SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Year Ended December 31, 1997
Commission File No. 0 - 26728
TEL-SAVE HOLDINGS, INC.
(Exact name of registrant as specified an its charter)
DELAWARE 23-2827736
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6805 ROUTE 202
NEW HOPE, PENNSYLVANIA 18938
(215) 862-1500
(Address, including zip code, and telephone
number, including area code, of registrant's
principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class Name of each exchange on which registered
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None Not applicable
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 30, 1998 was approximately $895,030,756 based on the
average of the high and low prices of the Common Stock on March 30, 1998 of
$22.59 per share as reported on the Nasdaq National Market.
As of March 30, 1998, the Registrant had outstanding 64,585,012 shares of its
Common Stock, par value $.01 per share.
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TEL-SAVE HOLDINGS, INC.
INDEX TO FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
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ITEM PAGE
NO. NO.
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PART I
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1. BUSINESS.................................................................................................. 1
2. PROPERTIES............................................................................................... 16
3. LEGAL PROCEEDINGS........................................................................................ 16
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................................... 17
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................................... 19
6. SELECTED CONSOLIDATED FINANCIAL DATA..................................................................... 20
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................... 21
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................................................. 26
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE................................... 42
PART III
10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................................................... 42
11 EXECUTIVE COMPENSATION................................................................................... 42
12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................................... 42
13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................................... 42
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.......................................... 43
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PART I
ITEM 1. BUSINESS
For the definition of certain terms used in this Form 10-K, see
"Glossary."
OVERVIEW
Tel-Save Holdings, Inc. (the "Company") provides long distance services
throughout the United States to small and medium-sized businesses, and to
increasing numbers of residential customers as a result of the Company's recent
online marketing efforts. The Company's long distance service offerings include
outbound service, inbound toll-free 800 service, and dedicated private line
services for data.
Until 1997, the Company operated primarily as a switchless,
nonfacilities-based reseller of AT&T long distance services to small and
medium-sized businesses. By purchasing large usage volumes from AT&T pursuant to
contract tariffs, the Company has been and continues to be able to procure
substantial discounts and offer low cost, high quality long distance services to
its customers at rates generally more favorable than those offered directly by
AT&T.
In order to reduce its dependence on AT&T contract tariffs and increase
its growth opportunities, the Company has deployed its own nationwide
telecommunications network, One Better Net ("OBN"). OBN features five
Company-owned, AT&T (now Lucent Technologies, Inc., hereinafter "Lucent")
manufactured 5ESS-2000 switches connected with AT&T digital transmission
facilities. OBN's reduced cost structure allows the Company to offer rates
competitive with those of non-AT&T resellers while continuing to provide the
quality of AT&T (now Lucent) manufactured switches and AT&T-provided
transmission facilities and billing services. OBN allows the Company to pursue
the non-AT&T based switchless resale market, which represents the majority of
the switchless resale long distance market.
In February 1997, as part of its efforts to expand its business by
taking advantage of online marketing, billing and customer service, the Company
entered into a Telecommunications Marketing Agreement (the "AOL Agreement") with
America Online, Inc. ("AOL"), under which the Company provides long distance
telecommunications services marketed by AOL to the subscribers to AOL's online
network. The Company's services were launched on the AOL online network on
October 9, 1997 on a limited basis and the general public promotion of the
service began at the end of 1997. The AOL Agreement has an initial term of three
years and can be extended by AOL on an annual basis thereafter.
The Company's strategy for expanding its business is principally to
target new retail customers through the Company's online marketing, expanded
services to be offered to the Company's online customer base, local service and
dial around long distance service. The Company also intends to attract new
partitions and support existing partitions, to grow through acquisitions and
strategic partnerships and to expand into the college and university market. The
Company will approach online customers through the AOL Agreement and similar
opportunities, such as the Company's recently announced arrangement with
CompuServe Interactive, Inc. ("CompuServe") pursuant to which the Company will
provide long distance telecommunications services to be marketed by CompuServe
to its online network subscribers. The Company intends to attract new partitions
and support existing partitions by, among other things, continuing its current
practice of offering advances to new partitions to enable such partitions to pay
outstanding balances due to their existing long distance providers in order for
such partitions to transfer their end users to the Company's service, and to
existing partitions to support their marketing efforts. The Company regularly
evaluates potential acquisition candidates and strategic partners with which the
Company could achieve its expansion goals. The Company, with the recent
completion of the acquisition of Compco, Inc. ("Compco"), intends to leverage
the relationships that Compco has as a leading provider of communications
software in the college and university marketplace by offering bundled
communications services to the college and university market. The Company has
also recently gained certification in many states to sell local services,
although it does not yet offer such services. Although the Company expects to
expand its business through these and other opportunities, in view of the
intense competition in this industry and other contingencies, there can be no
assurance that the Company will be able to expand its business.
