ 37
SECTION 2.05 Global Notes................................................... 38
SECTION 2.06 Transfer and Exchange.......................................... 38
SECTION 2.07 Replacement Notes.............................................. 46
SECTION 2.08 Outstanding Notes.............................................. 47
SECTION 2.09 Temporary Notes................................................ 47
SECTION 2.10 Cancellation................................................... 48
SECTION 2.11 Payment of Interest; Interest Rights Preserved................. 48
SECTION 2.12 Authorized Denominations....................................... 49
SECTION 2.13 Computation of Interest........................................ 49
SECTION 2.14 Persons Deemed Owners.......................................... 49
SECTION 2.15 CUSIP Numbers.................................................. 50
ARTICLE III REDEMPTION.............................. 50
SECTION 3.01 Notice to Trustee.............................................. 50
SECTION 3.02 Selection of Notes to be Redeemed.............................. 50
SECTION 3.03 Notice of Redemption........................................... 51
SECTION 3.04 Effect of Notice of Redemption................................. 52
SECTION 3.05 Deposit of Redemption Price.................................... 52
SECTION 3.06 Notes Redeemed in Part......................................... 52
ARTICLE IV COVENANTS................................ 53
SECTION 4.01 Payment of Notes............................................... 53
</TABLE>
iv
<PAGE> 5
<TABLE>
<S> <C> <C>
SECTION 4.02 Maintenance of Office or Agency............................................... 53
SECTION 4.03 Money for the Note Payments to be Held in Trust............................... 54
SECTION 4.04 Corporate Existence........................................................... 54
SECTION 4.05 Maintenance of Property....................................................... 54
SECTION 4.06 Payment of Taxes and Other Claims............................................. 55
SECTION 4.07 Repurchase at the Option of Holders upon a Change of Control.................. 55
SECTION 4.08 Limitation on Asset Sales..................................................... 58
SECTION 4.09 Limitation on Indebtedness.................................................... 62
SECTION 4.10 Limitation on Issuance of Guarantees by Restricted Subsidiaries............... 65
SECTION 4.11 Limitation on Liens........................................................... 66
SECTION 4.12 Limitation on Sale and Leaseback Transactions................................. 66
SECTION 4.13 Restricted Payments........................................................... 66
SECTION 4.14 Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries. 70
SECTION 4.15 Limitation on Issuance and Sale of Capital Stock of Restricted Subsidiaries... 71
SECTION 4.16 Transactions with Affiliates.................................................. 72
SECTION 4.17 Restricted and Unrestricted Subsidiaries...................................... 74
SECTION 4.18 Reports....................................................................... 74
SECTION 4.19 Compliance Certificate; Notice of Default or Event of Default................. 75
SECTION 4.20 Limitation on Construction of Fiber Networks.................................. 76
ARTICLE V CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER.... 76
SECTION 5.01 Merger, Consolidation or Sale of Assets....................................... 76
SECTION 5.02 Successor Corporation Substituted............................................. 77
ARTICLE VI DEFAULTS AND REMEDIES................................... 78
SECTION 6.01 Events of Default............................................................. 78
SECTION 6.02 Acceleration.................................................................. 80
SECTION 6.03 Other Remedies................................................................ 82
SECTION 6.04 Waiver of Past Defaults....................................................... 82
SECTION 6.05 Control by Majority........................................................... 83
SECTION 6.06 Limitation on Suits........................................................... 83
SECTION 6.07 Rights of Holders to Receive Payment.......................................... 84
</TABLE>
v
<PAGE> 6
<TABLE>
<S> <C> <C>
SECTION 6.08 Trustee May File Proofs of Claim............................................. 84
SECTION 6.09 Priorities................................................................... 84
SECTION 6.10 Undertaking for Costs........................................................ 85
SECTION 6.11 Waiver of Stay or Extension Laws............................................. 85
SECTION 6.12 Trustee May Enforce Claims Without Possession of the Notes................... 86
SECTION 6.13 Restoration of Rights and Remedies........................................... 86
SECTION 6.14 Rights and Remedies Cumulative............................................... 86
SECTION 6.15 Delay or Omission Not Waiver................................................. 86
ARTICLE VII TRUSTEE............................................... 87
SECTION 7.01 Duties of Trustee............................................................ 87
SECTION 7.02 Rights of Trustee............................................................ 88
SECTION 7.03 Individual Rights of Trustee................................................. 89
SECTION 7.04 Trustee's Disclaimer......................................................... 89
SECTION 7.05 Notice of Defaults........................................................... 89
SECTION 7.06 Preservation of Information; Reports by Trustee to Holders................... 89
SECTION 7.07 Compensation and Indemnity................................................... 90
SECTION 7.08 Replacement of Trustee....................................................... 91
SECTION 7.09 Successor Trustee by Merger.................................................. 94
SECTION 7.10 Eligibility; Disqualification................................................ 94
SECTION 7.11 Preferential Collection of Claims Against Company............................ 95
ARTICLE VIII DEFEASANCE............................................ 95
SECTION 8.01 Company's Option to Effect Legal Defeasance or
Covenant Defeasance.......................................................... 95
SECTION 8.02 Legal Defeasance and Discharge............................................... 95
SECTION 8.03 Covenant Defeasance.......................................................... 96
SECTION 8.04 Conditions to Defeasance or Covenant Defeasance.............................. 97
SECTION 8.05 Deposited Money and U.S. Government Obligations to
be Held in Trust; Miscellaneous Provisions................................... 98
SECTION 8.06 Reinstatement................................................................ 99
ARTICLE IX AMENDMENTS............................................. 99
SECTION 9.01 Without Consent of Holders................................................... 99
SECTION 9.02 With Consent of Holders...................................................... 100
SECTION 9.03 Effect of Supplemental Indentures............................................ 101
SECTION 9.04 Compliance with Trust Indenture Act.......................................... 101
SECTION 9.05 Revocation and Effect of Consents and Waivers................................ 101
</TABLE>
vi
<PAGE> 7
<TABLE>
<S> <C> <C>
SECTION 9.06 Notation on or Exchange of Notes............................................. 102
SECTION 9.07 Trustee to Execute Supplemental Indentures................................... 102
ARTICLE X MISCELLANEOUS.......................................... 103
SECTION 10.01 Trust Indenture Act Controls................................................ 103
SECTION 10.02 Notices..................................................................... 103
SECTION 10.03 Certificate and Opinion as to Conditions Precedent.......................... 104
SECTION 10.04 Statements Required in Certificate or Opinion............................... 104
SECTION 10.05 Rules by Trustee, Paying Agent and Registrar................................ 104
SECTION 10.06 Payments on Business Days................................................... 105
SECTION 10.07 Governing Law............................................................... 105
SECTION 10.08 No Recourse Against Others.................................................. 105
SECTION 10.09 Successors.................................................................. 105
SECTION 10.10 Counterparts................................................................ 105
SECTION 10.11 Table of Contents; Headings................................................. 105
SECTION 10.12 Severability................................................................ 105
SECTION 10.13 Further Instruments and Acts................................................ 106
</TABLE>
vii
<PAGE> 8
PAGE
----
EXHIBIT A FORM OF INITIAL GLOBAL NOTE
EXHIBIT B FORM OF INITIAL CERTIFICATED NOTE
EXHIBIT C FORM OF EXCHANGE GLOBAL NOTE
EXHIBIT D FORM OF EXCHANGE CERTIFICATED NOTE
EXHIBIT E TERMS OF SUBORDINATED INDEBTEDNESS
EXHIBIT F REGISTRATION AGREEMENT
EXHIBIT G REGULATION S CERTIFICATE
EXHIBIT H RESTRICTED NOTES CERTIFICATE
EXHIBIT I UNRESTRICTED SECURITIES CERTIFICATE
SCHEDULE A EXISTING INDEBTEDNESS
SCHEDULE B REQUIRED INVESTMENTS
SCHEDULE C SECURED CREDIT FACILITY AGREEMENTS
SCHEDULE D CONTRACTS WITH AFFILIATES
viii
<PAGE> 9
INDENTURE, dated as of July 24, 1998, between e.spire
COMMUNICATIONS, INC., a Delaware corporation (the "Company"), having its
principal office at 133 National Business Parkway, Suite 200, Annapolis
Junction, Maryland 20701, and THE CHASE MANHATTAN BANK, a New York banking
corporation, as trustee hereunder (the "Trustee"), having its Corporate Trust
Administration Office at 450 West 33rd Street, 15th Floor, New York, New York
10001-2697.
RECITALS OF THE COMPANY
The Company has duly authorized the creation and issue of its
10.625% Senior Discount Notes due July 1, 2008 (the "Initial Notes") of
substantially the tenor and amount hereinafter set forth, and to provide
therefor and for, if and when issued in exchange for the Initial Notes pursuant
to this Indenture and the Registration Agreement (as defined herein), the
Company's 10.625% Senior Discount Notes due July 1, 2008 (the "Exchange Notes,"
and together with the Initial Notes, the "Notes"), the Company has duly
authorized the execution and delivery of this Indenture.
All things necessary to make the Notes, when executed by the
Company and authenticated and delivered by the Trustee hereunder and duly issued
by the Company, the valid obligations of the Company and to make this Indenture
a valid instrument of the Company, in accordance with their respective terms,
have been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH, that, for and in
consideration of the premises and the purchase of the Initial Notes by the
Holders (as defined herein) thereof, it is mutually covenanted and agreed, for
the equal and proportionate benefit of all Holders of the Notes, as follows:
ARTICLE I
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
SECTION 1.01 Definitions. For all purposes of this Indenture,
except as otherwise expressly provided or 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; and
(b) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with GAAP (as defined herein).
<PAGE> 10
"Accreted Value" means, as of any date prior to July 1, 2003, an amount
per $1,000 principal amount at maturity of Notes that is equal to the sum of (a)
the initial offering price ($599.89 per $1,000 principal amount at maturity of
Notes) of such Notes and (b) the portion of the excess of the principal amount
of such Notes over such initial offering price which shall have been amortized
through such date, such amount to be so amortized on a daily basis and
compounded semi-annually on each January 1 and July 1 at the rate of 10.625%
per annum from the date of original issue of the Notes through the date of
determination computed on the basis of a 360-day year of twelve 30-day months,
and as of any date on or after July 1, 2003 the principal amount of each Note.
"Acquired Indebtedness" means, with respect to any specified Person,
Indebted ness of any other Person existing at the time such other Person merged
with or into or became a Subsidiary of such specified Person, including
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a Subsidiary of such specified Person,
but excluding Indebtedness which is extinguished, retired or repaid in
connection with such Person merging with or into or becoming a Subsidiary of
such specified Person.
"Act" when used with respect to any Holder, has the meaning set forth
in Section 1.05 hereof.
"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,
further, that except for purposes of Section 2.08 hereof, neither the Company
nor any of its Restricted Subsidiaries shall be deemed to be Affiliates of each
other; and provided, further, that any Lender under the Secured Credit Facility
and its Affiliates shall not be deemed to be Affiliates of the Company or any of
its Restricted Subsidiaries solely as a result of the existence of the Secured
Credit Facility or their holdings of Capital Stock of the Company or any of its
Restricted Subsidiaries acquired in connection with the Secured Credit Facility.
For purposes of this definition, "control" (including, with correlative
meanings, the terms "controlling," "under common control with" and "controlled
by"), and as used with respect to any Person, shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of the
management or policies of such Person, whether through the ownership of Voting
Stock, by agreement or otherwise; provided that beneficial ownership of 10
percent or more of the Voting Stock of a Person shall be deemed to constitute
control.
"Affiliate Transaction" has the meaning set forth in Section 4.16
hereof.
2
<PAGE> 11
"Agent Member" has the meaning set forth in Section 2.05(a) hereof.
"Applicable Procedures" means, with respect to any transfer or
transaction involving a Global Note or beneficial interest therein, the rules
and procedures of the Depositary for such Note, Euroclear and Cedel, in each
case to the extent applicable to such transaction and as in effect at the time
of such transfer or transaction.
"Asset Sale" means, with respect to any Person, any transfer,
conveyance, sale, lease or other disposition (including, without limitation, by
way of consolidation or merger, but excluding by means of any Sale and Leaseback
Transaction or by the granting of a Lien permitted by Section 4.11) by such
Person or any of its Restricted Subsidiaries to any Person other than the
Company or a Restricted Subsidiary of the Company, in one transaction, or a
series of related transactions (each hereinafter referred to as a
"Disposition"), of Property or assets of such Person or any of its Restricted
Subsidiaries, the Fair Market Value of which exceeds $2,000,000, other than (i)
a Disposition of Property in the ordinary course of business consistent with
industry practice, (ii) a Disposition that constitutes a Restricted Payment
permitted to be made under Section 4.13 hereof and (iii) a Disposition by the
Company in connection with a transaction permitted pursuant to Article V hereof.
For purposes of this definition, any series of related transactions that, if
effected as a single transaction would constitute an Asset Sale, shall be deemed
to be a single Asset Sale effected when the last transaction which is a part
thereof is effected.
"Asset Sale Offer" has the meaning set forth in Section 4.08(c) hereof.
"Asset Sale Payment Date" has the meaning set forth in Section
4.08(d)(ii) hereof.
"Asset Sale Purchase Price" has the meaning set forth in Section
4.08(c) hereof.
"Attributable Indebtedness" means, with respect to any Sale and
Leaseback Transaction of any Person, as at the time of determination, the
greater of (i) the capitalized amount in respect of such transaction that would
appear on the balance sheet of such Person in accordance with GAAP and (ii) the
present value (discounted at a rate consistent with accounting guidelines, as
determined in good faith by such Person, or the Board of Directors if such
Person is the Company or a Restricted Subsidiary) of the payments during the
remaining term of the lease (including any period for which such lease has been
extended or may, at the option of the lessor, be extended) or until the earliest
date on which the lessee may terminate such lease without penalty or upon
payment of a penalty (in which case the rental payments shall include such
penalty).
3
<PAGE> 12
"Average Life" means, as of any date, with respect to any debt security
or Disqualified Stock, the quotient obtained by dividing (i) the sum of the
products of (x) the number of years from such date to the dates of each
scheduled principal payment or redemption payment (including any sinking fund or
mandatory redemption payment requirements) of such debt security or Disqualified
Stock multiplied in each case by (y) the amount of such principal or redemption
payment, by (ii) the sum of all such principal or redemption payments.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board of Directors.
"Board Resolution" means a duly adopted resolution of the Board of
Directors in full force and effect at the time of determination and certified as
such by the Secretary or an Assistant Secretary of the Company.
"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
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 (including, without limitation, common stock, preferred stock and
partnership interests) and any rights (other than Indebtedness convertible into
an equity interest), warrants or options to subscribe for or 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.
"Cedel" has the meaning set forth in Section 2.01(a) hereof.
4
<PAGE> 13
"Certificated Notes" means Initial Certificated Notes and Exchange
Certificated Notes.
"Change of Control" shall be deemed to occur if (i) the sale,
conveyance, transfer or lease of all or substantially all of the assets of the
Company 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), other than to any Permitted Holder or any Restricted Subsidiary
of the Company, 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, 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 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 (together with any new directors whose
election or appointment by such board or whose nomination for election by the
shareholders 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 then in office.
"Change of Control Offer" has the meaning set forth in Section 4.07(a)
hereof.
"Change of Control Payment Date" has the meaning set forth in Section
4.07(b)(ii) hereof.
"Change of Control Purchase Price" has the meaning set forth in Section
4.07(a) hereof.
"Clearing Agency" has the meaning set forth in Section 3(a)(23) of the
Exchange Act.
"Closing Price" means, on any Trading Day with respect to the per share
price of any share of Common Stock, the last reported sale price regular way or,
in case no such
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<PAGE> 14
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 another national securities exchange on which such shares are listed or
admitted to trading is the principal trading market for such Common Stock, then
such national securities exchange or, if such Common Stock is not listed or
admitted to trading on any national securities exchange, on The Nasdaq Stock
Market (or any market for trading of securities administered by the NASD), or,
if such Common Stock is not listed or admitted to trading on any such national
securities exchange or market, 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.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the United States Securities and Exchange
Commission, as from time to time constituted, created under the Exchange Act,
or, if at any time after the execution of this Indenture such commission is not
existing and performing the duties now assigned to it under the Trust Indenture
Act, the body performing such duties at such time.
"Common Stock" means, with respect to any Person, Capital Stock of such
Person that does not rank prior, as to the payment of dividends or as to the
distribution of assets upon any voluntary or involuntary liquidation,
dissolution or winding up of such Person, to shares of Capital Stock of any
other class of such Person.
"Company" means the party named as such in the preamble to this
Indenture until a successor replaces it pursuant to the applicable provisions
hereof and, thereafter, means such successor.
"Company Order" means a written order signed in the name of the Company
by (i) its Chairman of the Board, President, a Vice Chairman or a Vice
President, and (ii) its Treasurer, an Assistant Treasurer, its Secretary or an
Assistant Secretary.
"Consolidated Interest Expense" means, with respect to any Person for
any period, without duplication (A) the sum of (i) the aggregate amount of cash
and non-cash interest expense (including capitalized interest) of such Person
and its Restricted Subsidiaries for such period as determined on a consolidated
basis in accordance with GAAP in respect of Indebtedness (including, without
limitation, (v) any amortization of debt discount, (w) net costs associated with
Interest Hedging Obligations (including any amortization of discounts), (x) the
interest portion of any deferred payment obligation, (y) all accrued interest
and (z) all commissions, discounts and other fees and charges owed with respect
6
<PAGE> 15
to letters of credit, bankers' acceptances or similar facilities) paid or
accrued, or scheduled to be paid or accrued, during such period; (ii) dividends
or distributions with respect to Preferred Stock or Disqualified Stock of such
Person (and of its Restricted Subsidiaries if to be paid to a Person other than
such Person or its Restricted Subsidiaries) declared and payable in cash; (iii)
the portion of any rental obligation of such Person or its Restricted
Subsidiaries in respect of any Capital Lease Obligation allocable to interest
expense in accordance with GAAP; (iv) the portion of any rental obligation of
such Person or its Restricted Subsidiaries in respect of any Sale and Leaseback
Transaction allocable to interest expense (determined as if such Sale and
Leaseback Transaction were treated as a Capital Lease Obligation); and (v) to
the extent any Indebtedness of any other Person is Guaranteed by such Person or
any of its Restricted Subsidiaries, the aggregate amount of interest paid,
accrued or scheduled to be paid or accrued, by such other Person during such
period attributable to any such Indebtedness, less (B) to the extent included in
(A) above, amortization or write-off of deferred financing costs of such Person
and its Restricted Subsidiaries during such period and any charge related to any
premium or penalty paid in connection with redeeming or retiring any
Indebtedness of such Person and its Restricted Subsidiaries prior to its Stated
Maturity; in the case of both (A) and (B) above, after elimination of
intercompany accounts among such Person and its Restricted Subsidiaries and as
determined in accordance with GAAP.
"Consolidated Net Income" of any Person means, for any period, the
aggregate net income (or net loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis determined in accordance
with GAAP; provided that there shall be excluded therefrom, without duplication,
(i) all items classified as extraordinary; (ii) any net income of any Person
other than such Person and its Restricted Subsidiaries, except to the extent of
the amount of dividends or other distributions actually paid to such Person or
its Restricted Subsidiaries by such other Person during such period in respect
of such income; (iii) the net income of any Person acquired by such Person or
any of its Restricted Subsidiaries in a pooling-of-interests transaction for
any period prior to the date of the related acquisition; (iv) any gain or loss,
net of taxes, realized on the termination of any employee pension benefit plan;
(v) net gains (but not net losses) in respect of Asset Sales by such Person or
its Restricted Subsidiaries; (vi) the net income (but not net loss) of any
Restricted Subsidiary of such Person to the extent that the payment of dividends
or other distributions to such Person is restricted by the terms of its charter
or any agreement, instrument, contract, judgment, order, decree, statute, rule,
governmental regulation or otherwise, except for any dividends or distributions
actually paid by such Restricted Subsidiary to such Person; (vii) with regard to
a non-wholly owned Restricted Subsidiary, any aggregate net income (or loss) in
excess of such Person's or such Restricted Subsidiary's pro rata share of such
non-wholly owned Restricted Subsidiary's net income (or loss); and (viii) the
cumulative effect of changes in accounting principles.
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<PAGE> 16
"Consolidated Tangible Assets" of any Person means, as of any date, the
sum for such Person and its Restricted Subsidiaries (after eliminating
intercompany items) of the net book value of all Property and assets of such
Person and its Restricted Subsidiaries reflected on a balance sheet of such
Person or such Restricted Subsidiary, as the case may be, prepared in accordance
with GAAP, less the net book value of all items that would be classified as
intangibles under GAAP, including, without limitation, (i) licenses, patents,
patent applications, copyrights, trademarks, trade names, goodwill, noncompete
agreements and organizational expenses, and (ii) unamortized deferred financing
costs, debt discount and expenses, including any appropriate deductions for any
minority interest in such assets of such Restricted Subsidiaries.
"Corporate Trust Administration 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 450 West 33rd Street, 15th Floor, New York, New York
10001-2697.
"Covenant Defeasance" has the meaning set forth in Section 8.03 hereof.
"Debt to Capital Ratio" means, as at any date of determination, the
ratio of (i) the amount of Indebtedness of the Company and its Restricted
Subsidiaries then outstanding on a consolidated basis as at the date of
determination to (ii) the capital of the Company and its Restricted Subsidiaries
on a consolidated basis as at such date. For purposes of this calculation,
"capital" shall mean stockholders' equity (deficit), except that all Preferred
Stock shall be included and retained earnings (deficit) shall be excluded, each
as determined in accordance with GAAP.
"Debt to EBITDA Ratio" means, as at any date of determination, the
ratio of (i) the aggregate amount of Indebtedness of the Company and its
Restricted Subsidiaries on a consolidated basis as at the date of determination
to (ii) the aggregate amount of EBITDA of the Company and its Restricted
Subsidiaries for the four preceding fiscal quarters for which financial
information is available immediately prior to the date of determination;
provided that any Indebtedness incurred or retired by the Company or any of its
Restricted Subsidiaries during the fiscal quarter in which the date of
determination occurs shall be calculated as if such Indebtedness was so incurred
or retired on the first day of the fiscal quarter in which the date of
determination occurs; and provided, further, that (x) if the transaction giving
rise to the need to calculate the Debt to EBITDA Ratio would have the effect of
increasing or decreasing Indebtedness or EBITDA in the future, Indebtedness or
EBITDA shall be calculated on a pro forma basis as if such transaction had
occurred on the first day of such four fiscal quarter period preceding the date
of determination, and (y) if during such four fiscal quarter period, the Company
or any of its
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<PAGE> 17
Restricted Subsidiaries shall have engaged in any Asset Sale, EBITDA for such
period shall be reduced by an amount equal to the EBITDA (if positive), or
increased by an amount equal to the EBITDA (if negative), directly attributable
to the assets which are the subject of such Asset Sale and any related
retirement of Indebtedness as if such Asset Sale and related retirement of
Indebtedness had occurred on the first day of such period and (z) if during such
four fiscal quarter period the Company or any of its Restricted Subsidiaries
shall have acquired any material assets outside the ordinary course of business,
EBITDA shall be calculated on a pro forma basis as if such asset acquisition and
related financing had occurred on the first day of such period.
"Default" means any event, act or condition, the occurrence of which
is, or after notice or the passage of time or both would be, an Event of
Default.
"Default Amount" has the meaning set forth in Section 6.02.
"Defaulted Interest" has the meaning set forth in Section 2.11 hereof.
"Defeasance" has the meaning set forth in Section 8.02 hereof.
"Depositary" means The Depository Trust Company, its nominees and their
respective successors.
"Disposition" has the meaning set forth in the definition of "Asset
Sale" in this Section 1.01.
"Disqualified Stock" means any Capital Stock which, by its terms (or by
the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, or otherwise, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, or is exchangeable for
Indebtedness at any time, in whole or in part, on or prior to the Stated
Maturity of the Notes.
"EBIT" means the amount calculated in the same manner as EBITDA, but
not including clauses (iii) and (iv) of the definition thereof.
"EBITDA" means, with respect to any Person for any period, the sum for
such Person for such period of Consolidated Net Income plus, to the extent
reflected in the income statement of such Person for such period from which
Consolidated Net Income is determined, without duplication, (i) Consolidated
Interest Expense; (ii) income tax expense; (iii) depreciation expense; (iv)
amortization expense; (v) any non-cash charge
9
<PAGE> 18
related to the issuance to employees of such Person of options to purchase
Capital Stock of such Person; and (vi) any charge related to any premium or
penalty paid in connection with redeeming or retiring any Indebtedness prior to
its Stated Maturity and minus, to the extent reflected in such income statement,
any non-cash credits that had the effect of increasing Consolidated Net Income
of such Person for such period, each item to be determined in accordance with
GAAP.
"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 and
certificates of deposit 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 Standard & Poor's or Moody's and in each case maturing
within ninety 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).
"Equity Offering" means an offering of Common Stock of the Company
resulting in net proceeds to the Company in excess of $20 million.
"Euroclear" has the meaning set forth in Section 2.01(a) hereof.
"Event of Default" has the meaning set forth in Section 6.01 hereof.
"Excess Proceeds" has the meaning set forth in Section 4.08(b) hereof.
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<PAGE> 19
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
"Exchange Certificated Notes" means Notes issued in definitive, fully
registered form to beneficial owners of interests in the Exchange Global Note
pursuant to Section 2.06(c) hereof.
"Exchange Global Note" has the meaning set forth in Section 2.01(d)
hereof.
"Exchange Notes" has the meaning set forth in the Recitals of the
Company and more particularly means any of the Notes authenticated and delivered
under this Indenture pursuant to the Exchange Offer.
"Exchange Offer" shall have the meaning set forth in the Registration
Agreement.
"Exchange Rate Obligation" means, with respect to any Person, any
currency swap agreements, forward exchange rate agreements, foreign currency
futures or options, exchange rate collar agreements, exchange rate insurance or
other agreements or arrangements, or combination thereof, designed to provide
protection against fluctuations in currency exchange rates.
"Existing Indebtedness" means the Indebtedness of the Company and its
Restricted Subsidiaries outstanding on the date of this Indenture, including
the 2005 Notes, the 2006 Notes and the 2007 Notes, and specified in Schedule A
hereto, and the incurrence by the Company of Indebtedness represented by the
2005 Notes, the 2006 Notes and the 2007 Notes.
"Existing Notes" means the 2005 Notes, the 2006 Notes and the 2007
Notes.
"Fair Market Value" means, with respect to any Property or asset, the
sale value that would be obtained in an arm's-length transaction between an
informed and willing seller under no compulsion to sell and an informed and
willing buyer under no compulsion to buy, as determined in good faith by the
Board of Directors.
"Fiber Network" means a digital fiber optic telecommunications network
wholly owned by the Company that serves a Metropolitan Area.
"Final Memorandum" means the final Offering Memorandum, dated July 21,
1998, used in connection with the initial placement of the Notes.
11
<PAGE> 20
"Full Accretion Date" shall mean July 1, 2003, on which date the
Accreted Value shall be equal to the full principal amount at maturity of the
Notes.
"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 Article IV or
Section 5.01 hereof shall utilize GAAP as in effect on the Issue Date.
"Global Notes" means the Initial Global Note and the Exchange Global
Note.
"Guarantee" means any direct or indirect obligation, contingent or
otherwise, of a Person guaranteeing or having the economic effect of
guaranteeing any Indebtedness of any other Person in any manner. The terms
"Guaranteed," "Guaranteeing" and "Guarantor" shall have correlative meanings.
"Guaranteed Indebtedness" has the meaning set forth in Section 4.10(a)
hereof.
"Holder" means (i) in the case of any Certificated Note, the Person in
whose name such Certificated Note is registered in the Security Register and
(ii) in the case of any Global Note, the Depositary.
"incur" means, with respect to any Indebtedness or other obligation of
any Person, to create, issue, incur (by conversion, exchange or otherwise),
extend, assume, Guarantee or otherwise become liable in respect of such
Indebtedness or other obligation or the recording, as required pursuant to GAAP
or otherwise, of any such Indebtedness or obligation on the balance sheet of
such Person (and "incurrence," "incurred," "incurrable" and "incurring" shall
have meanings correlative to the foregoing); provided that a change in GAAP that
results in an obligation of such Person that exists at such time becoming
Indebtedness shall not be deemed an incurrence of such Indebtedness.
Indebtedness otherwise incurred by a Person before it becomes a Subsidiary of
the Company (whether by merger, consolidation, acquisition or otherwise) shall
be deemed to have been incurred at the time at which such Person becomes a
Subsidiary of the Company.
"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
12
<PAGE> 21
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; (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 60 days overdue or which are being contested in
good faith); (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 Persons other than such Person or its Restricted
Subsidiaries, the maximum fixed redemption or repurchase price of Disqualified
Stock of such Person's Restricted Subsidiaries, at the time of determination;
(vii) the notional amount of any Interest Hedging Obligations or Exchange Rate
Obligations of such Person at the time of determination; (viii) any Attributable
Indebtedness with respect to any Sale and Leaseback Transaction to which such
Person is a party; and (ix) any obligation of the type referred to in clauses
(i) through (viii) of this definition of another Person and all dividends and
distributions of another Person the payment of which, in either case, such
Person has Guaranteed or is responsible or liable, directly or indirectly, as
obligor, Guarantor or otherwise. For purposes of the preceding sentence, the
maximum fixed repurchase price of any Disqualified Stock that does not have a
fixed repurchase price shall be calculated in accordance with the terms of such
Disqualified Stock as if such Disqualified Stock were repurchased on any date on
which Indebtedness shall be required to be determined pursuant to this
Indenture; provided that if such Disqualified Stock is not then permitted to be
repurchased, the repurchase price shall be the book value of such Disqualified
Stock. The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability of any Guarantees at such date; provided that
for purposes of calculating the amount of the 2005 Notes, the 2006 Notes or the
Notes outstanding at any date, the amount of such 2005 Notes, the 2006 Notes or
the Notes shall be the Accreted Value (as defined in the relevant indenture)
thereof as of such date unless cash interest has commenced to accrue pursuant to
the terms of the relevant indenture, in which case the amount of the 2005 Notes,
2006 Notes or the Notes outstanding will be determined pursuant to the terms of
such notes and will not include any accrued and unpaid cash interest which would
otherwise be included in Accreted Value (as defined in the relevant Indenture)
because of clause (iii) of the definition thereof.
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<PAGE> 22
"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 Director" means a director of the Company other than a
director who is (i) a party, or who is an officer, employee, promoter, partner
or Person performing similar functions for a party (including the Company) to
the transaction in question; (ii) a director of a party (other than the Company)
to the transaction; or (iii) related by blood or marriage to any Person
specified in clause (i) or (ii) of this definition.
"Initial Certificated Notes" means Notes issued in definitive, fully
registered form to beneficial owners of interests in the Initial Global Note
pursuant to Section 2.06(c) hereof.
"Initial Global Note" has the meaning set forth in Section 2.01(a)
hereof.
"Initial Notes" has the meaning set forth in the Recitals of the
Company and, more particularly, means any of the Notes authenticated and
delivered under this Indenture other than Exchange Notes.
"Initial Purchasers" means the Purchasers, as such term is defined in
the Purchase Agreement.
"Interest Hedging Obligation" means, with respect to any Person, an
obligation of such Person pursuant to any interest rate swap agreement, interest
rate cap, collar or floor agreement or other similar agreement or arrangement
designed to protect against or manage such Person's or any of its Restricted
Subsidiaries' exposure to fluctuations in interest rates.
"Interest Payment Date" means the Stated Maturity of an installment of
interest on the Notes.
"Investment" in any Person means any direct, indirect or contingent (i)
advance or loan to, Guarantee of any Indebtedness of, extension of credit or
capital contribution to such Person; (ii) the acquisition of any shares of
Capital Stock, bonds, notes, debentures or other securities of such Person; or
(iii) the acquisition, by purchase or otherwise, of all or substantially all of
the business, assets or stock or other evidence of beneficial
14
<PAGE> 23
ownership of such Person; provided that Investments shall exclude commercially
reasonable extensions of trade credit. The amount of any 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 asset other
than cash, such Property or asset shall be valued at its Fair Market Value at
the time of such transfer. For purposes of the definition of "Restricted
Payment" and Section 4.13 only, "Investment" shall include the portion
(proportionate to the Company's equity interest in such Subsidiary) of the Fair
Market Value of the net assets of any Subsidiary at the time that such
Subsidiary is designated an Unrestricted Subsidiary and shall exclude the
portion (proportionate to the Company's equity interest in such Subsidiary) of
the Fair Market Value of the net assets of any Unrestricted Subsidiary at the
time that such Unrestricted Subsidiary is designated a Restricted Subsidiary.
"Issue Date" means the date on which the Notes were first authenticated
and delivered under this Indenture.
"Joint Venture Entity" has the meaning set forth in Section
4.13(b)(vii) hereof.
"Lender" means a lender under the Secured Credit Facility that is a
party to and is bound by an agreement with respect to the Secured Credit
Facility and has extended or is committed to extend financing to the Company or
any of its Subsidiaries under the Secured Credit Facility.
"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 kind or nature whatsoever on or with respect to such Property
or other asset (including, without limitation, any conditional sale or title
retention agreement having substantially the same economic effect as any of the
foregoing).
"Maturity" means, when used with respect to a Note, the date on which
the principal of such Note becomes due and payable as provided therein or in
this Indenture, whether on the date specified in such Note as the fixed date on
which the principal of such Note is due and payable, on the Change of Control
Payment Date or Asset Sale Payment Date, or by declaration of acceleration, call
for redemption or otherwise.
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<PAGE> 24
"Metropolitan Area" means the 32 metropolitan areas in which the
Company, as of March 31, 1998, has a Fiber Network and other metropolitan areas
deemed in the reasonable business judgment of the management of the Company to
provide an opportunity for the building and operation of such a Fiber Network
with the reasonable potential to produce financial results for the Company at
least substantially comparable to the metropolitan areas in which the Company
has such operational Fiber Networks.
"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 ratings
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 and that shall have been designated by
the Company in an Officers' Certificate.
"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 or any of its Restricted Subsidiaries)
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
16
<PAGE> 25
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.
"Notes" has the meaning set forth in the Recitals of the Company and
more particularly means any of the Notes authenticated and delivered under this
Indenture.
"Officer" means the Chairman of the Board of Directors, a Vice Chairman
of the Board of Directors, the President, 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 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, and delivered
to the Trustee, which certificate shall comply with the provisions of Section
10.04 hereof; provided that any Officers' Certificate delivered pursuant to the
first paragraph of Section 4.19 hereof shall be signed by the Chief Executive
Officer, the Chief Financial Officer or the Chief Accounting Officer.
"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 Section 10.04 hereof; provided
that any Opinion of Counsel delivered pursuant to Section 8.04 hereof shall not
be rendered by an employee of the Company or any of its Subsidiaries.
"Paying Agent" means any Person authorized by the Company to make
payments of principal, premium or interest with respect to the Notes on behalf
of the Company.
"Permitted Holders" means The Huff Alternative Income Fund, L.P., ING
Equity Partners, L.P.I., Apex Investment Fund I, L.P., Apex Investment Fund II,
L.P., The Productivity Fund II, L.P. and Anthony J. Pompliano and the respective
Affiliates (other than the Company and the Restricted Subsidiaries) of each of
the foregoing.
"Permitted Investments" means:
(i) Eligible Cash Equivalents;
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<PAGE> 26
(ii) Investments in Property used in the ordinary
course of business;
(iii) Investments in any Person as a result of which
such Person becomes a Restricted Subsidiary of the Company in
compliance with Section 4.17 hereof;
(iv) Investments pursuant to certain agreements or
obligations of the Company or a Restricted Subsidiary of the Company,
in effect on the Issue Date, to make such Investments, which agreements
and obligations are specified in Schedule B hereto;
(v) Investments in prepaid expenses, negotiable
instruments held for collection and lease, utility and workers'
compensation, performance and other similar deposits;
(vi) Interest Hedging Obligations with respect to any
floating rate Indebtedness that is permitted under Section 4.09 hereof
to be outstanding;
(vii) Exchange Rate Obligations, provided that such
Exchange Rate Obligations were entered into in connection with
transactions in the ordinary course of business or the incurrence of
Indebtedness that is permitted under Section 4.09 hereof to be
outstanding;
(viii) bonds, notes, debentures or other debt
securities received as a result of Asset Sales permitted under Section
4.08 hereof;
(ix) Investments by the Company or a Restricted
Subsidiary in or in respect of a Person to the extent the consideration
for such Investment consists of shares of Qualified Stock of the
Company;
(x) Investments funded or financed with Purchase
Money Debt; and
(xi) Investments in existence at the Issue Date.
"Permitted Liens" means:
(i) Liens on Property or assets of a Person existing
at the time such Person is merged with or into or consolidated with the
Company or any
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Subsidiary of the Company, provided that such Liens were in existence
prior to the contemplation of such merger or consolidation and do not
secure any Property or assets of the Company or any of its Subsidiaries
other than the Property or assets subject to the Liens prior to such
merger or consolidation;
(ii) Liens on Telecommunications Assets existing
during the time of the construction thereof;
(iii) Liens incurred or deposits made to secure the
performance of tenders, bids, leases, statutory or regulatory
obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of
business consistent with industry practice;
(iv) Liens existing on the Issue Date;
(v) Liens to secure Indebtedness permitted to be
incurred under Section 4.09(b)(i) or Section 4.09(b)(ix) hereof;
(vi) any Lien on Property of the Company in favor of
the United States of America or any state thereof, or any
instrumentality of either, to secure certain required payments pursuant
to any contract or statute;
(vii) any Lien for taxes or assessments or other
governmental charges or levies not then due and payable (or which, if
due and payable, are being contested in good faith and for which
adequate reserves are being maintained, to the extent required by
GAAP);
(viii) easements, rights-of-way, licenses and other
similar restrictions on the use of Properties or minor imperfections of
title that, in the aggregate, are not material in amount and do not in
any case materially detract from the Properties subject thereto or
interfere with the ordinary conduct of the business of the Company or
its Subsidiaries;
(ix) any Lien to secure obligations under workmen's
compensation laws or similar legislation, including any Lien with
respect to judgments which are not currently dischargeable;
(x) any statutory warehousemen's, materialmen's or
other similar Liens for sums not then due and payable (or which, if due
and payable, are
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being contested in good faith and with respect to which adequate
reserves are being maintained, to the extent required by GAAP);
(xi) any interest or title of a lessor in Property
subject to a Capital Lease Obligation;
(xii) Liens to secure any Vendor Financing
Indebtedness; provided that such Liens do not extend to any Property or
assets other than the Property or assets the acquisition of which was
financed by such Vendor Financing Indebtedness;
(xiii) Liens in favor of the Company or any
Restricted Subsidiary of the Company;
(xiv) Liens on Property or assets of a Person
existing prior to the time such Person is acquired by the Company as a
result of (a) an Investment described in clause (ix) of the definition
of "Permitted Investments" herein or (b) an Investment described in
clause (vii) of Section 4.13(b) hereof; provided that such Liens were
in existence prior to the contemplation of such Investment and do not
secure any Property or assets of the Company or any of its Subsidiaries
other than the Property or assets subject to the Liens prior to such
Investment;
(xv) Liens securing reimbursement obligations with
respect to letters of credit that encumber documents and other Property
relating to such letters of credit and the products and proceeds
thereof; and
(xvi) Liens to secure any permitted extension,
renewal, refinancing or refunding (or successive extensions, renewals,
refinancings or refundings), in whole or in part, or any Indebtedness
secured by Liens referred to in the foregoing clauses (i) through (v)
and (xii); provided that such Liens do not extend to any other Property
or assets and the principal amount of the Indebtedness secured by such
Liens is not increased.
"Permitted Subordinated Financing" means Indebtedness or Preferred
Stock of the Company issued to a Permitted Holder; provided that (i) in the case
of Permitted Subordinated Financing that constitutes Indebtedness, such
Indebtedness (A) is subordinated in right of payment to the Notes as provided in
Exhibit C hereto and (B) has a maturity of 180 days or less, and (ii) in the
case of Permitted Subordinated Financing that constitutes Preferred Stock, such
Preferred Stock is retired within 180 days of issuance.
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"Person" means any individual, corporation, partnership, limited
liability company, joint venture, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Preferred Stock" means, as applied to the Capital Stock of any Person,
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over shares
of Capital Stock of any other class of such Person.
"pro forma" means, with respect to any calculation made or required to
be made pursuant to the terms hereof, a calculation in accordance with Article
11 of Regulation S- X promulgated under the Securities Act (to the extent
applicable), as interpreted in good faith by the Board of Directors, or
otherwise, a calculation made in good faith by the Board of Directors.
"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.
"Purchase Agreement" means the Purchase Agreement relating to the
Notes, dated July 21, 1998, among the Company and the Initial Purchasers.
"Purchase Money Debt" means Indebtedness of the Company (including
Acquired Indebtedness and Indebtedness represented by Capital Lease Obligations,
mortgage financings and purchase money obligations) incurred for the purpose of
financing all or any part of the cost of construction, acquisition or
improvement by the Company or any Subsidiary of the Company or any joint venture
of any Telecommunications Assets of the Company, any Subsidiary of the Company
or any joint venture, and including any related notes, Guarantees, collateral
documents, instruments and agreements executed in connection therewith, as the
same may be amended, supplemented, modified or restated from time to time.
"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.
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"Redemption Date" means, when used with respect to any Note or part
thereof to be redeemed hereunder, the date fixed for redemption of such Notes
pursuant to the terms of the Notes and this Indenture.
"Redemption Price" means, when used with respect to any Note or part
thereof to be redeemed hereunder, the price fixed for redemption of such Note
pursuant to the terms of the Notes and this Indenture, plus accrued and unpaid
interest thereon, if any, to the Redemption Date.
"Refinance" has the meaning set forth in Section 4.09(b)(x) hereof (and
"Refinanced" and "Refinancing" shall have meanings correlative to the
foregoing).
"Refinancing Indebtedness" means any Indebtedness incurred in
connection with the Refinancing of other Indebtedness.
"Registrar" has the meaning set forth in Section 2.03 hereof.
"Registration Agreement" means the Exchange and Registration Rights
Agreement relating to the Notes, dated July 24, 1998, among the Company and the
Initial Purchasers, and attached hereto as Exhibit F.
"Regulation S" means Regulation S under the Securities Act.
"Regulation S Certificate" means a certificate substantially in the
form of Exhibit G hereto.
"Regulation S Global Note" has the meaning specified in Section
2.01(a).
"Regulation S Legend" means the legend set forth in Section 2.01(e)
(ii) hereof.
"Regulation S Notes" means all Notes required pursuant to Section
2.01(e) (ii) to bear a Regulation S Legend.
"Required Filing Date" has the meaning set forth in Section 4.18
hereof.
"Restricted Notes" means all Notes required by Section 2.01(e) (i) and
(ii) hereof to bear a Restricted Notes Legend.
"Restricted Notes Certificate" means a certificate substantially in the
form of Exhibit H hereto.
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"Restricted Notes Legend" means the legends set forth in Section
2.01(e) (i) hereof.
"Restricted Payment" means (i) a dividend or other distribution
declared or paid on the Capital Stock of the Company or to the Company's
stockholders (in their capacity as such), or declared or paid to any Person
other than the Company or a Restricted Subsidiary of the Company on the Capital
Stock of any Restricted Subsidiary of the Company, in each case, other than
dividends, distributions or payments made solely in Qualified Stock of the
Company or such Restricted Subsidiary; (ii) a payment made by the Company or any
of its Restricted Subsidiaries (other than to the Company or any Restricted
Subsidiary of the Company) to purchase, redeem, acquire or retire any Capital
Stock of the Company or of a Restricted Subsidiary of the Company; (iii) a
payment made by the Company or any of its Restricted Subsidiaries (other than a
payment made solely in Qualified Stock of the Company) to redeem, repurchase,
defease (including an in-substance or legal defeasance) or otherwise acquire or
retire for value (including pursuant to mandatory repurchase covenants), prior
to any scheduled maturity, scheduled sinking fund or mandatory redemption
payment, Indebtedness of the Company or such Restricted Subsidiary which is
subordinate (whether pursuant to its terms or by operation of law) in right of
payment to the Notes and which was scheduled to mature on or after the maturity
of the Notes; or (iv) an Investment in any Person, including an Unrestricted
Subsidiary or the designation of a Subsidiary as an Unrestricted Subsidiary,
other than (a) a Permitted Investment, (b) an Investment by the Company in a
Restricted Subsidiary of the Company or (c) an Investment by a Restricted
Subsidiary of the Company in the Company or a Restricted Subsidiary of the
Company.
"Restricted Period" has the meaning set forth in Section 2.01(a)
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 pursuant to Section 4.17 hereof.
"Rule 144" means Rule 144 under the Securities Act (including any
successor regulation thereto) as it may be amended from time to time.
"Rule 144A" means Rule 144A under the Securities Act (including any
successor regulation thereto), as it may be amended from time to time.
"Rule 144A Note" means the Notes purchased by the Initial Purchasers
from the Company pursuant to the Purchase Agreement, other than the Regulation S
Notes.
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"Rule 144A Global Notes" has the meaning set forth in Section 2.01(a)
hereof.
"Sale and Leaseback Transaction" means, with respect to any Person, any
direct or indirect arrangement pursuant to which Property is sold or transferred
by such Person or a Restricted Subsidiary of such Person and is thereafter
leased back from the purchaser or transferee thereof by such Person or one of
its Restricted Subsidiaries.
"Secured Credit Facility" means the credit agreements among the
Company, certain of its Subsidiaries and AT&T Credit Corporation specified in
Schedule C hereto and additional secured credit agreements to which the Company
is or becomes a party, in an aggregate amount not to exceed $35,000,000, and all
related amendments, notes, collateral documents, guarantees, instruments and
other agreements executed in connection therewith, as the same may be amended,
modified, supplemented, restated, renewed, extended, refinanced, substituted or
replaced 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 2.03 hereof.
"Shelf Registration Statement" has the meaning set forth in the
Registration Agreement.
"Significant Restricted Subsidiary" means a Restricted Subsidiary that
is a "significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X under
the Securities Act and the Exchange Act.
"Special 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 Services, a
division of McGraw Hill Corporation, or, if Standard & Poor's Ratings Services
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 Services 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 and that shall have been designated by the Company in
an Officers' Certificate.
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"Stated Maturity" means, with respect to any security, the date
specified in such security as the fixed date on which the payment of principal
of such security is due and payable, including pursuant to any mandatory
redemption provision (but excluding any provision providing for the repurchase
of such security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred), and, when used with respect
to any installment of interest on such security, the fixed date on which such
installment of interest is due and payable.
"Subsidiary" means, with respect to any Person, (i) any corporation
more than 50 percent of the outstanding shares of Voting Stock of which is
owned, directly or indirectly, by such Person, or by one of more other
Subsidiaries of such Person, or by such Person and one or more other
Subsidiaries of such Person; (ii) any general partnership, joint venture or
similar entity, more than 50 percent of the outstanding partnership or similar
interests of which are owned, directly or indirectly, by such Person, or by one
or more other Subsidiaries of such Person, or by such Person and one or more
other Subsidiaries of such Person; and (iii) any limited partnership of which
such Person or any Subsidiary of such Person is a general partner.
"Subsidiary Guarantee" has the meaning set forth in Section 4.10(a)
hereof.
"Surviving Entity" has the meaning set forth in Section 5.01(a) hereof.
"Telecommunications Assets" means, with respect to any Person, assets
(including, without limitation, rights-of-way, trademarks and licenses to use
copyrighted material) that are utilized by such Person, directly or indirectly,
in a Telecommunications Business. Telecommunications Assets shall include stock,
joint venture or partnership interests in another Person, provided that
substantially all of the assets of such other Person consist of
Telecommunications Assets, and provided, further, that if such stock, joint
venture or partnership interests are held by the Company or a Restricted
Subsidiary, such other Person either is, or immediately following the relevant
transaction shall become, a Restricted Subsidiary of the Company pursuant to
Section 4.17 hereof. 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.
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"Telecommunications Company" means any Person substantially all of the
assets of which consist of Telecommunications Assets.
"Temporary Notes" has the meaning set forth in Section 2.09 hereof.
"Total Market Capitalization" of any Person means, at the time of
determination, the product of (i) the aggregate amount of outstanding shares of
Common Stock of such Person (which shall not include any Common Stock issuable
upon the exercise of options or warrants on, or securities convertible or
exchangeable into, shares of Common Stock of such Person) and (ii) the average
Closing Price of such Common Stock over the preceding twenty consecutive Trading
Days. If no such Closing Price exists with respect to shares of any such class,
the value of such shares shall be determined by the Board of Directors in good
faith and evidenced by a Board Resolution delivered to the Trustee.
"Trading Day" means, with respect to a security traded on a securities
exchange, automated quotation system or market, a day on which such exchange,
system or market is open for a full day of trading.
"Trust Indenture Act" means the Trust Indenture Act of 1939 (15 U.S.C.
Sections 77aaa-77bbbb) as in effect on the date of this Indenture except as
required by Section 9.04 hereof or if the Indenture is qualified under such Act
then as in effect on the date of such qualification, 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.
"2005 Indenture" means the indenture, dated as of November 14, 1995,
between the Company and The Chase Manhattan Bank (formerly known as Chemical
Bank), as trustee, as such indenture may from time to time be supplemented or
amended.
"2006 Indenture" means the indenture dated as of March 26, 1996,
between the Company and The Chase Manhattan Bank (formerly known as Chemical
Bank), as trustee, as such indenture may from time to time be supplemented or
amended.
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"2007 Indenture" means the indenture, dated as of July 23, 1997,
between the Company and The Chase Manhattan Bank, as trustee, as such indenture
may from time to time be supplemented or amended.
"2005 Notes" means the Company's 13% Senior Discount Notes due 2005
issued under the 2005 Indenture.
"2006 Notes" means the Company's 12 3/4% Senior Discount Notes due 2006
issued under the 2006 Indenture.
"2007 Notes" means the Company's 13 3/4% Senior Notes due 2007 issued
under the 2007 Indenture.
"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 super vised 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 4.17 hereof.
"Vendor Financing Indebtedness" of any Person means an obligation owed
by such Person to a vendor of any Telecommunications Assets solely in respect of
the purchase price of such assets, provided that the amount of such Indebtedness
does not exceed the Fair Market Value of such assets, and provided, further,
that such Indebted ness is incurred within 180 calendar days of the acquisition
of such assets.
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"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 1.02 Incorporation by Reference of Trust Indenture
Act. Whenever this Indenture refers to a provision of the Trust Indenture Act,
the provision is incorporated by reference in and made a part of this Indenture.
The following Trust Indenture Act terms incorporated by reference in this
Indenture have the following meanings:
"indenture securities" means the Notes.
"indenture security holder" means a Holder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Trustee.
"obligor" on the indenture securities means the Company or other
obligor on the Notes, if any.
All other Trust Indenture Act terms used or incorporated by
reference in this Indenture that are defined by the Trust Indenture Act, defined
by Trust Indenture Act reference to another statute or defined by Commission
rule have the meanings assigned to them therein.
SECTION 1.03 Rules of Construction. Unless the context
otherwise requires:
(a) the 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;
(b) "or" is not exclusive;
(c) "including" means including without limitation;
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(d) the principal amount of any noninterest bearing or other
discount security (other than the 2005 Notes, the 2006 Notes or the Notes), at
any date shall be the principal amount thereof that would be shown on a balance
sheet of the issuer dated such date prepared in accordance with GAAP;
(e) when used with respect to the 2005 Notes, the 2006 Notes
or the Notes the term "principal amount" shall mean the principal amount thereof
at the Stated Maturity of such principal amount; and
(f) unless otherwise expressly provided herein, the principal
amount of any Preferred Stock shall be the greater of (i) the maximum
liquidation value of such Preferred Stock or (ii) the maximum mandatory
redemption or mandatory repurchase price with respect to such Preferred Stock.
SECTION 1.04 Form of Documents Delivered to Trustee. In any
case where several matters are required to be certified by, or covered by an
opinion of, any specified Person, it is not necessary that all such matters be
certified by, or covered by the opinion of, only one such Person, or that they
be so certified or covered by only one document, but one such Person may certify
or give an opinion with respect to some 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 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 stating that the
information with respect to such factual matters is in the possession of the
Company, 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 1.05 Acts of Holders. (a) 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
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<PAGE> 38
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
delivered to the Trustee and, where it is hereby expressly required, to the
Company. Such instrument or instruments (and the action embodied therein and
evidenced thereby) are herein sometimes referred to as the "Act" of the Holders
signing such instrument or instruments. Proof of execution of any such
instrument or of a writing appointing any such agent shall be sufficient for any
purpose of this Indenture and (subject to Section 7.01) conclusive in favor of
the Trustee and the Company, if made in the manner provided in this Section.
(b) 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 a 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.
SECTION 1.06 Satisfaction and Discharge. This Indenture shall
cease to be of further effect (except as to the rights of Holders under Sections
2.06, 2.07, 2.09, 4.02, 4.03 and 4.04 hereof) and the Trustee, on receipt of a
Company Order requesting such action, shall execute proper instruments
acknowledging satisfaction and discharge of this Indenture, when (a) either (i)
all outstanding Notes have been delivered to the Trustee for cancellation or
(ii) all such Notes not theretofore delivered to the Trustee for cancellation
(A) have become due and payable, (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 irrevocable arrangements satisfactory to the Trustee for the giving of
notice of redemption by the Trustee in the name, and at the expense, of the
Company, and the Company, in the case of (A), (B) or (C) above, has irrevocably
deposited or caused to be deposited with the Trustee as trust funds in trust for
the purpose an amount sufficient to pay and discharge the entire indebtedness on
such Notes, for principal (and premium, if any) and interest to the date of such
deposit (in the case of Notes which have become due and payable) or to the
Stated Maturity or Redemption Date, as the case may be, together with
irrevocable instructions from the Company in form and substance satisfactory to
the Trustee directing the Trustee to apply such funds to the payment thereof;
(b) the Company has paid or caused to be paid all other sums payable hereunder
by the Company; and (c) 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
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satisfaction and discharge of this Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture pursuant to
this Section 1.06, the obligations of the Company to the Trustee under Section
7.07 hereof, and, if money shall have been deposited with the Trustee in trust
for the Holders pursuant to this Section 1.06, the obligations of the Trustee
under this Section 1.06 and Section 4.03 hereof shall survive.
All money deposited with the Trustee pursuant to this Section
1.06 shall be held in trust and applied by it, in accordance with the provisions
of the Notes and this Indenture, to the payment, either directly or through any
Paying Agent, to the Persons entitled thereto, of the principal (and premium, if
any) and interest for the payment of which such money has been deposited with
the Trustee. If the Trustee or Paying Agent is unable to apply any money or U.S.
Government Obligations in accordance with this Section 1.06 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 obligations under this Indenture and the Notes shall
be revived and reinstated as though no deposit had occurred pursuant to this
Section 1.06 until such time as the Trustee or Paying Agent is permitted to
apply all such money or U.S. Government Obligations in accordance with this
Section 1.06; provided, that if the Company has made any payment of interest on
or principal of any Notes because of the reinstatement of its obligations, the
Company shall be subrogated to the rights of the Holders of such Notes to
receive such payment from the cash or U.S. Government Obligations held by the
Trustee or Paying Agent.
ARTICLE II
THE NOTES
SECTION 2.01 Form and Dating. (a) Forms Generally; Initial
Forms of Rule 144A and Regulation S Notes.
The Notes and the Trustee's certificates of authentication
shall be in substantially the forms set forth in this Article, with such
appropriate insertions, omissions, substitutions and other variations as are
required or permitted by this Indenture, and may have such letters, numbers or
other marks of identification and such legends or endorsements placed thereon as
may, consistently herewith, be determined by the Officers executing such Notes
as evidenced by their execution of the Notes.
The definitive Notes shall be printed, lithographed or
engraved or produced by any combination of these methods on steel engraved
borders or may be produced in any other manner provided that such manner is
permitted by the rules of any
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securities exchange on which the Notes may be listed, all as determined by the
officers executing such Notes, as evidenced by their execution of such Notes.
Upon their original issuance, Rule 144A Notes shall be issued
in the form of one or more Global Notes (the "Rule 144A Global Notes")
registered in the name of DTC, as Depositary, or its nominee and deposited with
the Trustee at its Corporate Trust Office, as custodian for the Depositary, for
credit by the Depositary to the respective accounts of beneficial owners of the
Notes represented thereby (or such other accounts as they may direct).
The Regulation S Notes, if any, will be issued in the form of
a single global Note (the "Regulation S Global Note") in fully registered form
without coupons and will be registered in the name of a nominee of the
Depositary and deposited with the Trustee, as custodian for the Depositary for
credit to Morgan Guaranty Trust Company of New York, Brussels Office, as
operator of the Euroclear System ("Euroclear"), and Cedel Bank SA ("Cedel"), for
credit to the respective beneficial owners thereof in accordance with the rules
thereof. Until the expiration of the Restricted Period, beneficial interests in
the Regulation S Global Note, may only be held through Euroclear or Cedel,
unless exchanged for interests in the Rule 144A Global Note in accordance with
the transfer and certification requirements described below. The "Restricted
Period" means the period of 40 consecutive days commencing on the later of (i)
the date the Initial Purchasers advise the Company and the Trustee in writing of
the day on which the Notes are first offered to Persons (other than
distributors) in reliance upon Regulation S, and (ii) the original issue date of
the Notes.
The Rule 144A Global Notes and the Regulation S Global Note are
collectively herein called the "Initial Global Note."
(b) The Notes may have such letters, numbers or other marks of
identification and such legends and endorsements, stamped, printed, lithographed
or engraved thereon, (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 Notes may be listed and (iii) such as may be necessary to conform to
customary usage. Each Note shall be dated the date of its authentication by the
Trustee.
(c) Initial Notes shall be issued initially in the form of one
or more permanent, global notes in definitive, fully registered form, without
coupons, substantially in the form of Exhibit A hereto. Upon issuance, such
Initial Global Note shall be duly executed by the Company and authenticated by
the Trustee as hereinafter provided
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and deposited with the Trustee as custodian for the Depositary. Any Initial
Certificated Note that may be issued pursuant to Section 2.06(c) hereof, shall
be issued in the form of a Note in definitive, fully registered form, without
coupons, substantially in the form set forth in Exhibit B hereto. Upon issuance,
any such Initial Certificated Note shall be duly executed by the Company and
authenticated by the Trustee as hereinafter provided.
(d) In the event Exchange Notes are issued pursuant to an
Exchange Offer in exchange for Initial Notes held in the form of the Initial
Global Note, such Exchange Notes shall be issued initially in the form of a
permanent global Note in definitive, fully registered form, without coupons (the
"Exchange Global Note") substantially in the form set forth in Exhibit C hereto.
Upon issuance, such Exchange Global Note shall be duly executed by the Company
and authenticated by the Trustee as hereinafter provided and deposited with the
Trustee as custodian for the Depositary. Any Exchange Certificated Note that may
be issued pursuant to Section 2.06(d) hereof or in exchange for Initial
Certificated Notes pursuant to an Exchange Offer, shall be issued in the form of
a Note in definitive, fully registered form, without coupons, substantially in
the form set forth in Exhibit D hereto. Upon issuance, any such Exchange
Certificated Notes shall be duly executed by the Company and authenticated by
the Trustee as hereinafter provided.
(e) The following legends shall appear on each Global Note and
each Certificated Note as indicated below:
(i) Except as provided in Section 2.06(c) hereof,
each Initial Global Note, Initial Certificated Note and Regulation S
Note shall bear the following legend on the face thereof:
THE NOTES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"),
AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE
TRANSFERRED EXCEPT (A)(1) TO A PERSON WHO THE TRANSFEROR REASONABLY
BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE
144A UNDER THE SECURITIES ACT PURCHASING FOR ITS OWN ACCOUNT OR THE
ACCOUNT OF ANOTHER QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION
MEETING THE REQUIREMENTS OF RULE 144A, (2) IN AN OFFSHORE TRANSACTION
MEETING THE REQUIREMENTS OF RULE 903 OR RULE 904 OF REGULATION S UNDER
THE SECURITIES ACT, (3) TO AN INSTITUTIONAL ACCREDITED INVESTOR IN A
TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS UNDER THE
SECURITIES ACT, (4) PURSUANT TO AN EXEMPTION FROM RE-
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GISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF
AVAILABLE) OR (5) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT, AND (B) IN ACCORDANCE WITH ALL APPLICABLE
SECURITIES LAWS OF THE STATES OF THE UNITED STATES OF AMERICA AND
OTHER JURISDICTIONS.
(ii) The Regulation S Global Note and the Regulation
S Certificated Notes shall bear the following legend on the face
thereof:
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT") AND MAY NOT BE
OFFERED, SOLD OR DELIVERED IN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR
BENEFIT OF, ANY U.S. PERSON, UNLESS SUCH SECURITIES ARE REGISTERED UNDER THE
SECURITIES ACT OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREOF IS
AVAILABLE.
(iii) Each Global Note shall bear the following
legend on the face thereof:
UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY TO e. spire
COMMUNICATIONS, INC. OR THE REGISTRAR FOR REGISTRATION OF TRANSFER OR
EXCHANGE AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR
SUCH OTHER ENTITY AS HAS BEEN 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 HAS BEEN 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.
TRANSFER OF THIS GLOBAL NOTE SHALL BE LIMITED TO
TRANSFERS IN WHOLE, AND NOT IN PART, TO NOMINEES OF THE DEPOSITORY
TRUST COMPANY OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND
TRANSFERS OF INTERESTS IN
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THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH
THE RESTRICTIONS SET FORTH IN SECTION 2.06 OF THE INDENTURE, DATED AS
OF JULY 24, 1998, BETWEEN e. spire COMMUNICATIONS, INC. AND THE TRUSTEE
NAMED THEREIN, PURSUANT TO WHICH THIS NOTE WAS ISSUED.
SECTION 2.02 Execution and Authentication. The Notes may be
issued in two series, a series of Initial Notes and a series of Exchange Notes.
The aggregate principal amount of the Notes outstanding at any time shall not
exceed $375,000,000 except as provided in Section 2.07 hereof. The Notes shall
be executed on behalf of the Company by its Chief Executive Officer, its
President or any Executive Vice President by manual or facsimile signature.
The Notes shall be authenticated by manual signature of an
authorized officer of the Trustee and shall not be valid for any purpose unless
so authenticated.
In case any officer of the Company whose signature shall have
been placed upon any of the Notes shall cease to be such officer of the Company
before authentication of such Notes by the Trustee and the issuance and delivery
thereof, such Notes may, nevertheless, be authenticated by the Trustee and
issued and delivered with the same force and effect as though such Person had
not ceased to be such officer of the Company.
Notwithstanding any other provision hereof, the Trustee shall
authenticate and deliver Notes only upon receipt by the Trustee of an Officers'
Certificate and Opinion of Counsel complying with Section 10.04 hereof with
respect to satisfaction of all conditions precedent contained in this Indenture
to authentication and delivery of such Notes.
Upon compliance by the Company with the provisions of the
previous paragraph, the Trustee shall, upon receipt of a Company Order
requesting such action, authenticate (a) Initial Notes for original issuance in
an aggregate principal amount not to exceed $375,000,000 in the form of the
Initial Global Note or (b) Exchange Notes for issuance pursuant to an Exchange
Offer for Initial Notes in a principal amount equal to the principal amount of
Initial Notes exchanged in such Exchange Offer. Such Company Order shall specify
the amount of Notes to be authenticated and the date on which, in the case of
clause (a) above, the Initial Notes or, in the case of clause (b) above, the
Exchange Notes, are to be authenticated and shall further provide instructions
concerning registration, amounts for each Holder and delivery.
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Upon the occurrence of any event specified in Section 2.06(d)
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 the
Initial Global Note or Exchange Global Note, as the case may be, Initial
Certificated Notes or Exchange Certificated Notes, as the case may be,
representing Notes theretofore represented by the Initial Global Note or
Exchange Global Note, as the case may be.
A Note shall not be valid or entitled to any benefit under
this Indenture or obligatory for any purpose unless executed by the Company and
authenticated by the manual signature of the Trustee as provided herein. The
signature of an authorized officer of the Trustee shall be conclusive evidence,
and the only evidence, that such Note has been authenticated and delivered under
this Indenture.
The Trustee may appoint an authenticating agent reasonably
acceptable to the Company to authenticate the Notes. Unless limited by the terms
of such appointment, an authenticating agent may authenticate Notes whenever the
Trustee may do so. Each reference in this Indenture to authentication by the
Trustee includes authentication by such agent. Any authenticating agent of the
Trustee shall have the same rights hereunder as any Registrar or Paying Agent.
SECTION 2.03 Registrar and Paying Agent. The Company shall
maintain, pursuant to Section 4.02 hereof, an office or agency where the Notes
may be presented for registration of transfer or for exchange. The Company shall
cause to be kept at such office a register (the register maintained in such
office being herein sometimes referred to as the "Security Register") in which,
subject to such reasonable regulations as it may prescribe, the Company shall
provide for the registration of Notes and of transfers of Notes entitled to be
registered or transferred as provided herein. The Trustee, at its Corporate
Trust Administration Office, is initially appointed "Registrar" for the purpose
of registering Notes and transfers of Notes as herein provided. Such Security
Register shall distinguish between Initial Notes and Exchange Notes. The Company
may, upon written notice to the Trustee, change the designation of the Trustee
as Registrar and appoint another Person to act as Registrar for purposes of this
Indenture. 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.
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The Company shall enter into an appropriate agency agreement
with any Person designated by the Company as Registrar or Paying Agent that is
not a party to this Indenture, which agreement shall incorporate the provisions
of the Trust Indenture Act and shall implement the provisions of this Indenture
that relate to such Registrar or Paying Agent. Prior to the designation of any
such Person, the Company shall, by written notice (which notice shall include
the name and address of such Person), inform the Trustee of such designation. If
the Company fails to maintain a Registrar or Paying Agent, the Trustee shall act
as such.
Upon surrender for registration of transfer of any Note at an
office or agency of the Company designated for such purpose, subject to Section
2.06 hereof, the Company shall execute, and the Trustee shall authenticate and
deliver, in the name of the designated transferee or transferees, one or more
new Initial Notes or Exchange Notes, as the case may be, of any authorized
denomination or denominations, of like tenor and aggregate principal amount, all
as requested by the transferor.
Every Note presented or surrendered for registration of
transfer or for exchange shall (if so required by the Company, the Trustee or
the Registrar) be duly endorsed, or be accompanied by a duly executed instrument
of transfer in form satisfactory to the Company, the Trustee and the Registrar,
by the Holder thereof or such Holder's attorney duly authorized in writing.
SECTION 2.04 Paying Agent to Hold Money in Trust. On or prior
to each due date of the principal, premium, or any payment of interest with
respect to any Note, the Company shall deposit with the Paying Agent a sum
sufficient to pay such principal, premium or interest 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, or interest with respect to the Notes, shall
notify the Trustee of any default by the Company in making any such payment and
at any time during the continuance of any such default, upon the written request
of the Trustee, shall forthwith pay to the Trustee all sums held in trust by
such Paying Agent.
The Company at any time may require a Paying Agent to pay all
money held by it to the Trustee and to account for any funds disbursed by such
Paying Agent. Upon complying with this Section 2.04, the Paying Agent shall have
no further liability for the money delivered to the Trustee.
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SECTION 2.05 Global Notes. (a) So long as a Global Note is
registered in the name of the Depositary or its nominee, members of, or
participants in, the Depositary ("Agent Members") shall have no rights under
this Indenture with respect to the Global Note held on their behalf by the
Depositary or the Trustee as its custodian, and the Depositary may be treated by
the Company, the Trustee and any agent of the Company or the Trustee as the
absolute owner of such Global Note for all purposes. Notwithstanding the
foregoing, nothing herein shall (i) prevent the Company, the Trustee or any
agent of the Company or the Trustee, from giving effect to any written
certification, proxy or other authorization furnished by the Depositary or (ii)
impair, as between the Depositary and its Agent Members, the operation of
customary practices governing the exercise of the rights of a Holder of Notes.
(b) The Holder of a Global Note may grant proxies and
otherwise authorize any Person, including Agent Members and Persons that may
hold interests in such Global Note through Agent Members, to take any action
which a Holder of Notes is entitled to take under this Indenture or the Notes.
(c) Whenever, as a result of an optional redemption of Notes
by the Company, a Change of Control Offer, an Asset Sale Offer, an Exchange
Offer or an exchange pursuant to the second sentence of Section 2.06(d) hereof,
a Global Note is redeemed, repurchased or exchanged in part, such Global Note
shall be surrendered by the Holder thereof to the Trustee who shall cause an
adjustment to be made to Schedule A thereof so that the principal amount of such
Global Note will be equal to the portion of such Global Note not redeemed,
repurchased or exchanged and shall thereafter return such Global Note to such
Holder, provided that each such Global Note shall be in a principal amount of
$1,000 or an integral multiple thereof.
SECTION 2.06 Transfer and Exchange. (a) Global Notes.
(i) Each Global Note authenticated under this
Indenture shall be registered in the name of the Depositary designated
by the Company for such Global Note or a nominee thereof and delivered
to such Depositary or a nominee thereof or custodian therefor, and each
such Global Note shall constitute a single Note for all purposes of
this Indenture.
(ii) If any Global Note is to be exchanged for other
Notes or cancelled in whole, it shall be surrendered by or on behalf of
the Depositary or its nominee to the Trustee, as Security Registrar,
for exchange or cancellation as provided in this Article. If any
Global Note is to
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<PAGE> 47
be exchanged for other Notes or cancelled in part, or if another Note
is to be exchanged in whole or in part for a beneficial interest in any
Global Note, then either (i) such Global Note shall be so surrendered
for exchange or cancellation as provided in this Article or (ii) the
principal amount thereof shall be reduced or increased by an amount
equal to the portion thereof to be so exchanged or cancelled, or equal
to the principal amount of such other Note to be so exchanged for a
beneficial interest therein, as the case may be, by means of an
appropriate adjustment made to Schedule A thereto by the Trustee, as
Security Registrar, whereupon the Trustee, in accordance with the
Applicable Procedures, shall instruct the Depositary or its authorized
representative to make a corresponding adjustment to its records. Upon
any such surrender or adjustment of a Global Note, the Trustee shall,
subject to subparagraph (b) and as otherwise provided in this Article,
authenticate and deliver any Notes issuable in exchange for such Global
Note (or any portion thereof) to or upon the order of, and registered
in such names as may be directed by, the Depositary or its authorized
representative. Upon the request of the Trustee in connection with the
occurrence of any of the events specified in this paragraph, the
Company shall promptly make available to the Trustee a reasonable
supply of Notes that are not in the form of Global Notes. The Trustee
shall be entitled to rely upon any order, direction or request of the
Depositary or its authorized representative which is given or made
pursuant to this Article if such order, direction or request is given
or made in accordance with the Applicable Procedures and in accordance
with all applicable laws.
(iii) Every Note authenticated and delivered upon
registration of transfer of, or in exchange for or in lieu of, a Global
Note or any portion thereof, whether pursuant to this Article or
otherwise, shall be authenticated and delivered in the form of, and
shall be, a Global Note, unless such Note is registered in the name of
a Person other than the Depositary for such Global Note or a nominee
thereof.
(iv) The Depositary or its nominee, as registered
owner of a Global Note, shall be the Holder of such Global Note for all
purposes under this Indenture and the Notes and owners of beneficial
interests in a Global Note shall hold such interests pursuant to the
Applicable Procedures. Accordingly, any such owner's beneficial
interest in a Global Note will be shown only on, and the transfer of
such interest shall be effected only through, records maintained by the
Depositary or its nominee or its Agent Members.
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(b) Restrictions on Transfer and Exchange; Securities Act
Legends.
(i) Registration, Registration of Transfer and Exchange
Generally.
At the option of the Holder, and subject to the other
provisions of this Section, Notes may be exchanged for other Notes of any
authorized denominations, of a like aggregate principal amount and bearing such
restrictive legends as may be required by this Indenture upon surrender of the
Notes to be exchanged at any such office or agency. Whenever any Notes are so
surrendered for exchange, the Company shall execute, and the Trustee shall
authenticate and make available for delivery, the Notes which the Holder making
the exchange is entitled to receive.
All Notes issued upon any registration of transfer or exchange
of Notes shall be the valid obligations of the Company, evidencing the same
debt, and (except for the differences between Initial Notes and Exchange Notes
provided for herein) entitled to the same benefits under this Indenture, as the
Notes surrendered upon such registration of transfer or exchange.
Every Note presented or surrendered for registration of
transfer or for exchange shall (if so required by the Company or the Security
Registrar) be duly endorsed, or be accompanied by a written instrument of
transfer, in form satisfactory to the Company and the Security Registrar, duly
executed by the Holder thereof or his attorney duly authorized in writing.
No service charge shall be made for any registration of
transfer or exchange of Notes, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any registration of transfer or exchange of Securities, other
than exchanges not involving any transfer.
The Company and the Trustee shall not be required (i) to
issue, register the transfer of, or exchange any Note during a period beginning
at the opening of business 15 days before the day of the mailing of a notice of
redemption of Notes selected for redemption under Section 3.02 and ending at the
close of business on the day of such mailing, or (ii) to register the transfer
of or exchange any Note so selected for redemption, in whole or in part, except
the unredeemed portion of any Note being redeemed in part.
(ii) Certain Transfers and Exchanges. Notwithstanding any
other provision of this Indenture or the Notes, transfers and exchanges of Notes
and beneficial
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interests in a Global Note of the kinds specified in this subparagraph (b) shall
be made only in accordance with this subparagraph (b). Transfers and exchanges
subject to this subparagraph (b) shall also be subject to the other provisions
of this Indenture that are not inconsistent with this subparagraph (b).
(1) Rule 144A Global Note to Regulation S Global
Note. If the owner of a beneficial interest in the Rule 144A Global
Note wishes at any time to transfer such interest to a Person who is
required or permitted to acquire the same in the form of a beneficial
interest in the Regulation S Global Note, such transfer may be effected
only in accordance with the provisions of this Clause (b)(ii) subject
to the Applicable Procedures. Upon receipt by the Trustee, as Security
Registrar, of (A) an order given by the Depositary or its authorized
representative directing that a beneficial interest in the Regulation S
Global Note or in a specified principal amount be credited to a
specified Agent Member's account and that a beneficial interest in the
Initial Global Note or in an equal principal amount be debited from
another specified Agent Member's account and (B) a Regulation S
Certificate, satisfactory to the Trustee and duly executed by the
owner of such beneficial interest in the Rule 144A Global Note or his
attorney duly authorized in writing, then the Trustee, as Security
Registrar but subject to Clause (b)(iv) below, shall reduce the
principal amount of the Rule 144A Global Note and increase the
principal amount of the Regulation S Global Note by such specified
principal amount as provided in Section 2.06(a) (ii) above.
(2) Regulation S Global Note to Rule 144A Global
Note. If the owner of a beneficial interest in the Regulation S Global
Note wishes at any time to transfer such interest to a Person who is
required or permitted to acquire the same in the form of a beneficial
interest in the Rule 144A Global Note, such transfer may be effected
only in accordance with this Clause (b)(ii) and subject to the
Applicable Procedures. Upon receipt by the Trustee, as Security
Registrar, of (A) an order given by the Depositary or its authorized
representative directing that a beneficial interest in the Rule 144A
Global Note in a specified principal amount be credited to a specified
Agent Member's account and that a beneficial interest in the Regulation
S Global Note in an equal principal amount be debited from another
specified Agent Member's account and (B) if such transfer is to occur
during the Restricted Period, a Restricted Notes Certificate,
satisfactory to the Trustee and duly executed by the owner of such
beneficial interest in the Regulation S Global Note or his attorney
duly
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<PAGE> 50
authorized in writing, then the Trustee, as Security Registrar, shall
reduce the principal amount of the Regulation S Global Note and
increase the principal amount of the Initial Global Note by such
specified principal amount as provided in Section 2.06(a)(ii) above.
(3) Exchanges between Global Note and Non-Global
Note. A beneficial interest in a Global Note may be exchanged for a
Note that is not a Global Note as provided in subparagraph (a),
provided that, if such interest is a beneficial interest in the Rule
144A Global Note, or if such interest is a beneficial interest in the
Regulation S Global Note, then such interest shall be exchanged for a
Restricted Note (subject in each case to Section 2.06(a) (ii) above).
(4) Regulation S Global Note to be Held Through
Euroclear or Cedel during Restricted Period. The Company shall use its
best efforts to cause the Depositary to ensure that beneficial
interests in the Regulation S Global Note may be held only in or
through accounts maintained at the Depositary by Euroclear or Cedel
(or by Agent Members acting for the account thereof), and no Person
shall be entitled to effect any transfer or exchange that would result
in any such interest being held otherwise than in or through such an
account; provided that this Clause (b) (ii)(4) shall not prohibit any
transfer or exchange of such an interest in accordance with Clause
(b)(ii)(2) above.
(c) Securities Act Legends. The Rule 144A Notes and their
respective successor Notes shall bear a Restricted Notes Legend, and the
Regulation S Notes and their successor Notes shall bear a Regulation S Legend,
subject to the following:
(i) subject to the following Clauses of this
subparagraph (c), a Note or any portion thereof which is exchanged,
upon registration of transfer or otherwise, for a Global Note or any
portion thereof shall bear the Restricted Notes Legend borne by such
Global Note while represented thereby;
(ii) subject to the following Clauses of this Section
(c), a new Note which is not a Global Note and is issued in exchange
for another Note (including a Global Note) or any portion thereof, upon
registration of transfer or otherwise, shall bear the Restricted Notes
Legend borne by such other Note, provided that, if such new Note is
required pursuant to clause b(ii)(3) to be issued in the form of a
Restricted
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Notes, it shall bear a Restricted Notes Legend and, if such new Note is
so required to be issued in the form of a Regulation S Note, it shall
bear a Regulation S Legend;
(iii) Exchange Notes shall not bear a Restricted
Notes Legend;
(iv) at any time after the Notes may be freely
transferred without registration under the Securities Act or without
being subject to transfer restrictions pursuant to the Securities Act,
a new Note which does not bear a Restricted Notes Legend may be issued
in exchange for or in lieu of a Note (other than a Global Note) or any
portion thereof which bears such a legend if the Trustee has received a
Rule 144 Certificate in the form attached hereto as Exhibit I,
satisfactory to the Trustee and duly executed by the Holder of such
legended Note or his attorney duly authorized in writing, and after
such date and receipt of such certificate, the Trustee shall
authenticate and make available for delivery such a new Note in
exchange for or in lieu of such other Note as provided in this Article;
(v) a new Note which does not bear a Restricted Notes
Legend may be issued in exchange for or in lieu of a Note (other than a
Global Note) or any portion thereof which bears such a legend if, in
the Company's judgment, placing such a legend upon such new Note is not
necessary to ensure compliance with the registration requirements of
the Securities Act, and the Trustee, at the direction of the Company,
shall authenticate and deliver such a new Note as provided in this
Article provided that, the Trustee, if it deems reasonably necessary or
appropriate, may request an Opinion of Counsel in connection with such
direction; and
(vi) notwithstanding the foregoing provisions of this
Section, a successor Note of a Note that does not bear a Restricted
Notes Legend shall not bear such legend unless the Company advises the
Trustee in writing that it has reasonable cause to believe that such
successor Note is a "restricted Note" within the meaning of Rule 144,
in which case the Trustee, at the direction of the Company, shall
authenticate and make available for delivery a new Note bearing a
Restricted Notes Legend in exchange for such Note as provided in this
Article.
Each Holder of a Note by acceptance of such Note agrees to
indemnify the Trustee against any liability that may result from the
registration of transfer, exchange or
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<PAGE> 52
assignment of such Holder's Note in violation of any provision of this Indenture
and/or applicable United States federal or state securities law.
The Trustee shall have no obligation or duty to monitor,
determine or inquire as to compliance with any restrictions on transfer imposed
under this Indenture or under applicable law with respect to any registration of
transfer of any interest in any Note (including any transfers between or among
Depositary participants or beneficial owners of interest in any Global Note)
other than to require delivery of such certificates and other documentation or
evidence as are expressly required by, and to do so if and when expressly
required by the terms of, this Indenture, and to examine the same to determine
substantial compliance as to form with the express requirements hereof.
(d) An Initial Global Note or Exchange Global Note, as the
case may be, shall be exchanged by the Company for one or more Initial
Certificated Notes or Exchange Certificated Notes, as the case may be, if (i)
the Depositary (1) 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 (2) 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 calendar days, (ii) the Depositary is at any time unwilling or
unable to continue as Depositary and a successor to the Depositary is not able
to be appointed by the Company within 90 calendar days or (iii) the Company, at
its option, notifies the Trustee in writing that it elects to cause the issuance
of the Notes in certificated form. If an Event of Default occurs and is
continuing, the Company shall, at the request of the Holder thereof, exchange
all or part of the Initial Global Note or Exchange Global Note, as the case may
be, for one or more Initial Certificated Notes or Exchange Certificated Notes,
as the case may be; provided that the principal amount of each of such Initial
Certificated Notes or Exchange Certificated Notes, as the case may be, and such
Global Note, after such exchange, shall be $1,000 or an integral multiple
thereof. Whenever a Global Note is exchanged as a whole for one or more Initial
Certificated Notes or Exchange Certificated Notes, as the case may be, it shall
be surrendered by the Holder thereof to the Trustee for cancellation. Whenever a
Global Note is exchanged in part for one or more Initial Certificated Notes or
Exchange Certificated Notes, as the case may be, it shall be surrendered by the
Holder thereof to the Trustee and the Trustee shall make the appropriate
notations thereon pursuant to Section 2.05(c) hereof. All Initial Certificated
Notes or Exchange Certificated Notes, as the case may be, issued in exchange for
a Global Note or any portion thereof shall be registered in such names, and
delivered, as the Depositary shall instruct the Trustee. Any Initial
Certificated Notes issued pursuant to this Section 2.06(d) shall include the
Restricted Notes Legend of the Initial Global Note exchanged therefor, except as
set forth in Section
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2.06(a)(iii) hereto. Interests in a Global Note may not be exchanged for
Certificated Notes other than as provided in this Section 2.06(d).
(e) The transfer of a Note shall be registered by the
Securities Registrar only upon the surrender of such Note for registration of
transfer. No such registration of transfer shall be effected until, and the
transferee shall succeed to the rights of a Holder only upon, final acceptance
and registration of the transfer in the Security Register by the Registrar. When
Notes are presented to the Registrar with a request to register the transfer of,
or to exchange, such Notes, the Registrar shall register the transfer or make
such exchange as requested if its requirements for such transactions and any
applicable requirements hereunder are satisfied. To permit registrations of
transfers and exchanges, the Company shall execute and the Trustee shall
authenticate Certificated Notes at the Registrar's request.
(f) Prior to the effectiveness under the Securities Act of a
Shelf Registration Statement, or at any time during the suspension or following
the termination thereof, Holders of Initial Notes (or holders of interests
therein) and prospective purchasers designated by such Holders of Initial Notes
(or such holders of interests therein) shall have the right to obtain from the
Company upon request by such Holders (or such holders of interests) or
prospective purchasers, during any period in which the Company is not subject to
Section 13 or Section 15(d) of the Exchange Act, or is exempt from reporting
pursuant to 12g3-2(b) under the Exchange Act, the information required by
paragraph (d)(4)(i) of Rule 144A in connection with any transfer or proposed
transfer of such Notes or interests.
(g) Any Holder of a Global Note shall, by acceptance of such
Global Note, agree that transfers of beneficial interests in such Global Note
may be effected only through a book entry system maintained by the Holder of
such Global Note (or its agent), and that ownership of a beneficial interest in
the Notes represented thereby shall be required to be reflected in book entry
form. Transfers of a Global Note shall be limited to transfers in whole and not
in part, to the Depositary, its successors, and their respective nominees.
Interests of beneficial owners in a Global Note may be transferred in accordance
with the rules and procedures of the Depositary (or its successors).
SECTION 2.07 Replacement Notes. If any mutilated Note is
surrendered to the Trustee, the Company shall execute and upon its written
request the Trustee shall authenticate and deliver, in exchange for any such
mutilated Note, a new Note containing identical provisions and of like principal
amount, bearing a number not contemporaneously outstanding.
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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 Note and
(ii) such security or indemnity as may be required by them to save either of
them and any agent of each of them harmless, then, in the absence of notice to
the Company or the Trustee that such Note has been acquired by a bona fide
purchaser, the Company shall execute and upon its request the Trustee shall
authenticate and deliver, in lieu of any such destroyed, lost or stolen Note, a
new Note containing identical provisions and of like principal amount, bearing a
number not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Note has
become or is about to become due and payable, the Company in its discretion may,
instead of issuing a new Note, pay such Note.
Upon the issuance of any new Note under this Section 2.07, the
Company may require the payment by the Holder of a sum sufficient to cover any
tax or other governmental charge that may be imposed in relation thereto and any
other expenses (including the fees and expenses of the Trustee) connected
therewith.
Every new Note issued pursuant to this Section 2.07 in lieu of
any destroyed, lost or stolen Note shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Note shall be at any time enforceable by anyone, and shall be entitled to
all the benefits of this Indenture equally and proportionately with any and all
other Notes duly issued hereunder.
The provisions of this Section 2.07 are exclusive and shall
preclude (to the extent lawful) all other rights and remedies with respect to
the replacement or payment of mutilated, destroyed, lost or stolen Notes.
SECTION 2.08 Outstanding Notes. Notes outstanding at any time
are all Notes authenticated by the Trustee except for those canceled by it,
those delivered to it for cancellation and those described in this Section 2.08
as not outstanding. A Note does not cease to be outstanding because the Company
or an Affiliate of the Company holds such Note.
If a Note is replaced pursuant to Section 2.07 hereof, it
ceases to be outstanding unless the Trustee and the Company receive proof
satisfactory to them that such replaced Note is held by a bona fide purchaser.
If the Paying Agent segregates and holds in trust, in
accordance with this Indenture, on a redemption date or Maturity date money
sufficient to pay all principal,
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premium, if any, and interest payable on that date with respect to the Notes (or
portions thereof) to be redeemed or maturing, as the case may be, then on and
after that date such Notes (or such portions thereof) shall cease to be
outstanding and interest on them shall cease to accrue or the principal of such
Notes shall cease to accrete, as the case may be.
In determining whether the Holders of the required principal
amount of Notes have concurred in any direction, waiver or consent or any
amendment, modification or other change to this Indenture, Notes held or
beneficially owned by the Company or a Restricted Subsidiary of the Company or
by an Affiliate of the Company or a Restricted Subsidiary of the Company or by
agents of any of the foregoing shall be disregarded, except that for the
purposes of determining whether the Trustee shall be protected in relying on any
such direction, waiver or consent or any amendment, modification or other change
to this Indenture, only Notes which a Trust Officer knows are so owned shall be
so disregarded. Notes so owned which have been pledged in good faith shall not
be disregarded if the pledgee establishes to the satisfaction of the Trustee
such pledgee's right so to act with respect to the Notes and that the pledgee is
not the Company or an Affiliate of the Company or any of their agents.
SECTION 2.09 Temporary Notes. Pending the preparation of
definitive Notes, the Company may execute, and the Trustee shall authenticate,
temporary notes ("Temporary Notes") which are printed, lithographed, or
otherwise produced, substantially of the tenor of the definitive Notes in lieu
of which they are issued and with such appropriate insertions, omissions,
substitutions and other variations.
If Temporary Notes are issued, the Company shall cause
definitive Notes to be prepared without unreasonable delay. After the
preparation of definitive Notes, the Temporary Notes shall be exchangeable for
definitive Notes upon surrender of the Temporary Notes to the Trustee, without
charge to the Holder. Until so exchanged, Temporary Notes will evidence the same
debt and will be entitled to the same benefits under this Indenture as the
definitive Notes in lieu of which they have been issued.
SECTION 2.10 Cancellation. The Company at any time may deliver
Notes to the Trustee for cancellation. The Registrar and the Paying Agent shall
forward to the Trustee any Notes surrendered to them for registration of
transfer, exchange, purchase or payment. The Trustee shall cancel all Notes
surrendered for registration of transfer, exchange, purchase, payment or
cancellation and shall destroy such canceled Notes unless the Company shall by
Company Order otherwise direct. The Company may not issue new Notes to replace
Notes it has redeemed or paid or that have been delivered to the Trustee for
cancellation.
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SECTION 2.11 Payment of Interest; Interest Rights Preserved.
Interest on any Note which is payable, and is punctually paid or duly provided
for, on any Interest Payment Date shall be paid to the Person in whose name such
Note is registered at the close of business on the Record Date for such interest
payment, which shall be the December 15th or June 15th (whether or not a
Business Day) immediately preceding such Interest Payment Date.
Any interest on any Note which is payable, but is not
punctually paid or duly provided for, on any Interest Payment Date (herein
called "Defaulted Interest") shall forthwith cease to be payable to the
registered Holder on the relevant Record Date, and, except as hereinafter
provided, such Defaulted Interest, and any interest payable on such Defaulted
Interest, may be paid by the Company, at its election, as provided in clause (a)
or (b) below:
(a) The Company may elect to make payment of any Defaulted
Interest, and any interest payable on such Defaulted Interest, to the Persons in
whose names the Notes are registered at the close of business on a Special
Record Date for the payment of such Defaulted Interest, which shall be fixed in
the following manner. The Company shall notify the Trustee in writing of the
amount of Defaulted Interest proposed to be paid on the Notes and the date of
the proposed payment, and at the same time the Company shall deposit with the
Trustee an amount of money equal to the aggregate amount proposed to be paid in
respect of such Defaulted Interest or shall make arrangements satisfactory to
the Trustee for such deposit prior to the date of the proposed payment, such
money when deposited to be held in trust for the benefit of the Persons entitled
to such Defaulted Interest as provided in this Clause. Thereupon the Trustee
shall fix a Special Record Date for the payment of such Defaulted Interest which
shall be not more than 15 calendar days and not less than 10 calendar days prior
to the date of the proposed payment and not less than 10 calendar 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
calendar days prior to such Special Record Date. Notice of the proposed payment
of such Defaulted Interest and the Special Record Date therefor having been
mailed as aforesaid, such Defaulted Interest shall be paid to the Persons in
whose names the Notes are registered at the close of business on such Special
Record Date and shall no longer be payable pursuant to the following clause (b).
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(b) The Company may make payment of any Defaulted Interest,
and any interest payable on such Defaulted Interest, on the Notes in any other
lawful manner not inconsistent with the requirements of any securities exchange
on which the Notes may be listed, and upon such notice as may be required by
such exchange, if, after notice given by the Company to the Trustee of the
proposed payment pursuant to this clause, such manner of payment shall be deemed
practicable by the Trustee.
Subject to the foregoing provisions of this Section 2.11, each Note
delivered under this Indenture upon registration of transfer of, or in exchange
for, or in lieu of, any other Note, shall carry the rights to interest accrued
and unpaid, and to accrue, which were carried by such other Note.
SECTION 2.12 Authorized Denominations. The Notes shall be
issuable in denominations of $1,000 and any integral multiple thereof.
SECTION 2.13 Computation of Interest. Interest on the Notes
shall be computed on the basis of a 360-day year of twelve 30-day months.
SECTION 2.14 Persons Deemed Owners. Prior to the due
presentation for registration of transfer of any Note, the Company, the Trustee,
the Paying Agent, the Registrar or any co-registrar may deem and treat the
Person in whose name Note is registered as the absolute owner of such Note for
the purpose of receiving payment of principal of, premium, if any, and interest
on such Note and for all other purposes whatsoever, whether or not such Note is
overdue, and none of the Company, the Trustee, the Paying Agent, the Registrar
or any co-Registrar shall be affected by notice to the contrary.
SECTION 2.15 CUSIP Numbers. The Company, in issuing the Notes,
may use a "CUSIP" number for each series of Notes and, 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 correct ness or accuracy of the CUSIP number printed in the notice or
on the Notes and that reliance may be placed only on the other identification
numbers printed on the Notes. The Company shall promptly notify the Trustee of
any change in any CUSIP number used.
ARTICLE III
REDEMPTION
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SECTION 3.01 Notice to Trustee. If the Company elects to
redeem Notes pursuant to paragraph five of the Notes, it shall notify the
Trustee in writing of the Redemption Date and the principal amount of Notes to
be redeemed. The Company shall give each such notice to the Trustee at least 60
calendar days prior to the Redemption Date unless the Trustee consents to a
shorter period. Such notice shall be accompanied by an Officers' Certificate and
an Opinion of Counsel from the Company to the effect that such redemption will
comply with any conditions to such redemption set forth herein and in the Notes.
SECTION 3.02 Selection of Notes to be Redeemed. If less than
all the Notes are to be redeemed at any time, the Trustee shall select the Notes
to be redeemed on a pro rata basis, provided that the Trustee may select for
redemption in part only Notes in denominations larger than $1,000. In selecting
Notes to be redeemed pursuant to this Section 3.02, the Trustee shall make such
adjustments, reallocations and eliminations as it shall deem proper so that the
principal amount of each Note to be redeemed shall be $1,000 or an integral
multiple thereof, by increasing, decreasing or eliminating any amount less than
$1,000 which would be allocable to any Holder. If the Notes to be redeemed are
Certificated Notes, the Certificated Notes to be redeemed shall be selected by
the Trustee by prorating, as nearly as may be, the principal amount of
Certificated Notes to be redeemed among the Holders of Certificated Notes
registered in their respective names. The Trustee in its discretion may
determine the particular Notes (if there are more than one) registered in the
name of any Holder which are to be redeemed, in whole or in part. Provisions of
this Indenture that apply to Notes called for redemption also apply to portions
of Notes called for redemption. The Trustee shall notify the Company promptly of
the Notes or portions of Notes to be redeemed.
SECTION 3.03 Notice of Redemption. At least 30 calendar days
but not more than 60 calendar days before a Redemption Date, the Company shall
send a notice of redemption, first class mail, postage prepaid, to Holders of
Notes to be redeemed at the addresses of such Holders as they appear in the
Security Register.
The notice shall identify the Notes to be redeemed and shall state:
(a) the Redemption Date;
(b) the Redemption Price (and shall specify the portion of
such Redemption Price that constitutes the amount of accrued and unpaid interest
to be paid, if any);
(c) the name and address of the Paying Agent;
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(d) that the Notes called for redemption must be surrendered
to the Paying Agent to collect the Redemption Price;
(e) if any Global Note is being redeemed in part, the portion
of the principal amount of such Note to be redeemed and that, after the
Redemption Date, the Global Note, with a notation on Schedule A thereof
adjusting the principal amount thereof to be equal to the unredeemed portion,
will be returned to the Holder thereof;
(f) if any Certificated Note is being redeemed in part, the
portion of the principal amount of such Note to be redeemed and that, after the
Redemption Date, a new Certificated Note or Certificated Notes in principal
amount equal to the unredeemed portion will be issued;
(g) if fewer than all the outstanding Notes are to be
redeemed, the identification and principal amounts of the particular Notes to be
redeemed;
(h) that, unless the Company defaults in making the redemption
payment, interest on, or the accretion of the value of, the Notes (or portions
thereof) called for redemption shall cease and such Notes (or portions thereof)
shall cease to accrue interest or cease to accrete in value, as the case may be,
on and after the Redemption Date;
(i) the paragraph of the Notes pursuant to which the Notes are
being called for redemption; and
(j) any other information necessary to enable Holders to
comply with the notice of redemption.
At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at the Company's expense. In such event,
the Company shall provide the Trustee with the information required by this
Section 3.03 in a timely manner.
SECTION 3.04 Effect of Notice of Redemption. Once notice of
redemption is mailed, Notes called for redemption shall become due and payable
on the Redemption Date and at the Redemption Price stated in such notice. Upon
surrender to the Paying Agent, such Notes shall be paid at the Redemption Price
stated in such notice. Failure to give notice or any defect in the notice to any
Holder shall not affect the validity of the notice to any other Holder.
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SECTION 3.05 Deposit of Redemption Price. On or prior to 10:00
a.m., New York City time, on each Redemption Date, the Company shall deposit
with the Paying Agent (or, if the Company, one of its Subsidiaries or any of
their Affiliates is the Paying Agent, the Paying Agent shall segregate and hold
in trust for the benefit of the Holders) money, in federal or other immediately
available funds, sufficient to pay the Redemption Price on all Notes to be
redeemed on that date other than Notes or portions of Notes called for
redemption on such date which have been delivered by the Company to the Trustee
for cancellation.
So long as the Company complies with the preceding paragraph
and the other provisions of this Article III, interest on the Notes to be
redeemed on the applicable Redemption Date shall cease to accrue or such Notes
shall cease to accrete in value, as the case may be, from and after such date
and such Notes or portions thereof shall be deemed not to be entitled to any
benefit under this Indenture except to receive payment of the Redemption Price
on the Redemption Date. If any Note called for redemption shall not be so paid
upon surrender for redemption, then, from the Redemption Date until such
principal is paid, interest shall be paid on the unpaid principal and, to the
extent permitted by law, on any accrued but unpaid interest thereon, in each
case at the rate prescribed therefor by such Notes, or such Notes shall continue
to accrete in value, as the case may be.
SECTION 3.06 Notes Redeemed in Part. Upon surrender and
cancellation of a Certificated Note that is redeemed in part, the Company shall
issue and the Trustee shall authenticate and deliver to the surrendering Holder
(at the Company's expense) a new Certificated Note equal in principal amount to
the unredeemed portion of the Certificated Note surrendered and canceled,
provided that each such Certificated Note shall be in a principal amount of
$1,000 or an integral multiple thereof.
Upon surrender of a Global Note that is redeemed in part, the
Paying Agent shall forward such Global Note to the Trustee who shall make a
notation on Schedule A thereof to reduce the principal amount of such Global
Note to an amount equal to the unredeemed portion of such Global Note, as
provided in Section 2.05(c) hereof.
ARTICLE IV
COVENANTS
SECTION 4.01 Payment of Notes. The Company shall promptly pay
the principal of, premium, if any, and interest on, the Notes on the dates and
in the
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manner provided in the Notes and in this Indenture. Principal, premium and
interest shall be considered paid on the date due if, on such date, the Trustee
or the Paying Agent holds in accordance with this Indenture money sufficient to
pay all principal, premium and interest then due.
To the extent lawful, the Company shall pay interest on (i) if
prior to July 1, 2003 any overdue Accreted Value of (and premium, if any, on)
the Notes, or if on or after July 1, 2003 any overdue principal of (and premium,
if any, on) the Notes, at the accretion rate or interest rate, as the case may
be, borne on the Notes, plus 1% per annum, and (ii) Defaulted Interest (without
regard to any applicable grace period), at the same rate. The Company's
obligation pursuant to the previous sentence shall apply whether such overdue
amount is due at its Stated Maturity, as a result of the Company's obligations
pursuant to Section 3.05, Section 4.07 or Section 4.08 hereof, or otherwise.
SECTION 4.02 Maintenance of Office or Agency. The Company
shall maintain in the Borough of Manhattan, The City of New York, an office or
agency where Notes may be presented or surrendered for payment, where Notes may
be surrendered for registration of transfer or exchange and where notices and
demands to or upon the Company in respect of the Notes and this Indenture may be
served. The Company shall give prompt written notice to the Trustee of the
location, and any change in the location, of such office or agency. 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
Administration Office of the Trustee, and the Company hereby appoints the
Trustee its agent to receive all presentations, surrenders, notices and demands.
The Company may also from time to time designate one or more
other offices or agencies (in or outside of The City of New York) where the
Notes may be presented or surrendered for any or all of such purposes, and may
from time to time rescind such designations; provided that no such designation
or rescission shall in any manner relieve the Company of its obligation to
maintain an office or agency in The City of New York, for such purposes. The
Company shall give prompt written notice to the Trustee of any such designation
and any change in the location of any such other office or agency.
SECTION 4.03 Money for the Note Payments to be Held in Trust.
If the Company, any Subsidiary of the Company or any of their respective
Affiliates shall at any time act as Paying Agent with respect to the Notes, such
Paying Agent shall, on or before each due date of the principal of (and premium,
if any) or interest on any of the Notes, segregate and hold in trust for the
benefit of the Persons entitled thereto money
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sufficient to pay the principal (and premium, if any) or 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 Notes, it shall, prior to or on each due date of the principal of
(and premium, if any) or interest on any of the Notes, deposit with a Paying
Agent a sum sufficient to pay the principal (and premium, if any) or interest so
becoming due, such sum to be held in trust for the benefit of the Persons
entitled to such principal, premium or 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 4.04 Corporate Existence. Subject to the provisions of
Article V hereof, the Company shall do or cause to be done all things necessary
to preserve and keep in full force and effect the corporate existence, rights
(charter and statutory) and franchises of the Company and each of its Restricted
Subsidiaries; provided that the Company and any such Restricted Subsidiary shall
not be required to preserve the corporate existence of any such Restricted
Subsidiary or any such right or franchise if the Board of Directors shall
determine that the preservation thereof is no longer desirable in the conduct of
the business of the Company and that the loss thereof is not disadvantageous in
any material respect to the Holders of Notes.
SECTION 4.05 Maintenance of Property. The Company shall cause
all Property used or useful in the conduct of its business or the business of
any of its Restricted Subsidiaries to be maintained and kept in good condition,
repair and working order and supplied with all necessary equipment and shall
cause to be made all necessary repairs, renewals, replacements, betterments and
improvements thereof, all as, in the judgment of the Company, may be necessary
so that the business carried on in connection therewith may be properly and
advantageously conducted at all times; provided that nothing in this Section
4.05 shall prevent the Company from discontinuing the operation or maintenance
of any of such Property if such discontinuance is, in the judgment of the
Company, desirable in the conduct of its business or the business of any of its
Restricted Subsidiaries and not disadvantageous in any material respect to the
Holders of Notes.
SECTION 4.06 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, materials and supplies which, if unpaid,
might by law become a Lien upon the Property
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of the Company or any of its Restricted Subsidiaries; provided that the Company
shall not be required to pay or discharge or cause to be paid or discharged any
such tax, assessment, charge or claim whose amount, applicability or validity is
being contested in good faith by appropriate proceedings upon stay of execution
or the enforcement thereof and for which adequate reserves in accordance with
GAAP or other appropriate provision has been made.
SECTION 4.07 Repurchase at the Option of Holders upon a Change
of Control. (a) Upon the occurrence of a Change of Control, each Holder of Notes
shall have the right to require the Company to purchase such Holder's Notes, in
whole or in part in a principal amount that is an integral multiple of $1,000,
pursuant to the offer described in Section 4.07(b) hereof (the "Change of
Control Offer"), at a purchase price (the "Change of Control Purchase Price") in
cash equal to 101 percent of the aggregate principal amount thereof plus accrued
and unpaid interest, if any, to any Change of Control Payment Date, or, if such
Change of Control Offer is to be consummated prior to the Full Accretion Date,
101percent of the Accreted Value thereof to any Change of Control Payment Date.
(b) Within 30 calendar days of the date of any Change of
Control, the Company, or the Trustee at the request and expense of the Company,
shall send to each Holder by first class mail, postage prepaid, a notice
prepared by the Company stating:
(i) that a Change of Control has occurred and a
Change of Control Offer is being made pursuant to this Section 4.07,
and that all Notes that are timely tendered will be accepted for
payment;
(ii) the Change of Control Purchase Price, and the
date Notes are to be purchased pursuant to the Change of Control Offer
(the "Change of Control Payment Date"), which date shall be a date
occurring no earlier than 30 calendar days nor later than 40 calendar
days subsequent to the date such notice is mailed;
(iii) that any Notes or portions thereof not tendered
or accepted for payment will continue to accrete in value or accrue
interest, as the case may be;
(iv) that, unless the Company defaults in the payment
of the Change of Control Purchase Price with respect thereto, all Notes
or portions thereof accepted for payment pursuant to the Change of
Control
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Offer shall cease to accrete in value or accrue interest, as the case
may be, from and after the Change of Control Payment Date;
(v) that any Holder electing to have any Notes or
portions thereof purchased pursuant to a Change of Control Offer will
be required to surrender such Notes, with the form entitled "Option of
Holder to Elect Purchase" on the reverse of such Notes completed, to
the Paying Agent at the address specified in the notice, prior to the
close of business on the third Business Day preceding the Change of
Control Payment Date;
(vi) that 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 Change of Control
Payment Date, a telegram, telex, facsimile transmission or letter,
setting forth the name of the Holder, the principal amount of Notes
delivered for purchase, and a statement that such Holder is withdrawing
such Holder's election to have such Notes or portions thereof purchased
pursuant to the Change of Control Offer;
(vii) that any Holder electing to have Notes
purchased pursuant to the Change of Control Offer must specify the
principal amount that is being tendered for purchase, which principal
amount must be $1,000 or an integral multiple thereof;
(viii) if Certificated Notes have been issued
pursuant to Section 2.06(d), that any Holder of Certificated Notes
whose Certificated Notes are being purchased only in part will be
issued new Certificated Notes equal in principal amount to the
unpurchased portion of the Certificated Note or Notes surrendered,
which unpurchased portion will be equal in principal amount to $1,000
or an integral multiple thereof;
(ix) that the Trustee will return to the Holder of a
Global Note that is being purchased in part, such Global Note with a
notation on Schedule A thereof adjusting the principal amount thereof
to be equal to the unpurchased portion of such Global Note; and
(x) any other information necessary to enable any
Holder to tender Notes and to have such Notes purchased pursuant to
this Section 4.07.
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(c) On the Change of Control Payment Date, the Company shall
(i) accept for payment any Notes or portions thereof properly tendered pursuant
to the Change of Control Offer; (ii) irrevocably deposit with the Paying Agent,
by 10:00 a.m., New York City time, on such date, in immediately available funds,
an amount equal to the Change of Control Purchase Price in respect of all Notes
or portions thereof so accepted; and (iii) deliver, or cause to be delivered, to
the Trustee the Notes so accepted together with an Officers' Certificate listing
the Notes or portions thereof tendered to the Company and accepted for payment.
The Paying Agent shall promptly send by first class mail, postage prepaid, to
each Holder of Notes or portions thereof so accepted for payment, payment in an
amount equal to the Change of Control Purchase Price for such Notes or portions
thereof. The Company shall publicly announce the results of the Change of
Control Offer on or as soon as practicable after the Change of Control Payment
Date. For purposes of this Section 4.07, the Trustee shall act as the Paying
Agent.
(d) Upon surrender and cancellation of a Certificated Note
that is purchased in part pursuant to the Change of Control Offer, the Company
shall promptly issue and the Trustee shall authenticate and deliver to the
surrendering Holder of such Certificated Note, a new Certificated Note equal in
principal amount to the unpurchased portion of such surrendered Certificated
Note; provided that each such new Certificated Note shall be in a principal
amount of $1,000 or an integral multiple thereof.
Upon surrender of a Global Note that is purchased in part pursuant to a
Change of Control Offer, the Paying Agent shall forward such Global Note to the
Trustee who shall make a notation on Schedule A thereof to reduce the principal
amount of such Global Note to an amount equal to the unpurchased portion of such
Global Note, as provided in Section 2.06(a)(ii) 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
purchase of Notes pursuant to a Change of Control Offer.
SECTION 4.08 Limitation on Asset Sales. (a) The Company shall
not, and shall not permit any of its Restricted Subsidiaries, directly or
indirectly, to, consummate any Asset Sale, unless:
(i) no Event of Default shall have occurred and be
continuing or shall occur as a consequence thereof;
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(ii) the Company or such Restricted Subsidiary, as
the case may be, receives consideration at the time of such Asset Sale
at least equal to the Fair Market Value (as evidenced by a Board
Resolution 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 and/or Telecommunications Assets; and
(iv) the Company or such Restricted Subsidiary, as
the case may be, uses the Net Cash Proceeds from such Asset Sale in the
manner set forth in Section 4.08(b) hereof.
(b) Within 270 calendar 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 (or enter a binding agreement to
reinvest, provided that such reinvestment is completed within 180
calendar days of the date of such agreement) an amount equal to the Net
Cash Proceeds, or any portion thereof, from such Asset Sale in
Telecommunications Assets; and/or (ii) apply an amount equal to such
Net Cash Proceeds, or remaining Net Cash Proceeds, to the permanent
reduction of Indebtedness of the Company (other than Indebtedness to a
Restricted Subsidiary of the Company) that is pari passu with the Notes
or to the permanent reduction of Indebtedness or Preferred Stock of any
Restricted Subsidiary of the Company (other than Indebtedness to, or
Preferred Stock owned by, the Company or another Restricted Subsidiary
of the Company); provided, however, that any Net Cash Proceeds applied
to the permanent reduction of Indebtedness represented by the 2005
Notes, the 2006 Notes, the 2007 Notes, and the Notes shall be applied
in accordance with Section 4.08(c) hereof.
Net Cash Proceeds from any Asset Sale that are not applied
pursuant to clause (i) or (ii) above within 270 calendar days of the closing of
such Asset Sale shall constitute "Excess Proceeds."
(c) If at any time the aggregate amount of Excess Proceeds
(including any Net Cash Proceeds to be applied to the permanent reduction of
Indebtedness represented by the 2005 Notes, the 2006 Notes and the 2007 Notes)
calculated as of such date
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exceeds $10 million, the Company shall, within 30 days of the date the amount of
Excess Proceeds exceeds $10 million, use such Excess Proceeds to make an offer
to purchase (an "Asset Sale Offer") on a pro rata basis, from all holders,
outstanding Notes, 2005 Notes, 2006 Notes and 2007 Notes in an aggregate
principal amount equal to the maximum principal amount that may be purchased out
of Excess Proceeds, at a purchase price (the "Asset Sale Purchase Price") in
cash equal to (a) with respect to the Notes, the 2005 Notes and 2006 Notes, 100%
of the Accreted Value thereof (as defined in the relevant indenture) and (b)
with respect to the 2007 Notes, 100% of the principal amount thereof, plus, in
each case, accrued and unpaid interest, if any, to the purchase date, in
accordance with the procedures set forth in the relevant indenture. Upon
completion of an Asset Sale Offer (including payment of the Asset Sale Purchase
Price), any surplus Excess Proceeds that were the subject of such offer shall
cease to be Excess Proceeds, and the Company may then use such amounts for
general corporate purposes.