Tel-Save, Inc., the Company's predecessor ("Predecessor Corporation")
and now its principal operating subsidiary, was incorporated in Pennsylvania in
May 1989. The Company was incorporated in Delaware in June 1995. The address of
the Company's principal executive offices is 6805 Route 202, New Hope,
Pennsylvania 18938, and its telephone number is (215)
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862-1500. Unless the context otherwise requires, the "Company" or "Tel-Save"
includes the Predecessor Corporation and the Company's other subsidiaries.
DEVELOPMENT OF THE COMPANY
The Company was formed to capitalize on the Federal Communications
Commission ("FCC") mandate allowing the resale of AT&T services. The Company
initially marketed AT&T's multi-location calling plan ("MLCP"), which provided
incremental discounts earned by inclusion of the usage volume of diverse end
user locations under a single service plan. The Company was successful in
marketing MLCP, but realized that there were significant barriers to growth
associated with the product, primarily the lack of reporting from AT&T, product
inflexibility and the lack of control over end user accounts.
In late 1989, the Company successfully obtained an additional AT&T
service plan developed by AT&T and marketed as Software Defined Network Service
("SDN"), an AT&T product designed for larger business customers. SDN provided
the Company with higher margins, network controls, advanced features and the
ability to rebill its end users through AT&T and AT&T's College and University
Systems ("ACUS"), thus enabling the Company to have more control over the end
user account. As a result of SDN, the Company began to offer services on a
wholesale basis through partitions. The Company thereby outsourced its marketing
and end user service expenses to partitions, allowing it to focus on managing
the AT&T relationship and to further develop its billing and information
systems.
In December 1992, the Company obtained the first contract tariff
created by AT&T specifically for the Company. The contract tariff provided the
Company with significant additional price advantages at stabilized rates and the
ability to absorb the traffic of competitors' plans into the contract tariff.
The Company subsequently obtained other contract tariffs, which also provide
AT&T inbound 800 services and AT&T private line services, in order to diversify
its service offerings. This in turn enabled the Company to increase the number
of its partitions and end users.
Prior to 1997, the Company operated primarily as a "switchless,"
nonfacilities-based reseller of AT&T long distance services. The Company
offered, and continues to offer, its partitions and end users nationwide access
to AT&T long distance network services through contract tariffs, including
outbound long distance, 800 service and private line service. Outbound long
distance service accommodates voice, data and video transmissions. The Company's
800 service is currently provided by reselling AT&T's 800 Service (Readyline,
Megacom 800, etc.), which is AT&T's inbound, toll-free (recipient of the call
pays the charges) long distance service. The Company's private line service is
currently provided by reselling AT&T Private Line Service, which includes
dedicated transmission lines connecting pairs of sites.
The Company successfully established its position as a switchless
reseller of AT&T long distance services as a result of its ability to negotiate
with and obtain favorable contract tariffs from AT&T, manage and distribute
data, bill accurately and provide partition support. Contract tariff
subscriptions do not impose restrictions on the rates the Company may charge its
partitions and end users. By purchasing large usage volumes from AT&T pursuant
to such contract tariffs, the Company is able to procure substantial volume
discounts and offer long distance services to its partitions and end users at
rates generally more favorable than those offered directly by AT&T. With its
information systems, the Company is able to manage and distribute to partitions
information such as data about end user usage and payment history.
In order to reduce its dependence on the AT&T contract tariffs and
increase its growth opportunities, the Company developed its own network, OBN.