(d) Within 30 calendar days of the date the amount of Excess
Proceeds exceeds $10,000,000, the Company, or the Trustee at the request and
expense of the Company, shall send to each Holder by first class mail, postage
prepaid, a notice prepared by the Company stating:
(i) that an Asset Sale Offer is being made pursuant
to this Section 4.08, and that all Notes that are timely tendered will
be accepted for payment, subject to proration in the event the amount
of Excess Proceeds is less than the aggregate Asset Sale Purchase Price
of all Notes, the 2005 Notes, the 2006 Notes and the 2007 Notes, timely
tendered pursuant to the Asset Sale Offer;
(ii) the Asset Sale Purchase Price, the amount of
Excess Proceeds that are available to be applied to purchase tendered
Notes, the 2005 Notes, the 2006 Notes and the 2007 Notes and the date
Notes are to be purchased pursuant to the Asset Sale Offer (the "Asset
Sale Payment Date"), which date shall be a date no earlier than 30
calendar days nor later than 40 calendar days subsequent to the date
such notice is mailed;
(iii) that any Notes or portions thereof not tendered
or accepted for payment will continue to accrete in value or accrue
interest, as the case may be;
(iv) that, unless the Company defaults in the payment
of the Asset Sale Purchase Price with respect thereto, all Notes or
portions thereof accepted for payment pursuant to the Asset Sale Offer
shall cease
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to accrete in value or accrue interest, as the case may be, from and
after the Asset Sale Payment Date;
(v) that any Holder electing to have any Notes or
portions thereof purchased pursuant to the Asset Sale Offer will be
required to surrender such Notes, with the form entitled "Option of
Holder to Elect Purchase" on the reverse of such Notes completed, to
the Paying Agent at the address specified in the notice, prior to the
close of business on the third Business Day preceding the Asset Sale
Payment Date;
(vi) that any Holder shall be entitled to withdraw
such election if the Paying Agent receives, not later than the close of
business on the second Business Day preceding the Asset Sale Payment
Date, a telegram, telex, facsimile transmission or letter, setting
forth the name of the Holder, the principal amount of Notes delivered
for purchase, and a statement that such Holder is withdrawing such
Holder's election to have such Notes or portions thereof purchased
pursuant to the Asset Sale Offer;
(vii) that any Holder electing to have Notes
purchased pursuant to the Asset Sale Offer must specify the principal
amount that is being tendered for purchase, which principal amount must
be $1,000 or an integral multiple thereof;
(viii) if Certificated Notes have been issued
pursuant to Section 2.06(d), that any Holder of Certificated Notes
whose Certificated Notes are being purchased only in part will be
issued new Certificated Notes equal in principal amount to the
unpurchased portion of the Certificated Note or Notes surrendered,
which unpurchased portion will be equal in principal amount to $1,000
or an integral multiple thereof;
(ix) that the Trustee will return to the Holder of a
Global Note that is being purchased in part, such Global Note with a
notation on Schedule A thereof adjusting the principal amount thereof
to be equal to the unpurchased portion of such Global Note; and
(x) any other information necessary to enable any
Holder to tender Notes and to have such Notes purchased pursuant to
this Section 4.08.
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(e) If the aggregate Asset Sale Purchase Price of the Notes,
2005 Notes, 2006 Notes, and 2007 Notes surrendered by Holders exceeds the amount
of Excess Proceeds as indicated in the notice required by Section 4.08(d)
hereof, the Trustee shall select the Notes, 2005 Notes, 2006 Notes, and 2007
Notes to be purchased on a pro rata basis based on the aggregate principal
amount or the Accreted Value (as defined in the relevant indenture), as the case
may be, as of the Asset Sale Payment Date with such adjustments as may be deemed
appropriate by the Trustee, so that only Notes in denominations of $1,000 or
integral multiples thereof shall be purchased.
(f) On the Asset Sale Payment Date, the Company shall (i)
accept for payment any Notes or portions thereof properly tendered and selected
for purchase pursuant to the Asset Sale Offer and Section 4.08(e) hereof; (ii)
irrevocably deposit with the Paying Agent, by 10:00 a.m., New York City time, on
such date, in immediately available funds, an amount equal to the Asset Sale
Purchase Price in respect of all Notes or portions thereof so accepted; and
(iii) deliver, or cause to be delivered, to the Trustee the Notes so accepted
together with an Officers' Certificate listing the Notes or portions thereof
tendered to the Company and accepted for payment. The Paying Agent shall
promptly send by first class mail, postage prepaid, to each Holder of Notes or
portions thereof so accepted for payment, payment in an amount equal to the
Asset Sale Purchase Price for such Notes or portions thereof. The Company shall
publicly announce the results of the Asset Sale Offer on or as soon as
practicable after the Asset Sale Payment Date. For purposes of this Section
4.08, the Trustee shall act as the Paying Agent.
(g) Upon surrender and cancellation of a Certificated Note
that is purchased in part, the Company shall promptly issue and the Trustee
shall authenticate and deliver to the surrendering Holder of such Certificated
Note a new Certificated Note equal in principal amount to the unpurchased
portion of such surrendered Certificated Note; provided that each such new
Certificated Note shall be in a principal amount of $1,000 or an integral
multiple thereof.
Upon surrender of a Global Note that is purchased in part pursuant to
an Asset Sale Offer, the Paying Agent shall forward such Global Note to the
Trustee who shall make a notation on Schedule A thereof to reduce the principal
amount of such Global Note to an amount equal to the unpurchased portion of such
Global Note, as provided in Section 2.06(a)(ii) hereof.
(h) Upon completion of an Asset Sale Offer (including payment
of the Asset Sale Purchase Price for accepted Notes), any surplus Excess
Proceeds that were the subject of such offer shall cease to be Excess Proceeds,
and the Company may then use such amounts for general corporate purposes.
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(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
purchase of Notes pursuant to an Asset Sale Offer.
SECTION 4.09 Limitation on Indebtedness.
(a) The Company shall not, and will not permit its Restricted
Subsidiaries to, directly or indirectly, incur any Indebtedness (including
Acquired Indebtedness), and the Company will not issue any Disqualified Stock or
permit any of its Restricted Subsidiaries to issue any Disqualified Stock or
Preferred Stock; provided that the Company may incur Indebtedness or issue
Disqualified Stock if, after giving effect to such issuance or incurrence on pro
forma basis, (i) the Debt to EBITDA Ratio of the Company does not exceed 5.5x in
the case of any issuance or incurrence on or before November 1, 1998, or 5.0x in
the case of any issuance or incurrence thereafter or (ii) the Debt to Capital
Ratio as of the most recent available quarterly or annual balance sheet, after
giving pro forma effect to the incurrence of such Indebtedness and any other
Indebtedness incurred since such balance sheet date and the receipt and
application of the proceeds thereof, does not exceed 2.0x; provided that in
determining the amount of Indebtedness the Company may incur in reliance upon
the alternative set forth in clause (ii), $100,000,000 shall be subtracted from
such amount.
(b) The provisions of Section 4.09(a) hereof shall not apply
to:
(i) the incurrence by the Company or any of its
Restricted Subsidiaries of Indebtedness under the Secured Credit
Facility; provided that the aggregate principal amount of Indebtedness
incurred under the Secured Credit Facility by the Company and its
Restricted Subsidiaries does not exceed $35,000,000 at any one time
outstanding;
(ii) the incurrence of the Existing Indebtedness;
(iii) the incurrence by the Company or any of its
Restricted Subsidiaries of intercompany Indebtedness between or among
the Company and any of its Restricted Subsidiaries;
(iv) the incurrence by the Company or any of its
Restricted Subsidiaries of Interest Hedging Obligations with respect to
any
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floating rate Indebtedness that is permitted to be outstanding under
this Section 4.09;
(v) the incurrence by the Company of any Exchange
Rate Obligations, provided that such Exchange Rate Obligations were
entered into in connection with transactions in the ordinary course of
business or the incurrence of Indebtedness that is permitted under this
Section 4.09;
(vi) the incurrence by the Company of Indebtedness
represented by the Existing Notes and the Notes;
(vii) the incurrence by the Company of Indebtedness
in connection with one or more standby letters of credit issued in the
ordinary cause of business;
(viii) the incurrence by the Company of Indebtedness
in respect of performance, surety or appeal bonds provided by the
Company in the ordinary course of business;
(ix) Purchase Money Debt, provided that the amount of
such Purchase Money Debt does not exceed the cost of the construction,
acquisition or improvement of the applicable Telecommunications Assets;
provided, however that the Company may not incur, as of any date of
determination, Purchase Money Debt in excess of 50% of the amount of
accreted unsecured Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis as at such date (the "Purchase
Money Debt Allowance"); provided further, however that in calculating
such Purchase Money Debt Allowance, incurrences of Purchase Money Debt
consisting of (A) Capital Lease Obligations resulting from the
conversion of operating leases in an amount not to exceed $36,000,000
and (B) Indebtedness incurred pursuant to Section 4.09(b)(i) shall not
be included;
(x) the incurrence by the Company or any of its
Restricted Subsidiaries of Refinancing Indebtedness issued in exchange
for, or the proceeds of which are used to refinance, repurchase,
replace, refund or defease ("Refinance") Indebtedness permitted
pursuant to clauses (ii) or (vi) of this Section 4.09(b); provided that
(1) the amount of such Refinancing Indebtedness shall not exceed the
principal amount of, premium, if any, and accrued interest on the
Indebtedness so Refinanced (or if such
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Indebtedness was issued with original issue discount, the original
issue price plus amortization of the original issue discount at the
time of the repayment of such Indebtedness) plus the fees, expenses and
costs of such Refinancing and reasonable prepayment premiums, if any,
in connection therewith; (2) such Refinancing Indebtedness shall have a
Stated Maturity no earlier than the Stated Maturity of the Indebtedness
being Refinanced; (3) such Refinancing Indebtedness shall have an
Average Life equal to or greater than the Average Life of the
Indebtedness being Refinanced; (4) if the Indebtedness being Refinanced
is subordinated in right of payment to the Notes, such Refinancing
Indebtedness shall be subordinate in right of payment to the Notes on
terms at least as favorable to the holders of Notes as those contained
in the documentation governing the Indebtedness being so Refinanced;
and (5) no Restricted Subsidiary shall incur Refinancing Indebtedness
to Refinance Indebtedness of the Company or another Subsidiary;
(xi) The incurrence by the Company or any of its
Restricted Subsidiaries of Indebtedness of any Person which incurrence
resulted directly from an Investment described in clause (ix) of the
definition of "Permitted Investments" in Section 1.01 hereof; provided
that, (x) immediately after giving effect to such Investment on a pro
forma basis (and treating any Indebtedness which becomes, or is
anticipated to be come, an obligation of the Company or any Restricted
Subsidiary as a result of such Investment as having been incurred by
the Company or such Restricted Subsidiary at the time of such
Investment), the Company would (A) be permitted to incur $1.00 of
additional Indebtedness under Section 4.09(a) hereof or (B) have a Debt
to EBITDA Ratio which is equal to or not worse than the Debt to EBITDA
Ratio of the Company immediately prior to such Investment or (y) such
incurrence is otherwise permitted; provided, further that Indebtedness
incurred by the Company and its Restricted Subsidiaries under this
clause (xi) as a result of any such Investment does not exceed 50
percent of the Fair Market Value of the Qualified Stock used as
consideration in such Investment; provided, further that the aggregate
principal amount of Indebtedness incurred under this clause (xi) does
not exceed $50,000,000;
(xii) the incurrence by the Company of Permitted
Subordinated Financing; and;
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(xiii) Indebtedness not otherwise permitted to be
incurred pursuant to this Section 4.09 in an aggregate amount not to
exceed $10,000,000.
SECTION 4.10 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 Notes, unless (i) such
Restricted Subsidiary simultaneously executes and delivers a supplemental
indenture to this Indenture providing for a Guarantee (a "Subsidiary
Guarantee") of payment of the Notes by such Restricted Subsidiary and (ii) such
Restricted Subsidiary waives and will not in any manner whatsoever claim or take
the benefit or advantage of, any rights of reimbursement, indemnity or
subrogation or any other rights against the Company or any other Restricted
Subsidiary of the Company as a result of any payment by such Restricted
Subsidiary under its Subsidiary Guarantee. If the Guaranteed Indebtedness is (i)
pari passu with the Notes then the Guarantee of such Guaranteed Indebtedness
shall be pari passu with, or subordinated to, the Subsidiary Guarantee or (ii)
subordinated to the Notes, then the Guarantee of such Guaranteed Indebtedness
shall be subordinated to the Subsidiary Guarantee at least to the extent that
the Guaranteed Indebtedness is subordinated to the Notes.
(b) Notwithstanding the foregoing, any Subsidiary 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 Subsidiary
Guarantee, except a discharge or release by, or as a result of, payment under
such Guarantee.
SECTION 4.11 Limitation on Liens. The Company shall not, and
shall not permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into, create, incur, assume or suffer to exist any Liens of any kind,
other than Permitted Liens, on or with respect to any of its Property or assets
now owned or hereafter acquired, or any interest therein or any income or
profits therefrom, without effectively providing that the Notes shall be secured
equally and ratably with or prior to (and provided the Notes shall be secured
prior to any secured obligation that is subordinated in right of payment to the
Notes) the obligations so secured for so long as such obligations are so
secured.
SECTION 4.12 Limitation on Sale and Leaseback Transactions.
The Company shall not, and shall not permit any of its Restricted Subsidiaries
to, directly or indirectly, enter into, assume, Guarantee or otherwise become
liable with respect to, any Sale and Leaseback Transaction, unless (i) the
Company or such Restricted Subsidiary, as the case may be, receives
consideration at the time of such Sale and
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Leaseback Transaction at least equal to the Fair Market Value (as evidenced by
a Board Resolution delivered to the Trustee) of the Property or assets subject
to such transaction; (ii) the Attributable Indebtedness of the Company or such
Restricted Subsidiary with respect thereto is included as Indebtedness and would
be permitted to be incurred under Section 4.09 hereof; (iii) the Company or such
Restricted Subsidiary would be permitted to create a Lien on such Property or
assets without securing the Notes under Section 4.11 hereof; and (iv) the Net
Cash Proceeds from such transaction are applied in accordance with Section 4.08
hereof as if such proceeds resulted from an Asset Sale.
SECTION 4.13 Restricted Payments. (a) The Company shall not,
and shall not permit any of its Restricted Subsidiaries to, directly or
indirectly, make any Restricted Payment unless, at the time thereof and after
giving effect thereto (the amount of any such payment to be made if other than
in cash to be determined by the Board of Directors and evidenced by a Board
Resolution):
(i) no Default or Event of Default shall have
occurred and be continuing or shall occur as a consequence thereof;
(ii) after giving effect, on a pro forma basis, to
such Restricted Payment and the incurrence of any Indebtedness the net
proceeds of which are used to finance such Restricted Payment, the
Company could incur at least $1.00 of additional Indebtedness pursuant
to Section 4.09(a) hereof; and
(iii) after giving effect to such Restricted Payment
on a pro forma basis, the aggregate amount expended or declared for all
Restricted Payments after the Issue Date does not exceed the sum of
(without duplication) (A) 50 percent of the Consolidated Net Income of
the Company (or, if Consolidated Net Income shall be a deficit, minus
100 percent of such deficit) for the period (taken as one accounting
period) beginning on the last day of the fiscal quarter immediately
preceding the Issue Date and ending on the last day of the fiscal
quarter immediately preceding the date of such Restricted Payment, plus
(B) 100 percent of the aggregate Net Cash Proceeds received by the
Company subsequent to March 31, 1998 from the issuance or sale (other
than to a Restricted Subsidiary) of shares of its Qualified Stock,
including Qualified Stock issued upon the exercise of options, warrants
or rights to purchase Qualified Stock, plus (C) 100 percent of the
amount of any Indebtedness of the Company or any of its Restricted
Subsidiaries (as expressed on the face of a balance sheet in accordance
with GAAP), or the carrying value of any Disqualified Stock,
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which has been converted into, exchanged for or satisfied by the
issuance of shares of Qualified Stock of the Company subsequent to the
Issue Date, less the amount of any cash, or the value of any other
Property distributed by the Company or its Restricted Subsidiaries upon
such conversion, exchange or satisfaction, plus (D) 100 percent of the
net reduction in Investments, subsequent to the Issue Date, in any
Person, resulting from payments of interest on Indebtedness, dividends,
repayments of loans or advances, or other transfers of Property or
assets (but only to the extent such interest, dividends, repayments or
other transfers of Property or assets are not included in the
calculation of Consolidated Net Income), in each case to the Company or
any Restricted Subsidiary of the Company from any Person (including
without limitation, from Unrestricted Subsidiaries) or from
redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries
of the Company (valued in each case as provided in the definition of
"Investments"), not to exceed in the case of any Person the amount of
Investments previously made by the Company or any Restricted Subsidiary
in such Person and which was treated as a Restricted Payment, minus (E)
100% of the amount of Investments made pursuant to Section 4.13(b)(vii)
hereof subsequent to the Issue Date.
(b) The provisions of Section 4.13(a) hereof shall not prevent
the Company from:
(i) paying a dividend on its Capital Stock at any
time within 60 calendar days after the declaration thereof if, on the
date of declaration thereof, the Company could have paid such dividend
in compliance with this Section 4.13 and the other provisions of this
Indenture;
(ii) retiring, purchasing, redeeming or otherwise
acquiring for value, (A) any Capital Stock of the Company or any
Restricted Subsidiary of the Company, or (B) Indebtedness of the
Company that is subordinated in right of payment to the Notes or (C)
Indebtedness of a Restricted Subsidiary of the Company, solely in
exchange for, or out of the proceeds of the substantially concurrent
sale of Qualified Stock of the Company;
(iii) retiring, purchasing, redeeming or otherwise
acquiring for value, any Indebtedness of the Company subordinated in
right of payment to the Notes in exchange for, or out of the proceeds
of, the substantially concurrent incurrence of Indebtedness of the
Company (other
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than Indebtedness to a Subsidiary of the Company), provided that such
new Indebtedness (A) is subordinated in right of payment to the Notes
at least to the same extent as, (B) has an Average Life at least as
long as, and (C) has no scheduled principal payments due in any amount
earlier than, any equivalent amount of principal under the Indebtedness
so retired;
(iv) retiring, purchasing, redeeming or otherwise
acquiring for value, any Indebtedness of a Restricted Subsidiary of
the Company in exchange for, or out of the proceeds of, the
substantially concurrent incurrence of Indebtedness of the Company or
any Restricted Subsidiary of the Company that is permitted under
Section 4.09 hereof and that (A) is not secured by any assets of the
Company or any Restricted Subsidiary of the Company to a greater extent
than the retired, purchased, redeemed or acquired Indebtedness was so
secured, (B) has an Average Life at least as long as the retired,
purchased, redeemed or acquired Indebtedness and (C) is subordinated in
right of payment to the Notes at least to the same extent as the
retired, purchased, redeemed or acquired Indebtedness;
(v) retiring, purchasing, redeeming or otherwise
acquiring for value, any Capital Stock of the Company or any
Restricted Subsidiary of the Company held by any member of the
Company's (or any of its Subsidiaries') management pursuant to any
management equity subscription agreement or stock option plan in
effect on the Issue Date or upon the death or termination of such
member, provided that the aggregate price paid subsequent to the Issue
Date for all such retired, purchased, redeemed or acquired Capital
Stock shall not exceed, in the aggregate, the sum of $2,000,000 plus
the aggregate Net Cash Proceeds received by the Company subsequent to
the Issue Date from any reissuance of such Capital Stock by the Company
to members of management of the Company or its Subsidiaries;
(vi) making loans to members of management of the
Company as required pursuant to employment agreements with such
members, provided that the aggregate amount of all such loans (whether
such loans are outstanding or have been repaid) shall not exceed
$2,200,000;
(vii) making Investments in an aggregate amount not
to exceed $20,000,000 in joint ventures or other risk sharing
arrangements (which may include partnerships, limited liability
companies, corporations
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or other arrangements) (each a "Joint Venture Entity") the purpose of
which is to engage in the same or complementary lines of business as
the Company or a Restricted Subsidiary or in businesses consistent with
the fundamental nature of the operating business of the Company or a
Restricted Subsidiary; provided the management and operations of any
such Joint Venture Entity are controlled by the Company pursuant to (i)
the charter documents of such Joint Venture Entity, or (ii) an
agreement between or among the holders of the Voting Stock of such
Joint Venture Entity, or (iii) a management agreement of a minimum
duration of three or more years between the Company and such Joint
Venture Entity;
(viii) permitting a Restricted Subsidiary which
became a Restricted Subsidiary as a result of an Investment by the
Company or a Restricted Subsidiary described in clause (vii) of this
Section 4.13(b) to declare or pay any dividend or distribution on any
Capital Stock of such Subsidiary to all holders of Capital Stock of
such Subsidiary on a pro rata basis; and
(ix) permitting a Restricted Subsidiary to pay a
dividend with respect to any shares of Capital Stock of such Subsidiary
held by a Lender, which shares of Capital Stock were acquired by such
Lender in connection with the Secured Credit Facility.
(c) Not later than the date of making any Restricted Payment
(including any Restricted Payment permitted to be made pursuant to Section
4.13(b) hereof), the Company shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the required calculations were computed, which calculations
may be based upon the Company's latest available financial statements.
SECTION 4.14 Limitation on Dividends and Other Payment
Restrictions Affecting Subsidiaries. The Company shall not, and shall not permit
any of its Restricted Subsidiaries to, directly or indirectly, cause or suffer
to exist or become effective, or enter into, any encumbrance or restriction
(other than pursuant to law or regulation) on the ability of any of its
Restricted Subsidiaries (i) to pay dividends or make any other distributions in
respect of its Capital Stock or pay any Indebtedness or other obligation owed to
the Company or any Restricted Subsidiary of the Company; (ii) to make loans or
advances to the Company or any Restricted Subsidiary of the Company; or (iii) to
transfer any of its Property or assets to the Company or any Restricted
Subsidiary of the Company, except:
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(a) any encumbrance or restriction pursuant to an agreement
relating to the Secured Credit Facility or the Existing Indebtedness as of the
Issue Date;
(b) any encumbrance or restriction pursuant to an agreement
relating to an acquisition of assets or Property, so long as the encumbrances or
restrictions in any such agreement relate solely to the assets or Property so
acquired;
(c) any encumbrance or restriction relating to any
Indebtedness of any Restricted Subsidiary of the Company existing on the date on
which such Restricted Subsidiary is acquired by the Company or any Restricted
Subsidiary of the Company (other than Indebtedness incurred by such Restricted
Subsidiary in connection with or in anticipation of its acquisition), provided
that the EBITDA of such Restricted Subsidiary is not taken into account in
determining whether such acquisition is permitted hereunder;
(d) any encumbrance or restriction pursuant to an agreement
effecting a permitted Refinancing of Indebtedness issued pursuant to an
agreement referred to in the foregoing clauses (a) through (c) of this Section
4.14; provided that the encumbrances and restrictions contained in any such
Refinancing agreement are not materially more restrictive than the encumbrances
and restrictions contained in such original agreement;
(e) customary provisions restricting subletting or assignment
of any lease governing a leasehold interest of the Company or any Restricted
Subsidiary of the Company or customary provisions in supply, license or other
agreements entered into in the ordinary course of business that restrict the
assignment of any such agreement or any rights thereunder;
(f) any temporary encumbrance or restriction with respect to a
Restricted Subsidiary of the Company pursuant to an agreement that has been
entered into for the sale or disposition of all or substantially all of the
Capital Stock of, or Property and assets of, such Restricted Subsidiary; and
(g) any restriction on the sale or other disposition of
Property or assets securing Indebtedness as a result of a Permitted Lien on such
Property or assets permitted pursuant to Section 4.11 hereof.
SECTION 4.15 Limitation on Issuance and Sale of Capital Stock
of Restricted Subsidiaries. The Company (i) shall not permit any of its
Restricted Subsidiaries to issue any Capital Stock other than to the Company or
a Restricted Subsidiary of the Company and (ii) shall not permit any Person
other than the Company or a Restricted
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Subsidiary of the Company to own any Capital Stock of any of its Restricted
Subsidiaries (other than directors' qualifying shares), except for:
(a) a sale of 100 percent of the Capital Stock of a Restricted
Subsidiary sold in a transaction permitted under Section 4.08 hereof;
(b) Capital Stock of a Restricted Subsidiary issued and
outstanding on the Issue Date and held by Persons other than the Company or any
Restricted Subsidiary;
(c) Capital Stock of a Restricted Subsidiary issued and
outstanding prior to the time that such Person becomes a Restricted Subsidiary
so long as such Capital Stock was not issued in contemplation of such Person's
becoming a Restricted Subsidiary or otherwise being acquired by the Company;
(d) any Disqualified Stock permitted to be issued under
Section 4.09 hereof;
(e) Capital Stock of a Subsidiary issued to a Lender or
Lenders under the Secured Credit Facility in an aggregate amount not to exceed
7.25 percent of the outstanding Capital Stock of such Subsidiary; and
(f) Capital Stock of a Person which became or will become a
Restricted Subsidiary as a result of an Investment by the Company or a
Restricted Subsidiary described in clause (vii) of Section 4.13(b) hereof,
provided that (A) the Company or such Restricted Subsidiary, as the case may be,
receives net consideration at the time of such issuance at least equal to the
Fair Market Value (as evidenced by a Board Resolution delivered to the Trustee)
of the Capital Stock issued, (B) any consideration received by the Company or
such Restricted Subsidiary in respect of such issuance consist of Cash Proceeds
and/or Telecommunications Assets, (C) the Company or such Restricted Subsidiary,
as the case may be, within 270 calendar days of such issuance, uses the Net Cash
Proceeds from such issuance to (1) reinvest (or enters a binding agreement to
reinvest, provided that such reinvestment is completed within 180 calendar days
of the date of such agreement) an amount equal to the Net Cash Proceeds (or any
portion thereof) from such issuance in Telecommunications Assets and/or (2)
apply an amount equal to such Net Cash Proceeds (or remaining Net Cash Proceeds)
from such issuance to repurchase or redeem Notes or to permanently reduce
Indebtedness of the Company (other than Indebtedness to a Restricted Subsidiary)
that is pari passu with the Notes or to permanently reduce Indebtedness or
Preferred Stock of any Restricted Subsidiary (other than Indebtedness to, or
Preferred Stock owned by, the Company or another Restricted Subsidiary) and (D)
after giving effect to such issuance, the total amount of consideration
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that will have been received as a result of all issuances of Capital Stock of
Restricted Subsidiaries made pursuant to this clause (f) is less than the
greater of (x) $5,000,000 and (y) 5 percent of the Consolidated Tangible Assets
of the Company determined as of the date of such issuance; provided that any
issuance or sale specified in clause (c), (d), (e) or (f) of this Section 4.15
shall not cause such Restricted Subsidiary to fail to qualify as a Restricted
Subsidiary under the terms of this Indenture.
SECTION 4.16 Transactions with Affiliates. The Company shall
not, and shall not permit any of its Restricted Subsidiaries to, directly or
indirectly, sell, lease, transfer, or otherwise dispose of, any of its
Properties or assets to, or purchase any Property or assets from, or enter into
any contract, agreement, transaction, understanding, loan, advance or Guarantee
with, or for the benefit of, any Affiliate of the Company or any such Restricted
Subsidiary (each of the foregoing, an "Affiliate Transaction"), unless (a) such
Affiliate Transaction is on terms that are no less favorable to the Company or
such Restricted Subsidiary than those that would have been obtained in a
comparable arm's length transaction by the Company or such Restricted Subsidiary
with a Person that is not an Affiliate and (b) the Company delivers to the
Trustee (i) with respect to any Affiliate Transaction involving aggregate
payments in excess of $1,000,000, a Board Resolution certifying that such
Affiliate Transaction complies with clause (a) above and that such Affiliate
Transaction has been approved by a majority of the Independent Directors on the
Board of Directors, who have determined that such Affiliate Transaction is in
the best interests of the Company or such Restricted Subsidiary and (ii) with
respect to any Affiliate Transaction (other than Permitted Subordinated
Financing) involving aggregate payments in excess of $5,000,000, an opinion as
to the fairness from a financial point of view to the Company or such Restricted
Subsidiary issued by an investment banking firm of national standing together
with an Officers' Certificate to the effect that such opinion complies with this
clause (ii); provided that the following shall not be deemed Affiliate
Transactions:
(i) any employment agreement entered into by the
Company or any of its Restricted Subsidiaries in the ordinary course of
business and consistent with industry practice for services rendered by
a Person in such Person's capacity as an officer or employee of the
Company or such Restricted Subsidiary;
(ii) any agreement or arrangement with respect to the
compensation of a director of the Company or any Restricted Subsidiary
of the Company for services rendered by a Person in such Person's
capacity as a director approved by the Board of Directors and
consistent with industry practice;
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(iii) transactions between or among the Company and
its Restricted Subsidiaries;
(iv) the making of any payment permitted to be made
under Section 4.13 hereof;
(v) transactions pursuant to contracts existing on
the Issue Date and listed in Schedule D hereto; and
(vi) loans and advances to employees and officers of
the Company or a Restricted Subsidiary of the Company in the ordinary
course of business and consistent with the past practice of the Company
or such Restricted Subsidiary, provided that the aggregate principal
amount of all such loans and advances shall not exceed $3,000,000 at
any one time outstanding, and provided, further, that in the event the
aggregate principal amount of all such loans or advances exceeds
$1,000,000 at any one time outstanding, the Company shall, within 180
calendar days of the date such amount first exceeds $1,000,000, reduce
such amount to an amount less than $1,000,000.
SECTION 4.17 Restricted and Unrestricted Subsidiaries. (a) The
Company may designate a Subsidiary (including a newly formed or newly acquired
Subsidiary) of the Company or any of its Restricted Subsidiaries as an
Unrestricted Subsidiary if such Subsidiary does not have any obligations which,
if in Default, would result in a cross default on Indebtedness of the Company or
a Restricted Subsidiary (other than Indebtedness to the Company or a Restricted
Subsidiary), and (i) such Subsidiary has total assets of $1,000 or less or (ii)
such designation is effective immediately upon such Person becoming a
Subsidiary. Unless so designated as an Unrestricted Subsidiary, any Person that
becomes a Subsidiary of the Company or any of its Restricted Subsidiaries shall
be classified as a Restricted Subsidiary of the Company. Except as provided in
clause (a)(i) hereof, no Restricted Subsidiary may be redesignated as an
Unrestricted Subsidiary.
(b) The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, take any action or enter into any transaction or
series of transactions that would result in a Person (other than a newly formed
Subsidiary having no outstanding Indebtedness (other than Indebtedness to the
Company or a Restricted Subsidiary) at the date of determination) becoming a
Restricted Subsidiary of the Company (whether through an acquisition, the
redesignation of an Unrestricted Subsidiary or otherwise) unless, after giving
effect to such action, transaction or series of transactions, on a pro forma
basis, (i) the Company could incur at least $1.00 of additional Indebtedness
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pursuant to Section 4.09(a) hereof and (ii) no Default or Event of Default would
occur or be continuing; provided, however, that the foregoing restriction shall
not apply to a Person which becomes a Restricted Subsidiary as a result of (a)
an Investment described in clause (ix) of the definition of "Permitted
Investments" in Section 1.01 hereof or (b) an Investment described in clause
(vii) of Section 4.13(b) hereof. Subject to this Section 4.17(b), an
Unrestricted Subsidiary may be redesignated as a Restricted Subsidiary.
(c) The designation of a Subsidiary of the Company as an
Unrestricted Subsidiary or the designation of an Unrestricted Subsidiary of the
Company as a Restricted Subsidiary shall be made by the Board of Directors as
evidenced by a Board Resolution delivered to the Trustee and shall be effective
as of the date specified in such Board Resolution, which shall not be prior to
the date such Board Resolution is delivered to the Trustee.
SECTION 4.18 Reports. Whether or not the Company is subject to
Section 13(a) or Section 15(d) of the Exchange Act, or any successor provision
thereto, the Company shall file with the Commission the annual reports,
quarterly reports and other documents which the Company would have been required
to file with the Commission pursuant to Section 13(a) or Section 15(d) of the
Exchange Act or any successor provision thereto if the Company were subject
thereto, such documents to be filed with the Commission on or prior to the
respective dates (the "Required Filing Dates") by which the Company would have
been required to file them. The Company shall also (whether or not it is
required to file reports with the Commission), within 30 calendar days of each
Required Filing Date, (i) transmit by mail to all holders of Notes, as their
names and addresses appear in the Security Register and to any Persons that
request such reports in writing, without cost to such holders or Persons and
(ii) file with the Trustee, copies of the annual reports, quarterly reports and
other documents (without exhibits) which the Company has filed or would have
filed with the Commission pursuant to Section 13(a) or Section 15(d) of the
Exchange Act, any successor provisions thereto or this Section 4.18. The Company
shall not be required to file any report with the Commission if the Commission
does not permit such filing. In addition to the foregoing, the Company will file
with the Commission and will thereafter transmit by mail to the Holders and file
with the Trustee within the same time periods as set forth in the second next
preceding sentence, unaudited information, on an aggregate Fiber Network basis
(before headquarter allocations) segmented by the calendar year in which each
such Fiber Network became operational, setting forth the investment in plant,
property and equipment to date, revenue, EBITDA, EBIT, access lines, fiber
miles, route miles, buildings connected and voice grade equivalents; provided,
however, that the Company will provide such unaudited information with respect
to (i) all Fiber Networks that were initially operational at any time prior to
December 31, 1995 (all such Fiber Networks
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shall be deemed to have become operational in calendar year 1995) and (ii) all
Fiber Networks that were initially operational in each succeeding calendar year
(including all or any portion of the then current year); and provided, further,
that the Company need no longer comply with the information requirements of this
sentence after four consecutive fiscal quarters for which the ratio of EBITDA of
the Company to Consolidated Interest Expense (other than dividends or
distributions with respect to Preferred Stock or Disqualified Stock of the
Company) of the Company is greater than 1.0 or after the occurrence of a Change
of Control.
SECTION 4.19 Compliance Certificate; Notice of Default or
Event of Default. 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 stating whether or not, to the best knowledge
of such officer, 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.
For the purposes of this Section 4.19, compliance shall be
determined without regard to any period of grace or requirement of notice under
this Indenture.
The Company shall deliver written notice to the Trustee within
30 calendar days after any executive officer of the Company becomes aware of the
occurrence of any event which constitutes, or with the giving of notice or the
lapse of time or both would constitute, a Default or Event of Default,
describing such Default or Event of Default, its status and what action the
Company is taking or proposes to take with respect thereto.
SECTION 4.20 Limitation on Construction of Fiber Networks. The
Company may construct Fiber Networks in no more than 45 Metropolitan Areas until
the earlier of such time as (i) the ratio of EBITDA of the Company to
Consolidated Interest Expense (other than dividends or distributions with
respect to Preferred Stock or Disqualified Stock of the Company) of the Company
is greater than 1.0 for four consecutive fiscal quarters and (ii) the occurrence
of a Change of Control.
ARTICLE V
CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER
SECTION 5.01 Merger, Consolidation or Sale of Assets. The
Company shall not in any transaction or series of related transactions,
consolidate with, or
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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 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 related transactions on a pro forma basis (including, without
limitation, any Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction or series of transactions),
the Company (or the Surviving Entity, if the Company is not continuing) would
(A) be permitted to incur $1.00 of additional Indebtedness under Section 4.09(a)
hereof or (B) have a Total Market Capitalization of at least $1,000,000,0 00 and
total Indebtedness in an amount less than 40 percent of its Total Market
Capitalization.
In connection with any consolidation, merger, conveyance,
lease or other disposition contemplated by this Section 5.01, the Company shall
deliver, or cause to be delivered, to the Trustee, in form reasonably
satisfactory to the Trustee, an Officers' Certificate and an Opinion of Counsel,
each stating that such consolidation, merger, conveyance, lease or disposition
and any supplemental indenture in respect thereto
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comply with this Article V and that all conditions precedent herein provided for
relating to such transaction have been complied with.
SECTION 5.02 Successor Corporation Substituted. Upon any
consolidation with, or merger by the Company with or into, any other
corporation, or any sale, assignment, transfer, lease, conveyance or other
disposition of all or substantially all of the Property and assets of the
Company and its Restricted Subsidiaries taken as a whole in accordance with
Section 5.01 hereof, the successor corporation formed by such consolidation or
into which the Company is merged, or the Person to which such sale, conveyance,
assignment, transfer, lease, conveyance or other disposition is made, shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under this Indenture with the same effect as if such successor
Person has been named as the Company herein; and thereafter the predecessor
corporation shall be relieved of all obligations and covenants under this
Indenture and the Notes, except for the obligation to pay the principal of (and
premium, if any) and interest on the Notes.
ARTICLE VI
DEFAULTS AND REMEDIES
SECTION 6.01 Events of Default. "Event of Default," wherever
used herein with respect to the Notes, means any one of the following events
(whatever the reason for such event, and whether it shall be voluntary or
involuntary, or be effected by operation of law, pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(a) default in the payment of interest on any Note when the
same becomes due and payable, and the continuance of such Default for a period
of 30 calendar days; or
(b) default in the payment of the principal of (or premium, if
any, on) any Note when the same becomes due and payable whether upon Maturity,
optional redemption, required repurchase (including pursuant to a Change of
Control Offer or an Asset Sale Offer) or otherwise, or the failure to make an
offer to purchase any Note as herein required; or
(c) default in the performance, or breach, of any covenant or
agreement contained in Section 4.07, Section 4.08, Section 4.09, Section 4.12,
Section 4.13 or Article V hereof; or
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(d) default in the performance, or breach, of any covenant or
warranty of the Company contained in this Indenture or the Notes (other than a
covenant or warranty addressed in Section 6.01(a), Section 6.01(b) or Section
6.01(c) hereof), and the continuance of such Default or breach for a period of
30 calendar 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 of the outstanding Notes specifying
such Default and stating that such notice is a "Notice of Default" delivered in
connection with this Indenture; or
(e) a default or defaults under any bond, debenture, note or
other evidence of Indebtedness by the Company or any Restricted Subsidiary of
the Company (or under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any Indebtedness by
the Company or any such Restricted Subsidiary) having, individually or in the
aggregate, a principal or similar amount outstanding of at least $10,000,000,
whether such indebtedness now exists or shall hereafter be created, which
default or defaults shall have resulted in the acceleration of the maturity of
such Indebtedness prior to its express maturity or shall constitute a failure to
pay such Indebtedness when due and payable after the expiration of any
applicable grace period with respect thereto or shall have resulted in such
Indebtedness becoming or being declared due and payable; or
(f) a final judgment or final judgments for the payment of
money (other than to the extent covered by insurance as to which the insurance
company has acknowledged coverage and other than to the extent covered by an
indemnity given by an insurance company) is entered against the Company or any
Restricted Subsidiary of the Company in an aggregate amount in excess of
$10,000,000 by a court or courts of competent jurisdiction, which judgment is
not discharged, waived, stayed, bonded or satisfied for a period of 60
consecutive calendar 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 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
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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 calendar days; or
(h) (i) 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 of the Company, or the making by the
Company or any Significant Restricted Subsidiary of the Company of an assignment
for the benefit of creditors; or (v) the admission by the Company or any
Significant Restricted Subsidiary of the Company in writing of its inability to
pay its debts generally as they become due; or (vi) the taking of corporate
action by the Company or any Significant Restricted Subsidiary of the Company in
furtherance of any such action.
SECTION 6.02 Acceleration. If any Event of Default (other than
an Event of Default specified in Section 6.01(g) or Section 6.01(h) hereof)
occurs and is continuing, then and in every such case, the Trustee by a notice
in writing to the Company, or the Holders of not less than 25 percent of the
outstanding aggregate principal amount of Notes by a notice in writing to the
Company and the Trustee, may declare the Default Amount and any accrued and
unpaid interest on all Notes then outstanding to be
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immediately due and payable. Upon any such declaration, such Default Amount and
any accrued and unpaid interest on all Notes then outstanding will become and be
immediately due and payable.
If an Event of Default specified in Section 6.01(g) or Section
6.01(h) hereof occurs, the Default Amount and any accrued and unpaid interest on
all Notes then outstanding shall ipso facto become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
Holder of Notes.
In the event of a declaration of acceleration because an Event
of Default set forth in Section 6.01(e) hereof has occurred and is continuing,
such declaration of acceleration shall be automatically rescinded and annulled
if the event of default triggering such Event of Default pursuant to Section
6.01(e) hereof shall be remedied, or cured, or waived by the holders of the
relevant Indebtedness, within 60 calendar days after such event of default;
provided no judgment or decree for the payment of the money due on the Notes has
been obtained by the Trustee as hereinafter in this Article VI provided.
Until July 1, 2003, the Default Amount shall equal the
Accreted Value of the Notes as of such date. On or after July 1, 2003, the
Default Amount shall equal 100 percent of the principal amount thereof.
At any time after a declaration of acceleration with respect
to Notes has been made and before a judgment or decree for payment of the money
due has been obtained by the Trustee as hereinafter in this Article VI provided,
the Holders of a majority in principal amount of the outstanding Notes, by
written notice to the Company and the Trustee, may rescind and annul such
declaration and its consequences if,
(a) the Company has paid or deposited with the Trustee a sum
sufficient to pay:
(i) all overdue installments of interest on all
Notes,
(ii) the principal of (and premium, if any, on) any
Notes which have become due otherwise than by such declaration of
acceleration and interest thereon at the rate or rates prescribed
therefor in such Notes,
(iii) to the extent that payment of such interest is
lawful, interest on the Defaulted Interest at the rate prescribed
therefor in the Notes and this Indenture, and
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(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 7.07 hereof; and
(b) all Events of Default with respect to the Notes, other
than the non-payment of the principal of Notes which have become due solely by
such declaration of acceleration, have been cured or waived by the Holders as
provided herein.
No such rescission shall affect any subsequent Default or
impair any right consequent thereon.
SECTION 6.03 Other Remedies. The Company covenants that if an
Event of Default specified in Section 6.01(a) or Section 6.01(b) occurs the
Company shall, upon demand of the Trustee, pay to the Trustee, for the benefit
of the Holders, the whole amount then due and payable on the Notes for principal
(and premium, if any) and interest and, to the extent that payment of such
interest shall be legally enforceable, interest upon the overdue principal (and
premium, if any) and upon Defaulted Interest, at the rate or rates prescribed
therefor in such Notes; and, in addition thereto, such further amount as shall
be sufficient to cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel and all other amounts due to the Trustee pursuant to
Section 7.07 hereof.
If the Company fails to pay such amounts forthwith upon such
demand, the Trustee, in its own name and as trustee of an express trust, may
institute a judicial proceeding for the collection of the sums so due and
unpaid, and may prosecute such proceeding to judgment or final decree, and may
enforce the same against the Company or any other obligor upon such Notes and
collect the 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
Notes, wherever situated.
If an Event of Default with respect to the Notes occurs and is
continuing, the Trustee may in its discretion proceed to protect and enforce its
rights and the rights of the Holders by such appropriate judicial proceedings as
the Trustee shall deem most effectual to protect and enforce any such rights,
whether for the specific enforcement of any covenant or agreement in this
Indenture or in aid of the exercise of any power granted herein, or to enforce
any other proper remedy.
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SECTION 6.04 Waiver of Past Defaults. Subject to section 6.02,
the Holders of not less than a majority in principal amount of the outstanding
Notes may, on behalf of the Holders of all the Notes, waive any past Default and
its consequences under this Article VI, except a Default (a) in the payment of
the principal of (or premium, if any) or interest on, any Note, or (b) in
respect of a covenant or provision hereof which under Section 9.02 hereof cannot
be modified or amended without the consent of the Holders of not less than 75
percent in principal amount of the outstanding Notes, or (c) in respect of a
covenant or provision hereof which under Section 9.02 hereof cannot be modified
or amended without the consent of the Holder of each outstanding Note affected;
provided that with respect to any past Default referred to in clause (b) of this
paragraph, the Holders of not less than 75 percent in principal amount of the
outstanding Notes may waive such Default.
SECTION 6.05 Control by Majority. The Holders of not less than
a majority in principal amount of the outstanding Notes shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee; provided that
(a) such direction shall not be in conflict with any rule of
law or with this Indenture or unduly prejudicial to the rights of other Holders
and would not subject the Trustee to personal liability, and
(b) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction.
SECTION 6.06 Limitation on Suits. No Holder of Notes shall
have any right to institute any proceeding, judicial or otherwise, with respect
to this Indenture, or for the appointment of a receiver or trustee, or for any
other remedy hereunder, unless
(a) such Holder has previously given written notice to the
Trustee of a continuing Event of Default with respect to the Notes;
(b) the Holders of not less than 25 percent in principal
amount of the outstanding Notes shall have made written request to the Trustee
to institute proceedings in respect of such Event of Default in its own name as
Trustee hereunder;
(c) such Holder or Holders have offered to the Trustee
security or indemnity satisfactory to the Trustee in its reasonable discretion
against the costs, expenses and liabilities to be incurred in compliance with
such request;
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(d) the Trustee for 30 calendar 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 principal amount of the outstanding Notes;
in any event, it being understood and intended that no one or more Holders of
Notes shall have any right in any manner whatever by virtue of, or by availing
of, any provision of this Indenture to affect, disturb or prejudice the rights
of any other Holders of Notes, or to obtain or to seek to obtain priority or
preference over any other of such Holders or to enforce any right under this
Indenture, except in the manner herein provided and for the equal and ratable
benefit of all Holders of Notes.
SECTION 6.07 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 Notes
held by such Holder, on or after the respective due dates expressed in the Notes
or the redemption dates or purchase dates provided for 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 6.08 Trustee May File Proofs of Claim. In case of the
pendency of any receivership, insolvency, liquidation, bankruptcy,
reorganization, arrangement, adjustment, composition or other judicial
proceedings, or any voluntary or involuntary case under United States bankruptcy
laws, as now or hereafter constituted, relative to the Company or any other
obligor upon the Notes or the Property and assets of the Company or of such
other obligor or their creditors, the Trustee (irrespective of whether the
principal of such Notes shall then be due and payable as therein expressed or by
declaration or otherwise and irrespective of whether the Trustee shall have made
any demand on the Company for the payment of overdue principal or interest)
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 Notes, to file
such other papers or documents and to take such other actions, including
participating as a member or otherwise in any official committee of creditors
appointed in the matter, as may be necessary or advisable in order to have the
claims of the Trustee (including any claim for the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel and
all other amounts due to the Trustee pursuant to Section 7.07 hereof) and of the
Holders allowed in such judicial proceeding, and (ii) to collect and receive any
moneys or other Property
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payable or deliverable on any such claims and to distribute the same; and any
receiver, assignee, trustee, custodian, liquidator, sequestrator (or other
similar official) in any such proceeding is hereby authorized by each Holder to
make such payments to the Trustee, and in the event that the Trustee shall
consent to the making of such payments directly to the Holders, to pay to the
Trustee any amount due it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, and any other
amounts due the Trustee under Section 7.07 hereof. Nothing contained herein
shall be deemed to authorize the Trustee to authorize or consent to or accept or
adopt on behalf of any Holder any plan of reorganization, arrangement,
adjustment or composition affecting the Notes or the rights of any Holder
thereof, or to authorize the Trustee to vote in respect of the claim of any
Holder in any such proceeding.
SECTION 6.09 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) or interest, upon presentation of the
Notes and the notation thereon of the payment if only partially paid and upon
surrender thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee under Section 7.07
hereof;
SECOND: To the payment of the amounts then due and unpaid for principal
of (and premium, if any) and interest on the Notes, ratably, without
preference or priority of any kind, according to the amounts due and
payable on such Notes for principal (and premium, if any) and interest,
respectively; and
THIRD: To the Company.
The Trustee may fix a record date and payment date for any
payment to Holders pursuant to this Section 6.09. At least 15 calendar 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 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, 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
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litigant 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 of the outstanding Notes, or to any suit
instituted by any Holder for the enforcement of the payment of the principal of
(or premium, if any) or interest on any Note on or after its Stated Maturity.
SECTION 6.11 Waiver of Stay or Extension Laws. The Company (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 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; and the Company
(to the extent that it may lawfully do so) hereby expressly waives 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 Notes. All rights of action and claims under this Indenture or the Notes may
be prosecuted and enforced by the Trustee without the possession of any of the
Notes or the production thereof in any proceeding relating thereto, and any such
proceeding instituted by the Trustee shall be brought in its own name, as
trustee of an express trust, and any recovery of judgment shall, after provision
for the payment of the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel, be for the ratable benefit of
the Holders of the Notes.
SECTION 6.13 Restoration of Rights and Remedies. If the
Trustee or any Holder of Notes has instituted any proceeding to enforce any
right or remedy under this Indenture and such proceeding has been discontinued
or abandoned for any reason, or has been determined adversely to the Trustee or
to such Holder, then and in every such case the Company, the 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 2.07 hereof, no right or remedy herein conferred
upon or reserved to the Trustee or to the Holders is intended to be exclusive of
any other right or remedy, and every right and remedy shall, to the extent
permitted by law, be cumulative
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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 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 or by law to the Trustee or to
the Holders may be exercised from time to time, and as often as may be deemed
expedient, by the Trustee or by the Holders, as the case may be.
ARTICLE VII
TRUSTEE
SECTION 7.01 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 7.01; (ii) the Trustee shall not be liable for any
error of judgment made in good faith by a Trust Officer unless it is proved that
the Trustee was negligent in ascertaining the pertinent facts; and
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(iii) the Trustee shall not be liable with respect to any action it takes or
omits to take in good faith in accordance with a direction received by it
pursuant to Section 6.05 hereof.
(d) The Trustee shall not be liable for interest on any money
received by it except as the Trustee may agree in writing with the Company.
(e) Money held in trust by the Trustee need not be segregated
from other funds except to the extent required by law.
(f) No provision of this Indenture shall require the Trustee
to expend or risk its own funds or otherwise incur any financial liability in
the performance of any of its duties hereunder, or in the exercise of any of its
rights or powers, if it shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk of liability is
not reasonably assured to it.
(g) Every provision of this Indenture relating to the conduct
or affecting the liability of or affording protection to the Trustee shall be
subject to the provisions of this Article VII and to the provisions of the Trust
Indenture Act.
SECTION 7.02 Rights of Trustee. (a) The Trustee may rely on
any document believed by it to be genuine and to have been signed or presented
by the proper Person. Except as provided in Section 7.01(b) hereof, the Trustee
need not investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may
require an Officers' Certificate or an Opinion of Counsel. The Trustee shall not
be liable for any action it takes or omits to take in good faith in reliance on
any Officers' Certificate or Opinion of Counsel.
(c) The Trustee may act through agents and shall not be
responsible for the misconduct or negligence of any such agent; provided that
such agent was appointed with due care by the Trustee.
(d) The Trustee shall not be liable for any action it takes or
omits to take in good faith which it believes to be authorized or within its
rights or powers; provided that the Trustee's conduct does not constitute
willful misconduct or negligence.
(e) The Trustee shall not be charged with knowledge of any
Default or Event of Default under Sections 6.01(c), 6.01(d), 6.01(e) or 6.01(f)
hereof, of the identity of any Restricted Subsidiary or of the existence of any
Change of Control or Asset Sale
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unless either (i) a Trust Officer shall have actual knowledge thereof, or (ii)
the Trustee shall have received notice thereof in accordance with Section 10.02
hereof from the Company or any Holder of Notes.
(f) The Trustee may consult with counsel and the written
advice of such counsel or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or omitted
by it hereunder in good faith and in reliance thereon.
(g) The Trustee shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order, bond,
debenture or other paper or document, but the Trustee, in its discretion may
make such further inquiry or investigation into such facts or matters as it may
see fit, and, if the Trustee shall determine to make such further inquiry or
investigation, it shall be entitled to examine the books, records and premises
of the Company, personally or by agent or attorney.
SECTION 7.03 Individual Rights of Trustee. The Trustee, any
Paying Agent or Registrar, in its individual or any other capacity, may become
the owner or pledgee of Notes and may otherwise deal with the Company or its
Affiliates with the same rights it would have if it were not Trustee, Paying
Agent or Registrar hereunder, as the case may be; provided that the Trustee must
in any event comply with Section 7.10 and Section 7.11 hereof.
SECTION 7.04 Trustee's Disclaimer. The Trustee shall not be
responsible for and makes no representation as to the validity or adequacy of
this Indenture or the Notes, it shall not be accountable for the Company's use
of the proceeds from the Notes, and it shall not be responsible (a) for any
statement of the Company in this Indenture, including the recitals contained
herein, or in any document issued in connection with the sale of the Notes or in
the Notes other than the Trustee's certificate of authentication or (b) for
compliance by the Company with the Registration Rights Agreement.
SECTION 7.05 Notice of Defaults. Within 90 calendar days after
the occurrence of any Default hereunder with respect to the Notes, the Trustee
shall transmit by mail to all Holders, as their names and addresses appear in
the Security Register, notice of such Default hereunder known to the Trustee,
unless such Default shall have been cured or waived; provided that, except in
the case of a Default in the payment of the principal of (or premium, if any) or
interest on any Note, the Trustee shall be protected in withholding such notice
if and so long as the board of directors, the
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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 the Holders.
SECTION 7.06 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 calendar days
prior to each Interest Payment Date, a list, in such form as the
Trustee may reason ably require, of the names and addresses of the
Holders as of the Record Date request, a list of similar form and
content as of a date not more than 15 calendar days prior to the time
such list is furnished; provided, how ever, that if and so long as the
Trustee shall be the Registrar for the Notes, no such list need be
furnished with respect to the Notes.
(b) The Trustee shall preserve, in as current a form as is
reasonably practicable, the names and addresses of Holders contained in the most
recent list furnished to the Trustee as provided in Section 7.06(a) hereof and
the names and addresses of Holders received by the Trustee in its capacity as
Registrar, if so acting. The Trustee may destroy any list furnished to it as
provided in Section 7.06(a) hereof upon receipt of a new list so furnished.
(c) Holders may communicate as provided in Section 312(b) of
the Trust Indenture Act with other Holders with respect to their rights under
this Indenture or under the Notes.
(d) Each Holder of Notes, by receiving and holding the same,
agrees with the Company and the Trustee that neither the Company nor the Trustee
shall be held accountable by reason of the disclosure of any such information as
to the names and addresses of the Holders in accordance with this Section 7.06,
regardless of the source from which such information was derived, and that the
Trustee shall not be held account able by reason of mailing any material
pursuant to a request made under this Section 7.06.
(e) Within 60 calendar days after April 15 of each year
commencing with the year 1999, the Trustee shall transmit by mail to all Holders
of Notes, a brief report dated as of such April 15 if and to the extent required
under Section 313(a) of the Trust Indenture Act.
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(f) The Trustee shall comply with Sections 313(b) and 313(c)
of the Trust Indenture Act.
(g) A copy of each report described in Section 7.06(e) hereof
shall, at the time of its transmission to Holders, be filed by the Trustee with
each stock exchange, if any, upon which the Notes are then listed, with the
Commission and also with the Company. The Company shall promptly notify the
Trustee of any stock exchange upon which the Notes are listed.
SECTION 7.07 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 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, negligence or bad faith.
To secure the Company's payment obligations in this Section
7.07, the Trustee shall have a Lien prior to the Notes on all money or property
held or collected by the Trustee other than money or property held in trust to
pay principal of, premium, if any, and interest on, particular Notes.
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The Company's payment obligations pursuant to this Section
7.07 shall survive the resignation or removal of the Trustee and discharge of
this Indenture. Subject to any other rights available to the Trustee under
applicable bankruptcy law, when the Trustee incurs expenses after the occurrence
of a Default specified in Section 6.01(g) or Section 6.01(h) hereof, the
expenses are intended to constitute expenses of administration under bankruptcy
law.
SECTION 7.08 Replacement of Trustee. (a) No resignation or
removal of the Trustee and no appointment of a successor Trustee pursuant to
this Article VII shall become effective until the acceptance of appointment by
the successor Trustee under this Section 7.08.
(b) The Trustee may resign at any time by giving written
notice thereof to the Company. If an instrument of acceptance by a successor
Trustee shall not have been delivered to the Trustee within 30 calendar days
after the giving of such notice of resignation, the resigning Trustee may
petition any court of competent jurisdiction for the appointment of a successor
Trustee.
(c) The Trustee may be removed at any time by Act of the
Holders of a majority in principal amount of the outstanding 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 Note for
at least six months, unless the Trustee's duty to resign is stayed in
accordance with the provisions of Section 310(b) of the Trust Indenture
Act; or
(ii) the Trustee shall cease to be eligible under
Section 7.10 hereof and shall fail to resign after written request
therefor by the Company or by any such Holder; or
(iii) the Trustee shall become incapable of acting or
a decree or order for relief by a court having jurisdiction in the
premises shall have been entered in respect of the Trustee in an
involuntary case under the United States bankruptcy laws, as now or
hereafter constituted, or any other applicable Federal or state
bankruptcy, insolvency or similar law; or a decree or order by a court
having jurisdiction in the premises
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shall have been entered for the appointment of a receiver, custodian,
liquidator, assignee, trustee, sequestrator (or other similar official)
of the Trustee or of its Property and assets or affairs, or any public
officer shall take charge or control of the Trustee or of its Property
and assets or affairs for the purpose of rehabilitation, conservation,
winding up or liquidation; or
(iv) the Trustee shall commence a voluntary case
under the United States bankruptcy laws, as now or hereafter
constituted, or any other applicable Federal or state bankruptcy,
insolvency or similar law or shall consent to the appointment of or
taking possession by a receiver, custodian, liquidator, assignee,
trustee, sequestrator (or other similar official) of the Trustee or its
Property and assets or affairs, or shall make an assignment for the
benefit of creditors, or shall admit in writing its inability to pay
its debts generally as they become due, or shall take corporate action
in furtherance of any such action,
then, in any such case, (i) the Company by a Board Resolution may remove the
Trustee with respect to the Notes, or (ii) subject to Section 6.10 hereof, any
Holder who has been a bona fide Holder of a Note for at least six months may, on
behalf of such Holder and all others similarly situated, petition any court of
competent jurisdiction for the removal of the Trustee and the appointment of a
successor Trustee for the Notes.
(e) If the Trustee shall resign, be removed or become
incapable of acting, or if a vacancy shall occur in the office of Trustee for
any cause, the Company, by 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 principal amount of the outstanding
Notes delivered to the Company and the retiring Trustee, the successor Trustee
so appointed shall, forthwith upon its acceptance of such appointment in
accordance with this Section 7.08, become the successor Trustee and to that
extent replace any successor Trustee appointed by the Company. If no successor
Trustee shall have been so appointed by the Company or the Holders and shall
have accepted appointment in the manner hereinafter provided, any Holder that
has been a bona fide Holder of a Note for at least six months may, subject to
Section 6.10 hereof, on behalf of himself and all others similarly situated,
petition any court of competent jurisdiction for the appointment of a successor
Trustee.
(f) The Company shall give notice of each resignation and each
removal of the Trustee and each appointment of a successor Trustee by mailing
written
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notice of such resignation, removal and appointment by first class mail,
postage prepaid, to the Holders as their names and addresses appear in the
Security Register. Each notice shall include the name of the successor Trustee
with respect to the Notes and the address of its Corporate Trust Administration
Office.
(g) In the event of an appointment hereunder of a successor
Trustee, each such successor Trustee so appointed shall execute, acknowledge and
deliver to the Company and to the retiring Trustee an instrument accepting such
appointment, and thereupon the resignation or removal of the retiring Trustee
shall become effective and such successor Trustee, without any further act, deed
or conveyance, shall become vested with all the rights, powers, trusts and
duties of the retiring Trustee but, on request of the Company or the successor
Trustee, such retiring Trustee shall, upon payment of its charges, execute and
deliver an instrument transferring to such successor Trustee all the rights,
powers and trusts of the retiring Trustee, and shall duly assign, transfer and
deliver to such successor Trustee all Property and money held by such former
Trustee hereunder, subject to its Lien, if any, provided for in Section 7.07
hereof.
(h) Upon request of any such successor Trustee, the Company
shall execute any and all instruments for more fully and certainly vesting in
and confirming to such successor Trustee all such rights, powers and trusts
referred to in Section 7.08(g) hereof.
(i) No successor Trustee shall accept its appointment unless
at the time of such acceptance such successor Trustee shall be qualified and
eligible under this Article VII and under the Trust Indenture Act.
SECTION 7.09 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 Notes
shall have been authenticated, but not delivered, by the Trustee then in office,
any successor by merger, conversion or consolidation to such authenticating
Trustee may adopt such authentication and deliver the Notes so authenticated
with the same effect as if such successor Trustee had itself authenticated such
Notes. In the event that any Notes shall not have been authenticated by such
predecessor Trustee, any such successor Trustee may authenticate and deliver
such Notes, in either its own name or that of its predecessor Trustee, with the
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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
(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 $50,000,000.
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. Neither the Company nor any Affiliate of the Company shall serve as
Trustee hereunder. 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.
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.
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.
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ARTICLE VIII
DEFEASANCE
SECTION 8.01 Company's Option to Effect Legal Defeasance or
Covenant Defeasance. The Company may elect, at its option, at any time, to have
Section 8.02 or Section 8.03 hereof applied to the outstanding Notes (in whole
and not in part) upon compliance with the conditions set forth below in this
Article VIII, such election shall be evidenced by a Board Resolution delivered
to the Trustee.
SECTION 8.02 Legal Defeasance and Discharge. Upon the
Company's exercise of its option to have this Section 8.02 applied to the
outstanding Notes (in whole and not in part), the Company shall be deemed to
have been discharged from its obligations with respect to such Notes as
provided in this Section 8.02 on and after the date the conditions set forth in
Section 8.04 hereof are satisfied (hereinafter called "Defeasance"). For this
purpose, such Defeasance means that the Company shall be deemed to have paid and
discharged the entire indebtedness represented by such Notes and to have
satisfied all its other obligations under such Notes and this Indenture insofar
as such Notes are concerned (and the Trustee, at the expense of the Company,
shall execute proper instruments acknowledging the same), subject to the
following which shall survive until otherwise terminated or discharged
hereunder:
(a) the rights of Holders of such Notes to receive, solely
from the trust fund described in Section 8.04 hereof and as more fully set forth
in such Section 8.04 payments in respect of the principal of and any premium and
interest on such Notes when payments are due,
(b) the Company's obligations with respect to such Notes under
Sections 2.06, 2.07, 2.09, 4.02, 4.03 and 4.04 hereof,
(c) the rights, powers, trusts, duties and immunities of the
Trustee under this Indenture,
(d) Article III hereof, and
(e) this Article VIII.
Subject to compliance with this Article VIII, the Company may
exercise its option to have this Section 8.02 applied to the outstanding Notes
(in whole and not in
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part) notwithstanding the prior exercise of its option to have Section 8.03
hereof applied to such Notes.
SECTION 8.03 Covenant Defeasance. Upon the Company's exercise
of its option to have this Section 8.03 applied to the outstanding Notes (in
whole and not in part), (i) the Company shall be released from its obligations
under Section 5.01(c), Sections 4.05 through 4.18, inclusive, and any covenant
added to this Indenture subsequent to the Issue Date pursuant to Section 9.01
hereof, (ii) the occurrence of any event specified in Section 6.01(c) or Section
6.01(d) hereof, with respect to any of Section 5.01(c), Sections 4.05 through
4.18, inclusive, and any covenant added to this Indenture subsequent to the
Issue Date pursuant to Section 9.01 hereof, shall be deemed not to be or result
in an Event of Default, in each case with respect to such Notes as provided in
this Section 8.03 on and after the date the conditions set forth in Section 8.04
hereof are satisfied (hereinafter called "Covenant Defeasance"). For this
purpose, such Covenant Defeasance means that, with respect to such Notes, the
Company 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 the
extent so specified in the case of Sections 6.01(c) and 6.01(d) hereof), whether
directly or indirectly by reason of any reference elsewhere herein to any such
Section or by reason of any reference in any such Section to any other provision
herein or in any other document; but the remainder of this Indenture and such
Notes shall be unaffected thereby.
SECTION 8.04 Conditions to Defeasance or Covenant Defeasance.
The following shall be the conditions to the application of Section 8.02 or
Section 8.03 hereof to the outstanding Notes:
(a) The Company shall irrevocably have deposited or caused to
be deposited with the Trustee as trust funds in trust for the purpose of making
the following payments, specifically pledged as security for, and dedicated
solely to the benefits of the Holders of such Notes, (i) money in an amount, or
(ii) U.S. Government Obligations which through the scheduled payment of
principal and interest in respect thereof in accordance with their terms will
provide, not later than one day before the due date of any payment, money in an
amount, or (iii) a combination thereof, in each case sufficient, in the opinion
of a nationally recognized firm of independent public accountants expressed in a
written certification thereof delivered to the Trustee, to pay and discharge,
and which shall be applied by the Trustee (or any such other qualifying trustee)
to pay and discharge, the principal of and any installment of interest on such
Notes on the respective Stated Maturities thereof, in accordance with the terms
of this Indenture and such Notes.
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(b) In the event of an election to have Section 8.02 hereof
apply to the outstanding Notes, the Company shall have delivered to the Trustee
an Opinion of Counsel stating that (i) the Company has received from, or there
has been published by, the Internal Revenue Service a ruling or (ii) since the
date of this Indenture, there has been a change in the applicable Federal income
tax law, in either case (i) or (ii) to the effect that, and based thereon such
opinion shall confirm that, the Holders of such Notes will not recognize gain or
loss for Federal income tax purposes as a result of the deposit, Defeasance and
discharge to be effected with respect to such Notes and will be subject to
Federal income tax on the same amount, in the same manner and at the same times
as would be the case if such deposit, Defeasance and discharge were not to
occur.
(c) In the event of an election to have Section 8.03 hereof
apply to the outstanding Notes, the Company shall have delivered to the Trustee
an Opinion of Counsel to the effect that the Holders of such Notes will not
recognize gain or loss for Federal income tax purposes as a result of the
deposit and Covenant Defeasance to be effected with respect to such Notes and
will be subject to Federal income tax on the same amount, in the same manner and
at the same times as would be the case if such deposit and Covenant Defeasance
were not to occur.
(d) No Default or Event of Default with respect to the
outstanding Notes shall have occurred and be continuing at the time of such
deposit after giving effect thereto or at any time on or prior to the 91st
calendar day after the date of such deposit (it being understood that this
condition shall not be deemed satisfied until after such 91st calendar day).
(e) Such Defeasance or Covenant Defeasance shall not cause the
Trustee to have a conflicting interest within the meaning of the Trust Indenture
Act (assuming for the purpose of this clause (e) that all 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 constitute a default under, any other agreement or
instrument to which the Company 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.
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(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 8.05 Deposited Money and U.S. Government Obligations
to be Held in Trust; Miscellaneous Provisions. All money and U.S. Government
Obligations (including the proceeds thereof) deposited with the Trustee
pursuant to Section 8.04 hereof in respect of the outstanding Notes shall be
held in trust and applied by the Trustee, in accordance with the provisions of
such Notes and this Indenture, to the payment, either directly or through any
such Paying Agent as the Trustee may determine, to the Holders of such Notes, of
all sums due and to become due thereon in respect of principal and any premium
and interest, but money so held in trust need not be segregated from other funds
except to the extent required by law. The Company shall pay and indemnify the
Trustee against any tax, fee or other charge imposed on or assessed against the
U.S. Government Obligations deposited pursuant to Section 8.04 hereof or the
principal and interest received in respect thereof other than any such tax, fee
or other charge which by law is for the account of the Holders of outstanding
Notes.
Anything in this Article VIII to the contrary notwithstanding,
the Trustee shall deliver or pay to the Company from time to time upon Company
Order any money or U.S. Government Obligations held by it as provided in Section
8.04 hereof which, in the opinion of a nationally recognized firm of independent
public accountants expressed in a written certification thereof delivered to the
Trustee, are in excess of the amount thereof that would then be required to be
deposited to effect the Defeasance or Covenant Defeasance, as the case may be,
with respect to the outstanding Notes.
SECTION 8.06 Reinstatement. If the Trustee or Paying Agent is
unable to apply any money in accordance with this Article VIII with respect to
any Notes by reason of any order or judgment of any court or governmental
authority enjoining, restraining or otherwise prohibiting such application then
the obligations under this Indenture and such Notes from which the Company has
been discharged or released pursuant to Section 8.02 or 8.03 hereof shall be
revived and reinstated as though no deposit had occurred pursuant to this
Article VIII with respect to such Notes, until such time as the Trustee or
Paying Agent is permitted to apply all money held in trust pursuant to Section
8.05 hereof with respect to such Notes in accordance with this Article VIII;
provided that if the Company makes any payment of principal of or any premium or
interest on any such Note following such reinstatement of its obligations, the
Company shall be subrogated to the rights (if any) of the Holders of such Notes
to receive such payment from the money so held in trust.
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ARTICLE IX
AMENDMENTS
SECTION 9.01 Without Consent of Holders. The Company and the
Trustee may, at any time, and from time to time, without notice to or consent of
any Holder of Notes, enter into one or more indentures supplemental hereto, in
form satisfactory to the Trustee, for any of the following purposes:
(a) to evidence the succession of another Person to the
Company and the assumption by such successor of the covenants of the Company
herein and contained in the Notes; or
(b) to add to the covenants of the Company, for the benefit of
the Holders of all of the Notes, or to surrender any right or power herein
conferred upon the Company; or
(c) to add any additional Events of Default; or
(d) to provide for uncertificated Notes in addition to or in
place of Certificated Notes; or
(e) to evidence and provide for the acceptance of appointment
hereunder of a successor Trustee; or
(f) to secure the Notes; or
(g) to cure any ambiguity herein, or to correct or supplement
any provision hereof which may be inconsistent with any other provision hereof
or to add any other provisions with respect to matters or questions arising
under this Indenture; provided that such actions shall not adversely affect the
interests of the Holders of Notes in any material respect; or
(h) to comply with the requirements of the Commission in order
to effect or maintain the qualification of this Indenture under the Trust
Indenture Act.
SECTION 9.02 With Consent of Holders. With the consent of the
Holders of not less than a majority in principal amount of the outstanding
Notes, by Act of said Holders delivered to the Company and the Trustee, the
Company and the Trustee
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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 Holders of not less than 75 percent in principal amount of the
outstanding Notes, modify in any manner the obligations of the Company to make
offers to purchase Notes and purchase Notes pursuant to Section 4.07 or Section
4.08 hereof; and provided, further, that no such supplemental indenture shall,
without the consent of the Holder of each outstanding Note,
(a) change the Stated Maturity of the principal of, or any
installment of Interest on, any Note, or reduce the principal amount thereof (or
any premium, if any), or the interest thereon, that would be due and payable
upon Maturity thereof, or change the place of payment where, or the coin or
currency in which, any 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 Maturity thereof; or
(b) reduce the percentage in principal amount of the
outstanding Notes, the consent of whose Holders is required for any such
supplemental indenture; or
(c) modify any of the provisions of Section 6.04 hereof,
except to increase any percentage set forth therein or to provide that certain
other provisions of this Indenture cannot be modified or waived without the
consent of the Holder of each outstanding Note affected thereby; or
(d) subordinate in right of payment, or otherwise subordinate,
the Notes to any other Indebtedness; or
(e) modify any provisions of this Indenture relating to the
calculation of Accreted Value; or
(f) modify any of the provisions of this Section 9.02, except
to increase any percentage set forth herein or to provide that certain other
provisions of this Indenture cannot be modified or waived without the consent of
the Holder of each outstanding Note affected thereby.
It shall not be necessary for any Act of Holders under this
Section 9.02 to approve the particular form of any proposed supplemental
indenture, but it shall be sufficient if such Act shall approve the substance
thereof.
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SECTION 9.03 Effect of Supplemental Indentures. Upon the
execution of any supplemental indenture under this Article IX, this Indenture
shall be modified in accordance therewith, and such supplemental indenture shall
form a part of this Indenture for all purposes; and every Holder of Notes
theretofore or thereafter authenticated and delivered hereunder shall be bound
thereby.
SECTION 9.04 Compliance with Trust Indenture Act. Every amend-
ment or supplement to this Indenture or the Notes shall comply with the Trust
Indenture Act as then in effect.
SECTION 9.05 Revocation and Effect of Consents and Waivers. A
consent to an amendment, supplement or a waiver by a Holder of a Note shall bind
the Holder and every subsequent Holder of such Note or portion of such Note that
evidences the same debt as the consenting Holder's Note, even if notation of the
consent or waiver is not made on such Note; provided that any such Holder or
subsequent Holder may revoke the consent or waiver as to such Holder's Note or
portion of such Note if the Trustee receives the notice of revocation before the
date the amendment, supplement or waiver becomes 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
calendar days after such record date.
SECTION 9.06 Notation on or Exchange of Notes. If a
supplemental indenture changes the terms of a Note, the Trustee may require the
Holder thereof to deliver such Note to the Trustee. The Trustee may place an
appropriate notation on such Note regarding the changed terms and return it to
the Holder. Alternatively, if the Company or the Trustee so determines, the
Company in exchange for such Note shall issue and the Trustee shall authenticate
a new Note that reflects the changed terms. Failure to make the appropriate
notation or to issue a new Note shall not affect the validity of such amendment
or supplement.
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SECTION 9.07 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 receive indemnity
reasonably satisfactory to it and to receive, and (subject to Section 7.01
hereof) shall be fully protected in relying upon, an Officers' Certificate
(which need only cover the matters set forth in clause (a) below) and an Opinion
of Counsel provided by the Company stating that:
(a) such supplemental indenture is authorized or permitted by
this Indenture and that all conditions precedent to the execution, delivery and
performance of such supplemental indenture have been satisfied;
(b) the Company has 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;
(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) the
Indenture, (ii) the charter documents and by-laws of the Company, or (iii) any
material agreement or instrument to which the Company 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 (ii) any material order, writ, injunction or decree of any court
or governmental instrumentality applicable to the Company;
(e) such supplemental indenture has been duly and validly
executed and delivered by the Company, and the Indenture together with such
supplemental indenture constitutes a legal, valid and binding obligation of the
Company enforceable against the Company 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
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(f) the Indenture together with such amendment or supplement
complies with the Trust Indenture Act.
ARTICLE X
MISCELLANEOUS
SECTION 10.01 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.
SECTION 10.02 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: e. spire Communications, Inc., 133
National Business Parkway, Suite 200, Annapolis Junction, Maryland 20701,
Attention: Secretary; if to the Trustee: The Chase Manhattan Bank, 450 West 33rd
Street, Fifteenth Floor, New York, New York 10001-2697, Attention: Corporate
Trustee Administration Department.
The Company or the Trustee, by notice to the other, may
designate additional or different addresses for subsequent notices or
communications. Any notice or communication mailed to a Holder shall be sent to
the Holder by first class mail, postage prepaid, at the Holder's address as it
appears in the Security Register and shall be duly given if so sent within the
time prescribed. Failure to mail a notice or communication to a Holder or any
defect in it shall not affect its sufficiency with respect to other Holders. If
a notice or communication is mailed to the Company, the Trustee or a Holder in
the manner provided above, it is duly given, whether or not the addressee
receives it. 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 10.03 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.
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SECTION 10.04 Statements Required in Certificate or Opinion.
Each certificate or opinion with respect to compliance with a covenant or
condition provided for in this Indenture (other than pursuant to Section 4.19
hereof) shall include: (a) a statement that the individual making such
certificate or opinion has read such covenant or 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 10.05 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 10.06 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 day that is a Business Day, and no interest
shall accrue with respect to that payment during the intervening period. If a
regular record date is a date that is not a Business Day, such record date shall
not be affected.
SECTION 10.07 Governing Law. THIS INDENTURE AND THE NOTES
SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SAID STATE.
SECTION 10.08 No Recourse Against Others. No director,
officer, employee, incorporator or stockholder of the Company, as such, shall
have any liability for any obligations of the Company under the Notes or this
Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation, solely by reason of its status as a director,
officer, employee, incorporator or stockholder of the Company. By accepting a
Note, each Holder waives and releases all such liability (but only such
liability) as part of the consideration for issuance of such Note to such
Holder.
SECTION 10.09 Successors. All agreements of the Company in
this Indenture and the 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.
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SECTION 10.10 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 10.11 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 or provisions hereof.
SECTION 10.12 Severability. In case any provision in this
Indenture or in the Notes shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
SECTION 10.13 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.
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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.
e.spire COMMUNICATIONS, INC.
By: /s/ Jack E. Reich
---------------------------------
Name: Jack E. Reich
Title: President & CEO
[Corporate Seal]
Attest:
------------------------
THE CHASE MANHATTAN BANK, as Trustee
By: /s/ Andrew M. Deck
---------------------------------
Name: Andrew M. Deck
Title: Vice President
[Corporate Seal]
Attest: ____________________
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EXHIBIT A
FORM OF INITIAL GLOBAL NOTE
e.spire COMMUNICATIONS, INC.
No._________ CUSIP No.__________
ISIN No.________
THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO.
UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY TO e.spire COMMUNICATIONS, INC. OR THE
REGISTRAR FOR REGISTRATION OF TRANSFER OR EXCHANGE AND ANY NOTE ISSUED IS
REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER ENTITY AS HAS BEEN 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 HAS BEEN
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.
TRANSFER OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN
WHOLE, AND NOT IN PART, TO NOMINEES OF THE DEPOSITORY TRUST COMPANY OR TO A
SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF INTERESTS IN
THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE
RESTRICTIONS SET FORTH IN SECTION 2.06 OF THE INDENTURE, DATED AS OF JULY 24,
1998, BETWEEN e.spire COMMUNICATIONS, INC. AND THE TRUSTEE NAMED THEREIN,
PURSUANT TO WHICH THIS NOTE WAS ISSUED.
THIS NOTE HAS BEEN ISSUED WITH ORIGINAL ISSUE DISCOUNT FOR
UNITED STATES FEDERAL INCOME TAX PURPOSES. FOR FURTHER INFORMATION, PLEASE
CONTACT DAVID L. PIAZZA, CHIEF FINANCIAL OFFICER, e.spire COMMUNICATIONS, INC.,
133 NATIONAL BUSINESS PARKWAY, SUITE 200, ANNAPOLIS JUNCTION, MD 20701, (301)
617-4200.
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GLOBAL NOTE
REPRESENTING 10.625% SENIOR DISCOUNT NOTES DUE JULY 1, 2008
e.spire Communications, Inc., a Delaware corporation, for
value received, hereby promises to pay to CEDE & CO., or its registered assigns,
the principal amount at Stated Maturity indicated on Schedule A hereof, on July
1, 2008.
Reference is hereby made to the further provisions of this
Note set forth on the reverse hereof, which further provisions shall for all
purposes have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been duly
executed by the Trustee referred to on the reverse hereof by manual signature,
this Note shall not be entitled to any benefit under the Indenture or be valid
or obligatory for any purposes.
IN WITNESS WHEREOF, the Company has caused this Note to be
duly executed.
Dated:
e.spire COMMUNICATIONS, INC.
By: ______________________________________
Name:
Title:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
THE CHASE MANHATTAN BANK,
as Trustee, certifies that this is one of
the Notes referred to in the Indenture.
By: _____________________________
Authorized Officer
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REVERSE SIDE OF FORM OF GLOBAL NOTE
e.spire COMMUNICATIONS, INC.
GLOBAL NOTE
REPRESENTING 10.625% SENIOR DISCOUNT NOTES DUE JULY 1, 2008
1. Indenture.
This Note is one of a duly authorized issue of debt securities of the
Company (as defined below) designated as its "10.625% Senior Discount Notes due
July 1, 2008" (herein called the "Notes") limited in aggregate principal amount
at Stated Maturity to $375,000,000, issued under an indenture dated as of July
24, 1998 (as amended or supplemented from time to time, the "Indenture") between
the Company and The Chase Manhattan Bank, as trustee (the "Trustee," which term
includes any successor Trustee under the Indenture), to which Indenture
reference is hereby made for a statement of the respective rights, limitations
of rights, duties and immunities thereunder of the Company, the Trustee and each
Holder of Notes and of the terms upon which the Notes are, and are to be,
authenticated and delivered. The summary of the terms of this Note contained
herein does not purport to be complete and is qualified by reference to the
Indenture. All terms used in this Note which are not defined herein shall have
the meanings assigned to them in the Indenture.
The Indenture imposes certain limitations on the ability of the Company
and its Restricted Subsidiaries to, among other things, make certain Investments
and other Restricted Payments, pay dividends and other distributions, incur
Indebtedness, enter into consensual restrictions upon the payment of certain
dividends and distributions by such Restricted Subsidiaries, enter into or
permit certain transactions with Affiliates, create or incur Liens, enter into
or permit certain Sale and Leaseback Transactions and make Asset Sales. The
Indenture also imposes limitations on the ability of the Company to consolidate
or merge with or into any other Person or permit any other Person to merge with
or into the Company, or sell, convey, assign, transfer, lease or otherwise
dispose of all or substantially all of the Property of the Company to any other
Person and on the ability of the Company's Restricted Subsidiaries to issue
Capital Stock.
2. Principal and Interest.
e.spire Communications, Inc., a Delaware corporation (such
corporation, and its successors and assigns under the Indenture, being herein
called the "Company"), promises to pay the principal amount at Stated Maturity
set forth on Schedule A of this Note to the Holder hereof on July 1, 2008.
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This Note will accrete at a rate of approximately 10.625%, per annum,
compounded semiannually from an initial principal amount of $599.89 per $1000
principal amount at Stated Maturity on the Issue Date to a principal amount in
arrears of $1,000 per $1,000 principal amount at Stated Maturity by July 1,
2003.
The Company shall pay interest at a rate of 10.625%, per annum, from
July 1, 2003, or from the most recent Interest Payment Date thereafter to which
interest has been paid or duly provided for, semiannually on January 1 and July
1 of each year, commencing on January 1, 2004, in cash, to the Holder hereof
until the principal amount hereof is paid or made available for payment. The
interest so payable, and punctually paid or duly provided for, on any Interest
Payment Date will, subject to certain exceptions provided in the Indenture, be
paid to the Person in whose name this Note (or the Note in exchange or
substitution for which this Note was issued) is registered at the close of
business on the Record Date for interest payable on such Interest Payment Date.
The Record Date for any interest payment is the close of business on December 15
or June 15, as the case may be, whether or not a Business Day, immediately
preceding the Interest Payment Date on which such interest is payable. Any such
interest not so punctually paid or duly provided for ("Defaulted Interest")
shall forthwith cease to be payable to the Holder on such Record Date and shall
be paid as provided in Section 2.11 of the Indenture. Interest will be computed
on the basis of a 360-day year of twelve 30-day months.
Each payment of interest in respect of an Interest Payment Date will
include interest accrued through the day before such Interest Payment Date. If
an Interest Payment Date falls on a day that is not a Business Day, the interest
payment to be made on such Interest Payment Date will be made on the next
succeeding Business Day with the same force and effect as if made on such
Interest Payment Date, and no additional interest will accrue as a result of
such delayed payment.
To the extent lawful, the Company shall pay interest on (i) if prior to
July 1 , 2003, any overdue Accreted Value of (and premium, if any, on) this
Note, or if on or after July 1, 2003, any overdue principal of (and premium, if
any, on) this Note, at the rate of 11.625% per annum, and (ii) Defaulted
Interest (without regard to any applicable grace period), at the rate of 11.625%
per annum. The Company's obligation pursuant to the previous sentence shall
apply whether such overdue amount is due at its Stated Maturity, as a result of
the Company's obligations pursuant to Section 3.05, Section 4.07 or Section 4.08
of the Indenture, or otherwise.
If (a) the Company fails to file any of the Registration Statements
required by the Registration Rights Agreement on or before the date specified
for such filing, (b) any of such Registration Statements is not declared
effective by the Commission on or prior to
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the date specified for such effectiveness (the "Effectiveness Target Date"), or
(c) the Company fails to consummate the Exchange Offer within 30 Business Days
of the date of effectiveness of the Exchange Offer Registration Statement, or
(d) the Shelf Registration Statement or the Exchange Offer Registration
Statement is declared effective but thereafter ceases to be effective or usable
(other than in connection with permissible exceptions noted in the Registration
Rights Agreement) in connection with resales of Restricted Notes during the
periods specified in the Registration Rights Agreement (each such event referred
to in clauses (a) through (d) above a "Registration Default"), the Company will
pay Special Interest to each Holder of Notes, with respect to the first 90- day
period immediately following the occurrence of the first Registration Default in
an amount equal to $.05 per week per $1,000 principal amount of Notes held by
such Holder. The amount of the Special Interest will increase by an additional
$.05 per week per $1,000 principal amount of Notes with respect to each
subsequent 90-day period until all Registration Defaults have been cured, up to
a maximum amount of Special Interest for all Registration Defaults of $.50 per
week per $1,000 principal amount of Notes. All accrued Special Interest will be
paid by the Company on each January 1 and July 1 to the Global Note Holder by
wire transfer of immediately available funds or by federal funds check and to
Holders of Certificated Notes by wire transfer to the accounts specified by them
or by mailing checks to their registered addresses if no such accounts have been
specified. Following the cure of all Registration Defaults, the accrual of
Special Interest will cease.
3. Method of Payment.
The Company, through the Paying Agent, shall pay interest on this Note
to the registered Holder of this Note, as provided above. The Holder must
surrender this Note to a Paying Agent to collect principal payments. The Company
will pay principal and interest in money of the United States of America that at
the time of payment is legal tender for payment of all debts public and private.
Principal and interest will be payable at the office of the Paying Agent but, at
the option of the Company, interest may be paid by check mailed to the
registered Holders at their registered addresses.
4. Paying Agent and Registrar.
Initially, the Trustee will act as Paying Agent and Registrar under the
Indenture. The Company may, upon written notice to the Trustee, appoint and
change any Paying Agent or Registrar. The Company or any of its subsidiaries may
act as Paying Agent or Registrar.
5. Optional Redemption.
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The Notes may not be redeemed prior to July 1 , 2003. Thereafter, the
Notes will be subject to redemption at the option of the Company, in whole or in
part, upon not less than 30 calendar days, nor more than 60 calendar days'
notice, at the prices (expressed as percentages of principal amount) set forth
below, plus accrued and unpaid interest thereon (if any) at the applicable
Redemption Date, if redeemed during the twelve-month period beginning July 1 of
the years indicated below:
<TABLE>
<CAPTION>
Year Percentage
<S> <C>
2003 105.312%
2004 103.542%
2005 101.771%
2006 and thereafter 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to July 1, 2001, the
Company may redeem up to 35% of the aggregate principal amount of Notes with the
net proceeds of one or more Equity Offerings of the Company at a redemption
price equal to 110.625 % of the aggregate principal amount thereof on the date
of redemption; provided, however, that, after giving effect to any such
redemption, at least 65% of the original aggregate principal amount of the Notes
remain outstanding. In order to effect the foregoing redemption with the
proceeds of any Equity Offering, the Company shall make such redemption not more
than 60 days after the consummation of any such Equity Offering.
6. Notice of Redemption.
At least 30 calendar days but not more than 60 calendar days before a
Redemption Date, the Company will send a notice of redemption, first-class mail,
postage prepaid, to Holders of Notes to be redeemed at the addresses of such
Holders as they appear in the Security Register.
If less than all of the Notes are to be redeemed at any time, the Notes
to be redeemed will be chosen by the Trustee in accordance with the Indenture.
If any Note is redeemed subsequent to a Record Date with respect to any Interest
Payment Date specified above and on or prior to such Interest Payment Date, then
any accrued interest will be paid on such Interest Payment Date to the Holder of
the Note on such Record Date. If money in an amount sufficient to pay the
Redemption Price of all Notes (or portions thereof) to be redeemed on the
Redemption Date is deposited with the Paying
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<PAGE> 121
Agent on or before the applicable Redemption Date and certain other conditions
are satisfied, interest on the Notes to be redeemed on the applicable Redemption
Date will cease to accrue.
The Notes are not subject to any sinking fund.
7. Repurchase at the Option of Holders upon Change of Control.
Upon the occurrence of a Change of Control, each Holder of Notes shall
have the right to require the Company to purchase such Holder's Notes, in whole,
or in part in a principal amount that is an integral multiple of $1,000,
pursuant to a Change of Control Offer, at a purchase price in cash equal to 101%
of the Accreted Value thereof on any Change of Control Payment Date prior to
July 1, 2003 or 101% of the principal amount thereof on any Change of Control
Payment Date on or after July 1, 2003, plus accrued and unpaid interest, if any,
to the Change of Control Payment Date.
Within 30 calendar days following any Change of Control, the Company
shall send, or cause to be sent, by first-class mail, postage prepaid, a notice
regarding the Change of Control Offer to each Holder of Notes. The Holder of
this Note may elect to have this Note or a portion hereof in an authorized
denomination purchased by completing the form entitled "Option of Holder to
Require Purchase" appearing below and tendering this Note pursuant to the Change
of Control Offer. Unless the Company defaults in the payment of the Change of
Control Purchase Price with respect thereto, all Notes or portions thereof
accepted for payment pursuant to the Change of Control Offer will cease to
accrete in value or accrue interest, as the case may be, from and after the
Change of Control Payment Date.
8. Repurchase at the Option of Holders upon Asset Sale.
If at any time the aggregate amount of Excess Proceeds (including any
Net Cash Proceeds to be applied to the permanent reduction of Indebtedness
represented by the 2005 Notes, the 2006 Notes and 2007 Notes) calculated as of
such date exceeds $10 million, the Company shall, within 30 days of the date the
amount of Excess Proceeds exceeds $10 million, use such Excess Proceeds to make
an offer to purchase (an "Asset Sale Offer") on a pro rata basis, from all
holders, outstanding Notes, 2005 Notes, 2006 Notes and 2007 Notes in an
aggregate principal amount equal to the maximum principal amount that may be
purchased out of Excess Proceeds, at a purchase price (the "Asset Sale Purchase
Price") in cash equal to (a) with respect to the Notes, the 2005 Notes and 2006
Notes, 100% of the Accreted Value thereof (as defined in the relevant indenture)
and (b) with respect to the 2007 Notes, 100% of the principal amount thereof,
plus, in
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each case, accrued and unpaid interest, if any, to the purchase date, in
accordance with the procedures set forth in the relevant indenture. Upon
completion of an Asset Sale Offer (including payment of the Asset Sale Purchase
Price for accepted Notes), any surplus Excess Proceeds that were the subject of
such offer shall cease to be Excess Proceeds, and the Company may then use such
amounts for general corporate purposes.
Within 30 calendar days of the date the amount of Excess Proceeds
exceeds $10,000,000, the Company shall send, or cause to be sent, by first-class
mail, postage prepaid, a notice regarding the Asset Sale Offer to each Holder of
Notes. The Holder of this Note may elect to have this Note or a portion hereof
in an authorized denomination purchased by completing the form entitled "Option
of Holder to Require Purchase" appearing below and tendering this Note pursuant
to the Asset Sale Offer. Unless the Company defaults in the payment of the Asset
Sale Purchase Price with respect thereto, all Notes or portions thereof selected
for payment pursuant to the Asset Sale Offer will cease to accrete in value or
accrue interest, as the case may be, from and after the Asset Sale Payment Date.
9. The Global Note.
So long as this Global Note is registered in the name of the Depositary
or its nominee, members of, or participants in, the Depositary ("Agent Members")
shall have no rights under the Indenture with respect to this Global Note held
on their behalf by the Depositary or the Trustee as its custodian, and the
Depositary may be treated by the Company, the Trustee and any agent of the
Company or the Trustee as the absolute owner of this Global Note for all
purposes. Notwithstanding the foregoing, nothing herein shall (i) prevent the
Company, the Trustee or any agent of the Company or the Trustee, from giving
effect to any written certification, proxy or other authorization furnished by
the Depositary or (ii) impair, as between the Depositary and its Agent Members,
the operation of customary practices governing the exercise of the rights of a
Holder of Notes.
The Holder of this Global Note may grant proxies and otherwise
authorize any Person, including Agent Members and Persons that may hold
interests in this Global Note through Agent Members, to take any action which a
Holder of Notes is entitled to take under the Indenture or the Notes.
Whenever, as a result of optional redemption by the Company, a Change
of Control Offer, an Asset Sale Offer or an exchange for Certificated Notes,
this Global Note is redeemed, repurchased or exchanged in part, this Global Note
shall be surrendered by the Holder thereof to the Trustee who shall cause an
adjustment to be made to Schedule A hereof so that the principal amount of this
Global Note will be equal to the
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<PAGE> 123
portion not redeemed, repurchased or exchanged and shall thereafter return this
Global Note to such Holder; provided that this Global Note shall be in a
principal amount of $1,000 or an integral multiple of $1,000.
10. Exchange Offer Registration
Pursuant to the Registration Rights Agreement, the Company has agreed
to file with the Commission the Exchange Offer Registration Statement on the
appropriate form under the Securities Act with respect to the Exchange Notes.
Upon the effectiveness of the Exchange Offer Registration Statement, the Company
will offer to the Holders of Restricted Notes pursuant to the Exchange Offer who
are able to make certain representations the opportunity to exchange their
Restricted Notes for Exchange Notes. If (i) the Company is not permitted to
consummate the Exchange Offer because the Exchange Offer is not permitted by
applicable law or Commission policy or (ii) any Holder of Restricted Notes
notifies the Company prior to the 20th day following consummation of the
Exchange Offer that (A) it is prohibited by law or Commission policy from
participating in the Exchange Offer or (B) that it may not resell the Exchange
Notes acquired by it in the Exchange Offer to the public without delivering a
prospectus and the prospectus contained in the Exchange Offer Registration
Statement is not appropriate or available for such resales or (C) that it is a
broker-dealer and owns Notes acquired directly from the Company or an affiliate
of the Company, the Company will file with the Commission a Shelf Registration
Statement to cover resales of the Notes by the Holders thereof who satisfy
certain conditions relating to the provisions of information in connection with
the Shelf Registration Statement. The Company will use its reasonable best
efforts to cause the applicable registration statement to be declared effective
as promptly as possible by the Commission.
The Registration Rights Agreement provides that (i) the Company will
use its reasonable best efforts to file an Exchange Offer Registration Statement
with the Commission on or prior to 75 days after the Closing Date, (ii) the
Company will use its best efforts to have the Exchange Offer Registration
Statement declared effective by the Commission on or prior to 120 days after the
Closing Date, (iii) unless the Exchange Offer would not be permitted by
applicable law or commission policy, the Company will commence the Exchange
Offer and use its best efforts to issue on or prior to 30 business days after
the date on which the Exchange Offer Registration Statement was declared
effective by the Commission Exchange Notes in exchange for all Notes tendered
prior thereto in the Exchange Offer and (iv) if obligated to file the Shelf
Registration State ment, the Company will use its best efforts to file the Shelf
Registration State-
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<PAGE> 124
ment with the Commission on or prior to 45 days after such filing obligation
arises and to cause the Shelf Registration Statement to be declared effective by
the Commission on or prior to 90 days after such obligation arises.
11. Transfer and Exchange.
The Holder of this Global Note shall, by acceptance of this Global
Note, agree that transfers of beneficial interests in this Global Note may be
effected only through a book entry system maintained by such Holder (or its
agent), and that ownership of a beneficial interest in the Notes represented
thereby shall be required to be reflected in book entry form.
Transfers of this Global Note shall be limited to transfers in whole,
and not in part, to the Depositary, its successors and their respective
nominees. Interests of beneficial owners in this Global Note may be transferred
in accordance with the rules and procedures of the Depositary (or its
successors).
This Global Note will be exchanged by the Company for one or more
Certificated Notes if (a) the Depositary (i) has notified the Company that it is
unwilling or unable to continue as, or ceases to be, a clearing agency
registered under Section 17A of the Exchange Act and (ii) a successor to the
Depositary registered as a clearing agency under Section 17A of the Exchange Act
is not able to be appointed by the Company within 90 calendar days, (b) the
Depositary is at any time unwilling or unable to continue as Depositary and a
successor to the Depositary is not able to be appointed by the Company within 90
calendar days or (c) the Company, at its option, notifies the Trustee in writing
that it elects to cause the issuance of the Notes in certificated form. If an
Event of Default occurs and is continuing, the Company shall, at the request of
the Holder hereof, exchange all or part of this Global Note for one or more
Certificated Notes; provided that the principal amount of each of such
Certificated Notes and this Global Note, after such exchange, shall be $1,000 or
an integral multiple thereof. Whenever this Global Note is exchanged as a whole
for one or more Certificated Notes, it shall be surrendered by the Holder to the
Trustee for cancellation. Whenever this Global Note is exchanged in part for one
or more Certificated Notes, it shall be surrendered by the Holder to the Trustee
and the Trustee shall make the appropriate notations thereon pursuant to Section
2.05(c) of the Indenture. All Certificated Notes issued in exchange for this
Global Note or any portion hereof shall be registered in such names as the
Depositary shall instruct the
A-10
<PAGE> 125
Trustee. Interests in this Global Note may not be exchanged for Certificated
Notes other than as provided in this paragraph.
Prior to the expiration of the Restricted Period, beneficial interests
in the Regulation S Global Note may be exchanged for beneficial interests in
the Rule 144A Global Note only if such exchange occurs in connection with a
transfer of the Notes pursuant to Rule 144A and the transferor first delivers to
the Trustee a written certificate (in the form, provided in the Indenture) to
the effect that the Notes are being transferred to a Person who the transferor
reasonably believes is a qualified institutional buyer within the meaning of
Rule 144A under the Securities Act, purchasing for its own account or the
account of a qualified institutional buyer in a transaction meeting the
requirements of Rule 144A and in accordance with all applicable securities laws
of the states of the United States and other jurisdictions.
Beneficial interests in the Rule 144A Global Note may be transferred to
a Person who takes delivery in the form of an interest in the Regulation S
Global Note, whether before, on or after the Restricted Period, only upon
receipt by the Trustee of a written certificate from the transferor (in the form
provided in the Indenture) to the effect that such transfer is being made in
accordance with Rule 903 or 904 of Regulation S or Rule 144 (if available) and
that, if such transfer occurs prior to the expiration of the Restricted Period,
the interest transferred will be held immediately thereafter through Euroclear
or Cedel.
Any beneficial interest in one of the Global Notes that is transferred to a
Person who takes delivery in the form of an interest in another Global Note
will, upon transfer, cease to be an interest in such Global Note and become an
interest in such other Global Note and, accordingly, will thereafter be subject
to all restrictions and other procedures applicable to beneficial interests in
such other Global Note for as long as it remains such an interest.
12. Denominations.
The Notes are issuable only in registered form without coupons in
denominations of $1,000 and integral multiples thereof of principal amount.
13. Unclaimed Money.
If money for the payment of principal or interest remains unclaimed for
two years, the Trustee or Paying Agent shall pay the money back to the Company
at its request unless an abandoned property law designates another Person. After
any such payment,
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<PAGE> 126
Holders entitled to the money must look only to the Company and not to the
Trustee for payment unless such abandoned property law designates another
Person.
14. Discharge and Defeasance.
Subject to certain conditions, the Company at any time may terminate
some or all of its obligations under the Notes and the Indenture if the Company
irrevocably deposits with the Trustee money or U.S. Government Obligations for
the payment of principal and interest on the Notes to redemption or maturity, as
the case may be.
15. Amendment, Waiver.
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Notes may be amended with the written consent of the Holders of
at least a majority in principal amount of the outstanding Notes and (ii) any
past Default and its consequences may be waived with the written consent of the
Holders of at least a majority in principal amount of the outstanding Notes.
Subject to certain exceptions set forth in the Indenture, without the consent of
any Holder of Notes, the Company and the Trustee may amend the Indenture or the
Notes (i) to evidence the succession of another Person to the Company and the
assumption by such successor of the covenants of the company under the Indenture
and contained in the Notes; (ii) to add additional covenants or to surrender
rights and powers conferred on the Company; (iii) to add any additional Events
of Default; (iv) to provide for uncertificated Notes in addition to or in place
of Certificated Notes; (v) to evidence and provide for the acceptance of
appointment under the Indenture of a successor Trustee; (vi) to secure the
Notes; (vii) to cure any ambiguity in the Indenture, to correct or supplement
any provision in the Indenture which may be inconsistent with any other
provision therein or to add any other provisions with respect to matters or
questions arising under the Indenture, provided that such actions shall not
adversely affect the interests of the Holders in any material respect; or (viii)
to comply with the requirements of the Commission in order to effect or maintain
the qualification of the Indenture under the Trust Indenture Act.
16. Defaults and Remedies.
If an Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the Notes, subject to certain
limitations, may declare all the Notes to be immediately due and payable.
Certain events of bankruptcy or insolvency
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<PAGE> 127
are Events of Default and shall result in the Notes being immediately due and
payable upon the occurrence of such Events of Default without any further act of
the Trustee or any Holder.
Holders of Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. The Trustee may refuse to enforce the Indenture or
the Notes unless it receives reasonable indemnity or security. Subject to
certain limitations, Holders of a majority in principal amount of the Notes may
direct the Trustee in its exercise of any trust or power under the Indenture.
The Holders of a majority in principal amount of the outstanding Notes, by
written notice to the Company and the Trustee, may rescind any declaration of
acceleration and its consequences if the rescission would not conflict with any
judgment or decree, and if all Events of Default have been cured or waived
except nonpayment of principal and interest that has become due solely because
of the acceleration.
17. Individual Rights of Trustee.
Subject to certain limitations imposed by the Trust Indenture Act, the
Trustee or any Paying Agent or Registrar, in its individual or any other
capacity, may become the owner or pledgee of Notes and may otherwise deal with
the Company or its Affiliates with the same rights it would have if it were not
Trustee, Paying Agent or Registrar, as the case may be, under the Indenture.
18. No Recourse Against Certain Others.
No director, officer, employee, incorporator or stockholder of the
Company, as such, shall have any liability for any obligations of the Company
under the Notes or the Indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation, solely by reason of its status as
a director, officer, employee, incorporator or stockholder of the Company. By
accepting a Note, each Holder waives and releases all such liability (but only
such liability) as part of the consideration for issuance of such Note to such
Holder.
19. Governing Law.
THE INDENTURE AND THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE
AND TO BE PERFORMED IN SAID STATE.
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<PAGE> 128
The Company will furnish to any Holder of Notes upon written request
and without charge to the Holder a copy of the Indenture which has in it the
text of this Note. Requests may be made to:
e.spire Communications, Inc.
133 National Business Parkway
Suite 200
Annapolis Junction, Maryland 20701
Attention: Secretary
A-14
<PAGE> 129
SCHEDULE A
SCHEDULE OF PRINCIPAL AMOUNT
The initial principal amount at Stated Maturity of this Note
shall be $ . The following decreases/increase in the principal amount at Stated
Maturity of this Note have been made:
<TABLE>
<CAPTION>
Total Notation
Principle Amount Made By or
Date of Decrease in Increase in Following Such on
Decrease/ Principal Principal Decrease/ Behalf of
Increase Amount Amount Increase Trustee
- ------------------ -------------------- ------------------- ------------------------- --------------------
<S> <C> <C> <C> <C>
- ------------------ -------------------- ------------------- ------------------------- --------------------
- ------------------ -------------------- ------------------- ------------------------- --------------------
- ------------------ -------------------- ------------------- ------------------------- --------------------
- ------------------ -------------------- ------------------- ------------------------- --------------------
- ------------------ -------------------- ------------------- ------------------------- --------------------
- ------------------ -------------------- ------------------- ------------------------- --------------------
- ------------------ -------------------- ------------------- ------------------------- --------------------
- ------------------ -------------------- ------------------- ------------------------- --------------------
- ------------------ -------------------- ------------------- ------------------------- --------------------
- ------------------ -------------------- ------------------- ------------------------- --------------------
- ------------------ -------------------- ------------------- ------------------------- --------------------
- ------------------ -------------------- ------------------- ------------------------- --------------------
- ------------------ -------------------- ------------------- ------------------------- --------------------
- ------------------ -------------------- ------------------- ------------------------- --------------------
- ------------------ -------------------- ------------------- ------------------------- --------------------
</TABLE>
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<PAGE> 130
ASSIGNMENT
(To be executed by the registered Holder
if such Holder desires to transfer this Note)
FOR VALUE RECEIVED _______________ hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER TAX IDENTIFYING NUMBER
OF TRANSFEREE: __________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
(Please print name and address of transferee)
_______________________________________________________ this Note, together
with all right, title and interest herein, and does hereby irrevocably
constitute and appoint ____________ Attorney to transfer this Note on the
Security Register, with full power of substitution.
_______________________________________________________
Dated:_______________ Signature of Holder:________________________
Signature Guaranteed:________________________
Commercial Bank or Trust Company
or Member Firm of the New York
Stock Exchange, Inc.
NOTICE: The signature to the foregoing Assignment must correspond to the Name as
written upon the face of this Note in every particular, without alteration or
any change whatsoever.
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<PAGE> 131
OPTION OF HOLDER TO ELECT PURCHASE
(check as appropriate)
/ / In connection with the Change of Control Offer made pursuant
to Section 4.07 of the Indenture, the undersigned hereby
elects to have
/ / the entire principal amount
/ / $___($1,000 in principal amount or an integral multiple thereof)
of this Note
repurchased by the Company. The undersigned hereby directs the
Trustee or Paying Agent to pay it or an amount in cash equal
to 101% of the Accreted Value with respect to the principal amount
indicated in the preceding sentence or the principal amount indicated
in the preceding sentences, as the case may be, plus accrued and unpaid
interest thereon, if any, to the Change of Control Payment Date.
/ / In connection with the Asset Sale Offer made pursuant to Section 4.08
of the Indenture, the undersigned hereby elects to have
/ / the entire principal amount
/ / $___($1,000 in principal amount or an integral multiple thereof)
of this Note
repurchased by the Company. The undersigned hereby directs the
Trustee or Paying Agent to pay it or an amount in cash equal
to 100% of the Accreted Value with respect to the principal amount
indicated in the preceding sentence, or the principal amount indicated
in the preceding sentence, as the case may be, plus accrued and unpaid
interest thereon, if any, to the Asset Sale Payment Date.
Dated:_________________________ Signature of
Holder:______________________
Signature Guaranteed:____________________________
Commercial Bank or Trust Company
or Member Firm of the New York
Stock Exchange, Inc.
NOTICE: The signature to the foregoing Assignment must correspond to the Name as
written upon the face of this Note in every particular, without alteration or
any change whatsoever.
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<PAGE> 132
EXHIBIT B
FORM OF CERTIFICATED NOTE
e.spire COMMUNICATIONS, INC.
No.________ CUSIP No.____
ISIN No.____
10.625% SENIOR DISCOUNT NOTE DUE JULY 1, 2008
e.spire Communications, Inc., a Delaware corporation, for value
received, hereby promises to pay to CEDE & CO., or its registered assigns,
$ , on July 1, 2008.
THIS NOTE HAS BEEN ISSUED WITH ORIGINAL ISSUE DISCOUNT FOR UNITED
STATES FEDERAL INCOME TAX PURPOSES. FOR FURTHER INFORMATION, PLEASE CONTACT
DAVID L. PIAZZA, CHIEF FINANCIAL OFFICER, AMERICAN COMMUNICATIONS SERVICES,
INC., 133 NATIONAL BUSINESS PARKWAY, SUITE 200, ANNAPOLIS JUNCTION, MD 20701,
(301) 617-4200.
Reference is hereby made to the further provisions of this Note set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been duly executed
by the Trustee referred to on the reverse hereof by manual signature, this Note
shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purposes.
B-1
<PAGE> 133
IN WITNESS WHEREOF, the Company has caused this Note to be duly
executed.
Dated:
e.spire COMMUNICATIONS, INC.
By:___________________________________
Name:
Title:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
THE CHASE MANHATTAN BANK,
as Trustee, certifies that this is one of
the Notes referred to in the Indenture.
By:__________________________
Authorized Officer
B-2
<PAGE> 134
REVERSE SIDE OF FORM OF CERTIFICATED NOTE
e.spire COMMUNICATIONS, INC.
CERTIFICATED NOTE
10.625% SENIOR DISCOUNT NOTES DUE JULY 1, 2008
1. Indenture.
This Note is one of a duly authorized issue of debt securities of the
Company (as defined below) designated as its "10.625% Senior Discount Notes due
July 1, 2008" (herein called the "Notes") limited in aggregate principal amount
at Stated Maturity to $375,000,000, issued under an indenture dated as of July
24, 1998 (as amended or supplemented from time to time, the "Indenture") between
the Company and The Chase Manhattan Bank, as trustee (the "Trustee," which term
includes any successor Trustee under the Indenture), to which Indenture
reference is hereby made for a statement of the respective rights, limitations
of rights, duties and immunities thereunder of the Company, the Trustee and each
Holder of Notes and of the terms upon which the Notes are, and are to be,
authenticated and delivered. The summary of the terms of this Note contained
herein does not purport to be complete and is qualified by reference to the
Indenture. All terms used in this Note which are not defined herein shall have
the meanings assigned to them in the Indenture.
The Indenture imposes certain limitations on the ability of the Company
and its Restricted Subsidiaries to, among other things, make certain Investments
and other Restricted Payments, pay dividends and other distributions, incur
Indebtedness, enter into consensual restrictions upon the payment of certain
dividends and distributions by such Restricted Subsidiaries, enter into or
permit certain transactions with Affiliates, create or incur Liens, enter into
or permit certain Sale and Leaseback Transactions and make Asset Sales. The
Indenture also imposes limitations on the ability of the Company to consolidate
or merge with or into any other Person or permit any other Person to merge with
or into the Company, or sell, convey, assign, transfer, lease or otherwise
dispose of all or substantially all of the Property of the Company to any other
Person and on the ability of the Company's Restricted Subsidiaries to issue
Capital Stock.
2. Principal and Interest.
e.spire Communications, Inc., a Delaware corporation (such
corporation, and its successors and assigns under the Indenture, being herein
called the "Company"), promises to pay the principal amount hereof to the
Holder hereof on July 1, 2008.
B-3
<PAGE> 135
This Note will accrete at a rate of approximately 10.625%, per annum,
com pounded semiannually, from an initial principal amount of $599.89 per $1000
principal amount at Stated Maturity on the Issue Date to a principal amount in
arrears of $1,000 per $1,000 principal amount at Stated Maturity by July 1,2003.