Since 1996, the Company has deployed five 5ESS-2000 switches in Chicago, Dallas,
Jacksonville, New York and San Francisco. As of March 30, 1998, the Company has
provisioned approximately one million lines (representing approximately 71% of
the total lines then using the Company's services) of the Company's end users)
to OBN and most of the Company's new outbound lines are now being provisioned to
OBN. OBN enables the Company to offer its end users and partitions more
competitive rates than in the past and to improve customer provisioning, as well
as to improve reporting to existing and new partitions.
RECENT DEVELOPMENTS
The Company believes that eventually it must either be, or become part
of, a larger organization in order to succeed in the long term. To that end, the
Company has been exploring the possibility of being acquired by larger entities
that have expressed interest in the Company. The Company has previously
disclosed that it has had discussions with potential suitors and that the
Company has retained Salomon Smith Barney to advise the Company on any proposed
acquisition of the Company.
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There can be no assurance that any transaction will take place and no prediction
can be made as to the price at which an acquisition of the Company, if any, may
be consummated or whether any such transaction would be for cash or securities.
Moreover, the Company has not made any determination to be acquired, and may
remain independent. The Company does not plan to make any further public
statements regarding the possible acquisition of the Company until it has
reached a definitive agreement regarding such a transaction, or has determined
not to continue to pursue such possibility.
At the same time, the Company continues to seek and consider potential
acquisitions and strategic partnerships. On February 3, 1998, the Company
completed the acquisition of Symetrics Industries, Inc. ("Symetrics"), a Florida
corporation, for approximately $25 million in cash, plus assumed liabilities.
Symetrics designs, develops and manufactures electronic systems, system
components and related software for defense-related products and for
telecommunications applications. In the telecommunications field, Symetrics has
developed hardware and software to make telephone switching more efficient for
small telephone networks, such as in college dormitories and apartments. The
equipment routes room-to-room calls itself and sends only billing information
back to the service provider's switch, freeing space on the system to handle
more calls. The Company intends to dispose of Symetrics' assets related to
non-telecommunications businesses, although there can be no assurance that any
such transaction will be consummated.
The Company has announced that its Board has authorized the repurchase
from time to time of up to eight million shares of its Common Stock. It is
anticipated that the repurchased shares will be held in treasury for issuance
upon exercise of outstanding options and warrants and upon conversion, if any,
of convertible notes, and for other general corporate purposes. In connection
with the AOL Agreement, the Company issued two warrants to AOL to purchase
shares of the Company's Common Stock, including a warrant to purchase 5 million
shares at an exercise price of $15.50 per share, which warrant became fully
vested on February 22, 1998. AOL is exercising this warrant as to 1 million
shares of Company Common Stock on a net issuance basis and the Company is
repurchasing from AOL all of the 380,624 shares issued upon such net issuance
exercise for $23 1/4 per share. In connection with such purchases, AOL agreed
not to dispose of any shares of the Company's Common Stock acquired by AOL under
any of these warrants until March 30, 1999.
SALES AND MARKETING
Online
The Company launched a major new initiative for the marketing and
provisioning of its telecommunication services online when, in February 1997, it
entered into the AOL Agreement, under which the Company provides long distance
telecommunications services that are marketed by AOL to the subscribers of AOL's
online network. The AOL Agreement has an initial term of three years and can be
extended by AOL on an annual basis thereafter. Under the AOL Agreement, the
Company also has certain rights to offer, on a comparable basis, local and
wireless telecommunications services when available.
The Company's services, which include provision for online sign-up,
call detail and reports and credit card payment, were launched on the AOL online
network on October 9, 1997 on a limited basis, and general public promotion of
the services began at the end of 1997. AOL subscribers who sign-up for the
telecommunications services are customers of the Company, as the carrier
providing such services.
Under the AOL Agreement, AOL provides, each month over the term of the
Agreement, certain minimum amounts of online advertising and promotion of the
services and provides all of its subscribers with access to a dedicated Company
service area online. Effective January 25, 1998, the Company and AOL entered
into an amendment (the "AOL Amendment") to the AOL Agreement to provide for the
acceleration of some of AOL's online advertising and promotion obligations under
the AOL Agreement into a special promotional period (the "Special Promotional
Period") during the latter part of the first quarter of 1998, as well as to
provide for offline marketing through other media, such as directed mail
promotions and print and radio promotions of the services, the costs of which
would be borne by the Company.