The Company shall pay interest at a rate of 10.625%, per annum, from
July 1, 2003, or from the most recent Interest Payment Date thereafter to which
interest has been paid or duly provided for, semiannually on January 1 and July
1 of each year, commencing on January 1, 2004, in cash, to the Holder hereof
until the principal amount hereof is paid or made available for payment. The
interest so payable, and punctually paid or duly provided for, on any Interest
Payment Date will, subject to certain exceptions provided in the Indenture, be
paid to the Person in whose name this Note (or the Note in exchange or
substitution for which this Note was issued) is registered at the close of
business on the Record Date for interest payable on such Interest Payment Date.
The Record Date for any interest payment is the close of business on December 15
or June 15, as the case may be, whether or not a Business Day, immediately
preceding the Interest Payment Date on which such interest is payable. Any such
interest not so punctually paid or duly provided for ("Defaulted Interest")
shall forthwith cease to be payable to the Holder on such Record Date and shall
be paid as provided in Section 2.11 of the Indenture. Interest will be computed
on the basis of a 360-day year of twelve 30-day months.
Each payment of interest in respect of an Interest Payment Date will
include interest accrued through the day before such Interest Payment Date. If
an Interest Payment Date falls on a day that is not a Business Day, the interest
payment to be made on such Interest Payment Date will be made on the next
succeeding Business Day with the same force and effect as if made on such
Interest Payment Date, and no additional interest will accrue as a result of
such delayed payment.
To the extent lawful, the Company shall pay interest on (i) if prior to
July 1 , 2003, any overdue Accreted Value of (and premium, if any, on) this
Note, or if on or after July 1, 2003, any overdue principal of (and premium, if
any, on) this Note, at the rate of 11.625% per annum, and (ii) Defaulted
Interest (without regard to any applicable grace period), at the rate of 11.625%
per annum. The Company's obligation pursuant to the previous sentence shall
apply whether such overdue amount is due at its Stated Maturity, as a result of
the Company's obligations pursuant to Section 3.05, Section 4.07 or Section 4.08
of the Indenture, or otherwise.
If (a) the Company fails to file any of the Registration Statements
required by the Registration Rights Agreement on or before the date specified
for such filing, (b) any of such Registration Statements is not declared
effective by the Commission on or prior to the date specified for such
effectiveness (the "Effectiveness Target Date"), or (c) the
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Company fails to consummate the Exchange Offer within 30 Business Days of the
date of effectiveness of the Exchange Offer Registration Statement, or (d) the
Shelf Registration Statement or the Exchange Offer Registration Statement is
declared effective but thereafter ceases to be effective or usable (other than
in connection with permissible exceptions noted in the Registration Rights
Agreement) in connection with resales of Restricted Notes during the periods
specified in the Registration Rights Agreement (each such event referred to in
clauses (a) through (d) above a "Registration Default"), the Company will pay
Special Interest to each Holder of Notes, with respect to the first 90-day
period immediately following the occurrence of the first Registration Default in
an amount equal to $.05 per week per $1,000 principal amount of Notes held by
such Holder. The amount of the Special Interest will increase by an additional
$.05 per week per $1,000 principal amount of Notes with respect to each
subsequent 90-day period until all Registration Defaults have been cured, up to
a maximum amount of Special Interest for all Registration Defaults of $.50 per
week per $1,000 principal amount of Notes. All accrued Special Interest will be
paid by the Company on each January 1 and July 1 to the Global Note Holder by
wire transfer of immediately available funds or by federal funds check and to
Holders of Certificated Notes by wire transfer to the accounts specified by them
or by mailing checks to their registered addresses if no such accounts have been
specified. Following the cure of all Registration Defaults, the accrual of
Special Interest will cease.
3. Method of Payment.
The Company, through the Paying Agent, shall pay interest on this Note
to the registered Holder of this Note, as provided above. The Holder must
surrender this Note to a Paying Agent to collect principal payments. The Company
will pay principal and interest in money of the United States of America that at
the time of payment is legal tender for payment of all debts public and private.
Principal and interest will be payable at the office of the Paying Agent but, at
the option of the Company, interest may be paid by check mailed to the
registered Holders at their registered addresses.
4. Paying Agent and Registrar.
Initially, the Trustee will act as Paying Agent and Registrar under the
Indenture. The Company may, upon written notice to the Trustee, appoint and
change any Paying Agent or Registrar. The Company or any of its subsidiaries may
act as Paying Agent or Registrar.
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4. Optional Redemption.
The Notes may not be redeemed prior to July 1, 2003. Thereafter, the
Notes will be subject to redemption at the option of the Company, in whole or in
part, upon not less than 30 calendar days, nor more than 60 calendar days'
notice, at the prices (expressed as percentages of principal amount) set forth
below, plus accrued and unpaid interest thereon (if any) at the applicable
Redemption Date, if redeemed during the twelve-month period beginning July 1 of
the years indicated below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2003 105.312%
2004 103.542%
2005 101.771%
2006 and thereafter 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to July 1, 2001, the
Company may redeem up to 35% of the aggregate principal amount of Notes with the
net proceeds of one or more Equity Offerings of the Company at a redemption
price equal to 110.625% of the aggregate principal amount thereof on the date of
redemption; provided, however, that, after giving effect to any such redemption,
at least 65% of the original principal amount of the Notes remain outstanding.
In order to effect the foregoing redemption with the proceeds of any Equity
Offering, the Company shall make such redemption not more than 60 days after the
consummation of any such Equity Offering.
5. Notice of Redemption.
At least 30 calendar days but not more than 60 calendar days before a
Redemption Date, the Company will send a notice of redemption, first-class mail,
postage prepaid, to Holders of Notes to be redeemed at the addresses of such
Holders as they appear in the Security Register.
If less than all of the Notes are to be redeemed at any time, the Notes
to be redeemed will be chosen by the Trustee in accordance with the Indenture.
If any Note is redeemed subsequent to a Record Date with respect to any Interest
Payment Date specified above and on or prior to such Interest Payment Date, then
any accrued interest will be paid on such Interest Payment Date to the Holder of
the Note on such Record Date. If money in an amount sufficient to pay the
Redemption Price of all Notes (or portions thereof) to be redeemed on the
Redemption Date is deposited with the Paying Agent on or before the applicable
Redemption Date and certain other conditions are
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satisfied, interest on the Notes to be redeemed on the applicable Redemption
Date will cease to accrue or such Notes will cease to accrete in value, as the
case may be.
The Notes are not subject to any sinking fund.
6. Repurchase at the Option of Holders upon Change of Control.
Upon the occurrence of a Change of Control, each Holder of Notes shall
have the right to require the Company to purchase such Holder's Notes, in whole,
or in part in a principal amount that is an integral multiple of $1,000,
pursuant to a Change of Control Offer, at a purchase price in cash equal to 101%
of the Accreted Value thereof on any Change of Control Payment Date prior to
July 1, 2003, or 101% of the principal amount thereof on any Change of Control
Payment Date, on or after July 1, 2003 plus accrued and unpaid interest, if any,
to the Change of Control Payment Date.
Within 30 calendar days following any Change of Control, the Company
shall send, or cause to be sent, by first-class mail, postage prepaid, a notice
regarding the Change of Control Offer to each Holder of Notes. The Holder of
this Note may elect to have this Note or a portion hereof in an authorized
denomination purchased by completing the form entitled "Option of Holder to
Require Purchase" appearing below and tendering this Note pursuant to the Change
of Control Offer. Unless the Company defaults in the payment of the Change of
Control Purchase Price with respect thereto, all Notes or portions thereof
accepted for payment pursuant to the Change of Control Offer will cease to
accrete in value or accrue interest, as the case may be, from and after the
Change of Control Payment Date.
7. Repurchase at the Option of Holders upon Asset Sale.
If at any time the aggregate amount of Excess Proceeds (including any
Net Cash Proceeds to be applied to the permanent reduction of Indebtedness
represented by the 2005 Notes, the 2006 Notes and the 2007 Notes) calculated as
of such date exceeds $10 million, the Company shall, within 30 days of the date
the amount of Excess Proceeds exceeds $10 million, use such Excess Proceeds to
make an offer to purchase (an "Asset Sale Offer") on a pro rata basis, from all
holders, outstanding Notes, 2005 Notes and 2006 Notes in an aggregate principal
amount equal to the maximum principal amount that may be purchased out of Excess
Proceeds, at a purchase price (the "Asset Sale Purchase Price") in cash equal to
(a) with respect to the Notes, the 2005 Notes and 2006 Notes, 100% of the
Accreted Value thereof (as defined in the relevant indenture) and (b) with
respect to the 2007 Notes, 100% of the principal amount thereof, plus, in each
case, accrued and unpaid interest, if any, to the purchase date, in accordance
with the procedures set forth in the relevant indenture. Upon completion of an
Asset Sale Offer
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(including payment of the Asset Sale Purchase Price for accepted Notes), any
surplus Excess Proceeds that were the subject of such offer shall cease to be
Excess Proceeds, and the Company may then use such amounts for general corporate
purposes.
Within 30 calendar days of the date the amount of Excess Proceeds
exceeds $10,000,000, the Company shall send, or cause to be sent, by first-class
mail, postage prepaid, a notice regarding the Asset Sale Offer to each Holder of
Notes. The Holder of this Note may elect to have this Note or a portion hereof
in an authorized denomination purchased by completing the form entitled "Option
of Holder to Require Purchase" appearing below and tendering this Note pursuant
to the Asset Sale Offer. Unless the Company defaults in the payment of the Asset
Sale Purchase Price with respect thereto, all Notes or portions thereof selected
for payment pursuant to the Asset Sale Offer will cease to accrete in value or
accrue interest, as the case may be, from and after the Asset Sale Payment Date.
8. Exchange Offer Registration
Pursuant to the Registration Rights Agreement, the Company has agreed
to file with the Commission the Exchange Offer Registration Statement on the
appropriate form under the Securities Act with respect to the Exchange Notes.
Upon the effectiveness of the Exchange Offer Registration Statement, the Company
will offer to the Holders of Restricted Notes pursuant to the Exchange Offer who
are able to make certain representations the opportunity to exchange their
Restricted Notes for Exchange Notes. If (i) the Company is not permitted to
consummate the Exchange Offer because the Exchange Offer is not permitted by
applicable law or Commission policy or (ii) any Holder of Restricted Notes
notifies the Company prior to the 20th day following consummation of the
Exchange Offer that (A) it is prohibited by law or Commission policy from
participating in the Exchange Offer or (B) that it may not resell the Exchange
Notes acquired by it in the Exchange Offer Registration Statement is not
appropriate or available for such resales or (C) that it is a broker-dealer and
owns Notes acquired directly from the Company or an affiliate of the Company,
the Company will file with the Commission a Shelf Registration Statement to
cover resales of the Notes by the Holders thereof who satisfy certain conditions
relating to the provisions of information in connection with the Shelf
Registration Statement. The Company will use its reasonable best efforts to
cause the applicable registration statement to be declared effective as promptly
as possible by the Commission.
The Registration Rights Agreement provides that (i) the Company will
use its reasonable best efforts to file an Exchange Offer Registration Statement
with the Commission on or prior to 75 days after the Closing Date, (ii) the
Company will use its best efforts to have the Exchange Offer Registration
Statement declared effective by the
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Commission on or prior to 120 days after the Closing Date, (iii) unless the
Exchange Offer would not be permitted by applicable law or commission policy,
the Company will commence the Exchange Offer and use its best efforts to issue
on or prior to 30 Business Days after the date on which the Exchange Offer
Registration Statement was declared effective by the Commission Exchange Notes
in exchange for all Notes tendered prior thereto in the Exchange Offer and (iv)
if obligated to file the Shelf Registration Statement, the Company will use its
best efforts to file the Shelf Registration Statement with the Commission on or
prior to 45 days after such filing obligation arises and to cause the Shelf
Registration Statement to be declared effective by the Commission on or prior to
90 days after such obligation arises.
9. Transfer and Exchange.
A Holder may transfer a Note only upon the surrender of such Note for
registration of transfer. No such transfer shall be effected until, and such
transferee shall succeed to the rights of a Holder only upon, final acceptance
and registration of the transfer in the Security Register by the Registrar. When
Notes are presented to the Registrar with a request to register the transfer of,
or to exchange, such Notes, the Registrar shall register the transfer or make
such exchange as requested if its requirements for such transactions and any
applicable requirements hereunder are satisfied.
No service charge shall be made for any registration of transfer or
exchange of Notes, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge that may be imposed in connection
with any registration of transfer of Notes.
Prior to the expiration of the Restricted Period, beneficial
interests in the Regulation S Global Note may be exchanged for beneficial
interests in the Rule 144A Global Note only if such exchange occurs in
connection with a transfer of the Notes pursuant to Rule 144A and the transferor
first delivers to the Trustee a written certificate (in the form, provided in
the Indenture) to the effect that the Notes are being transferred to a person
who the transferor reasonably believes is a qualified institutional buyer within
the meaning of Rule 144A under the Securities Act, purchasing for its own
account or the account of a qualified institutional buyer in a transaction
meeting the requirements of Rule 144A and in accordance with all applicable
securities laws of the states of the United States and other jurisdictions.
Beneficial interests in the Rule 144A Global Note may be transferred to
a Person who takes delivery in the form of an interest in the Regulation S
Global Note, whether before, on or after the Restricted Period, only upon
receipt by the Trustee of a written certificate from the transferor (in the form
provided in the Indenture) to the effect that
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such transfer is being made in accordance with Rule 903 or 904 of Regulation S
or Rule 144 (if available) and that, if such transfer occurs prior to the
expiration of the Restricted Period, the interest transferred will be held
immediately thereafter through Euroclear or Cedel.
Any beneficial interest in one of the Global Notes that is transferred
to a Person who takes delivery in the form of an interest in another Global Note
will, upon transfer, cease to be an interest in such Global Note and become an
interest in such other Global Note and, accordingly, will thereafter be subject
to all restrictions and other procedures applicable to beneficial interests in
such other Global Note for as long as it remains such an interest.
10. Denominations.
The Notes are issuable only in registered form without coupons in
denominations of $1,000 and integral multiples thereof of principal amount.
11. Unclaimed Money.
If money for the payment of principal or interest remains unclaimed for
two years, the Trustee or Paying Agent shall pay the money back to the Company
at its request unless an abandoned property law designates another Person. After
any such payment, Holders entitled to the money must look only to the Company
and not to the Trustee for payment unless such abandoned property law designates
another Person.
12. Discharge and Defeasance.
Subject to certain conditions, the Company at any time may terminate
some or all of its obligations under the Notes and the Indenture if the Company
irrevocably deposits with the Trustee money or U.S. Government Obligations for
the payment of principal and interest on the Notes to redemption or maturity, as
the case may be.
13. Amendment, Waiver.
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Notes may be amended with the written consent of the Holders of
at least a majority in principal amount of the outstanding Notes and (ii) any
past Default and its consequences may be waived with the written consent of the
Holders of at least a majority in principal amount of the outstanding Notes.
Subject to certain exceptions set forth in the Indenture, without the consent of
any Holder of Notes, the Company and the Trustee may amend the Indenture or the
Notes (i) to evidence the succession of another Person to the Company
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and the assumption by such successor of the covenants of the company under the
Indenture and contained in the Notes; (ii) to add additional covenants or to
surrender rights and powers conferred on the Company; (iii) to add any
additional Events of Default; (iv) to provide for uncertificated Notes in
addition to or in place of Certificated Notes; (v) to evidence and provide for
the acceptance of appointment under the Indenture of a successor Trustee; (vi)
to secure the Notes; (vii) to cure any ambiguity in the Indenture, to correct or
supplement any provision in the Indenture which may be inconsistent with any
other provision therein or to add any other provisions with respect to matters
or questions arising under the Indenture, provided that such actions shall not
adversely affect the interests of the Holders in any material respect; or (viii)
to comply with the requirements of the Commission in order to effect or maintain
the qualification of the Indenture under the Trust Indenture Act.
14. Defaults and Remedies.
If an Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the Notes, subject to certain
limitations, may declare all the Notes to be immediately due and payable.
Certain events of bankruptcy or insolvency are Events of Default and shall
result in the Notes being immediately due and payable upon the occurrence of
such Events of Default without any further act of the Trustee or any Holder.
Holders of Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. The Trustee may refuse to enforce the Indenture or
the Notes unless it receives reasonable indemnity or security. Subject to
certain limitations, Holders of a majority in principal amount of the Notes may
direct the Trustee in its exercise of any trust or power under the Indenture.
The Holders of a majority in principal amount of the outstanding Notes, by
written notice to the Company and the Trustee, may rescind any declaration of
acceleration and its consequences if the rescission would not conflict with any
judgment or decree, and if all Events of Default have been cured or waived
except nonpayment of principal and interest that has become due solely because
of the acceleration.
15. Individual Rights of Trustee.
Subject to certain limitations imposed by the Trust Indenture Act, the
Trustee or any Paying Agent or Registrar, in its individual or any other
capacity, may become the owner or pledgee of Notes and may otherwise deal with
the Company or its Affiliates with the same rights it would have if it were not
Trustee, Paying Agent or Registrar, as the case may be, under the Indenture.
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16. No Recourse Against Certain Others.
No director, officer, employee, incorporator or stockholder of the
Company, as such, shall have any liability for any obligations of the Company
under the Notes or the Indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation, solely by reason of its status as
a director, officer, employee, incorporator or stockholder of the Company. By
accepting a Note, each Holder waives and releases all such liability (but only
such liability) as part of the consideration for issuance of such Note to such
Holder.
17. Governing Law.
THE INDENTURE AND THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE
AND TO BE PERFORMED IN SAID STATE.
The Company will furnish to any Holder of Notes upon written request
and without charge to the Holder a copy of the Indenture which has in it the
text of this Note. Requests may be made to:
e.spire Communications, Inc.
133 National Business Parkway
Suite 200
Annapolis Junction, Maryland 20701
Attention: Secretary
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ASSIGNMENT
(To be executed by the registered Holder
if such Holder desires to transfer this Note)
FOR VALUE RECEIVED _______________ hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER TAX IDENTIFYING NUMBER
OF TRANSFEREE: __________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
(Please print name and address of transferee)
_______________________________________________________ this Note, together with
all right, title and interest herein, and does hereby irrevocably constitute and
appoint ____________ Attorney to transfer this Note on the Security Register,
with full power of substitution.
_______________________________________________________
Dated:____________ Signature of Holder:__________________
Signature Guaranteed:________________________
Commercial Bank or Trust Company
or Member Firm of the New York
Stock Exchange, Inc.
NOTICE: The signature to the foregoing Assignment must correspond to the Name as
written upon the face of this Note in every particular, without alteration or
any change whatsoever.
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<PAGE> 145
OPTION OF HOLDER TO ELECT PURCHASE
(check as appropriate)
[ ] In connection with the Change of Control Offer made pursuant to Section
4.07 of the Indenture, the undersigned hereby elects to have
[ ] the entire principal amount
[ ] $____($1,000 in principal amount or an integral multiple thereof)
of this Note
repurchased by the Company. The undersigned hereby directs the
Trustee or Paying Agent to pay it or an amount in cash equal to 101% of
the Accreted Value with respect to the principal amount indicated in
the preceding sentence or the principal amount indicated in the
preceding sentences, as the case may be, plus accrued and unpaid
interest thereon, if any, to the Change of Control Payment Date.
[ ] In connection with the Asset Sale Offer made pursuant to Section 4.08
of the Indenture, the undersigned hereby elects to have
[ ] the entire principal amount
[ ] $____($1,000 in principal amount or an integral multiple thereof)
of this Note
repurchased by the Company. The undersigned hereby directs the
Trustee or Paying Agent to pay it or an amount in cash equal to 100% of
the Accreted Value with respect to the principal amount indicated in
the preceding sentence or the principal amount indicated in the
preceding sentence, as the case may be, plus accrued and unpaid
interest thereon, if any, to the Asset Sale Payment Date.
Dated:____________ Signature of Holder:__________________
Signature Guaranteed:________________________
Commercial Bank or Trust Company
or Member Firm of the New York
Stock Exchange, Inc.
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<PAGE> 146
NOTICE: The signature to the foregoing Assignment must correspond to the Name as
written upon the face of this Note in every particular, without alteration or
any change whatsoever.
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EXHIBIT C
FORM OF EXCHANGE GLOBAL NOTE
e.spire COMMUNICATIONS, INC.
No._________ CUSIP No.__________
ISIN No.___________
THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO.
UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY TO e.spire COMMUNICATIONS, INC. OR THE REGISTRAR
FOR REGISTRATION OF TRANSFER OR EXCHANGE AND ANY NOTE ISSUED IS REGISTERED IN
THE NAME OF CEDE & CO. OR SUCH OTHER ENTITY AS HAS BEEN 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 HAS BEEN 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.
TRANSFER OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN
WHOLE, AND NOT IN PART, TO NOMINEES OF THE DEPOSITORY TRUST COMPANY OR TO A
SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF INTERESTS IN
THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE
RESTRICTIONS SET FORTH IN SECTION 2.06 OF THE INDENTURE, DATED AS OF JULY 24,
1998, BETWEEN e.spire COMMUNICATIONS, INC. AND THE TRUSTEE NAMED THEREIN,
PURSUANT TO WHICH THIS NOTE WAS ISSUED.
THIS NOTE HAS BEEN ISSUED WITH ORIGINAL ISSUE DISCOUNT FOR UNITED
STATES FEDERAL INCOME TAX PURPOSES. FOR FURTHER INFORMATION, PLEASE CONTACT
DAVID L. PIAZZA, CHIEF FINANCIAL OFFICER, e.spire COMMUNICATIONS, INC., 133
NATIONAL BUSINESS PARKWAY, SUITE 200, ANNAPOLIS JUNCTION, MD 20701, (301) 617-
4200.
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GLOBAL NOTE
REPRESENTING 10.625% SENIOR DISCOUNT NOTES DUE JULY 1, 2008
e.spire Communications, Inc., a Delaware corporation, for value
received, hereby promises to pay to CEDE & CO., or its registered assigns, the
principal amount at Stated Maturity indicated on Schedule A hereof, on July 1,
2008.
Reference is hereby made to the further provisions of this Note
set forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been duly
executed by the Trustee referred to on the reverse hereof by manual signature,
this Note shall not be entitled to any benefit under the Indenture or be valid
or obligatory for any purposes.
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<PAGE> 149
IN WITNESS WHEREOF, the Company has caused this Note to be duly
executed.
Dated:
e.spire COMMUNICATIONS, INC.
By: _________________________________________
Name:
Title:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
THE CHASE MANHATTAN BANK,
as Trustee, certifies that this is one of
the Notes referred to in the Indenture.
By: _____________________________
Authorized Officer
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<PAGE> 150
REVERSE SIDE OF FORM OF EXCHANGE GLOBAL NOTE
e.spire COMMUNICATIONS, INC.
GLOBAL NOTE
REPRESENTING 10.625% SENIOR DISCOUNT NOTES DUE JULY 1, 2008
1. Indenture.
This Note is one of a duly authorized issue of debt securities of the
Company (as defined below) designated as its "10.625% Senior Discount Notes due
July 1, 2008" (herein called the "Notes") limited in aggregate principal amount
at Stated Maturity to $375,000,000, issued under an indenture dated as of July
24, 1998 (as amended or supplemented from time to time, the "Indenture") between
the Company and The Chase Manhattan Bank, as trustee (the "Trustee," which term
includes any successor Trustee under the Indenture), to which Indenture
reference is hereby made for a statement of the respective rights, limitations
of rights, duties and immunities thereunder of the Company, the Trustee and each
Holder of Notes and of the terms upon which the Notes are, and are to be,
authenticated and delivered. The summary of the terms of this Note contained
herein does not purport to be complete and is qualified by reference to the
Indenture. All terms used in this Note which are not defined herein shall have
the meanings assigned to them in the Indenture.
The Indenture imposes certain limitations on the ability of the Company
and its Restricted Subsidiaries to, among other things, make certain Investments
and other Restricted Payments, pay dividends and other distributions, incur
Indebtedness, enter into consensual restrictions upon the payment of certain
dividends and distributions by such Restricted Subsidiaries, enter into or
permit certain transactions with Affiliates, create or incur Liens, enter into
or permit certain Sale and Leaseback Transactions and make Asset Sales. The
Indenture also imposes limitations on the ability of the Company to consolidate
or merge with or into any other Person or permit any other Person to merge with
or into the Company, or sell, convey, assign, transfer, lease or otherwise
dispose of all or substantially all of the Property of the Company to any other
Person and on the ability of the Company's Restricted Subsidiaries to issue
Capital Stock.
2. Principal and Interest.
e. spire Communications, Inc., a Delaware corporation (such
corporation, and its successors and assigns under the Indenture, being herein
called the "Company"), promises to pay the principal amount at Stated Maturity
set forth on Schedule A of this Note to the Holder hereof on July 1, 2008.
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This Note will accrete at a rate of approximately 10.625%, per annum,
compounded semiannually from an initial principal amount of $599.89 per $1,000
principal amount at Stated Maturity on the Issue Date to a principal amount in
arrears of $1,000 per $1,000 principal amount at Stated Maturity by July 1,
2003.
The Company shall pay interest at a rate of 10.625%, per annum, from
July 1, 2003, or from the most recent Interest Payment Date thereafter to which
interest has been paid or duly provided for, semiannually on January 1 and July
1 of each year, commencing on January 1, 2004, in cash, to the Holder hereof
until the principal amount hereof is paid or made available for payment. The
interest so payable, and punctually paid or duly provided for, on any Interest
Payment Date will, subject to certain exceptions provided in the Indenture, be
paid to the Person in whose name this Note (or the Note in exchange or
substitution for which this Note was issued) is registered at the close of
business on the Record Date for interest payable on such Interest Payment Date.
The Record Date for any interest payment is the close of business on December 15
or June 15, as the case may be, whether or not a Business Day, immediately
preceding the Interest Payment Date on which such interest is payable. Any such
interest not so punctually paid or duly provided for ("Defaulted Interest")
shall forthwith cease to be payable to the Holder on such Record Date and shall
be paid as provided in Section 2.11 of the Indenture. Interest will be computed
on the basis of a 360-day year of twelve 30-day months.
Each payment of interest in respect of an Interest Payment Date will
include interest accrued through the day before such Interest Payment Date. If
an Interest Payment Date falls on a day that is not a Business Day, the interest
payment to be made on such Interest Payment Date will be made on the next
succeeding Business Day with the same force and effect as if made on such
Interest Payment Date, and no additional interest will accrue as a result of
such delayed payment.
To the extent lawful, the Company shall pay interest on (i) if prior to
July 1, 2003, any overdue Accreted Value of (and premium, if any, on) this Note,
or if on or after July 1, 2003, any overdue principal of (and premium, if any,
on) this Note, at the rate of 10.625% per annum, and (ii) Defaulted Interest
(without regard to any applicable grace period), at the rate of 11.625% per
annum. The Company's obligation pursuant to the previous sentence shall apply
whether such overdue amount is due at its Stated Maturity, as a result of the
Company's obligations pursuant to Section 3.05, Section 4.07 or Section 4.08 of
the Indenture, or otherwise.
3. Method of Payment.
The Company, through the Paying Agent, shall pay interest on this Note
to the registered Holder of this Note, as provided above. The Holder must
surrender this Note to
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a Paying Agent to collect principal payments. The Company will pay principal and
interest in money of the United States of America that at the time of payment is
legal tender for payment of all debts public and private. Principal and interest
will be payable at the office of the Paying Agent but, at the option of the
Company, interest may be paid by check mailed to the registered Holders at their
registered addresses.
4. Paying Agent and Registrar.
Initially, the Trustee will act as Paying Agent and Registrar under the
Indenture. The Company may, upon written notice to the Trustee, appoint and
change any Paying Agent or Registrar. The Company or any of its subsidiaries may
act as Paying Agent or Registrar.
5. Optional Redemption.
The Notes may not be redeemed prior to July 1, 2003. Thereafter, the
Notes will be subject to redemption at the option of the Company, in whole or in
part, upon not less than 30 calendar days, nor more than 60 calendar days'
notice, at the prices (expressed as percentages of principal amount) set forth
below, plus accrued and unpaid interest thereon (if any) at the applicable
Redemption Date, if redeemed during the twelve-month period beginning July 1 of
the years indicated below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2003 105.312%
2004 103.542%
2005 101.771%
2006 and thereafter 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to July 1, 2001, the
Company may redeem up to 35% of the aggregate principal amount of Notes with the
net proceeds of one or more Equity Offerings of the Company at a redemption
price equal to 110.625% of the aggregate principal amount thereof on the date of
redemption; provided, however, that, after giving effect to any such redemption,
at least 65% of the original aggregate principal amount of the Notes remain
outstanding. In order to effect the foregoing redemption with the proceeds of
any Equity Offering the Company shall make such redemption not more than 60 days
after the consummation of any such Equity Offering.
6. Notice of Redemption.
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At least 30 calendar days but not more than 60 calendar days before a
Redemption Date, the Company will send a notice of redemption, first-class mail,
postage prepaid, to Holders of Notes to be redeemed at the addresses of such
Holders as they appear in the Security Register.
If less than all of the Notes are to be redeemed at any time, the Notes
to be redeemed will be chosen by the Trustee in accordance with the Indenture.
If any Note is redeemed subsequent to a Record Date with respect to any Interest
Payment Date specified above and on or prior to such Interest Payment Date, then
any accrued interest will be paid on such Interest Payment Date to the Holder of
the Note on such Record Date. If money in an amount sufficient to pay the
Redemption Price of all Notes (or portions thereof) to be redeemed on the
Redemption Date is deposited with the Paying Agent on or before the applicable
Redemption Date and certain other conditions are satisfied, interest on the
Notes to be redeemed on the applicable Redemption Date will cease to accrue.
The Notes are not subject to any sinking fund.
7. Repurchase at the Option of Holders upon Change of Control.
Upon the occurrence of a Change of Control, each Holder of Notes shall
have the right to require the Company to purchase such Holder's Notes, in whole,
or in part in a principal amount that is an integral multiple of $1,000,
pursuant to a Change of Control Offer, at a purchase price in cash equal to 101%
of the Accreted Value thereof on any Change of Control Payment Date prior to
July 1, 2003 or 101% of the principal amount thereof on any Change of Control
Payment Date on or after July 1, 2003, plus accrued and unpaid interest, if any,
to the Change of Control Payment Date.
Within 30 calendar days following any Change of Control, the Company
shall send, or cause to be sent, by first-class mail, postage prepaid, a notice
regarding the Change of Control Offer to each Holder of Notes. The Holder of
this Note may elect to have this Note or a portion hereof in an authorized
denomination purchased by completing the form entitled "Option of Holder to
Require Purchase" appearing below and tendering this Note pursuant to the Change
of Control Offer. Unless the Company defaults in the payment of the Change of
Control Purchase Price with respect thereto, all Notes or portions thereof
accepted for payment pursuant to the Change of Control Offer will cease to
accrete in value or accrue interest, as the case may be, from and after the
Change of Control Payment Date.
8. Repurchase at the Option of Holders upon Asset Sale.
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If at any time the aggregate amount of Excess Proceeds (including any
Net Cash Proceeds to be applied to the permanent reduction of Indebtedness
represented by the 2005 Notes, the 2006 Notes and 2007 Notes) calculated as of
such date exceeds $10 million, the Company shall, within 30 days of the date the
amount of Excess Proceeds exceeds $10 million, use such Excess Proceeds to make
an offer to purchase (an "Asset Sale Offer") on a pro rata basis, from all
holders, outstanding Notes, 2005 Notes, 2006 Notes and 2007 Notes in an
aggregate principal amount equal to the maximum principal amount that may be
purchased out of Excess Proceeds, at a purchase price (the "Asset Sale Purchase
Price") in cash equal to (a) with respect to the Notes, the 2005 Notes and 2006
Notes, 100% of the Accreted Value thereof (as defined in the relevant indenture)
and (b) with respect to the 2007 Notes, 100% of the principal amount thereof,
plus, in each case, accrued and unpaid interest, if any, to the purchase date,
in accordance with the procedures set forth in the relevant indenture. Upon
completion of an Asset Sale Offer (including payment of the Asset Sale Purchase
Price for accepted Notes), any surplus Excess Proceeds that were the subject of
such offer shall cease to be Excess Proceeds, and the Company may then use such
amounts for general corporate purposes.
Within 30 calendar days of the date the amount of Excess Proceeds
exceeds $10,000,000, the Company shall send, or cause to be sent, by first-class
mail, postage prepaid, a notice regarding the Asset Sale Offer to each Holder of
Notes. The Holder of this Note may elect to have this Note or a portion hereof
in an authorized denomination purchased by completing the form entitled "Option
of Holder to Require Purchase" appearing below and tendering this Note pursuant
to the Asset Sale Offer. Unless the Company defaults in the payment of the Asset
Sale Purchase Price with respect thereto, all Notes or portions thereof selected
for payment pursuant to the Asset Sale Offer will cease to accrete in value or
accrue interest, as the case may be, from and after the Asset Sale Payment Date.
9. The Global Note.
So long as this Global Note is registered in the name of the Depositary
or its nominee, members of, or participants in, the Depositary ("Agent Members")
shall have no rights under the Indenture with respect to this Global Note held
on their behalf by the Depositary or the Trustee as its custodian, and the
Depositary may be treated by the Company, the Trustee and any agent of the
Company or the Trustee as the absolute owner of this Global Note for all
purposes. Notwithstanding the foregoing, nothing herein shall (i) prevent the
Company, the Trustee or any agent of the Company or the Trustee, from giving
effect to any written certification, proxy or other authorization furnished by
the Depositary or (ii) impair, as between the Depositary and its Agent Members,
the operation of customary practices governing the exercise of the rights of a
Holder of Notes.
C-8
<PAGE> 155
The Holder of this Global Note may grant proxies and otherwise
authorize any Person, including Agent Members and Persons that may hold
interests in this Global Note through Agent Members, to take any action which a
Holder of Notes is entitled to take under the Indenture or the Notes.
Whenever, as a result of optional redemption by the Company, a Change
of Control Offer, an Asset Sale Offer or an exchange for Certificated Notes,
this Global Note is redeemed, repurchased or exchanged in part, this Global Note
shall be surrendered by the Holder thereof to the Trustee who shall cause an
adjustment to be made to Schedule A hereof so that the principal amount of this
Global Note will be equal to the portion not redeemed, repurchased or exchanged
and shall thereafter return this Global Note to such Holder; provided that this
Global Note shall be in a principal amount of $1,000 or an integral multiple of
$1,000.
10. Transfer and Exchange.
The Holder of this Global Note shall, by acceptance of this Global
Note, agree that transfers of beneficial interests in this Global Note may be
effected only through a book entry system maintained by such Holder (or its
agent), and that ownership of a beneficial interest in the Notes represented
thereby shall be required to be reflected in book entry form.
Transfers of this Global Note shall be limited to transfers in whole,
and not in part, to the Depositary, its successors and their respective
nominees. Interests of beneficial owners in this Global Note may be transferred
in accordance with the rules and procedures of the Depositary (or its
successors).
This Global Note will be exchanged by the Company for one or more
Certificated Notes if (a) the Depositary (i) has notified the Company that it is
unwilling or unable to continue as, or ceases to be, a clearing agency
registered under Section 17A of the Exchange Act and (ii) a successor to the
Depositary registered as a clearing agency under Section 17A of the Exchange Act
is not able to be appointed by the Company within 90 calendar days or (b) the
Depositary is at any time unwilling or unable to continue as Depositary and a
successor to the Depositary is not able to be appointed by the Company within 90
calendar days or (c) the Company, at its option, notifies the Trustee in writing
that it elects to cause the issuance of the Notes in certificated form. If an
Event of Default occurs and is continuing, the Company shall, at the request of
the Holder hereof, exchange all or part of this Global Note for one or more
Certificated Notes; provided that the principal amount of each of such
Certificated Notes and this Global Note, after such exchange, shall be $1,000 or
an integral multiple thereof. Whenever this Global Note is
C-9
<PAGE> 156
exchanged as a whole for one or more Certificated Notes, it shall be surrendered
by the Holder to the Trustee for cancellation. Whenever this Global Note is
exchanged in part for one or more Certificated Notes, it shall be surrendered by
the Holder to the Trustee and the Trustee shall make the appropriate notations
thereon pursuant to Section 2.05(c) of the Indenture. All Certificated Notes
issued in exchange for this Global Note or any portion hereof shall be
registered in such names as the Depositary shall instruct the Trustee. Interests
in this Global Note may not be exchanged for Certificated Notes other than as
provided in this paragraph.
11. Denominations.
The Notes are issuable only in registered form without coupons in
denominations of $1,000 and integral multiples thereof of principal amount.
12. Unclaimed Money.
If money for the payment of principal or interest remains unclaimed for
two years, the Trustee or Paying Agent shall pay the money back to the Company
at its request unless an abandoned property law designates another Person. After
any such payment, Holders entitled to the money must look only to the Company
and not to the Trustee for payment unless such abandoned property law designates
another Person.
13. Discharge and Defeasance.
Subject to certain conditions, the Company at any time may terminate
some or all of its obligations under the Notes and the Indenture if the Company
irrevocably deposits with the Trustee money or U.S. Government Obligations for
the payment of principal and interest on the Notes to redemption or maturity, as
the case may be.
14. Amendment, Waiver.
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Notes may be amended with the written consent of the Holders of
at least a majority in principal amount of the outstanding Notes and (ii) any
past Default and its consequences may be waived with the written consent of the
Holders of at least a majority in principal amount of the outstanding Notes.
Subject to certain exceptions set forth in the Indenture, without the consent of
any Holder of Notes, the Company and the Trustee may amend the Indenture or the
Notes (i) to evidence the succession of another Person to the Company and the
assumption by such successor of the covenants of the company under the Indenture
and contained in the Notes; (ii) to add additional covenants or to surrender
rights and powers conferred on the Company; (iii) to add any additional Events
of
C-10
<PAGE> 157
Default; (iv) to provide for uncertificated Notes in addition to or in place of
Certificated Notes; (v) to evidence and provide for the acceptance of
appointment under the Indenture of a successor Trustee; (vi) to secure the
Notes; (vii) to cure any ambiguity in the Indenture, to correct or supplement
any provision in the Indenture which may be inconsistent with any other
provision therein or to add any other provisions with respect to matters or
questions arising under the Indenture, provided that such actions shall not
adversely affect the interests of the Holders in any material respect; or (viii)
to comply with the requirements of the Commission in order to effect or maintain
the qualification of the Indenture under the Trust Indenture Act.
15. Defaults and Remedies.
If an Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the Notes, subject to certain
limitations, may declare all the Notes to be immediately due and payable.
Certain events of bankruptcy or insolvency are Events of Default and shall
result in the Notes being immediately due and payable upon the occurrence of
such Events of Default without any further act of the Trustee or any Holder.
Holders of Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. The Trustee may refuse to enforce the Indenture or
the Notes unless it receives reasonable indemnity or security. Subject to
certain limitations, Holders of a majority in principal amount of the Notes may
direct the Trustee in its exercise of any trust or power under the Indenture.
The Holders of a majority in principal amount of the outstanding Notes, by
written notice to the Company and the Trustee, may rescind any declaration of
acceleration and its consequences if the rescission would not conflict with any
judgment or decree, and if all Events of Default have been cured or waived
except nonpayment of principal and interest that has become due solely because
of the acceleration.
16. Individual Rights of Trustee.
Subject to certain limitations imposed by the Trust Indenture Act, the
Trustee or any Paying Agent or Registrar, in its individual or any other
capacity, may become the owner or pledgee of Notes and may otherwise deal with
the Company or its Affiliates with the same rights it would have if it were not
Trustee, Paying Agent or Registrar, as the case may be, under the Indenture.
17. No Recourse Against Certain Others.
C-11
<PAGE> 158
No director, officer, employee, incorporator or stockholder of the
Company, as such, shall have any liability for any obligations of the Company
under the Notes or the Indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation, solely by reason of its status as
a director, officer, employee, incorporator or stockholder of the Company. By
accepting a Note, each Holder waives and releases all such liability (but only
such liability) as part of the consideration for issuance of such Note to such
Holder.
18. Governing Law.
THE INDENTURE AND THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE
AND TO BE PERFORMED IN SAID STATE.
The Company will furnish to any Holder of Notes upon written request
and without charge to the Holder a copy of the Indenture which has in it the
text of this Note. Requests may be made to:
e.spire Communications, Inc.
133 National Business Parkway
Suite 200
Annapolis Junction, Maryland 20701
Attention: Secretary
C-12
<PAGE> 159
SCHEDULE A
SCHEDULE OF PRINCIPAL AMOUNT
The initial principal amount at Stated Maturity of this Note shall
be $ . The following decreases/increase in the principal amount at Stated
Maturity of this Note have been made:
<TABLE>
<CAPTION>
Total
Principle Amount Notation Made
Date of Decrease in Increase in Following Such By or on
Decrease/ Principal Principal Decrease/ Behalf of
Increase Amount Amount Increase Trustee
- ------------- --------------- --------------- -------------------- -----------------
<S> <C> <C> <C> <C>
- ------------- --------------- --------------- -------------------- -----------------
- ------------- --------------- --------------- -------------------- -----------------
- ------------- --------------- --------------- -------------------- -----------------
- ------------- --------------- --------------- -------------------- -----------------
- ------------- --------------- --------------- -------------------- -----------------
- ------------- --------------- --------------- -------------------- -----------------
- ------------- --------------- --------------- -------------------- -----------------
- ------------- --------------- --------------- -------------------- -----------------
- ------------- --------------- --------------- -------------------- -----------------
- ------------- --------------- --------------- -------------------- -----------------
- ------------- --------------- --------------- -------------------- -----------------
- ------------- --------------- --------------- -------------------- -----------------
- ------------- --------------- --------------- -------------------- -----------------
- ------------- --------------- --------------- -------------------- -----------------
- ------------- --------------- --------------- -------------------- -----------------
</TABLE>
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<PAGE> 160
ASSIGNMENT
(To be executed by the registered Holder
if such Holder desires to transfer this Note)
FOR VALUE RECEIVED _______________ hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER TAX IDENTIFYING NUMBER OF TRANSFEREE:
__________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
(Please print name and address of transferee)
_______________________________________________________ this Note, together with
all right, title and interest herein, and does hereby irrevocably constitute and
appoint ____________ Attorney to transfer this Note on the Security Register,
with full power of substitution.
_______________________________________________________
Dated:_______________ Signature of Holder:________________________
Signature Guaranteed:________________________
Commercial Bank or Trust Company
or Member Firm of the New York
Stock Exchange, Inc.
NOTICE: The signature to the foregoing Assignment must correspond to the Name as
written upon the face of this Note in every particular, without alteration or
any change whatsoever.
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<PAGE> 161
OPTION OF HOLDER TO ELECT PURCHASE
(check as appropriate)
[ ] In connection with the Change of Control Offer made pursuant to Section
4.07 of the Indenture, the undersigned hereby elects to have
[ ] the entire principal amount
[ ] $____($1,000 in principal amount or an integral multiple thereof)
of this Note
repurchased by the Company. The undersigned hereby directs the
Trustee or Paying Agent to pay it or an amount in cash equal to 101% of
the Accreted Value with respect to the principal amount indicated in
the preceding sentence or the principal amount indicated in the
preceding sentences, as the case may be, plus accrued and unpaid
interest thereon, if any, to the Change of Control Payment Date.
[ ] In connection with the Asset Sale Offer made pursuant to Section 4.08
of the Indenture, the undersigned hereby elects to have
[ ] the entire principal amount
[ ] $_____($1,000 in principal amount or an integral multiple thereof)
of this Note
repurchased by the Company. The undersigned hereby directs the
Trustee or Paying Agent to pay it or an amount in cash equal to 100% of
the Accreted Value with respect to the principal amount indicated in
the preceding sentence, or the principal amount indicated in the
preceding sentence, as the case may be, plus accrued and unpaid
interest thereon, if any, to the Asset Sale Payment Date.
Dated:_________________________ Signature of
Holder::______________________
Signature Guaranteed:________________________
Commercial Bank or Trust Company
or Member Firm of the New York
Stock Exchange, Inc.
C-15
<PAGE> 162
NOTICE: The signature to the foregoing Assignment must correspond to the Name as
written upon the face of this Note in every particular, without alteration or
any change whatsoever.
C-16
<PAGE> 163
EXHIBIT D
FORM OF EXCHANGE CERTIFICATED NOTE
e.spire COMMUNICATIONS, INC.
No.________ CUSIP No.____
ISIN No._____
10.625% SENIOR DISCOUNT NOTE DUE JULY 1, 2008
e.spire Communications, Inc., a Delaware corporation, for value received,
hereby promises to pay to CEDE & CO., or its registered assigns, $ , on July 1,
2008.
THIS NOTE HAS BEEN ISSUED WITH ORIGINAL ISSUE DISCOUNT FOR UNITED STATES
FEDERAL INCOME TAX PURPOSES. FOR FURTHER INFORMATION, PLEASE CONTACT DAVID L.
PIAZZA, CHIEF FINANCIAL OFFICER, AMERICAN COMMUNICATIONS SERVICES, INC., 133
NATIONAL BUSINESS PARKWAY, SUITE 200, ANNAPOLIS JUNCTION, MD 20701, (301)
617-4200.
Reference is hereby made to the further provisions of this Note set forth
on the reverse hereof, which further provisions shall for all purposes have the
same effect as if set forth at this place.
Unless the certificate of authentication hereon has been duly executed by
the Trustee referred to on the reverse hereof by manual signature, this Note
shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purposes.
D-1
<PAGE> 164
IN WITNESS WHEREOF, the Company has caused this Note to be duly
executed.
Dated:
e.spire COMMUNICATIONS, INC.
By:___________________________________
Name:
Title:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
THE CHASE MANHATTAN BANK,
as Trustee, certifies that this is one
of the Notes referred to in the Indenture.
By:__________________________
Authorized Officer
D-2
<PAGE> 165
REVERSE SIDE OF FORM OF EXCHANGE CERTIFICATED NOTE
e.spire COMMUNICATIONS, INC.
CERTIFICATED NOTE
10.625% SENIOR DISCOUNT NOTES DUE JULY 1, 2008
1. Indenture.
This Note is one of a duly authorized issue of debt securities of the
Company (as defined below) designated as its "10.625% Senior Discount Notes due
July 1, 2008" (herein called the "Notes") limited in aggregate principal amount
at Stated Maturity to $375,000,000, issued under an indenture dated as of July
1, 1998 (as amended or supplemented from time to time, the "Indenture") between
the Company and The Chase Manhattan Bank, as trustee (the "Trustee," which term
includes any successor Trustee under the Indenture), to which Indenture
reference is hereby made for a statement of the respective rights, limitations
of rights, duties and immunities thereunder of the Company, the Trustee and each
Holder of Notes and of the terms upon which the Notes are, and are to be,
authenticated and delivered. The summary of the terms of this Note contained
herein does not purport to be complete and is qualified by reference to the
Indenture. All terms used in this Note which are not defined herein shall have
the meanings assigned to them in the Indenture.
The Indenture imposes certain limitations on the ability of the Company
and its Restricted Subsidiaries to, among other things, make certain Investments
and other Restricted Payments, pay dividends and other distributions, incur
Indebtedness, enter into consensual restrictions upon the payment of certain
dividends and distributions by such Restricted Subsidiaries, enter into or
permit certain transactions with Affiliates, create or incur Liens, enter into
or permit certain Sale and Leaseback Transactions and make Asset Sales. The
Indenture also imposes limitations on the ability of the Company to consolidate
or merge with or into any other Person or permit any other Person to merge with
or into the Company, or sell, convey, assign, transfer, lease or otherwise
dispose of all or substantially all of the Property of the Company to any other
Person and on the ability of the Company's Restricted Subsidiaries to issue
Capital Stock.
2. Principal and Interest.
e.spire Communications, Inc., a Delaware corporation (such corporation,
and its successors and assigns under the Indenture, being herein called the
"Company"), promises to pay the principal amount hereof to the Holder hereof on
July 1, 2008.
D-3
<PAGE> 166
This Note will accrete at a rate of approximately 10.625%, per annum,
compounded semiannually, from an initial principal amount of $599.89 per $1,000
principal amount at Stated Maturity on the Issue Date to a principal amount in
arrears of $1,000 per $1,000 principal amount at Stated Maturity by July 1,
2003.
The Company shall pay interest at a rate of 10.625%, per annum, from July
1, 2003, or from the most recent Interest Payment Date thereafter to which
interest has been paid or duly provided for, semiannually on January 1 and July
1 of each year, commencing on January 1, 2004, in cash, to the Holder hereof
until the principal amount hereof is paid or made available for payment. The
interest so payable, and punctually paid or duly provided for, on any Interest
Payment Date will, subject to certain exceptions provided in the Indenture, be
paid to the Person in whose name this Note (or the Note in exchange or
substitution for which this Note was issued) is registered at the close of
business on the Record Date for interest payable on such Interest Payment Date.
The Record Date for any interest payment is the close of business on December 15
or June 15, as the case may be, whether or not a Business Day, immediately
preceding the Interest Payment Date on which such interest is payable. Any such
interest not so punctually paid or duly provided for ("Defaulted Interest")
shall forthwith cease to be payable to the Holder on such Record Date and shall
be paid as provided in Section 2.11 of the Indenture. Interest will be computed
on the basis of a 360-day year of twelve 30-day months.
Each payment of interest in respect of an Interest Payment Date will
include interest accrued through the day before such Interest Payment Date. If
an Interest Payment Date falls on a day that is not a Business Day, the interest
payment to be made on such Interest Payment Date will be made on the next
succeeding Business Day with the same force and effect as if made on such
Interest Payment Date, and no additional interest will accrue as a result of
such delayed payment.
To the extent lawful, the Company shall pay interest on (i) if prior to
July 1, 2003, any overdue Accreted Value of (and premium, if any, on) this Note,
or if on or after July 1, 2003, any overdue principal of (and premium, if any,
on) this Note, at the rate of 11.625% per annum, and (ii) Defaulted Interest
(without regard to any applicable grace period), at the rate of 11.625% per
annum. The Company's obligation pursuant to the previous sentence shall apply
whether such overdue amount is due at its Stated Maturity, as a result of the
Company's obligations pursuant to Section 3.05, Section 4.07 or Section 4.08 of
the Indenture, or otherwise.
3. Method of Payment.
The Company, through the Paying Agent, shall pay interest on this Note to
the registered Holder of this Note, as provided above. The Holder must surrender
this Note to
D-4
<PAGE> 167
a Paying Agent to collect principal payments. The Company will pay principal and
interest in money of the United States of America that at the time of payment is
legal tender for payment of all debts public and private. Principal and interest
will be payable at the office of the Paying Agent but, at the option of the
Company, interest may be paid by check mailed to the registered Holders at their
registered addresses.
4. Paying Agent and Registrar.
Initially, the Trustee will act as Paying Agent and Registrar under the
Indenture. The Company may, upon written notice to the Trustee, appoint and
change any Paying Agent or Registrar. The Company or any of its subsidiaries may
act as Paying Agent or Registrar.
4. Optional Redemption.
The Notes may not be redeemed prior to July 1, 2002. Thereafter, the Notes
will be subject to redemption at the option of the Company, in whole or in part,
upon not less than 30 calendar days, nor more than 60 calendar days' notice, at
the prices (expressed as percentages of principal amount) set forth below, plus
accrued and unpaid interest thereon (if any) at the applicable Redemption Date,
if redeemed during the twelve-month period beginning July 1 of the years
indicated below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2003 105.312%
2004 103.542%
2005 101.771%
2006 and thereafter 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to July 1, 2001, the
Company may redeem up to 35% of the aggregate principal amount of Notes with the
net proceeds of one or more Equity Offerings of the Company at a redemption
price equal to 110.625% of the aggregate principal amount thereof on the date of
redemption; provided, however, that, after giving effect to any such redemption,
at least 65% at the original principal amount of the Notes remain outstanding.
In order to effect the foregoing redemption with the proceeds of any Equity
Offering, the Company shall make such redemption not more than 60 days after the
consumption of any such Equity Offering.
D-5
<PAGE> 168
5. Notice of Redemption.
At least 30 calendar days but not more than 60 calendar days before a
Redemption Date, the Company will send a notice of redemption, first-class mail,
postage prepaid, to Holders of Notes to be redeemed at the addresses of such
Holders as they appear in the Security Register.
If less than all of the Notes are to be redeemed at any time, the Notes to
be redeemed will be chosen by the Trustee in accordance with the Indenture. If
any Note is redeemed subsequent to a Record Date with respect to any Interest
Payment Date specified above and on or prior to such Interest Payment Date, then
any accrued interest will be paid on such Interest Payment Date to the Holder of
the Note on such Record Date. If money in an amount sufficient to pay the
Redemption Price of all Notes (or portions thereof) to be redeemed on the
Redemption Date is deposited with the Paying Agent on or before the applicable
Redemption Date and certain other conditions are satisfied, interest on the
Notes to be redeemed on the applicable Redemption Date will cease to accrue or
such Notes will cease to accrete in value, as the case may be.
The Notes are not subject to any sinking fund.
6. Repurchase at the Option of Holders upon Change of Control.
Upon the occurrence of a Change of Control, each Holder of Notes shall
have the right to require the Company to purchase such Holder's Notes, in whole,
or in part in a principal amount that is an integral multiple of $1,000,
pursuant to a Change of Control Offer, at a purchase price in cash equal to 101%
of the Accreted Value thereof on any Change of Control Payment Date prior to
July 1, 2003, or 101% of the principal amount thereof on any Change of Control
Payment Date, on or after July 1, 2003 plus accrued and unpaid interest, if any,
to the Change of Control Payment Date.
Within 30 calendar days following any Change of Control, the Company shall
send, or cause to be sent, by first-class mail, postage prepaid, a notice
regarding the Change of Control Offer to each Holder of Notes. The Holder of
this Note may elect to have this Note or a portion hereof in an authorized
denomination purchased by completing the form entitled "Option of Holder to
Require Purchase" appearing below and tendering this Note pursuant to the Change
of Control Offer. Unless the Company defaults in the payment of the Change of
Control Purchase Price with respect thereto, all Notes or portions thereof
accepted for payment pursuant to the Change of Control Offer will cease to
accrete in value or accrue interest, as the case may be, from and after the
Change of Control Payment Date.
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<PAGE> 169
7. Repurchase at the Option of Holders upon Asset Sale.
If at any time the aggregate amount of Excess Proceeds (including any Net
Cash Proceeds to be applied to the permanent reduction of Indebtedness
represented by the 2005 Notes, the 2006 Notes and the 2007 Notes) calculated as
of such date exceeds $10 million, the Company shall, within 30 days of the date
the amount of Excess Proceeds exceeds $10 million, use such Excess Proceeds to
make an offer to purchase (an "Asset Sale Offer") on a pro rata basis, from all
holders, outstanding Notes, 2005 Notes and 2006 Notes in an aggregate principal
amount equal to the maximum principal amount that may be purchased out of Excess
Proceeds, at a purchase price (the "Asset Sale Purchase Price") in cash equal to
(a) with respect to the Notes, the 2005 Notes and 2006 Notes, 100% of the
Accreted Value thereof (as defined in the relevant indenture) and (b) with
respect to the 2007 Notes, 100% of the principal amount thereof, plus, in each
case, accrued and unpaid interest, if any, to the purchase date, in accordance
with the procedures set forth in the relevant indenture. Upon completion of an
Asset Sale Offer (including payment of the Asset Sale Purchase Price for
accepted Notes), any surplus Excess Proceeds that were the subject of such offer
shall cease to be Excess Proceeds, and the Company may then use such amounts for
general corporate purposes.
Within 30 calendar days of the date the amount of Excess Proceeds exceeds
$10,000,000, the Company shall send, or cause to be sent, by first-class mail,
postage prepaid, a notice regarding the Asset Sale Offer to each Holder of
Notes. The Holder of this Note may elect to have this Note or a portion hereof
in an authorized denomination purchased by completing the form entitled "Option
of Holder to Require Purchase" appearing below and tendering this Note pursuant
to the Asset Sale Offer. Unless the Company defaults in the payment of the Asset
Sale Purchase Price with respect thereto, all Notes or portions thereof selected
for payment pursuant to the Asset Sale Offer will cease to accrete in value or
accrue interest, as the case may be, from and after the Asset Sale Payment Date.
8. Transfer and Exchange.
A Holder may transfer a Note only upon the surrender of such Note for
registration of transfer. No such transfer shall be effected until, and such
transferee shall succeed to the rights of a Holder only upon, final acceptance
and registration of the transfer in the Security Register by the Registrar. When
Notes are presented to the Registrar with a request to register the transfer of,
or to exchange, such Notes, the Registrar shall register the transfer or make
such exchange as requested if its requirements for such transactions and any
applicable requirements hereunder are satisfied.
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No service charge shall be made for any registration of transfer or
exchange of Notes, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge that may be imposed in connection
with any registration of transfer of Notes.
9. Denominations.
The Notes are issuable only in registered form without coupons in
denominations of $1,000 and integral multiples thereof of principal amount.
10. Unclaimed Money.
If money for the payment of principal or interest remains unclaimed for
two years, the Trustee or Paying Agent shall pay the money back to the Company
at its request unless an abandoned property law designates another Person. After
any such payment, Holders entitled to the money must look only to the Company
and not to the Trustee for payment unless such abandoned property law designates
another Person.
11. Discharge and Defeasance.
Subject to certain conditions, the Company at any time may terminate some
or all of its obligations under the Notes and the Indenture if the Company
irrevocably deposits with the Trustee money or U.S. Government Obligations for
the payment of principal and interest on the Notes to redemption or maturity, as
the case may be.
12. Amendment, Waiver.
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Notes may be amended with the written consent of the Holders of
at least a majority in principal amount of the outstanding Notes and (ii) any
past Default and its consequences may be waived with the written consent of the
Holders of at least a majority in principal amount of the outstanding Notes.
Subject to certain exceptions set forth in the Indenture, without the consent of
any Holder of Notes, the Company and the Trustee may amend the Indenture or the
Notes (i) to evidence the succession of another Person to the Company and the
assumption by such successor of the covenants of the company under the Indenture
and contained in the Notes; (ii) to add additional covenants or to surrender
rights and powers conferred on the Company; (iii) to add any additional Events
of Default; (iv) to provide for uncertificated Notes in addition to or in place
of Certificated Notes; (v) to evidence and provide for the acceptance of
appointment under the Indenture of a successor Trustee; (vi) to secure the
Notes; (vii) to cure any ambiguity in the Indenture, to correct or supplement
any provision in the Indenture which may be incon-
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sistent with any other provision therein or to add any other provisions with
respect to matters or questions arising under the Indenture, provided that such
actions shall not adversely affect the interests of the Holders in any material
respect; or (viii) to comply with the requirements of the Commission in order to
effect or maintain the qualification of the Indenture under the Trust Indenture
Act.
13. Defaults and Remedies.
If an Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the Notes, subject to certain
limitations, may declare all the Notes to be immediately due and payable.
Certain events of bankruptcy or insolvency are Events of Default and shall
result in the Notes being immediately due and payable upon the occurrence of
such Events of Default without any further act of the Trustee or any Holder.
Holders of Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. The Trustee may refuse to enforce the Indenture or
the Notes unless it receives reasonable indemnity or security. Subject to
certain limitations, Holders of a majority in principal amount of the Notes may
direct the Trustee in its exercise of any trust or power under the Indenture.
The Holders of a majority in principal amount of the outstanding Notes, by
written notice to the Company and the Trustee, may rescind any declaration of
acceleration and its consequences if the rescission would not conflict with any
judgment or decree, and if all Events of Default have been cured or waived
except nonpayment of principal and interest that has become due solely because
of the acceleration.
14. Individual Rights of Trustee.
Subject to certain limitations imposed by the Trust Indenture Act, the
Trustee or any Paying Agent or Registrar, in its individual or any other
capacity, may become the owner or pledgee of Notes and may otherwise deal with
the Company or its Affiliates with the same rights it would have if it were not
Trustee, Paying Agent or Registrar, as the case may be, under the Indenture.
15. No Recourse Against Certain Others.
No director, officer, employee, incorporator or stockholder of the
Company, as such, shall have any liability for any obligations of the Company
under the Notes or the Indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation, solely by reason of its status as
a director, officer, employee, incorporator or stockholder of the Company. By
accepting a Note, each Holder waives and releases all
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such liability (but only such liability) as part of the consideration for
issuance of such Note to such Holder.
16. Governing Law.
THE INDENTURE AND THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE
AND TO BE PERFORMED IN SAID STATE.
The Company will furnish to any Holder of Notes upon written request and
without charge to the Holder a copy of the Indenture which has in it the text of
this Note. Requests may be made to:
e.spire Communications, Inc.
133 National Business Parkway
Suite 200
Annapolis Junction, Maryland 20701
Attention: Secretary
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ASSIGNMENT
(To be executed by the registered Holder
if such Holder desires to transfer this Note)
FOR VALUE RECEIVED _______________ hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER TAX IDENTIFYING NUMBER OF
TRANSFEREE:________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
(Please print name and address of transferee)
_______________________________________________________ this Note, together with
all right, title and interest herein, and does hereby irrevocably constitute and
appoint ____________ Attorney to transfer this Note on the Security Register,
with full power of substitution.
________________________________________________________________________
Dated:____________ Signature of Holder:_________________________
Signature Guaranteed:________________________
Commercial Bank or Trust Company
or Member Firm of the New York
Stock Exchange, Inc.
NOTICE: The signature to the foregoing Assignment must correspond to the Name as
written upon the face of this Note in every particular, without alteration or
any change whatsoever.
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OPTION OF HOLDER TO ELECT PURCHASE
(check as appropriate)
/ / In connection with the Change of Control Offer made pursuant to Section
4.07 of the Indenture, the undersigned hereby elects to have
/ / the entire principal amount
/ / $____($1,000 in principal amount or an integral multiple thereof) of
this Note
repurchased by the Company. The undersigned hereby directs the
Trustee or Paying Agent to pay it or an amount in cash equal to 101% or
the Accreted Value with respect to the principal amount indicated in the
preceding sentence or the principal amount indicated in the preceding
sentences, as the case may be, plus accrued and unpaid interest thereon,
if any, to the Change of Control Payment Date.
/ / In connection with the Asset Sale Offer made pursuant to Section 4.08 of
the Indenture, the undersigned hereby elects to have
/ / the entire principal amount
/ / $____($1,000 in principal amount or an integral multiple thereof) of
this Note
repurchased by the Company. The undersigned hereby directs the
Trustee or Paying Agent to pay it or an amount in cash equal to 100% of
the Accreted Value with respect to the principal amount indicated in the
preceding sentence or the principal amount indicated in the preceding
sentence, as the case may be, plus accrued and unpaid interest thereon, if
any, to the Asset Sale Payment Date.
Dated:______________________ Signature of Holder:_________________
Signature Guaranteed:__________________________
Commercial Bank or Trust Company
or Member Firm of the New York
Stock Exchange, Inc.
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NOTICE: The signature to the foregoing Assignment must correspond to the Name as
written upon the face of this Note in every particular, without alteration or
any change whatsoever.
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EXHIBIT E
TERMS OF SUBORDINATED INDEBTEDNESS
The provisions set forth in Sections 2 through 9 of this Exhibit E set
shall be the terms on which the Subordinated Indebtedness (as defined below) is
subordinated to the Notes and shall be set forth in any agreement or evidence of
Indebtedness relating to the Subordinated Indebtedness.
1. Definitions. Terms used but not defined in this Exhibit F shall have
the meanings assigned such terms in the Indenture. The following terms shall
have the meanings indicated:
"Subordinated Indebtedness" means the Indebtedness required to be
subordinated to the Notes on the terms set forth in this Exhibit C pursuant to
the Indenture.
"Subordination Provisions" means the provisions set forth in Sections 2
through 9 of this Exhibit C.
2. Agreement to Subordinate. The Company agrees and each holder of the
Subordinated Indebtedness, by such holder's acceptance of any Note or other
evidence of such Subordinated Indebtedness, likewise agrees, that the payment of
the principal of, premium, if any, and interest on the Subordinated Indebtedness
is subordinated in right of payment, to the extent and in the manner provided
herein, to the prior payment in full, in cash or cash equivalents, of all Notes,
that such subordination is for the benefit of, and shall be enforceable directly
by, any Holder of Notes or the Trustee, and that each Holder of Notes shall be
deemed to have acquired Notes in reliance upon covenants and provisions
contained herein.
All of the provisions of any agreement, Note or other evidence of
indebtedness relating to the Subordinated Indebtedness shall be subject to the
Subordination Provisions.
The Subordination Provisions as they apply to the Subordinated
Indebtedness may not be amended without the consent of the Holders of two-thirds
in principal amount of the outstanding Notes obtained in the manner set forth in
the Indenture.
The Subordination Provisions shall remain in full force and effect so long
as there are any Notes outstanding.
3. Liquidation; Dissolution; Bankruptcy. (a) Upon any payment or
distribution of assets of the Company to creditors upon a liquidation or a total
or partial
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dissolution of the Company, or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its Property or
assets, all Notes shall first be paid in full (including interest after the
commencement of any such proceeding at the rate specified in the Notes), in cash
or cash equivalents, before holders of the Subordinated Indebtedness shall be
entitled to receive any payment of principal of, premium, if any, or interest
on, or any other distribution with respect to, the Subordinated Indebtedness.
Until all Notes are paid in full, in cash or cash equivalents, any distribution
to which holders of the Subordinated Indebtedness would be entitled but for the
Subordination Provisions shall be made by the Company or by any receiver,
trustee in bankruptcy, custodian, liquidating trustee, agent or other Person
making such payment or distribution directly to the Trustee for the benefit of
the Holders of Notes. For purposes of the Subordination Provisions `paid in
full," as used with respect to the Notes, means the receipt of cash or cash
equivalents of the principal amount of the Notes and premium, if any, interest
and fees thereon to the date of such payment.
(b) If a holder of the Subordinated Indebtedness does not FILE a
proper claim or proof of debt in the form required in any proceeding
contemplated by this Section 3 prior to 20 calendar days before the expiration
of the time to file such claims or proofs, then, so long as any Notes are
outstanding, the Trustee or any Holder of Notes is hereby authorized, and shall
have the right, to file an appropriate claim or proof of debt on behalf of such
holder of the Subordinated Indebtedness.
4. Default on Notes. (a) The Company may not, directly or indirectly, make
any payment of principal of, premium, if any, or interest on the Subordinated
Indebtedness in cash, Property or other assets and may not acquire any Note or
other evidence of the Subordinated Indebtedness for cash, Property or other
assets (other then Indebtedness subordinated to the Notes to at least the same
extent as the Subordinated Indebtedness or Common Stock of the Company) until
all Notes have been paid in full, in cash or cash equivalents, if:
(i) a Default in the payment of any principal of, premium,
if any, or interest on any Note occurs and is continuing, whether at
Stated Maturity or at a date fixed for payment or by acceleration or
otherwise; or
(ii) a Default on the Notes (other than described in clause
(a)(i) of this Section 4) occurs and is continuing that permits Holders of
Notes to accelerate such Notes and notice of such Default is given to the
Company by any Holder of Notes or the Trustee.
(b) The Company may resume payments on the Subordinated Indebtedness
when:
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(i) the Default is cured or waived in accordance with the
terms of the Notes and the Indenture, or
(ii) 180 days pass after the notice is given pursuant to
Section 4(a)(ii) and judicial proceedings relating to such Default have
not been commenced or the Notes have not been accelerated, if the other
Subordination Provisions permit the payment or acquisition of the
Subordinated Indebtedness at that time.
5. Acceleration of the Loans. (a) If payment of the Subordinated
Indebtedness is accelerated, the Company shall promptly notify the Holders of
Notes and the Trustee of such acceleration.
(b) Upon the occurrence of an event of default with respect to the
Subordinated Indebtedness, if any Notes shall then be outstanding, holders of
the Subordinated Indebtedness shall not be permitted to accelerate the maturity
of the Subordinated Indebtedness or take any other action to collect the
repayment of the Subordinated Indebtedness prior to maturity or to marshal
assets, to exercise any right of set off or to take any other remedy with
respect to the Subordinated Indebtedness, until the earlier of (i) 180 days
after each Holder of Notes and the Trustee have received from the Company notice
of such event of default or (ii) the date on which the Notes shall have been
paid in full. Nothing in this Section 5 shall affect or impair the ability of
holders of the Subordinated Indebtedness to accelerate the maturity of the
Subordinated Indebtedness upon the occurrence of an event of default with
respect to the Subordinated Indebtedness caused by any event described in
Section 6.01(g) or 6.01(h) of the Indenture.
6. When Distribution Must Be Paid Over. In the event that,
notwithstanding the foregoing provisions prohibiting such payment or
distribution, holders of the Subordinated Indebtedness or any agent of such
holders shall have received any payment on account of the principal, premium, if
any, or interest on the Subordinated Indebtedness at a time when such payment is
prohibited by the Subordination Provisions, such payment shall be received and
held in trust for the benefit of, and shall be paid forthwith over and delivered
to, the Trustee, for application to the payment of all Notes then remaining
unpaid to the extent necessary to pay all Notes in full, in cash or cash
equivalents, in accordance with their terms and the Indenture, after giving
effect to any concurrent payment or distribution to or for the Holders of Notes.
7. Notice by Company. The Company shall promptly notify holders of the
Subordinated Indebtedness of any facts known to the Company that would cause a
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payment of principal of, premium, if any, or interest on the Subordinated
Indebtedness to violate the Subordination Provisions.
8. Subrogation. After all Notes are paid in full in cash or cash
equivalents, and until the Subordinated Indebtedness is paid in full, the
holders of the Subordinated Indebtedness shall be subrogated to the rights of
Holders of Notes to receive distributions applicable to Notes to the extent that
distributions otherwise payable to holders of the Subordinated Indebtedness have
been applied to payment of Notes. A distribution made under the Subordination
Provisions to Holders of Notes that otherwise would have been made to holders of
the Subordinated Indebtedness is not, as between the Company and the holders of
the Subordinated Indebtedness, a payment by the Company on the Subordinated
Indebtedness.
9. Subordination May Not Be Impaired by Company. No right of any
current or future Holder of Notes or the Trustee to enforce the Subordination
Provisions shall be impaired by any act or failure to act by the Company or by
its failure to comply with the Subordination Provisions or any agreement or
evidence of indebtedness relating to the Subordinated Indebtedness.
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EXHIBIT F
[ Registration Agreement ]
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EXHIBIT G
REGULATION S CERTIFICATE
The Chase Manhattan Bank
450 West 33rd Street
15th floor
New York, New York 10001
Attention: Corporate Trust Trustee Administration Department
Re: 10.625% Senior Discount Notes due July 1, 2008 of
e. spire Communications, Inc. (the "Securities")
Reference is made to the Indenture, dated as of July 1, 1998 (the
"Indenture"), between e. spire Communications, Inc. (the "Issuer") and The Chase
Manhattan Bank, as Trustee. Terms used herein and defined in the Indenture or in
Regulation S or Rule 144 under the U.S. Securities Act of 1933 (the "Securities
Act") are used herein as so defined.
This certificate relates to U.S. $___________ principal amount at Stated
Maturity of Securities, which are evidenced by the following certificate(s) (the
"Specified Securities"):
CUSIP No(s).______________________
CERTIFICATE No(s).________________
The person in whose name this certificate is executed below (the "Undersigned")
hereby certifies that either (i) it is the sole beneficial owner of the
Specified Securities or (ii) it is acting on behalf of all the beneficial owners
of the Specified Securities and is duly authorized by them to do so. Such
beneficial owner or owners are referred to herein collectively as the "Owner".
If the Specified Securities are represented by a Global Security, they are held
through the Depositary or an Agent Member in the name of the Undersigned, as or
on behalf of the Owner. If the Specified Securities are not represented by a
Global Security, they are registered in the name of the undersigned, as or on
behalf of the Owner.
The Owner has requested that the Specified Securities be transferred to a
person (the "Transferee") who will take delivery in the form of a Regulation S
Security or an interest therein. In connection with such transfer, the Owner
hereby certifies that, unless such transfer is being effected pursuant to an
effective registration statement under the
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Securities Act, it is being effected in accordance with Rule 904 or Rule 144
under the Securities Act and with all applicable securities laws of the states
of the United States and other jurisdictions. Accordingly, the Owner hereby
further certifies as follows:
(1) Rule 904 Transfers. If the transfer is being effected in accordance
with Rule 904:
(A) the Owner is not a distributor of the Securities, an affiliate
of the Issuer or any such distributor or a person acting on behalf of any
of the foregoing;
(B) the offer of the Specified Securities was not made to a person
in the United States;
(C) either:
(i) at the time the buy order was originated, the Transferee
was outside the United States or the Owner and any person acting on
its behalf reasonably believed that the Transferee was outside the
United States, or
(ii) the transaction is being executed in, on or through the
facilities of the Eurobond market, as regulated by the Association
of International Bond Dealers, or another designated offshore
securities market and neither the Owner nor any person acting on its
behalf knows that the transaction has been prearranged with a buyer
in the United States;
(D) no directed selling efforts in contravention of Rule 904(b)
have been made in the United States by or on behalf of the Owner or any
affiliate thereof;
(E) if the Owner is a dealer in securities or has received a
selling concession, fee or other remuneration in respect of the Specified
Securities, and the transfer is to occur during the Restricted Period,
then the requirements of Rule 904(c)(1) have been satisfied; and
(F) the transaction is not part of a plan or scheme to evade the
registration requirements of the Securities Act.
(2) Rule 144 Transfers. If the transfer is being effected pursuant to
Rule 144:
(A) the transfer is occurring after a holding period of at least
one year (computed in accordance with paragraph (d) of Rule 144) has
elapsed since the
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Specified Securities were last acquired from an Issuer or from an
affiliate of the Issuer, whichever is later, and is being effected in
accordance with the applicable amount, manner of sale and notice
requirements of Rule 144;
(B) the transfer is occurring after a holding period of at least
two years has elapsed since the Specified Securities were last acquired
from the Issuer or from an affiliate of the Issuer, whichever is later,
and the Owner is not, and during the preceding three months has not been,
an affiliate of the Issuer; and
(C) the Specified Securities are being transferred in compliance
with any applicable "blue sky" securities laws of all applicable states of
the United States.
This certificate and the statements contained herein are made for
your benefit and the benefit of the Issuer and the Initial Purchasers.
Dated: ____________________________________________________________________
(Print the name of the Undersigned, as such term is defined in the
second paragraph of this certificate.)
By:________________________________*
Name:
Title:
Phone:
Agent Member Account Number:
(DTC / Euroclear / Cedel Account Number)
(If the Undersigned is a corporation, partnership or fiduciary, the
title of the person signing on behalf of the Undersigned must be
stated.)
* Signature must be guaranteed by an eligible Guarantor Institution (banks,
stockbrokers, savings and loan associations and credit unions) with
membership in an approved signature medallion program pursuant to
Securities and Exchange Commission Rule 17Ad-15.
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EXHIBIT H
RESTRICTED NOTES CERTIFICATE
The Chase Manhattan Bank
450 West 33rd Street
15th Floor
New York, New York 10001
Attention: Corporate Trust Trustee Administration Department
Re: 10.625% Senior Discount Notes due July 1, 2008
of e.spire Communications, Inc. (the "Securities")
Reference is made to the Indenture, dated as of July 24, 1998 (the
"Indenture"), between e.spire Communications, Inc. (the "Issuer") and The Chase
Manhattan Bank, as Trustee. Terms used herein and defined in the Indenture or in
Rule 144A or Rule 144 under the U.S. Securities Act of 1933 (the "Securities
Act") are used herein as so defined.
This certificate relates to U.S. $__________ principal amount at maturity
of Securities, which are evidenced by the following certificate(s) (the
"Specified Securities"):
CUSIP No(s).__________________________
ISIN No(s), If any.___________________
CERTIFICATE No(s).____________________
The person in whose name this certificate is executed below (the "Undersigned")
hereby certifies that either (i) it is the sole beneficial owner of the
Specified Securities or (ii) it is acting on behalf of all the beneficial owners
of the Specified Securities and is duly authorized by them to do so. Such
beneficial owner or owners are referred to herein collectively as the "Owner".
If the Specified Securities are represented by a Global Security, they are held
through the Depositary or an Agent Member in the name of the Undersigned, as or
on behalf of the Owner. If the Specified Securities are not represented by a
Global Security, they are registered in the name of the Undersigned, as or on
behalf of the Owner.
The Owner has requested that the Specified Securities be transferred
to a person (the "Transferee") who will take delivery in the form of a
Restricted Security or an interest in a Restricted Global Security. In
connection with such transfer, the Owner hereby certifies that, unless such
transfer is being effected pursuant to an effective registration statement under
the Securities Act, (i) the Owner is not a U.S. Person (as
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defined in the Indenture) and (ii) such transfer is being effected in accordance
with Rule 144A or Rule 144 under the Securities Act and all applicable
securities laws of the states of the United States and other jurisdictions.
Accordingly, the Owner hereby further certifies as follows:
(1) Rule 144A Transfers. If the transfer is being effected in accordance
with Rule 144A:
(A) the Specified Securities are being transferred to a person
that the Owner and any person acting on its behalf reasonably believe is a
"qualified institutional buyer" within the meaning of Rule 144A, acquiring
for its own account or for the account of a qualified institutional buyer;
and
(B) the Owner and any person acting on its behalf have taken
reasonable steps to ensure that the Transferee is aware that the Owner may
be relying on Rule 144A in connection with the transfer; and
(C) the Specified Securities are being transferred in compliance
with any applicable "blue sky" securities laws of all applicable states of
the United States.
(2) Rule 144 Transfers. If the transfer is being effected pursuant to
Rule 144:
(A) the transfer is occurring after a holding period of at least
one year (computed in accordance with paragraph (d) of Rule 144) has
elapsed since the Specified Securities were last acquired from an Issuer
or from an affiliate of the Issuer, whichever is later, and is being
effected in accordance with the applicable amount, manner of sale and
notice requirements of Rule 144;
(B) the transfer is occurring after a holding period of at least
two years has elapsed since the Specified Securities were last acquired
from an Issuer or from an affiliate of the Issuer, whichever is later, and
the Owner is not, and during the preceding three months has not been, an
affiliate of the Issuer; and
(C) the Specified Securities are being transferred in compliance
with any applicable "blue sky" securities laws of all applicable states of
the United States.
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This certificate and the statements contained herein are made for your
benefit and the benefit of the Issuer, and the Initial Purchasers.
Dated: _________________________________________________
(Print the name of the Undersigned, as such term
is defined in the second paragraph of this
certificate.)
By:_____________________________________________*
Name:
Title:
Phone:
Agent Member Account Number:
(DTC / Euroclear / Cedel Account Number)
(If the Undersigned is a corporation, partnership
or fiduciary, the title of the person signing on
behalf of the Undersigned must be stated.)
* Signature must be guaranteed by an eligible Guarantor Institution (banks,
stockbrokers, savings and loan associations and credit unions) with
membership in an approved signature medallion program pursuant to
Securities and Exchange Commission Rule 17Ad-15.
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EXHIBIT I
UNRESTRICTED SECURITIES CERTIFICATE
(For removal of Restricted Notes Legend pursuant to Section 206(c))
The Chase Manhattan Bank
450 West 33rd Street, 15th Floor
New York, NY 10001
Attention: Corporate Trust Trustee Administration
Re: 10.625% Senior Discount Notes Due 2008
of e.spire Communications, Inc. (the "Securities")
Reference is made to the Indenture, dated as of July 24, 1998 (the
"Indenture"), between e.spire Communications, Inc. (the "Issuer") and The Chase
Manhattan Bank, as Trustee. Terms used herein and defined in the Indenture or in
Rule 144 under the U.S. Securities Act of 1933 (the "Securities Act") are used
herein as so defined.
This certificate related to U.S. $__________ principal amount of
Securities, which are evidenced by the following certificates (s) (the
"Specified Securities"):
CUSIP No(s)._____________________
CERTIFICATE No(s).______________
The person in whose name this certificate is executed below (the "Undersigned")
hereby certifies that either (i) it is the sole beneficial owner of the
Specified Securities or (ii) it is acting on behalf of all the beneficial owners
of the Specified Securities and is duly authorized by them to do so. Such
beneficial owner or owners are referred to herein collectively as the "Owner".
If the Specified Securities are represented by a Global Security, they are held
through the Depositary or an Agent Member in the name of the Undersigned, as or
on behalf of the Owner. If the Specified Securities are not represented by a
Global Security, they are registered in the name of the Undersigned, as or on
behalf of the Owner.
The Owner has requested that the Specified Securities be exchanged for
Securities bearing no Securities be exchanged for Restricted Notes Legend
pursuant to Section 206(a) of the Indenture. In connection with such exchange,
the Owner hereby certifies that the exchange is occurring after a holding period
of at least two years (computed in accordance with paragraph (d) of Rule 144)
has elapsed since the Specified Securities
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<PAGE> 188
were last acquired from an Issuer of from an affiliate of the Issuer, whichever
is later, and the Owner is not, and during the preceding three months has not
been, an affiliate of the Issuer. The Owner also acknowledges that any future
transfers of the Specified Securities must comply with all applicable securities
laws of the states of the United States and other jurisdictions.
This certificate and the statements contained herein are made for your
benefit and the benefit of the Issuer, and the Initial Purchasers.
Dated: _____________________________________________
(Print the name of the Undersigned, as such term
is defined in the second paragraph of this
certificate.)
By:_______________________________
Name:
Title:
Phone:
Agent Member Account Number:
(DTC / Euroclear / Cedel Account Number)
(If the Undersigned is a corporation, partnership
or fiduciary, the title of the person signing on
behalf of the Undersigned must be stated.)
* Signature must be guaranteed by an eligible Guarantor Institution (banks,
stockbrokers, savings and loan associations and credit unions) with
membership in an approved signature medallion program pursuant to
Securities and Exchange Commission Rule 17Ad-15.
I-2
<PAGE> 189
SCHEDULE A
TO
INDENTURE
DATED AS OF JULY 24, 1998
BY AND BETWEEN
e.spire COMMUNICATIONS, INC.
AND
THE CHASE MANHATTAN BANK, AS TRUSTEE
(EXISTING INDEBTEDNESS)
The Company and certain of its subsidiaries have letters of credit for the
benefit of several cities, rights-of-way providers and others which guarantee
franchise terms compliance. To, date the Company and such subsidiaries have
pledged $2,000,000 in cash to secure approximately $5,000,000 of these potential
liabilities.
Pursuant to an agreement (the "LG&E Agreement") between American
Communication Services Louisville, Inc. ("ACSL") and Louisville Gas & Electric
Company, effective as of June 28, 1994, the first 12 strands of all installed
fiber optic cable in the Extended System (as defined in the LG&E Agreement) are
subject to a security interest as collateral security for performance of the
obligations of the Company and ACSL under the LG&E Agreement.
Pursuant to a Stock Purchase Agreement, dated as of November 28, 1994, by
and among the Company, City Link Corp., and the former directors and
shareholders of City Link Corp., as amended August 3, 1995, the Company has an
obligation to repurchase 10,636 shares of its common stock for a purchase price
of $7.00 per share.
Pursuant to a Stock Purchase Agreement, dated as of May 12, 1995, by and
among the Company, Piedmont Teleport, Inc., Randal Holcombe and Karen Holcombe,
as amended, the Company has an obligation to repurchase 62,000 shares of its
common stock for a purchase price of $2.50 per share.
Pursuant to the terms of an Agreement with Louisville Gas & Electric
Company (LG&E"), if LG&E exercises its option to purchase up to 500,000 shares
of the Pledgor's common stock after a transaction in which 50% or more of the
Pledgor's stock is purchased by a combination of existing shareholders and/or
management in a transaction which results in the Pledgor no longer being listed
on a national securities market, then LG&E shall have the option, exercisable at
any time by written notice to the Pledgor prior
1
<PAGE> 190
to the first anniversary of the exercise of the option, to put its shares to the
Pledgor for a cash purchase equal to that tendered in the "going private"
transaction.
Pursuant to a Third Amended and Restated Employment Agreement (the
"Pompliano Agreement"), dated June 30, 1995, with Mr. Anthony J. Pompliano, Mr.
Pompliano shall have the right for a period of 90 days after the termination of
his employment with the Company (unless such employment is terminated by the
Company "for cause" (as defined in the Pompliano Agreement) or Mr. Pompliano
voluntarily resigns), to sell to the Company and the Company is required to
purchase, the shares of Common Stock issued or issuable pursuant to options
granted to Mr. Pompliano under the Pompliano Agreement, at a price equal to the
publicly traded price of the Common Stock (as defined in the Pompliano
Agreement), less the exercise price of the options with respect to unexercised
options. The aggregate purchase price paid by the Company for such shares shall
not exceed $1 million (which amount shall be reduced by the net proceeds
received by Mr. Pompliano from his sales of shares of Common Stock in the market
or otherwise). This right may be exercised by Mr. Pompliano only if at the time
of exercise the aggregate value (based on the publicly traded price) of the
Company's outstanding shares of Common Stock and the shares of Common stock
issuable pursuant to options, warrants and other convertible securities which
have an exercise or conversion price which is equal to or less than the then
publicly traded price of the Common Stock is greater than $200 million and at
least 5,000,000 outstanding shares of Common Stock are neither held by
"affiliates" (as defined in Rule 405 under the Securities Act of 1933, as
amended (the "Securities Act")) of the Company nor "restricted securities" (as
defined in Rule 144 under the Securities Act).
Pursuant to a Third Amended and Restated Employment Agreement (the "Kozak
Agreement"), dated June 30, 1995, with Mr. Richard A. Kozak, Mr. Kozak shall
have the right for a period of 90 days after the termination of his employment
with the Company (unless such employment is terminated by the Company "for
cause" (as defined in the Kozak Agreement) or Mr. Kozak voluntarily resigns), to
sell to the Company and the Company is required to purchase, the shares of
Common Stock issued or issuable pursuant to options granted to Mr. Kozak under
the Kozak Agreement, at a price equal to the publicly traded price of the Common
Stock (as defined in the Kozak Agreement), less the exercise price of the
options with respect to unexercised options. The aggregate purchase price paid
by the Company for such shares shall not exceed $1 million (which amount shall
be reduced by the net proceeds received by Mr. Kozak from his sales of shares of
Common Stock in the market or otherwise). This right may be exercised by Mr.
Kozak only if at the time of exercise the aggregate value (based on the publicly
traded price) of the Company's outstanding shares of Common Stock and the shares
of Common Stock issuable pursuant to options, warrants and other convertible
securities which have an exercise or conversion price which is equal to or less
than the then publicly traded
2
<PAGE> 191
price of the Common Stock is greater than $200 million and at least 5,000,000
outstanding shares of Common Stock are neither held by "affiliates" (as defined
in Rule 405 under the Securities Act) of the Company nor "restricted securities"
(as defined in Rule 144 under the Securities Act).
Pursuant to an indenture dated as of November 14, 1995, between the
Company and The Chase Manhattan Bank (formerly known as Chemical Bank) as
trustee, as amended or supplemented (the "2005 Indenture"), the Company issued
13% senior discount notes due 2005 (the "2005 Notes"). The 2005 Notes accrete at
a rate of 13%, compounded semi-annually to an aggregate principal amount of $190
million by November 1, 2000. Cash interest does not accrue on the 2005 Notes
prior to November 1, 2000. Commencing May 1, 2001, cash interest will be payable
semi-annually on the 2005 Notes at the rate of 13% per annum (approximately
$24.7 million per year). The full accreted value of the 2005 Notes of an
aggregate of $190 million will become due on November 1, 2005. The 2005
Indenture also provides, under certain circumstances, for repurchase of the 2005
Notes by the Company and special interest provisions.
Pursuant to an indenture dated as of March 26, 1996, between the Company
and The Chase Manhattan Bank (formerly known as Chemical Bank), as trustee, as
amended or supplemented (the "2006 Indenture"), the Company issued 12-3/4%
senior discount notes due 2006 (the "2006 Notes"). The 2006 Notes accrete at a
rate of 12-3/4%, compounded semi-annually to an aggregate principal amount of
$120 million by April 1, 2001. Cash interest does not accrue on the 2006 Notes
prior to April 1, 2001. Commencing October 1, 2001, cash interest will be
payable semi-annually on the 2006 Notes at the rate of 12-3/4% per annum
(approximately $15.3 million per year). The full accreted value of the 2006
Notes of an aggregate of $120 million will become due on April 1, 2006. The 2006
Indenture also provides, under certain circumstances, for repurchase of the 2006
Notes by the Company and special interest provisions.
Pursuant to an indenture dated as of July 23, 1997, between the Company
and The Chase Manhattan Bank (formerly known as Chemical Bank), as trustee, as
amended or supplemented (the "2007 Indenture"), the Company issued 13-3/4%
senior notes due 2007 (the "2007 Notes"). Commencing January 15, 1998, cash
interest is payable semi-annually on the 2007 Notes at the rate of 13-3/4% per
annum (approximately $30.2 million per year). The full principal amount of the
2007 Notes of an aggregate of $220 million will become due on April 1, 2007. The
2007 Indenture also provides, under certain circumstances, for repurchase of the
2007 Notes by the Company and special interest provisions.
3
<PAGE> 192
SCHEDULE B
TO
INDENTURE
DATED AS OF JULY 24, 1998
BY AND BETWEEN
e.spire COMMUNICATIONS, INC.
AND
THE CHASE MANHATTAN BANK, AS TRUSTEE
(REQUIRED INVESTMENTS)
None
4
<PAGE> 193
SCHEDULE C
TO
INDENTURE
DATED AS OF JULY 24, 1998
BY AND BETWEEN
e.spire COMMUNICATIONS, INC.
AND
THE CHASE MANHATTAN BANK, AS TRUSTEE
(SECURED CREDIT FACILITY AGREEMENTS)
On December 30, 1997, the Company entered into the New AT&T Credit
Facility pursuant to which AT&T Commercial Finance Corporation has provided up
to $35.0 million in financing in order to effect the refinancing of then
outstanding loans made to certain of the Company's subsidiaries under a $31.2
million credit facility (the "Old AT&T Credit Facility) (the "Refinancing") for
general purposes. It is expected that amounts outstanding under the New AT&T
Credit Facility will be repaid in connection with the closing of the GSOP Credit
Facilities described below.
The loans under the New AT&T Credit Facility are secured by the capital
stock of the material subsidiaries of the Company and the promissory notes (the
"Intercompany Notes") of certain subsidiaries of the Company evidencing debt
provided by the Company pursuant to the Refinancing. The aggregate outstanding
principal balance of the loans is payable in twenty-four (24) consecutive
quarterly installments beginning on December 31, 1998 and continuing on each of
the last calendar days (or the next succeeding business day if such date is not
a business day) of March, June, September and December in each calendar year
thereafter through and including September 30, 2004. The principal of borrowed
amounts may be prepaid in certain circumstances and must be prepaid, without
premium or penalty, in other circumstances. Interest is due quarterly. Interest
is variable based on the tree-month Commercial Paper Rate or LIBOR Rate plus
4.5% per annum, at the Company's option and is compounded quarterly. Upon
certain events of default, additional interest at a rate of 2% will become
payable. In addition, the New AT&T Credit Facility included covenants, some of
which impose certain restrictions on the Company and its material subsidiaries
including restrictions on the declaration or payment of dividends, the conduct
of certain activities, certain investments, the creation of additional liens or
indebtedness, the disposition of assets, transactions with affiliates and
extraordinary corporate transactions.
5
<PAGE> 194
In connection with the New AT&T Credit Facility, the Company issued to
AT&T Credit Corporation 207,964 shares of its common stock in exchange for AT&T
Credit Corporation conveying to the Company (i) 145 shares of common stock of
American Communication Services of Columbia, Inc., (ii) 14.5 shares of common
stock of American Communication Services of El Paso, Inc., (iii) 145 shares of
common stock of American Communication Services of Fort Worth, Inc., (iv) 145
shares of common stock of American Communication Services of Greenville, Inc.,
and (v) 156.3 shares of common stock of American Communication Services of
Louisville, Inc. The Company was required to pledge to AT&T Commercial Finance
Corporation (i) all of its shares (present and future) of capital stock in its
material subsidiaries, along with all options and warrants therein, (ii) the
Intercompany Notes and (iii) any proceeds of any of the foregoing. Under certain
circumstances, the pledge agreement governing such pledge also restricts the
Company's ability to receive and retain dividends in respect of the pledged
collateral.
6
<PAGE> 195
SCHEDULE D
TO
INDENTURE
DATED AS OF JULY 24, 1998
BY AND BETWEEN
e.spire COMMUNICATIONS, INC.
AND
THE CHASE MANHATTAN BANK, AS TRUSTEE
(CONTRACTS WITH AFFILIATES)
As of July 1, 1992 American Lightwave, Inc. entered into a Registration
Rights Agreement among American Lightwave, Inc. and persons named therein
(including the persons referenced below in the following three paragraphs).
On July 1, 1992, Russell T. Stern, Jr., Patrick J. Haynes and Willard
McNitt, the stockholders of Alabama Lightwave, Inc., North Carolina Lightwave,
Inc., Chicago Lightwave, Inc., Delaware Lightwave, Inc., and Virginia Lightwave,
Inc. (collectively referred to as the "ALI subsidiaries") entered into stock
exchange agreements with ALI. Under these agreements, the stockholders of the
ALI subsidiaries received 650 shares of ALI mandatorily redeemable, non-voting,
cumulative Series A preferred stock (the "ALI Preferred Stock") and 103,920
shares of ALI common stock (the "ALI Common Stock"). Additionally, ALI issued
363,720 shares of ALI Common Stock to existing stockholders for $.0042 per
share.
At the time of the exchange agreements, ALI also entered into a share
subscription agreement under which an aggregate 500 shares of ALI Preferred
Stock and an aggregate 181,860 shares of ALI Common Stock were issued to Apex
Investment Fund I, L.P. ("Apex"), The Productivity Fund II, L.P.
("Productivity") and Brian Boyer for a total of $500,875.
On December 15, 1992, 100 additional shares of ALI Preferred Stock and
36,372 shares of ALI Common Stock were issued to Apex, Productivity and Brian
Boyer for a total of $100,175, under the stock subscription agreement noted
above.
On September 15, 1993, the Company's former subsidiary, ALI, issued
promissory notes to Apex, Productivity, Russell T. Stern, Jr. and Brian Boyer
for $68,825, $68,825, $7,083 and $1,350, respectively (the "ALI Notes"). These
ALI Notes were originally due September 15, 1994, but ALI had the option to
extend the maturity
7
<PAGE> 196
date to September 15, 1995. Interest was payable on the notes at ten percent
(10%) per annum. The noteholders had warrants to purchase, at any time up to
September 14, 1996, shares of ALI Common Stock at a price of $181.86 per share,
subject to antidilution adjustments. ALI elected to extend the maturity date to
September 14, 1995, and the number of ALI shares that the noteholder could
purchase pursuant to the warrant increased as provided therein. The holders of
ALI Notes converted the ALI Notes and warrants into notes and warrants
substantially similar to notes and warrants issued by the Company on or about
September 14, 1993. These notes together with accrued interest were repaid on
the maturity date. The converted warrants along with the additional warrants
issued upon the extension of the ALI Notes gave the four holders listed above
the right to purchase an aggregate of 36,500 shares of the Company's Common
Stock at a price of $0.875 per share. The unexpired term of the three-year
warrants carried over to the converted warrants. In connection with the October
1994 Private Placement (as defined below), Apex and Productivity agreed to
reduce the number of warrants held by each of them by 50% in exchange for the
exercise price of 50% of such remaining warrants being reduced to $0.44 and 50%
of such remaining warrants being reduced to $0.01. Apex and Productivity each
exercised warrants for 8,353 shares of Common Stock at $0.44 per share during
November 1994 and each exercised warrants for 8,353 shares of Common Stock at
$0.01 per share during December 1994.
In November 1993, the Company executed a financial consulting and advisory
agreement with The Thurston Group, Inc. for a period of six months. The Company
believes that Russell T. Stern, Jr., who, as of December 31, 1995, owned in
excess of 5% of the Company's outstanding voting stock and was a director of the
Company at the time the consulting agreement was executed, and Patrick J.
Haynes, who at the time the consulting agreement was executed was an executive
officer of the Company and owned in excess of 5% of the Company's outstanding
voting stock, had controlling interests in The Thurston Group, Inc. In
consideration, The Thurston Group, Inc. or its transferees received warrants to
purchase 300,000 shares of Company Common Stock, exercisable at $.875 per share.
The holders of these warrants had the right to resell the shares to Company for
$2.25 per share through October 25, 1995. Pursuant to an Assignment and
Assumption Agreement dated June 21, 1995 (as described below), Apex Investment
Fund II, L.P. ("Apex II") assumed the Company's obligation to purchase such
shares for a purchase price of $2.25 per share.
On June 1, 1994, the Company entered into a Stock Exchange Agreement, with
the following holders of 1,700 shares of its preferred stock, some of whom were
affiliates of the Company: Apex--247.5 shares; Productivity--247.5 shares; Brian
Boyer--5 shares; Russell T. Stern, Jr.--550 shares and The Thurston Group,
Inc.--650 shares. George Middlemas, who is a director of the Company, is a
general partner of a partnership which is the general partner of Apex.
Productivity, until the closing of the October
8
<PAGE> 197
1994 Private Placement owned in excess of 5% of the Company's outstanding voting
stock. Brian Boyer is a former officer and director of the Company. Russell T.
Stern, Jr. owned in excess of 5% of the Company's outstanding voting stock as of
December 31, 1995, and was a director of the Company at the time such exchange
was effective. The Company believes that Mr. Stern is also a principal
stockholder of The Thurston Group, Inc. The preferred stock had a face value of
$1,000 per share, and represented all of the then issued and outstanding shares
of the Company's preferred stock. As of June 30, 1994, none of the preferred
stock remained outstanding. The Company exchanged each share of such preferred
stock for the number of shares of Common Stock determined by dividing the face
amount of such shares of preferred stock by $3.10 (which equals the average of
the high bid and low ask prices for the Company's Common Stock during the five
trading days immediately preceding June 1, 1994). The preferred stockholders
were granted piggy-back registration rights for the Common Stock received in the
exchange, and demand registration rights on two occasions for the two-year
period, June 1, 1995, to June 1, 1997, upon written request of 60% of the
holders of such Common Stock received in the exchange. The preferred
stockholders also each executed a general release in favor of the Company.
On June 9, 1994, the Company issued Secured Convertible Notes to, and
executed Security Agreements with, Apex, Productivity and Russell T. Stern, Jr.
The notes, which were repaid immediately following the October 1994 Private
Placement, had principal amounts of $264,680, $264,680 and $77,281,
respectively, with an interest rate of 15% per annum. The notes were secured
pari passu by the tangible assets of the Company's subsidiaries in the first two
cities to complete construction of networks, American Communication Services of
Louisville, Inc. and American Communication Services of Little Rock, Inc. The
Company paid the principal and accrued interest on Mr. Stern's note in cash and
paid Apex and Productivity in shares of its 9% Series A Convertible Preferred
Stock (the "Series A Preferred Stock"). Under the terms of the notes, because
the notes held by Apex and Productivity were paid in shares of Series A
Preferred Stock valued at $90 per share, the Company was obligated to pay an
additional $77,250 each to Apex and Productivity, payable also in shares of
Series A Preferred Stock valued at $90 per share.
Also in June 1994, Apex, Productivity and William G. Salatich, then a
director of the Company, purchased notes with the aggregate principal amount of
$1,300,720. These notes paid interest at a rate of 15% per annum and were
originally due December 31, 1994. The principal of these notes was converted
into 14,453 shares of Series A Preferred Stock as part of the October 1994
Private Placement and the holders thereof received warrants to purchase 173,428
shares of Common Stock, which warrants were exercised. The accrued interest of
$62,736 on these notes as of October 21, 1994, was paid by the Company in cash.
9
<PAGE> 198
On June 16, 1994, the Company entered into a financial consulting
agreement with Thurston Partners, Inc. and Global Capital, Inc., both of which
the Company believes to be affiliates of Patrick J. Haynes, a former executive
officer of the Company and a principal shareholder at that time and Russell T.
Stern, Jr. The Company agreed to pay $153,750 for consulting services rendered
through the date of the agreement, and a monthly payment of $7,500 continuing
for a period of two years following the closing of the October 1994 Private
Placement.
Effective June 1, 1994, the Company engaged SGC Advisory Services, Inc.
("SGC") as a financial and business consultant for three years. SGC is an
affiliate of Steven G. Chrust, a former director of the Company. Pursuant to the
agreement, the Company will compensate SGC as follows: (1) a monthly fee of
$5,000; (2) options to purchase up to 50,000 shares of the Company's Common
Stock which vest on July 1, 1997, and are exercisable on or before July 1, 1999;
and (3) a fee equal to 4% of the total aggregate consideration received by the
Company or its shareholders, in any transaction which the Company completes with
a strategic partner, merger partner or buyer if SGC is the finder of such
entity; or in the case where SGC is not the finder but proves instrumental in
completing the transaction then a fee of 2% will be payable to SGC. In either
case, 50% of the fee will be payable in cash at the time of closing and 50% will
be payable in warrants to purchase securities or instruments similar to those
received by the Company or its shareholders, unless the entire purchase price is
paid in cash. In the latter case, the entire fee will be payable in cash at
closing. Any warrants will have an exercise life of five years from the date of
issuance or vesting, whichever is later, and be exercisable at the same price as
established by the transaction which generates the warrant fee. At the end of
each month of the term of the agreement, SGC earns a credit against the exercise
price of the options referred to in (2) above equal to 1/36th of the exercise
price. The shares issued upon exercise of the options were priced at the average
of the high bid and low asked price on the closing date of the October 1994
Private Placement and have piggy-back registration rights.
In August, 1994, Apex II loaned the Company $250,000. The terms of this
loan were 15% per annum interest on a note due December 31, 1994, the grant of a
security interest in the tangible assets of the Company's operating subsidiary
which was then constructing a CAP network, and the issuance of the Company's
warrants in the amount of $250,000 to purchase shares of Series A Preferred
Stock at $90 per share. Apex II converted the principal of this loan into 2,778
shares of Series A Preferred Stock at $90 per share as part of the October 1994
Private Placement. In addition, Apex II received warrants to purchase 3,333
shares of Common Stock at $1.125 per share and warrants to purchase 3,333 shares
of Common Stock at $0.01 per share in connection with this conversion. All of
these warrants were exercised.
10
<PAGE> 199
In October 1994, the Company completed a private placement (the "October
1994 Private Placement") in which it sold an aggregate of 186,664 shares of its
Series A Preferred Stock and issued warrants to purchase an aggregate of
2,674,506 shares of Common Stock for an aggregate consideration of $16.8
million, including the conversion of $4.3 million of outstanding debt. Each
share of the Series A Preferred Stock is convertible into 40 shares of Common
Stock, subject to anti-dilution adjustments, generally at the option of the
holder. The Huff Alternative Income Fund, L.P. ("Huff") acquired control of the
Company through its purchase of 138,889 shares of the Series A Preferred Stock
for an aggregate purchase price of $12.5 million and its receipt of warrants to
purchase 77,000 and 1,414,222 shares of Common Stock at prices of $1.125 and
$0.01 per share, respectively, all of which were exercised in November 1994.
Huff is an investment limited partnership and the consideration for the Series A
Preferred Stock was obtained from its general and limited partners through
capital calls for investments by the fund. Upon completion of these
transactions, Huff owned approximately 55.1% of the Company's outstanding voting
stock.
On June 21, 1995 the Company entered into an Assignment and Assumption
Agreement between the Company and Apex II wherein Apex II assumed the Company's
obligation to purchase from certain stockholders an aggregate of 300,000 shares
of Common Stock at a purchase price of $2.25 per share.
On June 26, 1995 the Company completed a private placement (the "June 1995
Private Placement") of its 9% Series B-1 Convertible Preferred Stock ("Series
B-1 Preferred Stock"), 9% Series B-2 Convertible Preferred Stock ("Series B-2
Preferred Stock") and 9% Series B-3 Convertible Preferred Stock ("Series B-3
Preferred Stock") (collectively, the "Series B Preferred Stock"). In the June
1995 Private Placement ING Equity Partners, L.P. I (ING") purchased an aggregate
of 100,000 shares of Company's Series B-1 Preferred Stock, warrants to purchase
428,571 shares of Common Stock at an exercise price of $0.01 per share and a
warrant to purchase 100,000 shares Common Stock at an exercise price of $2.50
per share. In connection with the June 1995 Private Placement, the Company's
Series A Preferred Stock was exchanged for an identical number of 9% Series A-1
Convertible Preferred Stock (the "Series A-1 Preferred Stock," and the Series
A-1 Preferred Stock together with the Series B Preferred Stock, the "Preferred
Stock") and subsequently retired. Huff and certain of its affiliates purchased
and aggregate of 100,975 shares of Series B-2 Preferred Stock, warrants to
purchase 432,749 shares of Common Stock at an exercise price of $0.01 per share,
a warrant to purchase 100,000 shares of Common Stock at an exercise price of
$1.79 per share and a warrant to purchase 100,000 shares of Common Stock at an
exercise price of $2.50 per share. Apex II and certain of its affiliates
purchased an aggregate of 21,000 shares of Series B-3 Preferred Stock and
warrants to purchase an aggregate of 90,000 shares of Common Stock at an
exercise price of $.01 per share. Each warrant to purchase Common
11
<PAGE> 200
Stock at an exercise price of $.01 per share that was issued pursuant to the
June 1995 Private Placement was exercised. The price per unit in the June 1995
Private Placement was $100. On November 14, 1995, pursuant to the Purchase
Agreement (the "Series B Purchase Agreement") dated as of June 26, 1995 among
the Company, Huff, ING, Apex, Apex II and other purchasers, ING purchased 50,000
shares of the Company's 9% Series B-4 Convertible Preferred Stock and a warrant
(exercised on that date) entitling ING to purchase 214,286 shares of Common
Stock at an exercise price of $0.01 per share. In connection with the June 1995
Private Placement, the Company entered into the Registration Rights Agreement
dated June 26, 1995, among the holders of the Preferred Stock, certain holders
of Common Stock and certain holders of options or warrants convertible into
Common Stock (the "Registration Rights Agreement") wherein the parties were
granted piggy-back registration rights with respect to any registration
statements (other than Registration Statements filed on Forms S-4 or S-8) filed
by the Company with the Commission at any time prior to the sixth anniversary of
the Registration Rights Agreement, and certain demand registration rights
following the occurrence of, among other things, a fully distributed, firm
commitment underwritten public offering of the Company's Common Stock registered
under the Securities Act of 1933, as amended, in which the gross proceeds to the
Company is at least $15,000,000 and the initial price to the public per share of
Common Stock is at least $5.00 and the result of which is the inclusion of the
Common Stock in the NASDAQ National Market System or listing on the New York
Stock Exchange.
The Company also has entered into the Stockholder's Agreement (the
"Stockholder's Agreement"), dated as of June 26, 1995, with the holders of the
Preferred Stock, Anthony J. Pompliano and Richard A. Kozak. The Stockholders
Agreement, among other things, generally restricts the transfer of Common and
Preferred Stock owned by the parties to the Stockholders Agreement with the
exception of stock sold: (i) in a public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), or (ii) in the public market pursuant to Rule 144 under the
Securities Act. The Stockholders Agreement further provides the stockholders
with rights of first refusal in the case of sales initiated by stockholders that
are parties to the Stockholders Agreement and certain "tag-along" rights, which
allow the stockholders to sell a proportionate amount of their stock in the
event a stockholder proposes to sell such stock to an unrelated purchaser.
As of June 30, 1995, the Company entered into an Amended and Restated
Management Registration Rights Agreement, as amended, wherein the Company's
executive officers Anthony J. Pompliano, Jack E. Reich, Riley M. Murphy, George
M. Tronsrue, III and Douglas R. Hudson were granted piggy-back registration
rights with respect to registration statements (other than Registration
Statements filed on Form S-4) filed by the Company with the Commission at any
time prior to the sixth anniversary of
12
<PAGE> 201
the Registration Rights Agreement, and certain demand registration rights, with
respect to shares of Common Stock underlying options granted to them under their
respective employment agreements with the Company.
Since June 26, 1995, the Company has entered into Indemnity Agreements
with each of its following Directors and Executive Officers providing for the
Company's indemnification of such Directors and Executive Officers.
On November 8, 1995, the Company entered into a Governance Agreement (the
"Governance Agreement") with Huff, ING, Apex, Apex II and other holders of the
Preferred Stock. Pursuant to the Governance Agreement, until June 26, 1996, the
Board was to consist of eleven members, four of whom were elected by holders of
the Common Stock and seven of whom were elected by holders of the Preferred
Stock. On February 26, 1996, the Company and the same parties to the Governance
Agreement signed a Supplemental Governance Agreement pursuant to which the Board
was reduced to seven members, four of whom were elected by holders of the Common
Stock and three of whom were elected by holders of the Preferred Stock.
On April 10, 1997, the Company entered into a Purchase Agreement with
Huff, ING, Apex and Apex II (the "Direct Purchasers") to sell an aggregate of
3,600,000 shares of the Company's Common Stock directly to the Direct Purchasers
at a price of $4.70 per share.
On April 28, 1997, the Company extended a loan in the principal amount of
$195,000 to George M. Tronsrue, III, the Company's President and Chief Operating
Officer--Strategy and Technology Development. The loan bears interest at 8% per
annum and is due and payable no later than April 28, 1999. Mr. Tronsrue must
prepay all amounts outstanding if his employment terminates earlier than April
28, 1999, and he must use the net proceeds from the sale of any of his shares of
Common Stock prior to April 28, 1999 to prepay any principal and interest then
outstanding.
On July 10, 1997, the Company entered into a Purchase Agreement with The
Huff Alternative Income Fund, L.P. ("Huff"), General Motors Domestic Group
Pension Trust ("G.M."), Societe Generale Securities Corporation ("SOCGEN"), ING
Baring (U.S.) Securities, Inc. ("ING Baring") and McDermott Inc. Master Trust
("McDermott")(the "Company Purchasers"), relating to the sale by the Company to
certain initial purchasers and the Company Purchasers of 75,000 Units (the
"Units"), consisting of $75,000,000 of 14-3/4% Redeemable Preferred Stock due
2008 (the "Preferred Stock") and 75,000 Warrants (the "Warrants"), each Warrant
initially to purchase 80.318 shares of common stock, par value $.01 per share
(the "Common Stock"), of the Company (the "Initial Warrant Shares"), subject to
an increase of 22.645
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<PAGE> 202
additional shares of Common Stock (the "Additional Warrant Shares" and, together
with the Initial Warrant Shares, the "Warrant Shares") in the event the Company
fails to raise net proceeds of at least $50,000,000 through the issue and sale
of its qualified capital stock (other than preferred stock) on or before
December 31, 1998. In connection with the offering of the Units, the Company
also entered into a Supplemental Registration Rights Agreement dated as of July
10, 1997, with Huff, G.M. and McDermott to provide for certain demand
registration rights with respect to the Units. Additionally, the Company entered
into a fee letter agreement dated July 10, 1997, with ING Baring and SOCGEN to
provide for the payment to each such entity of a fee in the amount of $337,500
in connection with the sale to each such entity of 7,500 Units.