The Company made an initial payment of $100 million to AOL at the
signing of the AOL Agreement and agreed to provide marketing payments to AOL
based on a percentage of the Company's profits from the services (between 50%
and 70% depending on the level of revenues from the services). The AOL Agreement
provides that $43 million of the initial $100 million payment will be offset and
recoverable by the Company through reduction of such profit-based marketing
payments during the initial term of the AOL Agreement or, subject to certain
monthly reductions of the amount thereof, directly by AOL upon certain earlier
terminations of the AOL Agreement. The $57 million balance of the initial
payment is solely recoverable by offset against a percentage of such
profit-based marketing payments made after the first five years of the AOL
Agreement (when extended beyond the initial term) and by offset against a
percentage of AOL's share of the profits from the services after termination or
expiration of the AOL Agreement. Any portion of the $43 million not previously
repaid or reduced in amount would be added to the $57 million and would be
recoverable similarly.
Also under the AOL Agreement, the Company issued to AOL at signing two
warrants to purchase shares of the Company Common Stock at a premium over the
market value of such stock on the issuance date. One warrant is for 5 million
shares, at an exercise price of $15.50 per share, one-half of which shares
vested on October 9, 1997 when the Company's service was launched on the AOL
online network in accordance with the AOL Agreement and the balance of which
vested on February 22, 1998, the first anniversary of issuance. See "RECENT
DEVELOPMENTS." The other warrant (the "Supplemental Warrant") is for up to 7
million shares, at an exercise price of $14.00 per share, which vest, commencing
December 31, 1997, based on the number of subscribers to the services and would
vest fully if there are at least 3.5 million such subscribers at any one time.
The Company also agreed to issue to AOL an additional warrant to purchase 1
million shares of the Company Common Stock, at market value at the time of
issuance, upon each of the first two annual
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extensions by AOL of the term of the AOL Agreement, which warrants also will
vest based on the number of subscribers to the services.
Under the AOL Amendment, the Company agreed to pay to AOL an additional
bonus fee for each new subscriber (up to an aggregate of 1,000,000 subscribers)
to the Company's services under the AOL Agreement who subscribed during the
Special Promotional Period or after this Period in response to AOL telemarketing
efforts and to direct mail solicitations to AOL subscribers and who continued as
a customer of the Company services for at least 30 days. Such bonus payments
also would continue as to additional qualifying subscribers who subscribe in
response to certain AOL telemarketing efforts. Under the AOL Amendment, the
Company guaranteed, with respect to these bonus payments, that it would pay to
AOL, as of April 3, 1998, an amount (the "Excess Amount") equal to $10 million
reduced by the amount of bonus fees paid to AOL before such date and by an
amount based on the number of shares of Company Common Stock that vested under
the Supplemental Warrant during the Special Promotional Period. Any Excess
Amount would be credited against, and solely recoverable from, any bonus fees
subsequently payable to AOL.
The Company also entered into a Telecommunications Marketing Agreement,
dated as of February 6, 1998 (the "CompuServe Agreement"), with CompuServe, a
wholly owned subsidiary of AOL, under which the Company will provide long
distance telecommunications services to be marketed by CompuServe to all of the
subscribers of CompuServe's online network in substantially the same manner as
under the AOL Agreement. The CompuServe Agreement has an initial term of three
years that can be extended by CompuServe on an annual basis thereafter and is
also subject to earlier termination by CompuServe if the AOL Agreement shall
have terminated upon payment of $10 million to the Company. As with the AOL
Agreement, the Company also has certain rights under the CompuServe Agreement to
offer, on a comparable basis, local and wireless telecommunications services
when available. The Company anticipates that the services will be offered
generally to CompuServe subscribers in the third quarter of 1998.
Under the CompuServe Agreement, which is similar to the AOL Agreement,
the Company services will include provision for online sign-up, call detail and
reports and credit card payment. CompuServe will provide, each month over the
term of the CompuServe Agreement, certain minimum amounts of online and offline
advertising and promotion of the Company services and provide all of its
subscribers with access to a dedicated Company service area online. CompuServe
subscribers who sign up for the telecommunications services will be customers of
the Company, as the carrier providing such services. The Company will provide
marketing payments to CompuServe based on a percentage of the Company's profits
from the services under the CompuServe Agreement (between 50% and 70% depending
on the level of revenues from such services).
Under the CompuServe Agreement, the Company made an initial payment of
$3,500,000 as an advance against profit-sharing payments to be made to
CompuServe; the Comapny will make an additional, non-refundable payment of
$3,500,000 (the "Base Payment") on the date that the Company's services first
are made generally available to substantially all of the CompuServe subscribers
(but, generally, not later than November 1, 1998); and, 18 months after the date
such services are first made generally available and if the CompuServe Agreement
has not earlier terminated the Company will make a further advance (the "Midterm
Advance") of an amount up to $7,000,000 and based on the then number of
subscribers to the CompuServe service. The CompuServe Agreement provides that
the initial $3.5 million advance and the Midterm Advance will be offset and
recoverable by the Company through reduction of the profit-based marketing
payments to be made to CompuServe during the initial term of the CompuServe
Agreement or, subject to certain monthly reductions of the amount thereof,
directly by CompuServe upon certain earlier terminations of the CompuServe
Agreement. The Base Payment is generally not recoverable by the Company. Under
the CompuServe Agreement, the Company also agreed to pay to CompuServe a $10 fee
for each new subscriber to the Company's services under the CompuServe Agreement
who subscribes within the first six months after the date that the Company's
services first are made generally available to substantially all of the
CompuServe subscribers and who continues as a subscriber for at least 60 days,
which fees also are not recoverable by the Company. Under the terms of the AOL
Amendment, subscribers to the Company services under the CompuServe Agreement
will be counted as subscribers for purposes of vesting under the AOL
Supplemental Warrant.
In connection with the AOL Agreement, the Company and AOL jointly
developed the online marketing and advertising for the services and the Company
and CompuServe will jointly develop the marketing and advertising under the
CompuServe Agreement. The Company provides online customer service as well as
inbound calling customer service to the AOL member base in connection with the
services and will do so for the Compuserve member base. Customer service
representatives for these services are located in the Company's Clearwater,
Florida facility. The Company anticipates that it will incur expenses for the
promotion of the services under the AOL Agreement and for the start-up and
development of the services contemplated in the CompuServe Agreement primarily
during the first half of 1998, including expenses for the continued expansion of
the Clearwater operation, for software programming and for software and hardware
additions to the Company's network, OBN, to expand its capacity for the traffic.
The profitability of the AOL and CompuServe Agreements for the Company
depends on the Company's ability to continue to develop (and, in the case of
CompuServe, to develop) and to maintain online ordering, call detail, billing
and customer services for the AOL and CompuServe members, which will require,
among other things, the ability to identify and employ sufficient personnel
qualified to provide the necessary programming; the ability of the Company and
AOL and CompuServe to work together effectively to
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develop jointly the marketing contemplated by the AOL and CompuServe Agreements;
a rapid response rate to online promotions to AOL's and CompuServe's online
subscribers, most of whom are expected to be potential residential customers
rather than business customers to which Tel-Save has marketed historically; and
the Company's ability to expand OBN to accommodate increased traffic levels;
and, in the case of CompuServe, CompuServe's ability to maintain its subscriber
base in light of its recently completed acquisition by AOL. Since the $100
million initial payment under the AOL Agreement and up to $10.5 million of the
payments that may be made by the Company under the CompuServe Agreement are
recoverable only through the profits from the services under the respective
Agreements, to the extent that the respective Agreement is unsuccessful, such
respective amounts are subject to potential non-recovery or limited recovery by
the Company. The Company currently estimates that between 2% and 6% of AOL's
customers will need to sign up for the Company's long distance service in order
for the Company to break even on its investment in the AOL Agreement.
Partitions
Prior to 1997, the Company primarily marketed its services to small and
medium-sized business end users (i.e., generally businesses with fewer than 200
employees) throughout the United States through independent long distance and
marketing companies known as "partitions." While the Company explored the use of
direct marketing in 1997, it has determined (as described below) to continue to
market its services to small and medium sized business end users primarily
through partitions. Partitions resell and market the Company's products,
allowing the Company to minimize its marketing and end user overhead. Partitions
offer end users a variety of services and rates. As compensation for their
services, partitions generally receive the difference between the amount
received from end users and the amount charged by the Company to the partition
for providing such services. The Company offers customer service to end users,
including end users of certain partitions. Customer service representatives are
located in the Company's facilities in Clearwater, Florida and New Hope,
Pennsylvania.