On July 23, 1997, in connection with the sale of the Notes, the Company
entered into a fee letter agreement with Huff Asset Management Co., L.L.C.
("W.R. Huff") to pay W.R. Huff, on behalf of investment management accounts for
which W.R. Huff acts as investment advisor, a fee of $750,000 with respect to
the $50,000,000 of Notes purchased by W.R. Huff, on behalf of investment
management accounts for which W.R. Huff acts as investment advisor, from the
Initial Purchasers. In addition, on July 23, 1997, the Company entered into a
Supplemental Registration Rights Agreement with W.R. Huff, on behalf of
investment management accounts for which W.R. Huff acts as investment advisor,
to provide for certain demand registration rights with respect to the Notes.
14
<PAGE> 1
EXHIBIT 5
RILEY M. MURPHY
e.spire COMMUNICATIONS, INC.
133 NATIONAL BUSINESS PARKWAY, SUITE 200
ANNAPOLIS JUNCTION, MD 20701
September 23, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-1004
Re: e.spire COMMUNICATIONS, INC. FORM S-4
Gentlemen:
The undersigned has acted as legal counsel to e.spire Communications, Inc.,
a Delaware corporation (the "Company"), in connection with the Registration
Statement on Form S-4 (the "Registration Statement") filed by the Company with
the Securities and Exchange Commission on the date hereof and relating to
$375,000,000 aggregate principal amount at maturity of the Company's 10.625%
Senior Discount Notes due 2008 (the "New Notes"), to be offered in exchange for
an equal principal amount of the Company's outstanding 10.625% Senior Discount
Notes due 2008 (the "Old Notes"; the exchange of the Old Notes for the New Notes
is hereinafter referred to as the "Exchange Offer") pursuant to a Prospectus
(the "Prospectus") contained in the Registration Statement.
In the capacity of legal counsel to the Company, the undersigned has
examined originals or copies, certified or otherwise identified to the
satisfaction of the undersigned, of such documents, corporate records and other
instruments as the undersigned has deemed necessary for the purpose of rendering
this opinion, including (a) the Indenture dated as of July 24, 1998 (the
"Indenture"), between the Company and The Chase Manhattan Bank, as trustee (the
"Trustee") and (b) the Registration Rights Agreement dated as of July 24, 1998
between the Company and the Initial Purchasers named therein (the "Registration
Rights Agreement"). In the course of such examinations, the undersigned has
assumed the genuineness of all documents submitted as originals and the
conformity to originals and certified documents of all copies submitted as
conformed copies.
Based upon and subject to the foregoing, and assuming that the Registration
Statement becomes and remains effective and that applicable state securities
laws are complied with, the undersigned is of the opinion that the New Notes,
when duly executed by the Company and authenticated by the Trustee in accordance
with the terms of the Indenture and duly issued and delivered by the Company in
exchange for an equal principal amount of Old Notes pursuant to the terms of the
Registration Rights Agreement, will be duly issued and will constitute valid and
binding obligations of the Company enforceable against the Company in accordance
with their terms (subject to applicable bankruptcy, insolvency, registration,
moratorium, fraudulent transfer and other similar laws affecting creditors'
rights generally from time to time in effect and to general principles of
equity, including, without limitation, concepts of materiality, reasonableness,
good faith and fair dealing, regardless of whether considered in a proceeding in
equity or at law).
<PAGE> 2
The undersigned hereby consents to the filing of this opinion as Exhibit 5
to the Registration Statement and the reference to the undersigned under the
caption "Validity of the Notes" in the Prospectus contained therein.
Very truly yours,
/s/ RILEY M. MURPHY
--------------------------------------
Riley M. Murphy
Executive Vice President -- Legal and
Regulatory Affairs
2
<PAGE> 1
Exhibit 10.39
EXCHANGE AND REGISTRATION RIGHTS AGREEMENT
EXCHANGE AND REGISTRATION RIGHTS AGREEMENT, dated as of
July 24, 1998, by and between e.spire Communications, Inc. (the "Company") and
Goldman, Sachs & Co., Bear, Stearns & Co. Inc. and ING Baring Furman Selz LLC,
(collectively, the "Initial Purchasers") as the purchasers of the 10.625% Senior
Discount Notes due July 1, 2008 of the Company.
1. Certain Definitions.
For purposes of this Agreement, the following terms shall have the
following respective meanings:
(a) "Closing Date" shall mean the date on which the Notes are
initially issued.
(b) "Commission" shall mean the Securities and Exchange
Commission, or any other federal agency at the time administering the Exchange
Act or the Securities Act, whichever is the relevant statute for the particular
purpose.
(c) "Effective Time", in the case of an Exchange Offer, shall
mean the date on which the Commission declares the Exchange Offer registration
statement effective or on which such registration statement otherwise becomes
effective and, in the case of a Shelf Registration, shall mean the date on which
the Commission declares the Shelf Registration effective or on which the Shelf
Registration otherwise becomes effective.
(d) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(e) "Exchange Offer" shall have the meaning assigned thereto
in Section 2.
(f) "Exchange Notes" shall have the meaning assigned thereto
in Section 2.
(g) The term "holder" shall mean the Initial Purchasers for so
long as they own any Registrable Securities and any person who is a holder or
beneficial
<PAGE> 2
owner of any Registrable Securities, for so long as such person owns any
Registrable Securities.
(h) "Indenture" shall mean the Indenture, dated as of July 24,
1998, between the Company and The Chase Manhattan Bank, as Trustee.
(i) "Participating Broker-Dealer" shall have the meaning
assigned thereto in Section 2(a) hereof.
(j) The term "Person" shall mean a corporation, limited
liability company, association, partnership, organization, business, individual,
trust, government or political subdivision thereof or governmental agency.
(k) "Purchase Agreement" shall mean the Purchase Agreement,
dated July 24, 1998, between the Company and the Initial Purchasers relating to
the initial issuance and sale of the Notes.
(l) "Registrable Securities" shall mean the Notes; provided,
however, that such Notes shall cease to be Registrable Securities upon the first
to occur of any of the following events: (i) in the circumstances contemplated
by Section 2(a), such Notes have been exchanged for Exchange Notes in an
Exchange Offer as contemplated in Section 2(a) by a person other than a
broker-dealer, (ii) in the case of a broker-dealer, following the exchange of
such Notes for Exchange Notes by such broker-dealer, the date on which such
Exchange Notes have been sold to a purchaser who receives from such
broker-dealer on or prior to the date of such sale a copy of the prospectus for
use in connection with resales by broker-dealers referred to in Section 2(a);
(iii) in the circumstances contemplated by Section 2(b), a registration
statement registering such Notes under the Securities Act has been declared or
becomes effective and such Notes have been sold or otherwise transferred by the
holder thereof pursuant to such effective registration statement; (iv) such
Notes are sold pursuant to Rule 144 under circumstances in which any legend
borne by such Notes relating to restrictions on transferability thereof, under
the Securities Act or otherwise, is removed by the Company or pursuant to the
Indenture or such Notes are eligible to be sold pursuant to paragraph (k) of
Rule 144; or (v) such Notes shall cease to be outstanding.
(m) "Registration Expenses" shall have the meaning assigned
thereto in Section 4 hereof.
2
<PAGE> 3
(n) "Restricted Holder" shall mean (i) a holder that is an
affiliate of the Company within the meaning of Rule 405 under the Securities
Act, (ii) a holder who acquires Exchange Notes outside the ordinary course of
such holder's business or (iii) a holder who has arrangements or understandings
with any person to participate in the Exchange Offer for the purpose of
distributing Exchange Notes.
(o) "Rule 144", "Rule 405" and "Rule 415" shall mean, in each
case, such rule promulgated under the Securities Act.
(p) "Notes" shall mean, collectively, the $375.0 million
aggregate principal amount of maturity of 10.625% Senior Discount Notes due July
1, 2008 of the Company to be issued and sold to the Initial Purchasers and
securities issued in exchange therefor or in lieu thereof pursuant to the
Indenture.
(q) "Securities Act" shall mean the Securities Act of 1933, as
amended.
(r) "Shelf Registration" shall have the meaning assigned
thereto in Section 2 hereof.
(s) "Trust Indenture Act" shall mean the Trust Indenture Act
of 1939, as amended.
(t) "Trustee" shall mean The Chase Manhattan Bank, as trustee
under the Indenture.
Unless the context otherwise requires, any reference herein to a
"Section" or "clause" refers to a Section or clause, as the case may be, of this
Agreement, and the words "herein," "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
Section or other subdivision. Unless the context otherwise requires, any
reference to a statute, rule or regulation refers to the same (including any
successor statute, rule or regulation thereto) as it may be amended from time to
time.
2. Registration Under the Securities Act.
(a) Except as set forth in Section 2(b) below, the Company
agrees, to the extent not prohibited by applicable law, to use its reasonable
best efforts to file under the Securities Act, as soon as practicable, but no
later than 75 days after the
3
<PAGE> 4
Closing Date, a registration statement relating to an offer to exchange (the
"Exchange Offer") any and all of the Notes for a like aggregate principal amount
of debt securities of the Company which are substantially identical to the Notes
(and which are entitled to the benefits of a trust indenture which is
substantially identical to the Indenture or is the Indenture and which has been
qualified under the Trust Indenture Act) except that they have been registered
pursuant to an effective registration statement under the Securities Act and
will not contain provisions for the additional interest contemplated by Section
2(c) hereof or provisions restricting transfer (such new debt securities
hereinafter called "Exchange Notes"). The Company agrees to use its reasonable
best efforts to cause such registration statement to become effective under the
Securities Act as soon as practicable, but no later than 120 days after the
Closing Date. The Exchange Offer will be registered under the Securities Act on
the appropriate form and will comply with all applicable tender offer rules and
regulations under the Exchange Act. The Company further agrees to use its
reasonable best efforts to commence and complete the Exchange Offer promptly
after such registration statement has become effective, hold the Exchange Offer
open for at least 20 business days and exchange the Exchange Notes for all
Registrable Securities that have been tendered and not withdrawn on or prior to
the expiration of the Exchange Offer. The Exchange Offer will be deemed to have
been completed only if the Exchange Notes received by holders other than
Restricted Holders in the Exchange Offer for Registrable Securities are, upon
receipt, transferable by each such holder without restriction under the
Securities Act and without material restrictions under the blue sky or
securities laws of a substantial majority of the States of the United States of
America, it being understood that broker-dealers receiving Exchange Notes will
be subject to certain prospectus delivery requirements with respect to resale of
the Exchange Notes. The Exchange Offer shall be deemed to have been completed
upon the earlier to occur of (i) the Company having exchanged the Exchange Notes
for all outstanding Registrable Securities pursuant to the Exchange Offer and
(ii) the Company having exchanged, pursuant to the Exchange Offer, Exchange
Notes for all Registrable Securities that have been properly tendered and not
withdrawn before the expiration of the Exchange Offer, which shall be on a date
that is at least 20 business days following the commencement of the Exchange
Offer. The Company agrees (i) to include in the registration statement a
prospectus for use in any resales by any holder of Notes that is a broker-dealer
and (ii) to keep such registration statement effective for a period ending on
the earlier of the 120th day after the Exchange Offer has been completed or such
time as such broker-dealers no longer own any Registrable Securities. With
respect to such registration statement such holders shall have the benefit of
the rights of indemnification and contribution set forth in Section 6 hereof.
4
<PAGE> 5
The Company shall include within the prospectus contained in the
registration statement used in connection with the Exchange Offer a section
entitled "Plan of Distribution," which shall contain a summary statement of the
positions taken or policies made by the staff of the Commission with respect to
the potential "underwriter" status of any broker-dealer that is the beneficial
owner (as defined in Rule 13d-3 under the Exchange Act) of Exchange Noted
received by such broker-dealer in the Exchange Offer (a "Participating
Broker-Dealer"), which have been publicly disseminated by the staff of the
Commission. Such "Plan of Distribution" section shall also expressly permit, to
the extent permitted by applicable policies and regulations of the Commission,
the use of the prospectus used in connection with the Exchange Offer by all
Persons subject to the prospectus delivery requirements of the Securities Act,
including, to the extent permitted by applicable policies and regulations of
the Commission, all Participating Broker-Dealers, and include a statement
describing the means by which Participating Broker-Dealers may resell the
Exchange Notes in compliance with the Securities Act.
Each holder that participates in the Exchange Offer will be required,
as a condition to its participation in the Exchange Offer, to represent to the
Company in writing (which may be contained in the applicable letter of
transmittal) (i) that any Exchange Notes to be received by it will be acquired
in the ordinary course of its business, (ii) that at the time of the
commencement of the Exchange Offer such holder will have no arrangement or
understanding with any Person to participate in the distribution (within the
meaning of the Securities Act) of the Exchange Notes in violation of the
provisions of the Securities Act, (iii) that such holder is not an affiliate of
the Company within the meaning of the Securities Act and (iv) that such holder
is not acting on behalf of a Person who could not make the foregoing
representations. In addition, each Participating Broker-Dealer that will receive
Exchange Notes for its own account in exchange for Notes that were acquired as a
result of market-making or other trading activities will be required to
represent that the Notes being tendered by such broker-dealer were acquired in
ordinary trading or market-making activities. A broker-dealer that is not able
to make the foregoing representation will not be permitted to participate in the
Exchange Offer.
(b) If (i) on or prior to the consummation of the Exchange
Offer existing Commission interpretations are changed such that the Exchange
Notes received by holders other than Restricted Holders in the Exchange Offer
for Registrable Securities are not or would not be, upon receipt, transferable
by each
5
<PAGE> 6
such holder without restriction under the Securities Act or (ii) any Holder of
Restricted Securities notifies the Company prior to the 20th day following
consummation of the Exchange Offer that (A) it is prohibited by law or
Commission policy from participating in the Exchange Offer or (B) that it may
not resell the Exchange Notes acquired by it in the Exchange Offer to the public
without delivering a prospectus and the resale prospectus contained in the
registration statement for the Exchange Offer referred to in Section 2(a) is not
appropriate or available for such resales or (C) that it is a broker-dealer and
owns Notes acquired directly from the Company or an affiliate of the Company, in
lieu of or, in the case of clause (iii), in addition to conducting the Exchange
Offer contemplated by Section 2(a) the Company shall file under the Securities
Act as soon as practicable a "shelf" registration statement providing for the
registration of, and the sale on a continuous or delayed basis by the holders
of, all of the Registrable Securities, pursuant to Rule 415 under the Securities
Act and/or any similar rule that may be adopted by the Commission (the "Shelf
Registration"). The Company agrees to use its reasonable best efforts to file
the registration statement relating to the Shelf Registration not later than 45
days after such filing obligation arises and to cause the Shelf Registration to
become or be declared effective no later than 90 days after such obligation
arises and to use its reasonable best efforts to keep such Shelf Registration
continuously effective for a period ending on the earlier of the second
anniversary of the Closing Date or such time as there are no longer any
Registrable Securities outstanding. The Company shall be deemed not to have used
its reasonable best efforts to keep the Shelf Registration effective during the
requisite period if it voluntarily takes any action that would result in holders
covered thereby not being able to offer and sell such Notes during that period,
unless (i) such action is required by applicable law or (ii) such action is
taken by the Company in good faith and for valid business reasons involving a
material undisclosed event, including, without limitation, the acquisition or
divestiture of assets or other pending corporate developments so long as the
Company promptly complies with the requirements of Section 3(c)(vi) and 3(e)
hereof, if applicable; provided, that in the case of clause (ii), such period
shall not exceed 60 days in any 12-month period (a "Suspension Period")
(whereafter Special Interest (as defined in paragraph (c)) shall accrue and be
payable). A Suspension Period shall commence on and include the date that the
Company gives notice that the Shelf Registration Statement is no longer
effective or the prospectus included therein is no longer usable for offers and
sales of Securities and shall end on the earlier to occur of (A) the date on
which each seller of Securities covered by the Shelf Registration Statement
either receives the copies of the supplemented or amended prospectus
contemplated by Section 3(e) hereof or is advised in writing by the Company that
the use of the prospectus may be resumed and (B) the expiration of 60 days in
any 12-
6
<PAGE> 7
month period during which one or more Suspension Periods has been in effect;
provided, however, that upon expiration of the 60-day period contemplated in
clause (B), sales under the Shelf Registration Statement shall not be permitted
unless and until the Company either delivers the copies of the supplemented or
amended prospectus contemplated by Section 3(e) hereof or advises the sellers in
writing that the use of the prospectus may be resumed. The Company further
agrees to supplement or make amendments to the Shelf Registration, as and when
required by the rules, regulations or instructions applicable to the
registration form used by the Company for such Shelf Registration or by the
Securities Act or rules and regulations thereunder for shelf registration, and
the Company agrees to furnish to the holders of the Registrable Securities
copies of any such supplement or amendment prior to its being used and/or filed
with the Commission.
(c) In the event that (i) the Company has not filed (a) the
registration statement relating to the Exchange Offer on or before the 75th day
after the Closing Date or (b) the Shelf Registration on or before the 45th day
after the date on which the filing obligation for the Shelf Registration has
arisen or (ii) either such registration statement has not become effective or
been declared effective by the Commission on or before the 120th day after the
Closing Date, in the case of the Exchange Offer, or the 90th day after the date
on which the filing obligation for the Shelf Registration has arisen, in the
case of the Shelf Registration, or (iii) the Exchange Offer has not been
completed within 30 business days after the initial effective date of the
registration statement (if the Exchange Offer is then required to be made) or
(iv) any registration statement required by Section 2(a) or 2(b) is filed and
declared effective but shall thereafter cease to be effective or usable (other
than in connection with a permissible Suspension Period) for transfers or
Registrable Securities during the periods referred to in Sections 2(a) and 2(b)
without being succeeded immediately by an additional registration statement
filed and declared effective (each such event referred to in clauses (i) through
(iv), a "Registration Default"), then the Company shall pay cash interest on the
Notes ("Special Interest") to each holder thereof in an amount equal to $.05 per
week per $1,000 principal amount of Notes held by such holder, which amount
shall increase after the first 90- day period following the occurrence of the
first Registration Default and at the beginning of each subsequent 90-day period
during such Registration Default by an additional $.05 per week per $1,000
principal amount of Notes with respect to each subsequent week during which any
Registration Default exists, up to a maximum amount of $.50 per week per $1,000
principal amount of Notes, for the period from and including the date of
occurrence of the first Registration Default until such time as no Registration
Default is in effect (after which such Special Interest shall cease to
7
<PAGE> 8
be payable). In the event that any Special Interest becomes payable, the Company
shall promptly notify the Trustee of such event, including any subsequent
increase in the amount of Special Interest, and the beginning and ending dates
therefor. All accrued Special Interest will be paid by the Company on each
January 1 and July 1 to the Holder of Notes by wire transfer of immediately
available funds or by federal funds check.
3. Registration Procedures.
If the Company files a registration statement pursuant to Section 2(a)
or Section 2(b), the following provisions shall apply:
(a) At or before the Effective Time of the Exchange Offer or
the Shelf Registration, as the case may be, the Company shall qualify the
Indenture under the Trust Indenture Act.
(b) In the event that such qualification would require the
appointment of a new trustee under the Indenture, the Company shall appoint a
new trustee thereunder pursuant to the applicable provisions of the Indenture.
(c) In connection with the Company's obligations with respect
to the Shelf Registration, if applicable, the Company shall use its reasonable
best efforts to effect or cause the Shelf Registration to permit the sale of the
Registrable Securities by the holders thereof in accordance with the intended
method or methods of distribution thereof described in the Shelf Registration.
In connection therewith, and, in the cases of clauses (ii) through (vii), (ix)
through (xi) and (xv) through (xvi) below, in connection with any sale by a
Holder that is a broker-dealer and must deliver the prospectus contained in the
registration statement relating to the Exchange Offer, the Company shall:
(i) as soon as reasonably practicable, prepare and
file with the Commission a registration statement with respect to the
Shelf Registration on any form which may be utilized by the Company and
which shall permit the disposition of the Registrable Securities in
accordance with the intended method or methods thereof, as specified in
writing by the holders of the Registrable Securities, and use its
reasonable best efforts to cause such registration statement to become
effective as soon as reasonably practicable thereafter;
8
<PAGE> 9
(ii) as soon as reasonably practicable and subject to
the Company's right to effect a Suspension Period in accordance with
Section 2(b) hereof, prepare and file with the Commission such
amendments and supplements to such registration statement and the
prospectus included therein as may be necessary to effect and maintain
the effectiveness of such registration statement for the period
specified in Section 2(b) hereof and as may be required by the
applicable rules and regulations of the Commission and the instructions
applicable to the form of such registration statement, and furnish to
the holders of the Registrable Securities copies of any such supplement
or amendment prior to its being used and/or filed with the Commission;
(iii) as soon as reasonably practicable, comply with
the provisions of the Securities Act with respect to the disposition of
all of the Registrable Securities covered by such registration
statement in accordance with the intended methods of disposition by the
holders thereof set forth in such registration statement;
(iv) provide (A) the holders of the Registrable
Securities to be included in such registration statement, (B) the
underwriters (which term, for purposes of this Agreement, shall include
a person deemed to be an under writer within the meaning of Section
2(11) of the Securities Act) if any, thereof, (C) the sales or
placement agent, if any, therefor, (D) counsel for such underwriters or
agent, and (E) not more than one counsel for all the holders of such
Registrable Securities the opportunity to participate in the
preparation of such registration statement, each prospectus included
therein or filed with the Commission, and each amendment or supplement
thereto;
(v) for a reasonable period prior to the filing of
such registration statement, and throughout the period specified in
the second sentence of Section 2(b), make available at reasonable times
at the Company's principal place of business or such other reasonable
place determined by the Company for inspection by the parties referred
to in Section 3(c)(iv) who shall certify to the Company in writing that
they have a current intention to sell the Registrable Securities
pursuant to the Shelf Registration such financial and other information
and books and records of the Company, and cause the officers,
employees, counsel and independent certified public accountants of the
Company to respond to such inquiries, as shall be reasonably necessary,
in the reasonable judgment of the respective counsel referred to in
such Section, to conduct a reasonable investigation within the meaning
of Section
9
<PAGE> 10
11 of the Securities Act; provided, however, that each such party shall
be required to maintain in confidence and not to disclose to any other
person any information or records reasonably designated by the Company
in writing as being confidential, until such time as (A) such
information becomes a matter of public record (whether by virtue of its
inclusion in such registration statement or otherwise), or (B) such
person shall be required, or shall deem it advisable, so to disclose
such information pursuant to the subpoena or order of any court or
other governmental agency or body having jurisdiction over the matter
(subject to the requirements of such order, and only after such person
shall have given the Company prompt prior written notice thereof), or
(C) such information is required to be set forth in such registration
statement or the prospectus included therein or in an amendment to such
registration statement or an amendment or supplement to such prospectus
in order that such registration statement, prospectus, amendment or
supplement, as the case may be, does not contain an untrue statement of
a material fact or omit to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading in light of the circumstances then existing;
(vi) promptly notify the selling holders of
Registrable Securities, the sales or placement agent, if any, therefor
and the managing underwriter or underwriters, if any, thereof and
confirm such advice in writing, (A) when such registration statement or
the prospectus included therein or any prospectus amendment or
supplement or post-effective amendment has been filed, and, with
respect to such registration statement or any post-effective amendment,
when the same has become effective, (B) of any comments by the
Commission, the Blue Sky or securities commissioner or regulator of any
state with respect thereto or any request by the Commission for
amendments or supplements to such registration statement or prospectus
or for additional information, (C) of the issuance by the Commission of
any stop order suspending the effectiveness of such registration
statement or the initiation or threatening of any proceedings for that
purpose, (D) if at any time the representations and warranties of the
Company contemplated by Section 3(c)(xv) or Section 5 cease to be true
and correct in all material respects, (E) of the receipt by the Company
of any notification with respect to the suspension of the qualification
of the Registrable Securities for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose, or (F) at
any time when a prospectus is required to be delivered under the
Securities Act, that such registration statement, prospectus,
prospectus amendment or
10
<PAGE> 11
supplement or post-effective amendment, or any document incorporated by
reference in any of the foregoing, contains an untrue statement of a
material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading in
light of the circumstances then existing;
(vii) use its reasonable best efforts to obtain the
withdrawal of any order suspending the effectiveness of such
registration statement or any post-effective amendment thereto at the
earliest practicable date;
(viii) if requested by any managing underwriter or
underwriters, any placement or sales agent or any holder of Registrable
Securities, promptly incorporate in a prospectus supplement or
post-effective amendment such information as is required by the
applicable rules and regulations of the Commission and as such managing
underwriter or underwriters, such agent or such holder specifies in
writing to the Company should be included therein relating to the terms
of the sale of such Registrable Securities, including, without
limitation, information with respect to the principal amount of
Registrable Securities being sold by such holder or agent or to any
underwriters, the name and description of such holder, agent or
underwriter, the offering price of such Registrable Securities and any
discount, commission or other compensation payable in respect thereof,
the purchase price being paid therefor by such underwriters and with
respect to any other terms of the offering of the Registrable
Securities to be sold by such holder or agent or to such underwriters;
and make all required filings of such prospectus supple ment or
post-effective amendment promptly after notification of the matters to
be incorporated in such prospectus supplement or post-effective
amendment;
(ix) furnish to each placement or sales agent, if
any, therefor, each underwriter, if any, thereof and the respective
counsel referred to in Section 3(c)(iv), and, upon a written request,
each holder of Registrable Securities an executed copy of such
registration statement, each such amendment and supplement thereto (in
each case including all exhibits thereto and documents incorporated by
reference therein) and such number of copies of such registration
statement (excluding exhibits thereto and documents incorporated by
reference therein unless specifically so requested by such holder,
agent or underwriter, as the case may be) and of the prospectus
included in such registration statement (including each preliminary
prospec-
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<PAGE> 12
tus and any summary prospectus), in conformity with the requirements of
the Securities Act, and such other documents, as such holder, agent, if
any, and underwriter, if any, may reasonably request in order to
facilitate the offering and disposition of the Registrable Securities
owned by such holder, offered or sold by such agent or underwritten by
such underwriter and to permit such holder, agent and underwriter to
satisfy the prospectus delivery requirements of the Securities Act; and
the Company hereby consents to the use of such prospectus (including
such preliminary and summary prospectus) and any amendment or
supplement thereto by each such holder and by any such agent and
underwriter, in each case in the form most recently provided to such
party by the Company, in connection with the offering and sale of the
Registrable Securities covered by the prospectus (including such
preliminary and summary prospectus) or any supplement or amendment
thereto;
(x) use its reasonable best efforts to (A) register
or qualify the Registrable Securities to be included in such
registration statement under such securities laws or blue sky laws of
such jurisdictions as any holder of such Registrable Securities and
each placement or sales agent, if any, therefor and underwriter, if
any, thereof shall reasonably request, (B) keep such registrations or
qualifications in effect and comply with such laws so as to permit the
continuance of offers, sales and dealings therein in such jurisdictions
during the period the Shelf Registration is required to remain
effective under Section 2(b) above and for so long as may be necessary
to enable any such holder, agent or underwriter to complete its
distribution of Notes pursuant to such registration statement and (C)
take any and all other actions as may be reasonably necessary to enable
each such holder, agent, if any, and underwriter, if any, to consummate
the disposition in such jurisdictions of such Registrable Securities;
provided, however, that the Company shall not be required for any such
purpose to (1) qualify as a foreign corporation in any jurisdiction
wherein it would not otherwise be required to qualify but for the
requirements of this Section 3(c)(x), (2) consent to general service of
process or taxation in any such jurisdiction or (3) make any changes to
its articles of incorporation or by-laws or any agreement between it
and its stockholders;
(xi) use its reasonable best efforts to obtain the
consent or approval of each governmental agency or authority, whether
federal, state, provincial or local, which may be required to effect
the Shelf Registration or the offering or sale in connection therewith
or to enable the selling holder or
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<PAGE> 13
holders to offer, or to consummate the disposition of, their
Registrable Securities;
(xii) cooperate with the holders of the Registrable
Securities and the managing underwriters, if any, to facilitate the
timely preparation and delivery of certificates representing
Registrable Securities to be sold, which certificates shall not bear
any restrictive legends;
(xiii) enter into one or more reasonable forms of
underwriting agreements, engagement letters, agency agreements, "best
efforts" underwriting agreements or similar agreements, as
appropriate, including (without limitation) customary provisions
relating to indemnification and contribution, and take such other
actions in connection therewith as any holders of Registrable
Securities aggregating at least 25% in aggregate principal amount of
Registrable Securities at the time outstanding shall reasonably request
in order to expedite or facilitate the disposition of such Registrable
Securities;
(xiv) whether or not an agreement of the type
referred to in Section (3)(c)(xiv) hereof is entered into and whether
or not any portion of the offering contemplated by such registration
statement is an underwritten offering or is made through a placement or
sales agent or any other entity, (A) make such representations and
warranties to the holders of such Registrable Securities and the
placement or sales agent, if any, therefor and the underwriters, if
any, thereof in form, substance and scope as are customarily reasonably
made in connection with an offering of debt securities pursuant to any
appropriate agreement and/or to a registration statement filed on the
form applicable to the Shelf Registration; (B) obtain an opinion or
opinions of counsel to the Company in customary form and covering such
other matters of the type customarily covered by such an opinion, as
the managing underwriters, if any, and as any holders of Registrable
Securities may reasonably request, addressed to such holder or holders
and the placement or sales agent, if any, therefor and the
underwriters, if any, thereof and dated the effective date of such
registration statement (and if such registration statement contemplates
an underwritten offering of a part or all of the Registrable
Securities, dated the date of the closing under the underwriting
agreement relating thereto); (C) obtain a "cold comfort" letter or
letters from the independent certified public accountants of the
Company addressed to the selling holders of Registrable Securities and
the placement or sales agent, if any, therefor and the underwriters, if
any, thereof, dated (i) the effective date of such registra-
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<PAGE> 14
tion statement and (ii) the effective date of any prospectus supplement
to the prospectus included in such registration statement or
post-effective amendment to such registration statement which includes
unaudited or audited financial statements as of a date or for a period
subsequent to that of the latest such statements included in such
prospectus (and, if such registration state ment contemplates an
underwritten offering pursuant to any prospectus supplement to the
prospectus included in such registration statement or post-effective
amendment to such registration statement which includes unaudited or
audited financial statements as of a date or for a period subsequent to
that of the latest such statements included in such prospectus, dated
the date of the closing under the underwriting agreement relating
thereto), such letter or letters to be in customary form and covering
such matters of the type customarily covered by letters of such type;
(D) deliver such documents and certificates, including officers'
certificates, as may be reasonably requested by any holders of
Registrable Securities and the placement or sales agent, if any,
therefor and the managing underwriters, if any, thereof to evidence the
accuracy of the representations and warranties made pursuant to clause
(A) above and the compliance with or satisfaction of any agreements or
conditions contained in the underwriting agreement or other agreement
entered into by the Company; and (E) undertake such obligations
relating to expense reimbursement, indemnification and contribution as
are customary for such transactions;
(xv) notify in writing each holder of Registrable
Securities of any proposal by the Company to amend or waive any
provision of this Agreement pursuant to Section 9(h) hereof and of any
amendment or waiver effected pursuant thereto, each of which notices
shall contain the text of the amendment or waiver proposed or effected,
as the case may be;
(xvi) in the event that any broker-dealer registered
under the Exchange Act shall underwrite any Registrable Securities or
participate as a member of an underwriting syndicate or selling group
or "assist in the distribution" (within the meaning of the Rules of
Conduct (the "Rules of Conduct") of the National Association of
Securities Dealers, Inc. ("NASD")) thereof, whether as a holder of such
Registrable Securities or as an under writer, a placement or sales
agent or a broker or dealer in respect thereof, or otherwise, cooperate
with such broker-dealer in connection with any filings required to be
made by the NASD; and
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<PAGE> 15
(xvii) comply with all applicable rules and
regulations of the Commission, and make generally available to its
security holders not later than eighteen months after the effective
date of such registration statement, an earning statement of the
Company and its subsidiaries complying with Section 11(a) of the
Securities Act (including, at the option of the Company, Rule 158
thereunder).
(d) The Company shall also prior to the effective date of the
first registration statement relating to the Registrable Securities, (i) provide
the Trustee with certificates for Registrable Securities in a form eligible for
deposit with The Depository Trust Company and (ii) provide a CUSIP number for
Registrable Securities and Exchange Notes.
(e) In the event that the Company would be required, in
connection with a Suspension Period or pursuant to Section 3(c)(vi)(F) above, to
notify the selling holders of Registrable Securities, the placement or sales
agent, if any, therefor and the managing underwriters, if any, thereof, the
Company shall without delay prepare and furnish to each such holder, to each
placement or sales agent, if any, and to each underwriter, if any, a reasonable
number of copies of a prospectus supplemented or amended so that, as thereafter
delivered to Initial Purchasers of Registrable Securities, such prospectus shall
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 in light of the circumstances then existing. Each holder of
Registrable Securities agrees that upon receipt of any notice from the Company
pursuant to Section 3(c)(vi)(F) hereof, such holder shall forthwith discontinue
the disposition of Registrable Securities pursuant to the registration statement
applicable to such Registrable Securities until such holder shall have received
copies of such amended or supplemented prospectus, and if so directed by the
Company, such holder shall deliver to the Company (at the Company's expense) all
copies, other than permanent file copies, then in such holder's possession of
the prospectus covering such Registrable Securities at the time of receipt of
such notice.
(f) The Company may require each holder of Registrable Securi-
ties as to which any registration is being effected to furnish to the Company
such information regarding such holder and such holders intended method of
distribution of such Registrable Securities as the Company may from time to time
reasonably request in writing, but only to the extent that such information is
required in order to comply with the Securities Act. No holder may include any
of its Registrable Securities in any Shelf Registration pursuant to this
Agreement or be entitled to
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<PAGE> 16
receive Special Interest unless and until such Holder furnishes to the Company,
in writing, such information as is required by applicable law for use in
connection with any Shelf Registration or related prospectus or preliminary
prospectus. Each such holder agrees to notify the Company as promptly as
practicable of any inaccuracy or change in information previously furnished by
such holder to the Company or of the occurrence of any event in either case as a
result of which any prospectus relating to such registration contains or would
contain an untrue statement of a material fact regarding such holder or such
holder's intended method of distribution of such Registrable Securities or omits
to state any material fact regarding such holder or such holder's intended
method of distribution of such Registrable Securities required to be stated
therein or necessary to make the statements therein not misleading in light of
the circumstances then existing, and promptly to furnish to the Company any
additional information required to correct and update any previously furnished
information or required so that such prospectus shall not contain, with respect
to such holder or the distribution of such Registrable Securities, 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 in
light of the circumstances then existing.
4. Registration Expenses.
The Company agrees to bear and to pay or cause to be paid all expenses
incident to the Company's performance of or compliance with this Agreement
(excluding fees and disbursements of counsel to the Initial Purchasers and fees
and disbursements of underwriters' counsel in connection with a Shelf
Registration, in each case other than reasonable fees and disbursements relating
to Blue Sky qualifications or as otherwise set forth herein or any other
agreement in writing), including, without limitation, (a) all Commission and any
NASD registration and filing fees and expenses, (b) all fees and expenses in
connection with the qualification of the Notes or Exchange Notes for offering
and sale under the State securities and blue sky laws referred to in Section
3(c)(x) hereof, including reasonable fees and disbursements of counsel for the
placement or sales agent or underwriters in connection with such qualifications,
(c) all expenses relating to the preparation, printing, distribution and
reproduction of each registration statement required to be filed hereunder, each
prospectus included therein or prepared for distribution pursuant hereto, each
amendment or supplement to the foregoing, the certificates representing the
Notes and Exchange Notes and all other documents relating hereto, (d) messenger
and delivery expenses, (e) fees and expenses of the Trustee under the Indenture
and of any escrow agent or custodian, (f) internal expenses (including, without
limitation,
16
<PAGE> 17
all salaries and expenses of the Company's officers and employees performing
legal or accounting duties), (g) fees, disbursements and expenses of counsel and
independent certified public accountants of the Company (including the expenses
of any opinions or "cold comfort" letters required by or incident to such
performance and compliance), and (h) reasonable fees, disbursements and expenses
of one counsel for the holders of Registrable Securities retained in connection
with a Shelf Registration, as selected by the holders of at least a majority in
aggregate principal amount of the Registrable Securities being registered, and
fees, expenses and disbursements of any other persons, including special
experts, retained by the Company in connection with such registration
(collectively, the "Registration Expenses"). To the extent that any Registration
Expenses are incurred, assumed or paid by any holder of Registrable Securities
or any placement or sales agent therefor or underwriter thereof, the Company
shall reimburse such person for the full amount of the Registration Expenses so
incurred, assumed or paid promptly after receipt of a written request (which
includes a description of the Registration Expenses for which reimbursement is
sought) therefor. Notwithstanding the foregoing, the holders of the Registrable
Securities being registered shall pay all agency fees and commissions and
underwriting discounts and commissions attributable to the sale of such
Registered Securities and the fees and disbursements of any counsel or other
advisors or experts retained by such holders (severally or jointly), other than
the counsel and experts specifically referred to above.
5. Representations and Warranties.
The Company represents and warrants to, and agrees with, the Initial
Purchasers and each of the holders from time to time of Registrable Securities
that:
(a) The compliance by the Company with all of the provisions
of this Agreement and the consummation of the transactions herein contemplated
will not conflict with or result in a breach of any of the terms or provisions
of, or constitute a default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the Company or any
subsidiary of the Company is a party or by which the Company or any subsidiary
of the Company is bound or to which any of the property or assets of the Company
or any subsidiary of the Company is subject nor will such action result in any
violation of the provisions of the articles of incorporation or by-laws of the
Company or any statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company or any
subsidiary of the Company or any of their properties; and no consent, approval,
authorization, order, registration or qualification of or with any
17
<PAGE> 18
such court or governmental agency or body is required for the consummation by
the Company of the transactions contemplated by this Agreement, except the
registration under the Securities Act of the Registrable Securities,
qualification of the Indenture under the Trust Indenture Act and such consents,
approvals, authorizations, registrations or qualifications as may be required
under State securities or blue sky laws in connection with the offering and
distribution of the Registrable Securities.
(b) This Agreement has been duly authorized, executed and
delivered by the Company.
6. Indemnification.
(a) Indemnification by the Company. Upon the registration of
the Registrable Securities pursuant to Section 2 hereof, and in consideration of
the agreements of the Initial Purchasers contained herein, and as an inducement
to the Initial Purchasers to purchase the Notes, the Company shall, and it
hereby agrees to, indemnify and hold harmless each of the holders of Registrable
Securities to be included in such registration, and each person who participates
as a placement or sales agent or as an underwriter in any offering or sale of
such Registrable Securities against any losses, claims, damages or liabilities,
joint or several, to which such holder, agent or underwriter may become subject
under the Securities Act or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in
any registration statement under which such Registrable Securities were
registered under the Securities Act, or any preliminary, final or summary
prospectus contained therein or furnished by the Company to any such holder,
agent or underwriter, or any amendment or supplement thereto, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and the Company shall, and hereby it agrees to, reimburse such
holder, such agent and such underwriter for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such action or claim as such expenses are incurred and documented; provided,
however, that the Company shall not be liable to any such person in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in such registration statement, or preliminary, final or
summary prospectus, or amendment or supplement thereto (i) in reliance upon and
in conformity with written information furnished to the Company by holders of
Registrable Securities expressly for use therein.
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<PAGE> 19
(b) Indemnification by the Holders and any Agents and
Underwriters. The Company may require, as a condition to including any
Registrable Securities in any registration statement filed pursuant to Section 2
hereof and to entering into any underwriting agreement with respect thereto,
that the Company shall have received an undertaking reasonably satisfactory to
it from the holder of such Registrable Securities and from each underwriter
named in any such underwriting agreement, severally and not jointly, to
indemnify and hold harmless the Company and all other holders of Registrable
Securities, against any losses, claims, damages or liabilities to which the
Company or such other holders of Registrable Securities may become subject,
under the Securities Act or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in
such registration statement, or any preliminary, final or summary prospectus
contained therein or furnished by the Company to any such holder, agent or
underwriter, or any amendment or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company by such holder or underwriter expressly for use therein, provided,
however, that no such holder shall be required to undertake liability to any
person under this Section 6(b) for any amounts in excess of the dollar amount of
the proceeds to be received by such holder from the sale of such holder's
Registrable Securities pursuant to such registration.
(c) Notices of Claims, Etc. Promptly after receipt by an
indemnified party under subsection (a) or (b) above of notice of the
commencement of any action, such indemnified party shall, if a claim in respect
thereof is to be made against an indemnifying party pursuant to the
indemnification provisions of or contemplated by this Section 6, notify such
indemnifying party in writing of the commencement of such action; but the
omission so to notify the indemnifying party shall not relieve it from any
liability which it may have to any indemnified party other than under the
indemnification provisions of or contemplated by Section 6(a) or 6(b) hereof. In
case any such action shall be brought against any indemnified party and it shall
notify an indemnifying party of the commencement thereof, such indemnifying
party shall be entitled to participate therein and, to the extent that it shall
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party (who
shall not, except with the consent of the indemnified party, be counsel to the
indemnifying
19
<PAGE> 20
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, such indemnifying party shall
not be liable to such indemnified party for any legal expenses of other counsel
or any other expenses, in each case subsequently incurred by such indemnified
party, in connection with the defense thereof other than reasonable costs of
investigation. No indemnifying party shall, without the written consent of the
indemnified party, effect the settlement or compromise of, or consent to the
entry of any judgment with respect to, any pending or threatened action or claim
in respect of which indemnification or contribution may be sought hereunder
(whether or not the indemnified party is an actual or potential party to such
action or claim) unless such settlement, compromise or judgment (i) includes an
unconditional release of the indemnified party from all liability arising out of
such action 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. No indemnifying party shall be liable for the cost of any settlement
effected by an indemnified party without the written consent of such
indemnifying party, which consent shall not be unreasonably withheld.
(d) Contribution. Each party hereto agrees that, if for any
reason the indemnification provisions contemplated by Section 6(a) or Section
6(b) are unavailable to or insufficient to hold harmless an indemnified party in
respect of any losses, claims damages or liabilities (or actions in respect
thereof) referred to therein, then each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party and the indemnified party in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities (or actions in
respect thereof), as well as any other relevant equitable considerations. The
relative fault of such indemnifying party and indemnified party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or omission or alleged omission to state a
material fact relates to information supplied by such indemnifying party or by
such indemnified party, and the parties relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The parties hereto agree that it would not be just and equitable if
contributions pursuant to this Section 6(d) were determined by pro rata
allocation (even if the holders or any agents or underwriters or all of them
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 in this Section 6(d). The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, or liabilities (or actions in respect
thereof) referred to
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<PAGE> 21
above shall be deemed to include any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 6(d), no holder
shall be required to contribute any amount in excess of the amount by which the
dollar amount of the proceeds receive by such holder from the sale of any
Registrable Securities (after deducting any fees, discounts and commissions
applicable thereto) exceeds the amount of any damages which such holder has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission, and no underwriter shall be required
to contribute any amount in excess of the amount by which the total price at
which the Registrable Securities underwritten by it and distributed to the
public were offered to the public exceeds the amount of any damages which such
underwriter has otherwise been required to pay by reason of 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
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The holders and any underwriters
obligations in this Section 6(d) to contribute shall be several in proportion to
the principal amount of Registrable Securities registered or underwritten, as
the case may be, by them and not joint.
(e) The obligations of the Company under this Section 6 shall
be in addition to any liability which the Company may otherwise have and shall
extend, upon the same terms and conditions, to each officer, director and
partner of each holder, agent and underwriter and each person, if any, who
controls any holder, agent or underwriter within the meaning of the Securities
Act; and the obligations of the holders and any underwriters contemplated by
this Section 6 shall be in addition to any liability which the respective holder
or underwriter may otherwise have and shall extend, upon the same terms and
conditions, to each officer and director of the Company including any person
who, with his consent, is named in any registration statement as about to become
a director of the Company and to each person, if any, who controls the Company
within the meaning of the Securities Act.
7. Underwritten Offerings.
(a) Selection of Underwriters. If any of the Registrable
Securities covered by the Shelf Registration are to be sold pursuant to an
underwritten offering, the managing underwriter or underwriters thereof shall be
designated by the holders of at least a majority in aggregate principal amount
of the Registrable Securities to be
21
<PAGE> 22
included in such offering, provided that such designated managing underwriter or
underwriters is or are reasonably acceptable to the Company.
(b) Participation by Holders. Each holder of Registrable
Securities hereby agrees with each other such holder that no such holder may
participate in any underwritten offering hereunder unless such holder (1) agrees
to sell such holder's Registrable Securities on the basis provided in any
underwriting arrangements approved by the persons entitled hereunder to approve
such arrangements and (ii) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents reasonably
required under the terms of such underwriting arrangements.
8. Rule 144.
The Company covenants to the holders of Registrable Securities that to
the extent it shall be required to do so under the Exchange Act, it shall timely
file the reports required to be filed by it under the Exchange Act or the
Securities Act (including, but not limited to, the reports under Section 13 and
15(d) of the Exchange Act referred to in subparagraph (c)(1) of Rule 144) and
the rules and regulations adopted by the Commission thereunder, and shall take
such further action as any holder of Registrable Securities may reasonably
request, but only to the extent required from time to time to enable such holder
to sell Registrable Securities without registration under the Securities Act
within the limitations of the exemption provided by Rule 144 or any similar rule
or regulation hereafter adopted by the Commission. Upon the written request of
any holder of Registrable Securities in connection with that holder's sale
pursuant to Rule 144, the Company shall deliver to such holder a written
statement as to whether it has complied with such requirements.
9. Miscellaneous.
(a) No Inconsistent Agreements. The Company represents,
warrants, covenants and agrees that it has not granted, and shall not grant,
registration rights with respect to Registrable Securities or any other
securities which would be inconsistent with the terms contained in this
Agreement.
(b) Specific Performance. The parties hereto acknowledge that
there would be no adequate remedy at law if any party fails to perform any of
its obligations hereunder and that each party may be irreparably harmed by any
such
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<PAGE> 23
failure, and accordingly agree that each party, in addition to any other remedy
to which it may be entitled at law or in equity, shall be entitled to compel
specific performance of the obligations of any other party under this Agreement
in accordance with the terms and conditions of this Agreement, in any court of
the United States or any State thereof having jurisdiction.
(c) Notices. All notices, requests, claims, demands, waivers
and other communications hereunder shall be in writing and shall be deemed to
have been duly given when delivered by hand, if delivered personally or by
courier, or three days after being deposited in the mail (registered or
certified mail, postage prepaid, return receipt requested) as follows: If to the
Company, to it at 133 National Business Parkway, Suite 200, Annapolis Junction,
Maryland 20701, Attention: Chief Financial Officer and if to a holder, to the
address of such holder set forth in the security register or other records of
the Company, or to such other address as any party may have furnished to the
others in writing in accordance herewith, except that notices of change of
address shall be effective only upon receipt.
(d) Parties in Interest. All the terms and provisions of this
Agreement shall be binding upon, shall inure to the benefit of and shall be
enforceable by the respective successors and assigns of the parties hereto. In
the event that any transferee of any holder of Registrable Securities shall
acquire Registrable Securities, in any manner, whether by gift, bequest,
purchase, operation of law or otherwise, such transferee shall, without any
further writing or action of any kind, be deemed a party hereto for all purposes
and such Registrable Securities shall be held subject to all of the terms of
this Agreement, and by taking and holding such Registrable Securities such
transferee shall be entitled to receive the benefits of and be conclusively
deemed to have agreed to be bound by and to perform all of the terms and
provisions of this Agreement.
(e) Survival. The respective indemnities, agreements,
representations, warranties and each other provision set forth in this
Agreement or made pursuant hereto shall remain in full force and effect
regardless of any investigation (or statement as to the results thereof) made by
or on behalf of any holder of Registrable Securities, any director, officer or
partner of such holder, any agent or underwriter or any director, officer or
partner thereof, or any controlling person of any of the foregoing, and shall
survive delivery of and payment for the Registrable Securities pursuant to the
Purchase Agreement and the transfer and registration of Registrable Securities
by such holder and the consummation of an Exchange Offer.
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<PAGE> 24
(f) LAW GOVERNING. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
(g) Headings. The descriptive headings of the several Sections
and paragraphs of this Agreement are inserted for convenience only, do not
constitute a part of this Agreement and shall not affect in any way the meaning
or interpretation of this Agreement.
(h) Entire Agreement; Amendments. This Agreement and the other
writings referred to herein (including the Indenture and the form of Notes) or
delivered pursuant hereto which form a part hereof contain the entire
understanding of the parties with respect to its subject matter. This Agreement
supersedes all prior agreements and understandings between the parties with
respect to its subject matter. This Agreement may be amended and the observance
of any term of this Agreement may be waived (either generally or in a particular
instance and either retroactively or prospectively) only by a written instrument
duly executed by the Company and the holders of a majority in aggregate
principal amount of the Registrable Securities at the time outstanding. Each
holder of any Registrable Securities at the time or thereafter outstanding shall
be bound by any amendment or waiver effected pursuant to this Section 9(h),
whether or not any notice, writing or marking indicating such amendment or
waiver appears on such Registrable Securities or is delivered to such holder.
(i) Inspection. For so long as this Agreement shall be in
effect, this Agreement and a complete list of the names and addresses of all the
holders of Registrable Securities shall be made available for inspection and
copying on any business day by any holder of Registrable Securities at the
offices of the Trustee under the Indenture.
(j) Counterparts. This agreement may be executed by the
parties in counterparts, each of which shall be deemed to be an original, but
all such respective counterparts shall together constitute one and the same
instrument.
24
<PAGE> 25
Agreed to and accepted as of the date referred to above.
e.spire COMMUNICATIONS, INC.
By: /s/ Riley M. Murphy
-------------------------------
Name: Riley M. Murphy
Title: Executive Vice President/
Secretary
GOLDMAN, SACHS & CO.
BEAR, STEARNS & CO. INC.,
ING BARING FURMAN SELZ LLC
By: GOLDMAN, SACHS & CO.
/s/ Goldman, Sachs & Co.
-----------------------------------
(Goldman, Sachs & Co.)
25
<PAGE> 1
Exhibit 12.1
e.spire COMMUNICATIONS, INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
($ IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED FISCAL YEAR ENDED SIX MONTHS ENDED
JUNE 30, DECEMBER 31, DECEMBER 31, JUNE 30,
------------------- ------------ --------------------- ------------------------------
1995 1996 1996 1997 1997 1998
-------- -------- ------------ --------------------- -------- -------------------
AS AS
ACTUAL ADJUSTED ACTUAL ADJUSTED
--------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Charges:
Interest expense $ 706 $ 13,528 $ 12,658 $ 45,499 $ 70,697 $ 15,014 $ 32,727 $ 46,313
including amortization
of debt issuance costs
and capitalized
interest(2).............
Portion of rent expenses 66 385 561 2,017 2,017 894 1,638 1,638
representative of
interest(1).............
-------- -------- -------- --------- --------- -------- -------- --------
Total fixed $ 772 $ 13,913 $ 13,219 $ 47,516 $ 72,714 $ 15,848 $ 34,366 $ 47,952
charges...........
Loss:
Loss before minority (14,746) (27,195) (35,077) (115,016) (140,215) (49,675) (64,540) (78,126)
interest................
Fixed charges............. 236 10,862 10,951 43,583 68,781 13,255 33,530 47,116
-------- -------- -------- --------- --------- -------- -------- --------
Loss adjusted for $(14,510) $(16,333) $(24,126) $ (71,433) $ (71,434) $(36,420) $(31,010) $(31,010)
fixed charges.....
Ratio of earnings (loss) to -- -- -- -- -- -- -- --
fixed charges.............
Deficiency in earnings to $(15,282) $(30,246) $(37,345) $(118,949) $(144,148) $(52,268) $(65,376) $(78,962)
cover fixed charges.......
</TABLE>
- ---------------
(1) One-third of rent expense is deemed to be representative of interest.
(2) Includes capitalized interest of $536, $3,051, $2,268, $4,556, $3,933,
$2,593, and $826 in the years ended June 30, 1995 and 1996, the six months
ended December 31, 1996, the year ended December 31, 1997 and the six months
ended December 31, 1997 and 1998, respectively.
<PAGE> 1
Exhibit 21.1
e.spire Communications, Inc.
(formerly American Communications Services, Inc.)
MATERIAL SUBSIDIARIES
<TABLE>
<CAPTION>
INCORPORATION QUALIFIED
SUBSIDIARY DATE IN
<S> <C> <C>
American Communications Services International, Inc. 10/4/96* MD
ACSI Advanced Data Services, Inc. 5/2/96+ AR, GA, KY
ACSI Local Switched Services, Inc. 11/27/96+ all states
ACSI Network Technologies, Inc. 5/7/97+
American Communication Services of Albuquerque, Inc. 1/4/95* MD, NM
American Communication Services of Amarillo, Inc. 7/26/95+ TX
American Communication Services of Atlanta, Inc. 3/31/1998+ GA
American Communication Services of Austin, Inc. 2/24/94* TX, MD
American Communication Services of Baton Rouge, Inc. 7/26/95+ LA
American Communication Services of Birmingham, Inc. 1/9/95* AL, MD
American Communication Services of Charleston, Inc. 11/17/94* SC, MD
American Communication Services of Chattanooga, Inc. 11/4/94* TN, MD
American Communication Services of Colorado Springs, Inc. 4/10/96+ CO
American Communication Services of Columbia, Inc. 6/2/94* MD, SC
American Communication Services of Columbus, Inc. 10/5/95+ GA
American Communication Services of Corpus Christi, Inc. 4/10/96+ TX
American Communication Services of Dallas, Inc. 10/2/96+ TX
American Communication Services of El Paso, Inc. 11/10/94* MD, TX
American Communication Services of Fort Worth, Inc. 3/1/94* MD, TX
American Communication Services of Greenville, Inc. 6/2/94* MD, SC
American Communication Services of Irving, Inc. 6/21/95* TX
American Communication Services of Jackson, Inc. 7/26/95+ MS
American Communication Services of Jacksonville, Inc. 5/9/96+ FL
American Communication Services of Kansas City, Inc. 4/10/96+ MO, KS-2/5/97
American Communication Services of Las Vegas, Inc. 10/5/95+ NV
American Communication Services of Lexington, Inc. 1/4/95* KY, MD
American Communication Services of Little Rock, Inc. 8/16/94* AR, MD
American Communication Services of Louisiana, Inc. 9/15/92* LA, MD
American Communication Services of Louisville, Inc. 4/12/94* KY, MD
American Communication Services of Maryland, Inc. 10/20/95+
American Communication Services of Mobile, Inc. 1/9/95* AL, MD
American Communication Services of Montgomery, Inc. 7/26/95+ AL
American Communication Services of Pima County, Inc. 1/4/95* AZ, MD
American Communication Services of San Antonio 1/1/95 TX
American Communication Services of Shreveport, Inc. 7/26/95+ LA
American Communication Services of Spartanburg, Inc. 7/26/95+ SC
American Communication Services of Tampa, Inc. 3/19/97+ FL
American Communication Services of Tulsa, Inc. 5/9/96+ OK
Cybergate, Inc. 9/2/93 FL, GA, MD
* a Delaware Corporation
+ a Maryland Corporation
</TABLE>
<PAGE> 1
ACCOUNTANT'S CONSENT Exhibit 23.1
The Board of Directors
e.spire Communications, Inc.