A substantial number of the Company's partitions have executed
partition agreements with the Company pursuant to which the Company agrees to
provide services utilizing the AT&T network service or OBN and to arrange for
end user billing services at agreed upon prices or discounts. The Company
requires that the partitions adhere to certain Company established guidelines in
marketing the Company's services and comply with federal and state regulations.
These requirements include certain representations by each organization that it
is acting as an independent contractor with regard to the resale of the
Company's services, and not as a joint venture partner, agent or employee of the
Company, along with provisions for the proper completion of forms and other
sales procedures. In addition, payments for long distance services made by end
users are either paid directly into a lock-box controlled by the Company or are
made to the end-user's local exchage carrier ("LEC"), which payments are then
forwarded by a third-party billing company to the Company. The Company's
partition agreements typically run for three years or for the term of the
applicable tariffs, whichever is less. The partitions generally make no minimum
use or revenue commitments to the Company under these agreements with respect to
the resale of services. The agreements also are generally non-exclusive. If the
Company were to lose access to services on the AT&T network or billing services
or experience difficulties with OBN, the Company's agreements with partitions
could be adversely affected.
The Company intends to continue to promote increased marketing
activities of certain of its partitions through advances collateralized by
assets of such partitions. In return for providing such marketing advances, the
Company seeks long-term arrangements with such partitions. In 1997, the Company
entered into long term arrangements with several existing and new partitions.
One partition, Group Long Distance, Inc., accounted for approximately 13% of the
Company's sales in 1997; however, the Company does not expect that any partition
will account for 10% or more of the Company's sales in 1998. In the event that
any of the partitions, and particularly the partition specifically noted above,
were to cease doing business with the Company, the financial condition or
results of operations of the Company could be materially adversely affected.
The Company believes that the discounts it offers partitions and end
users using OBN, together with the functionality and quality of OBN and the
accuracy of the billing services used, will enable it to continue to attract
current and future partitions to OBN. The Company will continue its policy of
advancing funds to most partitions to support their marketing efforts.
Historically, partitions of the Company have continued to do business under
their partition agreements following changes in the Company's service offerings.
Current marketing practices, including the methods and means to convert
a customer's long distance telephone service from one carrier to another, have
recently been subject to increased regulatory review at both the federal and
state levels. See "REGULATION". This increased regulatory review could affect
the current business of existing partitions and also could affect possible
future acquisitions of new business from new partitions or other resellers.
Provisions in the Company's partition agreements mandate compliance by the
partitions with applicable state and federal regulations. A partition's failure
to comply with applicable state and federal regulations could have an adverse
effect on the Company. Such a failure could result in state and
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federal authorities imposing sanctions on a partition (such as restrictions on
the partition's business practices, loss of its right to do business, or fines
or forfeitures) that would hinder the partition's ability to resell the
Company's services or raise its costs of doing so. Such sanctions also could
make it difficult for the Company to engage in an asset sale, merger, or other
transaction with the partition, and might impair any loans that the partition
has outstanding from the Company. State or federal authorities also might
attempt to hold the Company responsible for the partition's misconduct. Because
the Company's partitions are independent carriers and marketing companies, the
Company is unable to control such partitions' activities. The Company is also
unable to predict the extent of its partitions' compliance with applicable
regulations or the effect of such increased regulatory review.
The Company's partitions that resell AT&T long distance service are
under a contractual obligation to the Company to comply with AT&T's guidelines
on the use of the AT&T name and logo in connection with their resale of AT&T
long distance service. AT&T recently announced that it intends to enforce those
guidelines with renewed vigor. A partition's failure to comply with AT&T's
guidelines could have an adverse effect not only on the partition but also on
the Company, which might be sued by AT&T, be subject to increased rates from
AT&T or loss of service from AT&T.
Colleges and Universities
In late November, 1997, the Company acquired Compco, Inc., a provider
of communications software for the college and university marketplace, for $15
million in cash and stock. Compco primarily licenses proprietary communications
software to colleges and universities. This software assists the institution in
its management of the billing, services and facilities related to its
telecommunications network. In addition to the licensing of its telemanagement
software, Compco also offers and provides billing services and training to such
institutions. Compco's customers include approximately 100 academic institutions
in the country. The Company intends to leverage the relationships Compco has
with these institutions by offering bundled communications services to the
college and university market.
Direct Telemarketing
In 1996, Tel-Save began to telemarket its long distance service
directly to small and medium-sized businesses and, in December 1996, acquired
substantially all of the assets, and hired substantially all of the employees,
of American Business Alliance, Inc. ("ABA"), a switchless reseller of long
distance services and a partition of Tel-Save, which acquisition significantly
increased Tel-Save's direct telemarketing capabilities. In the second quarter of
1997, Tel-Save determined to change its business practice and de-emphasize the
use of direct telemarketing to solicit customers for Tel-Save as the carrier,
and, in October 1997, Tel-Save decided to discontinue its internal telemarketing
operations, which were primarily conducted through the ABA business that it had
acquired. Both federal and state officials are tightening the rules governing
the telemarketing of telecommunications services and the requirements imposed on
carriers acquiring customers in that manner. See "REGULATION". Customer
complaints of unauthorized conversion or "slamming" are widespread in the long
distance industry and are beginning to occur with respect to newly competitive
local services. While Tel-Save's discontinuance of its internal telemarketing
operations should reduce its exposure to customer complaints and federal or
state enforcement actions with respect to telemarketing practices, certain state
officials have made inquiries with respect to the marketing of Tel-Save's
services and there is the risk of enforcement actions by virtue of its prior,
telemarketing efforts and its ongoing support of its customer/partitions. Some
direct telemarketing is being used in connection with the AOL and Compuserve
Agreements.
INFORMATION AND BILLING SERVICES
The Company has developed and will seek to continue to develop and to
improve systems for customer care and billing services, including online
sign-up, call detail and billing reports and credit card payments. The Company
is currently implementing these technologies in connection with the AOL
Agreement. Any delay or difficulties in developing these systems or in hiring
personnel could adversely affect the success of this service offering and the
offering to AOL subscribers.
The Company also utilizes the billing services of AT&T and ACUS, a
wholly owned strategic business unit of AT&T, as well as the billing services of
the LECs. Detailed call information on the usage of each end user is produced by
AT&T (in the case of the switchless resale business) and by the Company (in the
case of OBN business). In each case, AT&T or the LEC then processes the
information and provides billing information to the Company and bills the end
users. In addition, the Company has developed its own information systems in
order to have its own billing capacity, although the Company has not provided
such direct billing services to end users in the past except in connection with
the online billing area under the AOL Agreement.
The Company provides to each partition computerized management systems
that control order processing, accounts receivable, billing and status
information in a streamlined fashion between the Company and its partitions.
Furthermore, when applicable, the systems interface with the AT&T Provisioning
System and ACUS for order processing and billing services,
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respectively. Enhancements and additional features are provided as needed.
Electronic processing and feature activation are designed to maintain the
Company's goal of minimizing overhead.
The information functions of the system are designed to provide easy
access to all information about an end user, including volume and patterns of
use, which will help the Company and partitions identify value-added services
that might be well suited for that end user. The Company also expects to use
such information to identify emerging end user trends and respond with services
to meet end users' changing needs. Such information also allows the Company and
its partitions to identify unusual or declining use by an individual end user,
which may indicate fraud or that an end user is switching its service to a
competitor. Recently released FCC rules, however, may limit the Company's use of
such customer proprietary network information. See "REGULATION."
ONE BETTER NET ("OBN")
In order to reduce its dependence on AT&T contract tariffs and to
increase its growth opportunities, the Company developed its own
telecommunications network, OBN, which utilizes AT&T (now Lucent) manufactured
switches owned by the Company in conjunction with AT&T-provided lines and
digital cross-connect equipment (herein referred to as "transmission
facilities") and AT&T-provided billing systems that the Company uses pursuant to
agreements with AT&T and ACUS. OBN includes five AT&T (now Lucent) 5ESS-2000
switches, which are generally considered the most reliable switches in the
telecommunications industry. The Company was one of the first installation sites
for AT&T's 5ESS-2000 switching equipment featuring the new Digital Networking
Unit--SONET technology, a switching interface designed to increase the
reliability of the 5ESS-2000 and to provide much greater capacity in a
significantly smaller footprint.