We consent to the use of our report included herein and to the references
to our firm under the headings "Experts" and "Selected Consolidated Financial
Data" in the prospectus.
KPMG Peat Marwick LLP
Washington, DC
September 23, 1998
<PAGE> 1
Exhibit 25.1
-------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-------------------------
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
-------------------------------------------
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF
A TRUSTEE PURSUANT TO SECTION 305(b)(2)
--------
----------------------------------------
THE CHASE MANHATTAN BANK
(Exact name of trustee as specified in its charter)
NEW YORK 13-4994650
(State of incorporation (I.R.S. employer
if not a national bank) identification No.)
270 PARK AVENUE
NEW YORK, NEW YORK 10017
(Address of principal executive offices) (Zip Code)
William H. McDavid
General Counsel
270 Park Avenue
New York, New York 10017
Tel: (212) 270-2611
(Name, address and telephone number of agent for service)
---------------------------------------------
e.spire COMMUNICATIONS, INC.
(Exact name of obligor as specified in its charter)
DELAWARE 52-1947746
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
131 NATIONAL BUSINESS PARKWAY
ANNAPOLIS JUNCTION, MARYLAND 20701
(Address of principal executive offices) (Zip Code)
---------------------------------------------
10.625% SENIOR DISCOUNT NOTES DUE 2008
(Title of the indenture securities)
-------------------------------------------------------------------
<PAGE> 2
GENERAL
Item 1. General Information.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to
which it is subject. New York State Banking Department, Suite
2310, 5 Empire State Plaza, Albany, New York 12223. Board of
Governors of the Federal Reserve System 20th and C Street NW,
Washington, D.C., 20551 Federal Reserve Bank of New York,
District No. 2, 33 Liberty Street, New York, N.Y. 10045.
Federal Deposit Insurance Corporation, 550 Seventeenth Street
NW Washington, D.C., 20429.
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
Item 2. Affiliations with the Obligor.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
- 2 -
<PAGE> 3
Item 16. List of Exhibits
List below all exhibits filed as a part of this Statement of
Eligibility.
1. A copy of the Articles of Association of the Trustee as now in
effect, including the Organization Certificate and the Certificates of Amendment
dated February 17, 1969, August 31, 1977, December 31, 1980, September 9, 1982,
February 28, 1985, December 2, 1991 and July 10, 1996 (see Exhibit 1 to Form T-1
filed in connection with Registration Statement No. 333-06249, which is
incorporated by reference).
2. A copy of the Certificate of Authority of the Trustee to Commence
Business (see Exhibit 2 to Form T-1 filed in connection with Registration
Statement No. 33-50010, which is incorporated by reference. On July 14, 1996, in
connection with the merger of Chemical Bank and The Chase Manhattan Bank
(National Association), Chemical Bank, the surviving corporation, was renamed
The Chase Manhattan Bank).
3. None, authorization to exercise corporate trust powers being
contained in the documents identified above as Exhibits 1 and 2.
4. A copy of the existing By-Laws of the Trustee (see Exhibit 4 to
Form T-1 filed in connection with Registration Statement No. 333-06249, which is
incorporated by reference).
5. Not applicable.
6. The consent of the Trustee required by Section 321(b) of the Act
(see Exhibit 6 to Form T-1 filed in connection with Registration Statement No.
33-50010, which is incorporated by reference. On July 14, 1996, in connection
with the merger of Chemical Bank and The Chase Manhattan Bank (National
Association), Chemical Bank, the surviving corporation, was renamed The Chase
Manhattan Bank).
7. A copy of the latest report of condition of the Trustee, published
pursuant to law or the requirements of its supervising or examining authority.
8. Not applicable.
9. Not applicable.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939 the
Trustee, The Chase Manhattan Bank, a corporation organized and existing under
the laws of the State of New York, has duly caused this statement of eligibility
to be signed on its behalf by the undersigned, thereunto duly authorized, all in
the City of New York and State of New York, on the 24TH day of AUGUST, 1998.
THE CHASE MANHATTAN BANK
By /s/ ANDREW M. DECK
---------------------------
ANDREW M. DECK
VICE PRESIDENT
- 3 -
<PAGE> 4
EXHIBIT 7 TO FORM T-1
BANK CALL NOTICE
RESERVE DISTRICT NO. 2
CONSOLIDATED REPORT OF CONDITION OF
THE CHASE MANHATTAN BANK
OF 270 PARK AVENUE, NEW YORK, NEW YORK 10017
AND FOREIGN AND DOMESTIC SUBSIDIARIES,
A MEMBER OF THE FEDERAL RESERVE SYSTEM,
AT THE CLOSE OF BUSINESS JUNE 30, 1998, IN
ACCORDANCE WITH A CALL MADE BY THE FEDERAL RESERVE BANK OF THIS DISTRICT
PURSUANT TO THE PROVISIONS OF THE FEDERAL RESERVE ACT.
<TABLE>
<CAPTION>
DOLLAR AMOUNTS
ASSETS IN MILLIONS
<S> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and
currency and coin ................................. $ 12,546
Interest-bearing balances ......................... 6,610
Securities:
Held to maturity securities ............................... 2,014
Available for sale securities ............................. 46,342
Federal funds sold and securities purchased under
agreements to resell .............................. 27,489
Loans and lease financing receivables:
Loans and leases, net of unearned income $129,281
Less: Allowance for loan and lease losses 2,796
Less: Allocated transfer risk reserve .... 0
--------
Loans and leases, net of unearned income,
allowance, and reserve ............................ 126,485
Trading Assets ............................................ 58,015
Premises and fixed assets (including capitalized
leases) ........................................... 3,001
Other real estate owned ................................... 260
Investments in unconsolidated subsidiaries and
associated companies .............................. 255
Customers' liability to this bank on acceptances
outstanding ....................................... 1,245
Intangible assets ......................................... 1,492
Other assets .............................................. 16,408
--------
TOTAL ASSETS .............................................. $302,162
========
</TABLE>
- 4 -
<PAGE> 5
<TABLE>
<CAPTION>
LIABILITIES
<S> <C>
Deposits
In domestic offices .................................... $ 99,347
Noninterest-bearing ......................... $ 41,566
Interest-bearing ............................ 57,781
---------
In foreign offices, Edge and Agreement,
subsidiaries and IBF's ................................. 80,602
Noninterest-bearing ......................... $ 4,109
Interest-bearing ............................ 76,493
Federal funds purchased and securities sold under agree-
ments to repurchase ............................................ 37,760
Demand notes issued to the U.S. Treasury ....................... 1,000
Trading liabilities ............................................ 42,941
Other borrowed money (includes mortgage indebtedness
and obligations under capitalized leases):
With a remaining maturity of one year or less .......... 4,162
With a remaining maturity of more than one year
through three years ............................. 213
With a remaining maturity of more than three years ....... 106
Bank's liability on acceptances executed and outstanding ....... 1,245
Subordinated notes and debentures .............................. 5,408
Other liabilities .............................................. 11,796
TOTAL LIABILITIES .............................................. 284,580
---------
EQUITY CAPITAL
Perpetual preferred stock and related surplus .................. 0
Common stock ................................................... 1,211
Surplus (exclude all surplus related to preferred stock)....... 10,441
Undivided profits and capital reserves ......................... 5,916
Net unrealized holding gains (losses)
on available-for-sale securities ............................... (2)
Cumulative foreign currency translation adjustments ............ 16
TOTAL EQUITY CAPITAL ........................................... 17,582
---------
TOTAL LIABILITIES AND EQUITY CAPITAL ........................... $ 302,162
=========
</TABLE>
I, Joseph L. Sclafani, E.V.P. & Controller of the above-named bank, do hereby
declare that this Report of Condition has been prepared in conformance with the
instructions issued by the appropriate Federal regulatory authority and is true
to the best of my knowledge and belief.
JOSEPH L. SCLAFANI
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us, and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the appropriate Federal regulatory authority and is true and correct.
WALTER V. SHIPLEY )
THOMAS G. LABRECQUE ) DIRECTORS
WILLIAM B. HARRISON, JR.)
-5-
<PAGE> 1
EXHIBIT 99.1
LETTER OF TRANSMITTAL
THIS EXCHANGE OFFER AND WITHDRAWAL RIGHTS
WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1998
(AS SUCH DATE AND TIME MAY BE EXTENDED BY THE COMPANY
IN ITS SOLE DISCRETION, THE "EXPIRATION DATE").
e.spire COMMUNICATIONS, INC.
10.625% SENIOR DISCOUNT NOTES DUE 2008
PLEASE READ CAREFULLY THE ATTACHED INSTRUCTIONS
IF YOU DESIRE TO ACCEPT THE SENIOR DISCOUNT NOTES EXCHANGE OFFER, THIS LETTER OF
TRANSMITTAL SHOULD BE COMPLETED, SIGNED AND SUBMITTED TO THE CHASE MANHATTAN
BANK, EXCHANGE AGENT:
<TABLE>
<S> <C> <C>
By Mail/Overnight Delivery: Facsimile Transmissions: By Hand:
The Chase Manhattan Bank (212) 638-7380 The Chase Manhattan Bank
450 West 33rd Street (212) 638-7381 Corporate Trust -- Services Window
15th Floor 55 Water Street -- Room 234
New York, New York North Building
10001-2697 New York New York 10041
</TABLE>
Confirm by Telephone:
Sharon Lewis: (212) 638-0454
Carlos Esteves: (212) 638-0828
Delivery of this Letter of Transmittal to an address other than as set
forth above or transmission of instructions via a facsimile number other than
that set forth above will not constitute a valid delivery.
The undersigned hereby acknowledges receipt of the Prospectus dated
, 1998 (the "Prospectus") of e.spire Communications, Inc., a
Delaware corporation ("e.spire" or the "Company"), and this Letter of
Transmittal (the "Letter of Transmittal"), that together constitute the
Company's offer (the "Exchange Offer") to exchange $1,000 in principal amount of
a new series of its 10.625% Senior Discount Notes due 2008 (the "New Notes") for
each $1,000 in principal amount of its outstanding 10.625% Senior Discount Notes
due 2008 (the "Old Notes"). The New Notes and the Old Notes are collectively
referred to as the "Notes". Capitalized terms used but not defined herein have
the meanings ascribed to them in the Prospectus.
THE REGISTRATION STATEMENT ON FORM S-4 (FILE NO. 333- ) OF
WHICH THE PROSPECTUS IS A PART WAS DECLARED EFFECTIVE BY THE SECURITIES AND
EXCHANGE COMMISSION ON , 1998.
The undersigned hereby tenders the principal amount of Old Notes described
in Box 1 below (the "Tendered Notes") pursuant to the terms and conditions
described in the Prospectus and this Letter of Transmittal. The undersigned is
the registered owner of all the Tendered Notes and the undersigned represents
that it has received from each beneficial owner of Tendered Notes ("Beneficial
Owners") a duly completed and executed form of "Instruction to Registered Holder
from Beneficial Owner" accompanying this Letter of Transmittal, instructing the
undersigned to take the action described in this Letter of Transmittal.
Subject to, and effective upon, the acceptance for exchange of the Tendered
Notes the undersigned hereby exchanges, assigns, and transfers to, or upon the
order of, the Company, all right, title, and interest in, to, and under the
Tendered Notes.
Please issue the New Notes exchanged for Tendered Notes in the name(s) of
the undersigned. Similarly, unless otherwise indicated under "Special Delivery
Instructions" below (Box 3), please send or cause to be sent the certificate(s)
for New Notes (and accompanying documents, as appropriate) to the undersigned at
the address shown below in Box 1.
<PAGE> 2
The undersigned hereby irrevocably constitutes and appoints the Exchange
Agent as the true and lawful agent and attorney in fact of the undersigned with
respect to the Tendered Notes, with full power of substitution (such power of
attorney being deemed to be an irrevocable power coupled with an interest), to
(i) deliver the Tendered Notes to the Company or cause ownership of the Tendered
Notes to be transferred to, or upon the order of, the Company, on the books of
the registrar for the Old Notes or on the account books maintained by a
book-entry transfer facility and deliver all accompanying evidence of transfer
and authenticity to, or upon the order of, the Company upon receipt by the
Exchange Agent, as the undersigned agent, of the New Notes to which the
undersigned is entitled upon the acceptance by the Company of the Tendered Notes
pursuant to the Exchange Offer, and (ii) receive all benefits and otherwise
exercise all rights of beneficial ownership of the Tendered Notes, all in
accordance with the terms of the Exchange Offer.
The undersigned understands that tenders of Old Notes pursuant to the
procedures described under the caption "The Exchange Offer -- Procedures for
Tendering" in the Prospectus and in the instructions hereto will constitute a
binding agreement between the undersigned and the Company upon the terms and
subject to the conditions of the Exchange Offer, subject only to withdrawal of
such tenders on the terms set forth in the Prospectus under the caption "The
Exchange Offer -- Withdrawal of Tenders." All authority herein conferred or
agreed to be conferred shall survive the death or incapacity of the undersigned
and any Beneficial Owner(s), and every obligation of the undersigned or any
Beneficial Owners hereunder shall be binding upon the heirs, representatives,
successors, and assigns of the undersigned and such Beneficial Owner(s).
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, exchange, assign, and transfer the Tendered
Notes and that the Company will acquire good and unencumbered title thereto,
free and clear of all liens, restrictions, charges, encumbrances, and adverse
claims when the Tendered Notes are acquired by the Company as contemplated
herein. The undersigned and each Beneficial Owner will, upon request, execute
and deliver any additional documents reasonably requested by the Company as
necessary or desirable to complete and give effect to the transactions
contemplated hereby.
The undersigned hereby represents and warrants that the information set
forth in Box 2 is true and correct.
By accepting the Exchange Offer, the undersigned hereby represents and
warrants that (i) the New Notes to be acquired by the undersigned and any
Beneficial Owner(s) in connection with the Exchange Offer are being acquired by
the undersigned and any Beneficial owner(s) in the ordinary course of business
of the undersigned and any Beneficial Owner(s), (ii) the undersigned and each
Beneficial Owner are not participating, do not intend to participate, and have
no arrangement or understanding with any person to participate, in the
distribution of the New Notes, (iii) the undersigned and each Beneficial Owner
acknowledge and agree that any person participating in the Exchange Offer for
the purpose of distributing the New Notes must comply with the registration and
prospectus delivery requirements of the Securities Act of 1933, as amended
(together with the rules and regulations promulgated thereunder, the "Securities
Act"), in connection with a secondary resale transaction of the New Notes
acquired by such person and cannot rely on the position of the Staff of the
Securities and Exchange Commission (the "Commission") set forth in the no-action
letters that are discussed in the section of the Prospectus entitled "The
Exchange Offer -- Resales of the New Notes."
The undersigned and each Beneficial Owner understands that any secondary
resale transaction described in clause (iii) above should be covered by an
effective registration statement containing the selling securityholder
information required by Item 507 of Regulation S-K of the Commission. Except as
otherwise disclosed to the Company in writing, the undersigned hereby represents
and warrants that neither it nor any Beneficial Owner(s) is an "affiliate," as
defined under Rule 405 of the Securities Act, of the Company except as otherwise
disclosed to the Company in writing.
If the undersigned is a broker-dealer that will receive New Notes for its
own account in exchange for Old Notes that were acquired as a result of
market-making activities or other trading activities, it acknowledges that it
will deliver a prospectus in connection with any resale of such New Notes;
however, by so acknowledging and by delivering a prospectus, the undersigned
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
2
<PAGE> 3
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETING THE BOXES
- --------------------------------------------------------------------------------
BOX 1
DESCRIPTION OF OLD NOTES TENDERED
(ATTACH ADDITIONAL SIGNED PAGES, IF NECESSARY)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
CERTIFICATE AGGREGATE AGGREGATE
NAME(S) AND ADDRESS(ES) OF REGISTERED OLD NOTES HOLDER(S), NUMBER(S) PRINCIPAL PRINCIPAL
EXACTLY AS NAME(S) APPEAR(S) ON OLD NOTES CERTIFICATE(S) OF AMOUNT OF NOTES AMOUNT OF NOTES
(PLEASE FILL IN, IF BLANK) OLD NOTES* BY CERTIFICATE(S) TENDERED**
- ---------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Need not be completed by book-entry holders.
** Unless otherwise indicated in this column, the number of shares represented
by all Old Notes Certificates identified in this Box 1 or delivered to the
Exchange Agent herewith shall be deemed tendered. See Instruction 4.
- --------------------------------------------------------------------------------
BOX 2
BENEFICIAL OWNER(S)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
STATE OF PRINCIPAL RESIDENCE OF EACH AGGREGATE PRINCIPAL AMOUNT OF TENDERED NOTES
BENEFICIAL OWNER OF TENDERED NOTES HELD FOR ACCOUNT OF BENEFICIAL OWNER
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
This Letter of Transmittal is to be used either if Old Notes are to be
forwarded herewith or if delivery of Old Notes is to be made by book-entry
transfer to an account maintained by the Exchange Agent at The Depository Trust
Company, pursuant to the procedures set forth in "The Exchange
Offer -- Procedures for Tendering" in the Prospectus. Delivery of documents to
the book-entry transfer facility does not constitute delivery to the Exchange
Agent.
Holders whose Old Notes are not immediately available or who cannot deliver
their Old Notes and all other documents required hereby to the Exchange Agent on
or prior to the Expiration Date must tender their Old Notes according to the
guaranteed delivery procedure set forth in the Prospectus under the caption "The
Exchange Offer -- Guaranteed Delivery Procedures."
3
<PAGE> 4
[ ] CHECK HERE IF TENDERED NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO AN ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY
TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution
----------------------------------------------------------------------------
[ ] The Depository Trust Company Account Number
- --------------------------------------------------------------
Transaction Code Number
----------------------------------------------------------------------------
BOX 3
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 5, 6 AND 7)
To be completed ONLY if the New Notes exchanged for Old Notes and untendered Old
Notes are to be sent to someone other than the undersigned, or to the
undersigned at an address other than that shown above.
Mail New Notes and any untendered Old Notes to:
Name(s):
- --------------------------------------------------------------------------------
(PLEASE PRINT)
Address:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(INCLUDE ZIP CODE)
Tax Identification or Social Security No.:
BOX 4
USE OF GUARANTEED DELIVERY
[ ] CHECK HERE ONLY IF OLD NOTES ARE BEING TENDERED BY MEANS OF A NOTICE OF
GUARANTEED DELIVERY.
See Instruction 2. If this box is checked, please provide the following
information:
Name(s) of Registered Holder(s):
- ------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Date of Execution of Notice of Guaranteed Delivery:
- ----------------------------------------------------------
If Delivered by Book Entry Transfer:
Account Number:
- --------------------------------------------------------------------------------
4
<PAGE> 5
BOX 5
TENDERING HOLDER SIGNATURE
(SEE INSTRUCTIONS 1 AND 5)
IN ADDITION, COMPLETE SUBSTITUTE FORM W-9
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
X Signature Guarantee
- ----------------------------------------------- (If required by Instruction 5)
X
- ----------------------------------------------- Authorized Signature
(SIGNATURE OF REGISTERED X
HOLDER(S) OR AUTHORIZED SIGNATORY) -----------------------------------------------
Note: The above lines must be signed by the
registered holder(s) of Old Notes as their Name:
name(s) appear(s) on the Old Notes or by -----------------------------------------------
person(s) authorized to become registered (PLEASE PRINT)
holder(s) (which must be transmitted with this
Letter of Transmittal). If signature is by a Title:
trustee, executor, administrator, guardian, -----------------------------------------------
attorney-in-fact, officer, or other person
acting in a fiduciary or representative Name of Firm:
capacity, such person must set forth his or her ----------------------------------------
full title below. See Instruction 5. (MUST BE AN ELIGIBLE INSTITUTION AS DEFINED IN
INSTRUCTION 2)
Name(s):
- --------------------------------------------- Address:
- ----------------------------------------------- ----------------------------------------------
-----------------------------------------------
Capacity: -----------------------------------------------
- ---------------------------------------------- (INCLUDE ZIP CODE)
- -----------------------------------------------
Area Code and Telephone Number:
Street Address: -----------------------------------------------
- ---------------------------------------
- ----------------------------------------------- Dated:
- ----------------------------------------------- -----------------------------------------------
(INCLUDE ZIP CODE)
Area Code and Telephone Number:
- -----------------------------------------------
Tax Identification or Social Security Number:
- -----------------------------------------------
</TABLE>
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name:
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
If the undersigned is not a broker-dealer, the undersigned represents that
it is not engaged in, and does not intend to engage in, and has no arrangement
or understanding with any person to engage in, a distribution of New Notes. If
the undersigned is a broker-dealer that will receive New Notes for its own
account in exchange for Old Notes that were acquired as a result of
market-making activities or other trading activities, it acknowledges that it
will deliver a prospectus in connection with any resale of such New Notes;
however, by so acknowledging and by delivering a prospectus, the undersigned
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
5
<PAGE> 6
INSTRUCTIONS TO LETTER OF TRANSMITTAL
FORMING PART OF THE TERMS AND CONDITIONS
OF THE NOTE EXCHANGE OFFER
1. Delivery of this Letter of Transmittal and Old Notes. The Tendered
Notes or confirmation of any book-entry transfer, as well as a properly
completed and duly executed copy of this Letter of Transmittal, a Substitute
Form W-9 (or facsimile thereof) and any other documents required by this Letter
of Transmittal must be received by the Exchange Agent at its address set forth
herein prior to the Expiration Date. The method of delivery of certificates for
Old Notes and all other required documents is at the election and risk of the
tendering holder and delivery will be deemed made only when actually received by
the Exchange Agent. If delivery is by mail, registered mail with return receipt
requested, properly insured, is recommended. Instead of delivery by mail, it is
recommended that the holder use an overnight or hand delivery service. In all
cases, sufficient time should be allowed to assure timely delivery. Neither
e.spire nor the registrar is under any obligation to notify any tendering holder
of the Company's acceptance of Tendered Notes prior to the Expiration Date.
2. Guaranteed Delivery Procedures. Holders who wish to tender their Old
Notes but whose Old Notes are not immediately available and who cannot deliver
Old Notes, Letter of Transmittal and any other documents required by the Letter
of Transmittal to the Exchange Agent prior to the Expiration Date or comply with
book-entry transfer procedures on a timely basis must tender their Old Notes
according to the guaranteed delivery procedures set forth below, including
completion of Box 4. Pursuant to such procedures: (i) such tender must be made
by or through a firm which is a member of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., or is a
commercial bank or trust company having an office or correspondent in the United
States, or is otherwise an "eligible guarantor institution" within the meaning
of Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended (an
"Eligible Institution") and the Notice of Guaranteed Delivery must be signed by
the holder; (ii) prior to the Expiration Date, the Exchange Agent must have
received from the holder and the Eligible Institution a properly completed and
duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail, or
hand delivery setting forth the name and address of the holder, the certificate
number or numbers of the Tendered Notes, and the principal amount of Tendered
Notes, stating that the tender is being made thereby and guaranteeing that,
within three business days after the Expiration Date, the Letter of Transmittal
(or facsimile thereof), together with the Tendered Notes (or a confirmation of
any book-entry transfer of the Old Notes into the Exchange Agent's account at a
book-entry transfer facility) and any other required documents will be deposited
by the Eligible Institution with the Exchange Agent; and (iii) such properly
completed and executed documents required by this Letter of Transmittal and the
Tendered Notes (or a confirmation of any book-entry transfer of the Old Notes
into the Exchange Agent's account at a book-entry transfer facility) in proper
form for transfer must be received by the Exchange Agent within three business
days after the Expiration Date. Any holder who wishes to tender Old Notes
pursuant to the guaranteed delivery procedures described above must ensure that
the Exchange Agent receives the Notice of Guaranteed Delivery relating to such
Old Notes prior to the Expiration Date. Failure to complete the guaranteed
delivery procedures outlined above will not, of itself, affect the validity or
effect a revocation of any Letter of Transmittal form properly completed and
executed by an Eligible Holder who attempted to use the guaranteed delivery
process.
3. Beneficial Owner Instructions to Registered Holders. Only a holder in
whose name the Old Notes are registered on the books of the registrar (or the
legal representative or attorney-in-fact of such registered holder) may execute
and deliver this Letter of Transmittal. Any Beneficial Owner of Old Notes who is
not the registered holder must arrange promptly with the registered holder to
execute and deliver this Letter of Transmittal on his or her behalf through the
execution and delivery to the registered holder of the Instructions to
Registered Holder from Beneficial Owner form accompanying this Letter of
Transmittal.
4. Partial Tenders. If less than the entire number of Old Notes is
tendered, the tendering holder should fill in the aggregate principal amount of
Notes tendered in the column labeled "Aggregate Principal Amount of Notes
Tendered" of the box entitled "Description of Old Notes Tendered" (Box 1) above.
The entire aggregate principal amount of Old Notes delivered to the Exchange
Agent will be deemed to have been
6
<PAGE> 7
tendered unless otherwise indicated. If the entire aggregate principal amount of
all Old Notes is not tendered, Old Notes for the aggregate principal amount of
Old Notes not tendered and New Notes exchanged for Old Notes tendered will be
sent to the holder at his or her registered address, unless a different address
is provided in the appropriate box on this Letter of Transmittal, as soon as
practicable following the Expiration Date.
5. Signatures on the Letter of Transmittal; Bond Powers and Endorsements;
Guarantee of Signatures. If this Letter of Transmittal is signed by the
registered holder(s) of the Tendered Notes, the signature must correspond with
the name(s) as written on the face of the Tendered Notes without alteration,
enlargement, or any change whatsoever.
If any of the Tendered Notes are owned of record by two or more joint
owners, all such owners must sign this Letter of Transmittal. If any Tendered
Notes are held in different names on several Old Notes, it will be necessary to
complete, sign, and submit as many separate copies of the Letter of Transmittal
documents as there are names in which Tendered Notes are held.
If this Letter of Transmittal is signed by the registered holder(s) (which
term, for the purposes described herein, shall include the book-entry transfer
facility whose name appears on a security listing as the owner of the Old Notes)
of Tendered Notes tendered and New Notes are to be issued (or any untendered Old
Notes are to be reissued) to the registered holder(s), the registered holder(s)
need not and should not endorse any Tendered Notes nor provide a separate bond
power. In any other case, such registered holder(s) must either properly endorse
the Old Notes tendered or transmit a properly completed separate bond power with
this Letter of Transmittal, with the signature(s) on the endorsement or bond
power guaranteed by an Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
Registered Holder(s) of any Old Notes, the Tendered Notes must be endorsed or
accompanied by appropriate bond powers, in each case, signed as the name of the
registered holder(s) appears on the Old Notes, with the signature on the
endorsement or bond power guaranteed by an Eligible Institution.
If this Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations, or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing and, unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with this Letter of Transmittal.
Endorsements on Old Notes or signatures on bond powers required by this
Instruction 5 must be guaranteed by an Eligible Institution.
Signatures on this Letter of Transmittal must be guaranteed by an Eligible
Institution unless the Tendered Notes are tendered (i) by a Registered Holder
who has not completed the box set forth herein entitled "Special Delivery
Instructions" (Box 3) or (ii) by an Eligible Institution.
6. Special Delivery Instructions. Tendering Eligible Holders should
indicate, in the applicable box (Box 3), the name and address to which the New
Notes and/or substitute Old Notes for Old Notes not tendered or not accepted for
exchange are to be sent, if different from the name and address of the person
signing this Letter of Transmittal.
7. Transfer Taxes. The Company will pay all transfer taxes, if any,
applicable to the sale and transfer of Old Notes to it or its order pursuant to
the Exchange Offer. If, however, a transfer tax is imposed for any reason other
than the transfer and sale of Old Notes to the Company or its order pursuant to
the Exchange Offer, then the amount of any such transfer taxes (whether imposed
on the registered holder or on any other person) will be payable by the
tendering holder. If satisfactory evidence of payment of such taxes or exemption
from taxes therefrom is not submitted with this Letter of Transmittal, the
amount of transfer taxes will be billed directly to such tendering holder.
Except as provided in this Instruction 7, it will not be necessary for
transfer tax stamps to be affixed to the Old Notes listed in this Letter of
Transmittal.
7
<PAGE> 8
8. Substitute Form W-9. Federal income tax law requires that a holder of
any Old Notes which are accepted for exchange must provide the Company (as
payor) with its correct taxpayer identification number ("TIN"), which, in the
case of a holder who is an individual, is his or her social security number, and
with certain other information, on Substitute Form W-9 (which is provided
herein), and to certify that the holder (or other payee) is not subject to
backup withholding. Failure to provide the information on the Substitute Form W-
9 may subject the holder to a $50 penalty imposed by the Internal Revenue
Service (the "IRS") and 31% federal income tax backup withholding on payments
made in connection with the Exchange Offer. (If withholding results in an
over-payment of taxes, a refund may be obtained from the IRS.) Certain holders
(including, among others, all corporations and certain foreign individuals) are
not subject to these backup withholding and reporting requirements. Exempt
holders should indicate their exempt status on Substitute Form W-9. In order for
a foreign individual to qualify as an exempt recipient, the holder must submit a
Form W-8, signed under penalties of perjury, attesting to that individual's
exempt status. A Form W-8 can be obtained from the Company. See the enclosed
"Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9" for additional instructions.
To prevent backup withholding, each tendering holder must provide such
holder's correct TIN by completing the Substitute Form W-9 set forth herein,
certifying that the TIN provided is correct (or that such holder is awaiting a
TIN), and that (i) the holder has not been notified by the Internal Revenue
Service that such holder is subject to backup withholding as a result of failure
to report all interest or dividends or (ii) the Internal Revenue Service has
notified the holder that such holder is no longer subject to backup withholding.
If the Old Notes are registered in more than one name or are not in the name of
the actual owner, consult the enclosed "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9" for information on which TIN to
report.
The Company reserves the right in its sole discretion to take whatever
steps are necessary to comply with the Company's obligation regarding backup
withholding.
9. Validity of Tenders. All questions as to the validity, form,
eligibility (including time of receipt), and acceptance of Tendered Notes will
be determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the right to reject any and all Old
Notes not validly tendered or any Old Notes the Company's acceptance of which
would, in the opinion of counsel for the Company, be unlawful. The Company also
reserves the right to waive any conditions of the Exchange Offer or defects,
irregularities or conditions of tender as to particular Old Notes. The
interpretation of the terms and conditions of the Exchange Offer (including this
Letter of Transmittal and the instructions hereto) by the Company shall be final
and binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Company shall determine. The Company will use reasonable efforts to give
notification of defects or irregularities with respect to tenders of Old Notes,
but shall not incur any liability for failure to give such notification.
10. Waiver of Conditions. The Company reserves the absolute right to
amend, waive, or modify specified conditions in the Exchange Offer in the case
of any Tendered Notes.
11. No Conditional Tender. No alternative, conditional, irregular, or
contingent tender of Old Notes or transmittal of this Letter of Transmittal will
be accepted.
12. Mutilated, Lost, Stolen, or Destroyed Old Notes. Any tendering holder
whose Old Notes have been mutilated, lost, stolen, or destroyed should contact
the Exchange Agent at the address indicated above for further instruction.
13. Requests for Assistance or Additional Copies. Questions and requests
for assistance and requests for additional copies of the Prospectus may be
directed to the Exchange Agent at the address specified in the Prospectus.
Holders may also contact their broker, dealer, commercial bank, trust company,
or other nominee for assistance concerning the Exchange Offer.
14. Acceptance of Tendered Notes and Issuance of New Notes; Return of Old
Notes. Subject to the terms and conditions of the Exchange Offer, the Company
will accept for exchange all validly tendered Old Notes as soon as practicable
after the Expiration Date and will issue New Notes therefor as soon as
practicable
8
<PAGE> 9
thereafter. For purposes of the Exchange Offer, the Company shall be deemed to
have accepted tendered Old Notes when, as and if the Company has given written
or oral notice thereof to the Exchange Agent. If any Tendered Notes are not
exchanged pursuant to the Exchange Offer for any reason, such unexchanged Old
Notes will be returned, without expense, to the undersigned at the address shown
below or at a different address as may be indicated herein under "Special
Delivery Instructions."
15. Withdrawal. Tenders may be withdrawn only pursuant to the limited
withdrawal rights set forth in the Prospectus under the caption "The Exchange
Offer -- Withdrawal of Tenders."
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
PAYOR'S NAME: e.spire COMMUNICATIONS, INC.
- ----------------------------------------------------------------------------------------------------------------------
Name (if joint names, list first and circle the name of the person or
entity whose number you enter in Part I below. See instructions if your
name has changed.)
-------------------------------------------------------------------------------
Address
SUBSTITUTE
FORM W-9 ---------------------------------------------------------------------------
DEPARTMENT OF THE City, state and ZIP Code
TREASURY
---------------------------------------------------------------------------
INTERNAL REVENUE SERVICES List account number(s) here (optional)
---------------------------------------------------------------------------
PART 1 -- PLEASE PROVIDE YOUR TAXPAYER Social Security
IDENTIFICATION NUMBER ("TIN") IN THE BOX number or TIN
AT RIGHT AND CERTIFY BY SIGNING AND
DATING BELOW -------------------------------
-------------------------------------------------------------------------------
PART 2 -- Check the box if you are NOT subject to backup withholding under
the provisions of section 3408(a)(1)(C) of the Internal Revenue Code
because (1) you have not been notified that you are subject to backup
withholding as a result of failure to report all interest or dividends or
(2) the Internal Revenue Service has notified you that you are no longer
subject to backup withholding.
[ ]
- ----------------------------------------------------------------------------------------------------------------------
PAYOR'S REQUEST FOR TIN CERTIFICATION -- UNDER THE PENALTIES OF PART 3
PERJURY, I CERTIFY THAT THE INFORMATION
PROVIDED ON THIS FORM IS TRUE, CORRECT
AND COMPLETE.
AWAITING TIN [ ]
Signature ---------------- Date ---------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE EXCHANGE OFFER. PLEASE
REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
9
<PAGE> 1
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY
WITH RESPECT TO
e.spire COMMUNICATIONS, INC.
10.625% SENIOR DISCOUNT NOTES DUE 2008
This form must be used by a holder of the 10.625% Senior Discount Notes due
2008 (the "Old Notes") of e.spire COMMUNICATIONS, INC. ("e.spire") who wishes to
tender Old Notes to the Exchange Agent pursuant to the guaranteed delivery
procedures described in "The Exchange Offer -- Guaranteed Delivery Procedures"
of the Prospectus dated , 1998 (the "Prospectus") and in Instruction 2
to the Letter of Transmittal. Any holder who wishes to tender Old Notes pursuant
to such guaranteed delivery procedures must ensure that the Exchange Agent
receives this Notice of Guaranteed Delivery prior to the Expiration Date of the
Exchange Offer. Capitalized terms not defined herein have the meanings ascribed
to them in the Prospectus or the Letter of Transmittal.
To: The Chase Manhattan Bank, Exchange Agent
<TABLE>
<S> <C> <C>
By Mail/Overnight Delivery: Facsimile Transmissions: By Hand:
The Chase Manhattan Bank (212) 638-7380 The Chase Manhattan Bank
450 West 33rd Street (212) 638-7381 Corporate Trust -- Services Window
15th Floor 55 Water Street -- Room 234
New York, New York North Building
10001-2697 New York New York 10041
</TABLE>
Confirm by Telephone:
Sharon Lewis: (212) 638-0454
Carlos Esteves: (212) 638-0828
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE OR TRANSMISSION VIA A FACSIMILE NUMBER OTHER THAN AS SET FORTH
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
The undersigned hereby tenders to e.spire, upon the terms and subject to
the conditions set forth in the Prospectus and the related Letter of
Transmittal, receipt of which is hereby acknowledged, the principal amount of
Old Notes specified below pursuant to the guaranteed delivery procedures set
forth in the Prospectus and in Instruction 2 of the Letter of Transmittal. The
undersigned hereby tenders the principal amount of Old Notes listed below:
<TABLE>
<S> <C> <C>
CERTIFICATE NUMBER(S) (IF KNOWN) PRINCIPAL AMOUNT PRINCIPAL AMOUNT
OF OLD NOTES REPRESENTED TENDERED
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
[ ] The Depositary Trust Company
(check if Old Notes will be tendered by book-entry transfer)
Account Number:
- --------------------------------------------------------------------------------
<PAGE> 2
SIGN HERE
Name of Holder:
- --------------------------------------------------------------------------------
Signature(s):
- --------------------------------------------------------------------------------
Name(s) (please print):
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
Telephone Number:
- --------------------------------------------------------------------------------
Date:
- --------------------------------------------------------------------------------
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm which is a member of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
or is a commercial bank or trust company having an office or correspondent in
the United States, or is otherwise an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934, as
amended, guarantees deposit with the Exchange Agent of the Letter of Transmittal
(or facsimile thereof), together with the Old Notes tendered hereby in proper
form for transfer and any other required documents, all by 5:00 p.m., New York
City time, on the third business day following the Expiration Date.
SIGN HERE
Name of firm:
- --------------------------------------------------------------------------------
Authorized Signature:
- --------------------------------------------------------------------------------
Name (please print):
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
------------------------------------------------------------------------
Telephone Number:
- --------------------------------------------------------------------------------
Date:
- --------------------------------------------------------------------------------
DO NOT SEND NOTES WITH THIS FORM. ACTUAL SURRENDER OF NOTES MUST BE MADE
PURSUANT TO, AND BE ACCOMPANIED BY, AN EXECUTED LETTER OF TRANSMITTAL.
INSTRUCTIONS FOR NOTICE OF GUARANTEED DELIVERY
1. DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY. A properly completed
and duly executed copy of this Notice of Guaranteed Delivery and any other
documents required by this Notice of Guaranteed Delivery must be received by the
Exchange Agent at its address set forth herein prior to the Expiration Date. The
method of delivery of this Notice of Guaranteed Delivery and any other required
documents to the Exchange Agent is at the election and risk of the holder, and
the delivery will be deemed made only when actually received by the Exchange
Agent. If delivery is by mail, registered mail with return receipt requested,
properly insured, is recommended. Instead of delivery by mail, it is recommended
that the holder use an overnight or hand delivery service. In all cases
sufficient time should be allowed to assure timely delivery. For a description
of the guaranteed delivery procedure, see Instruction 2 of the Letter of
Transmittal.
2
<PAGE> 3
2. SIGNATURES ON THIS NOTICE OF GUARANTEED DELIVERY. If this Notice of
Guaranteed Delivery is signed by the registered holder(s) of the Old Notes
referred to herein, the signature must correspond with the name(s) written on
the face of the Old Notes without alteration, enlargement, or any change
whatsoever.
If this Notice of Guaranteed Delivery is signed by a person other than the
registered holder(s) of any Old Notes listed, this Notice of Guaranteed Delivery
must be accompanied by appropriate bond powers, signed as the name of the
registered holder(s) appears on the Old Notes.
If this Notice of Guaranteed Delivery is signed by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation, or other
person acting in a fiduciary or representative capacity, such person should so
indicate when signing.
3. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests
for assistance and requests for additional copies of the Prospectus may be
directed to the Exchange Agent at the address specified in the Prospectus.
Holders may also contact their broker, dealer, commercial bank, trust company,
or other nominee for assistance concerning the Exchange Offer.
3
<PAGE> 1
EXHIBIT 99.3
E.SPIRE COMMUNICATIONS, INC.
OFFER TO EXCHANGE ITS REGISTERED
10.625% SENIOR DISCOUNT NOTES DUE 2008
FOR UP TO $350,000,000 AGGREGATE PRINCIPAL AMOUNT AT MATURITY
OF ITS OUTSTANDING
10.625% SENIOR DISCOUNT NOTES DUE 2008
To: Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees:
e.spire Communications, Inc. (the "Company") is offering to exchange (the
"Exchange Offer"), upon and subject to the terms and conditions set forth in the
Prospectus, dated , 1998 (the "Prospectus"), and the enclosed
Letter of Transmittal (the "Letter of Transmittal"), its registered 10.625%
Senior Discount Notes due 2008 (the "New Notes") for up to $350,000,000
aggregate principal amount at maturity of its outstanding 10.625% Senior
Discount Notes due 2008 (the "Old Notes"). The Exchange Offer is being made in
order to satisfy certain obligations of the Company contained in the
Registration Agreement dated as of July 24, 1998, between the Company and the
Initial Purchasers.
We are requesting that you contact your clients for whom you hold Old Notes
regarding the Exchange Offer. For your information and for forwarding to your
clients for whom you hold Old Notes registered in your name or in the name of
your nominee, or who hold Old Notes registered in their own names, we are
enclosing the following documents:
1. Prospectus dated , 1998;
2. The Letter of Transmittal for your use and for the information of
your clients;
3. A Notice of Guaranteed Delivery to be used to accept the Exchange
Offer if certificates for Old Notes are not immediately available or time
will not permit all required documents to reach the Exchange Agent prior to
the Expiration Date (as defined below) or if the procedure for book-entry
transfer cannot be completed on a timely basis;
4. A form of letter which may be sent to your clients for whose
account you hold Old Notes registered in your name or the name of your
nominee, with space provided for obtaining such clients' instructions with
regard to the Exchange Offer;
5. Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9; and
6. Return envelopes addressed to The Chase Manhattan Bank, the
Exchange Agent for the Old Notes.
YOUR PROMPT ACTION IS REQUESTED. THE EXCHANGE OFFER WILL EXPIRE AT 5:00
P.M., NEW YORK CITY TIME, ON , 1998 (THE "EXPIRATION DATE") (20
BUSINESS DAYS FOLLOWING THE COMMENCEMENT OF THE EXCHANGE OFFER), UNLESS EXTENDED
BY THE COMPANY. THE OLD NOTES TENDERED PURSUANT TO THE EXCHANGE OFFER MAY BE
WITHDRAWN AT ANY TIME BEFORE 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION
DATE.
To participate in the Exchange Offer, a duly executed and properly
completed Letter of Transmittal (or facsimile thereof), with any required
signature guarantees and any other required documents, should be sent to the
Exchange Agent and certificates representing the Old Notes should be delivered
to the Exchange Agent, all in accordance with the instructions set forth in the
Letter of Transmittal and the Prospectus.
If holders of Old Notes wish to tender, but it is impracticable for them to
forward their certificates for Old Notes prior to the expiration of the Exchange
Offer or to comply with the book-entry transfer procedures on a timely basis, a
tender may be effected by following the guaranteed delivery procedures described
in the Prospectus under "The Exchange Offer -- Guaranteed Delivery Procedures."
3
<PAGE> 2
The Company will, upon request, reimburse brokers, dealers, commercial
banks and trust companies for reasonable and necessary costs and expenses
incurred by them in forwarding the Prospectus and the related documents to the
beneficial owners of Old Notes held by them as nominee or in a fiduciary
capacity. The Company will pay or cause to be paid all stock transfer taxes
applicable to the exchange of Old Notes pursuant to the Exchange Offer, except
as set forth in Instruction 7 of the Letter of Transmittal.
Any inquiries you may have with respect to the Exchange Offer, or requests
for additional copies of the enclosed materials, should be directed to the
Exchange Agent for the Old Notes, at its address and telephone number set forth
on the front of the Letter of Transmittal.
Very truly yours,
e.spire Communications, Inc.
NOTHING HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY
OTHER PERSON AS AN AGENT OF THE COMPANY OR THE EXCHANGE AGENT, OR AUTHORIZE YOU
OR ANY OTHER PERSON TO USE ANY DOCUMENT OR MAKE ANY STATEMENTS ON BEHALF OF
EITHER OF THEM WITH RESPECT TO THE EXCHANGE OFFER, EXCEPT FOR STATEMENTS
EXPRESSLY MADE IN THE PROSPECTUS OR THE LETTER OF TRANSMITTAL.
Enclosures
4
<PAGE> 1
EXHIBIT 99.4
E.SPIRE COMMUNICATIONS, INC.
OFFER TO EXCHANGE ITS REGISTERED
10.625% SENIOR DISCOUNT NOTES DUE 2008
FOR UP TO $350,000,000 AGGREGATE PRINCIPAL AMOUNT AT MATURITY
OF ITS OUTSTANDING
10.625% SENIOR DISCOUNT NOTES DUE 2008
To Our Clients:
Enclosed for your consideration is a Prospectus, dated , 1998
(the "Prospectus"), and the enclosed Letter of Transmittal (the "Letter of
Transmittal"), relating to the offer (the "Exchange Offer") of e.spire
Communications, Inc. (the "Company") to exchange its registered 10.625% Senior
Discount Notes due 2008 (the "New Notes") for up to $350,000,000 aggregate
principal amount at maturity of its outstanding 10.625% Senior Discount Notes
due 2008 (the "Old Notes"), upon the terms and subject to the conditions
described in the Prospectus. The Exchange Offer is being made in order to
satisfy certain obligations of the Company contained in the Registration
Agreement dated as of July 24, 1998, between the Company and the Initial
Purchasers thereto.
This material is being forwarded to you as the beneficial owner of the Old
Notes carried by us in your account but not registered in your name. A TENDER OF
SUCH OLD NOTES MAY ONLY BE MADE BY US AS THE HOLDER OF RECORD AND PURSUANT TO
YOUR INSTRUCTIONS.
Accordingly, we request instructions as to whether you wish us to tender on
your behalf the Old Notes held by us for your account, pursuant to the terms and
conditions set forth in the enclosed Prospectus and Letter of Transmittal.
Your instructions should be forwarded to us as promptly as possible in
order to permit us to tender the Old Notes on your behalf in accordance with the
provisions of the Exchange Offer. The Exchange Offer will expire at 5:00 p.m.
New York City time, on , 1998, (the "Expiration Date") (20
business days following the commencement of the Exchange Offer) unless extended
by the Company. Any Old Notes tendered pursuant to the Exchange Offer may be
withdrawn at any time before 5:00 p.m., New York city time, on the Expiration
Date.
Your attention is directed to the following:
1. The Exchange Offer is for any and all Old Notes.
2. The Exchange Offer is subject to certain conditions set forth in
the Prospectus in the section captioned "The Exchange Offer -- Conditions
of the Exchange Offer."
3. Any transfer taxes incident to the transfer of Old Notes from the
holder to the Company will be paid by the Company, except as otherwise
provided in the Instructions in the Letter of Transmittal.
4. The Exchange Offer expires at 5:00 p.m., New York City time, on the
Expiration Date, unless extended by the Company.
If you wish to have us tender your Old Notes, please so instruct us by
completing, executing and returning to us the instruction form on the back of
this letter. THE LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR INFORMATION ONLY
AND MAY NOT BE USED DIRECTLY BY YOU TO TENDER OLD NOTES.
<PAGE> 2
INSTRUCTIONS WITH RESPECT TO
THE EXCHANGE OFFER
The undersigned acknowledge(s) receipt of your letter and the enclosed
material referred to therein relating to the Exchange offer made by e.spire
Communications, Inc. with respect to its Old Notes.
This will instruct you to tender the Old Notes held by you for the account
of the undersigned, upon and subject to the terms and conditions set forth in
the Prospectus and the related Letter of Transmittal.
Please tender the Old Notes held by you for my account as indicated below:
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL AMOUNT OF OLD NOTES
---------------------------------------
<S> <C>
-----------------------------------------------
10.625% Senior Discount Notes due 2008.........
-----------------------------------------------
[ ] Please do not tender any Old Notes held by
you for my account.
Dated: -------------------------, 1998 -----------------------------------------------
-----------------------------------------------
SIGNATURE(S)
-----------------------------------------------
-----------------------------------------------
PLEASE PRINT NAME(S) HERE
-----------------------------------------------
-----------------------------------------------
ADDRESS(ES)
-----------------------------------------------
AREA CODE(S) AND TELEPHONE NUMBER(S)
</TABLE>
None of the Old Notes held by us for your account will be tendered unless
we receive written instructions from you to do so. Unless a specific contrary
instruction is given in the space provided, your signature(s) hereon shall
constitute an instruction to us to tender all the Old Notes held by us for your
account.
2
<PAGE> 1
EXHIBIT 99.5
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE
PAYER:--Social Security numbers have nine digits separated by two hyphens: i.e.,
000-00-0000. Employer identification numbers have nine digits separated by only
one hyphen: i.e., 00-0000000. The table below will help determine the number to
give the payer.
<TABLE>
<C> <S> <C>
- ------------------------------------------------------------
GIVE THE
FOR THIS TYPE OF ACCOUNT: TAXPAYER
IDENTIFICATION
NUMBER OF--
- ------------------------------------------------------------
1. An individual's account The individual
2. Two or more individuals (joint The actual owner of
account) the account or, if
combined funds,the
first individual on
the account(1)
3. Custodian account of a minor The minor(2)
(Uniform Gift to Minors Act)
4. a. The unusual revocable savings The grantor-
trust (grantor is also trustee) trustee(1)
b. So-called trust account that is The actual owner(1)
not a legal or valid trust
under state law.
5. Sole proprietorship The owner(3)
6. A valid trust, estate, or pension The legal entity
trust (Do not furnish the
identifying number
of the personal
representative or
trustee unless the
legal entity itself
is not designated
in the account
title.)(4)
- ------------------------------------------------------------
- ------------------------------------------------------------
GIVE THE TAXPAYER
FOR THIS TYPE OF ACCOUNT: IDENTIFICATION
NUMBER OF--
- ------------------------------------------------------------
7. Corporate account The corporation
8. Religious, charitable, or The organization
educational organization account
9. Partnership account The partnership
10. Association, club, or other The organization
tax-exempt organization
11. A broker or registered nominee The broker or
nominee
12. account with the Department of The public entity
Agriculture in the name of a
public entity (such as a state or
local government, school district,
or prison) that receives
agricultural program payments
- ------------------------------------------------------------
</TABLE>
(1) List first and circle the name of the person whose number you furnish. If
only one person on a joint account has an SSN, that person's number must be
furnished.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Show your individual name. You may also enter your business or "doing
business as" name. You may use either your social security number or your
employer identification number.
(4) List first and circle the name of the legal trust, estate, or pension trust.
NOTE: If no name is circled when there is more than one name listed, the number
will be considered to be that of the first name listed.
<PAGE> 2
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
PAGE 2
Note: Section references are to the Internal Revenue Code unless otherwise
noted.
OBTAINING A NUMBER
If you do not have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card (for
individuals), or Form SS-4, Application for Employer Identification Number (for
businesses and all other entities), at the local office of the Social Security
Administration or the Internal Revenue Service (the "IRS") and apply for a
number.
PAYEES AND PAYMENTS EXEMPT FROM
BACKUP WITHHOLDING
The following is a list of payees exempt from backup withholding and for which
no information reporting is required. For interest and dividends, all listed
payees are exempt except item (9). For broker transactions, payees listed in
items (1) through (13) and a person registered under the Investment Advisors Act
of 1940 who regularly acts as a broker are exempt. Payments subject to reporting
under sections 6041 and 6041A are generally exempt from backup withholding only
if made to payees described in items (1) through (7), except a corporation
(other than certain hospitals described in Regulations section 1.6041-3(c)) that
provides medical and health care services or bills and collects payments for
such services is not exempt from backup withholding or information reporting.
Only payees described in items (1) through (5) are exempt from backup
withholding for barter exchange transactions and patronage dividends:
(1) An organization exempt from tax under section 501(a), or an IRA, or a
custodial account under section 403(b)(7), if the account satisfies the
requirements of section 401(f)(2).
(2) The United States or any of its agencies or instrumentalities.
(3) A state, the District of Columbia, a possession of the United States, or
any of their political subdivisions or instrumentalities.
(4) A foreign government or any of its political subdivisions, agencies or
instrumentalities.
(5) An international organization or any of its agencies or instrumentalities.
(6) A corporation.
(7) A foreign central bank of issue.
(8) A dealer in securities or commodities required to register in the United
States, the District of Columbia or a possession of the United States.
(9) A futures commission merchant registered with the Commodity Futures
Trading Commission.
(10) A real estate investment trust.
(11) An entity registered at all times during the tax year under the Investment
Company Act of 1940.
(12) A common trust fund operated by a bank under section 584(a).
(13) A financial institution.
(14) A middleman known in the investment community as a nominee or listed in
the most recent publication of the American Society of Corporate
Secretaries, Inc., Nominee List.
(15) A trust exempt from tax under section 664 or described in section 4947.
Payments of dividends and patronage dividends that generally are exempt from
backup withholding include the following:
- Payments to nonresident aliens subject to withholding under section 1441.
- Payments to partnerships not engaged in a trade or business in the U.S. and
which have at least one nonresident alien partner.
- Payments of patronage dividends not paid in money.
- Payments made by certain foreign organizations.
- Section 404(k) payments made by an ESOP.
Payments of interest that generally are exempt from backup withholding include
the following:
- Payments of interest on obligation issued by individuals. Note: You may be
subject to backup withholding if this interest is $600 or more and is paid
in the course of the payer's trade or business and you have not provided
your correct taxpayer identification number to the payor.
- Payments of tax-exempt interest (including exempt-interest dividends under
section 852).
- Payments described in section 6049(b)(5) to non-resident aliens.
- Payments on tax-free covenant bonds under section 1451.
- Payments made by certain foreign organizations.
- Payments of mortgage interest to you.
Exempt payees described above should file substitute Form W-9 to avoid possible
erroneous backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH YOUR
TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, SIGN AND
DATE THE FORM AND RETURN IT TO THE PAYER. IF YOU ARE A NON-RESIDENT ALIEN OR A
FOREIGN ENTITY NOT SUBJECT TO BACKUP WITHHOLDING, FILE WITH PAYER A COMPLETED
INTERNAL REVENUE FORM W-8 (CERTIFICATE OF FOREIGN STATUS).
Payment that are not subject to information reporting are also not subject to
backup withholding. For details, see sections 6041, 6041A, 6042, 6044, 6045,
6049, 6050A and 6050N and the regulations promulgated thereunder.
PRIVACY ACT NOTICE--Section 6109 requires most recipients of dividend,
interest or other payments to give taxpayer identification numbers to payors who
must report the payments to the IRS. The IRS uses the numbers for identification
purposes. Payers must generally withhold 31% of taxable interest, dividend, and
certain other payments to a payee who does not furnish a taxpayer identification
number to a payer. Certain penalties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER--If you fail
to furnish your correct taxpayer identification number to a requester, you are
subject to a penalty of $50 for each such failure unless your failure is due to
reasonable cause and not to willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING--If you make
a false statement with no reasonable basis which results in no imposition of
backup withholding, you are subject to a penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION--Willfully falsifying
certifications or affirmations may subject you to criminal penalties including
fines and/or imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX
CONSULTANT OR THE INTERNAL REVENUE SERVICE.