OBN allows the Company to offer long distance services directly to its
end users and partitions throughout the continental United States at rates that
are competitive with or below those offered by the major long distance
providers. OBN also allows the Company to control provisioning of end user
accounts.
The Company's current contract tariffs under which it resells AT&T
services require the Company to pay one all-inclusive "bundled" charge to AT&T
for the delivery of services, including switching and transmission services and
the payment of LEC access fees. As a result of the deployment of OBN, for
customers provisioned on OBN, the Company pays "unbundled" charges consisting of
charges paid directly to the LECs for access charges and, under AT&T contract
tariffs, charges paid to AT&T for use of its network transmission facilities.
The Company pays AT&T "bundled" charges for use of its international facilities
to handle the international portion of a call on OBN. The total cost per call to
the Company for the LEC access fees, the charges for use of AT&T's transmission
facilities and the overhead cost for calls using OBN is less than the per call
cost incurred by the Company as a switchless reseller paying "bundled" charges
to AT&T. LEC access fees represent a substantial portion of the total cost of
providing long distance services. As a result of the Telecommunications Act, it
is generally expected that the entry over time of competitors into LEC markets
will result in lowering of access fees, but there is no assurance that this will
occur. To the extent it does occur, the Company, by using OBN, will receive the
benefit of any future reduction in LEC access fees, which it would not
automatically receive under contract tariffs. See "REGULATION" for a discussion
of universal service contributions imposed on carriers, which may offset some or
all of the savings from lower access charges.
In October 1996, the Company subscribed to a new AT&T contract tariff,
which was amended in December 1996 and May 1997 and which permits the Company to
continue to resell through mid-1998 AT&T long distance services, including AT&T
SDN service and other services, at rates that are more favorable to the Company
than prior tariffs. As a result, the Company decided only to provision new end
users on OBN and to leave existing end users on AT&T service. The 1996 AT&T
contract has enabled the Company to earn higher margins on existing traffic and
minimize possible attrition that might result from moving existing end users
from the AT&T network to OBN. This has permitted a more gradual introduction of
OBN, which has reduced the expense of providing the capacity required in a more
rapid phase-in of OBN and lessened the impact of any technical difficulties
during the phase-in of OBN. See "AT&T CONTRACT TARIFFS."
While the Company expects to continue to offer private line service as
a reseller, in 1998 the Company also will begin to offer private line service
using OBN to new and existing customers.
In order for the Company to provide service over OBN, the Company has
installed and operates, and is responsible for the maintenance of, its own
switching equipment. The Company also has installed lines to connect its OBN
switches to LEC
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switches and is responsible for maintaining these lines. The Company entered
into a contract with GTE with respect to the monitoring, servicing and
maintenance of the switching equipment purchased from AT&T (now Lucent).
Additional management personnel and information systems are required to support
OBN, the costs of which have increased the Company's overhead. Moreover,
operation as a switch-based provider subjects the Company to risk of significant
interruption in the provision of services on OBN in the event of damage to the
Company's facilities (switching equipment or connections to AT&T transmission
facilities) such as could be caused by fire or natural disaster. Such
interruption could have a material adverse impact on the Company's financial
condition and results of operations.
The Company began testing new customer calls over OBN in the third
quarter of 1996. In the fourth quarter of 1996, the Company began provisioning
on a test basis new customer orders on OBN. In early 1997, the Company deployed
OBN. Of the over 1.4 million lines using the Company's services, OBN currently
provides services to approximately one million lines and most of the Company's
new outbound lines are now being provisioned to OBN.
The Company has continued to expand the capacity of OBN to meet its
increased demands and believes that such capacity may be further expanded at
reasonable cost to meet the Company's needs in the foreseeable future, including
under the AOL and CompuServe Agreements. Separately, the Company is operating
under an interim agreement with AT&T to purchase its Carrier Solutions Platform
("CSP") service, subject to either party's right to terminate such agreement.
The Company is negotiating a long term agreement with AT&T for such service. The
CSP service provides OBN with significant additional capacity and enables the
Company to accommodate large numbers of additional customers on OBN by handling
their peak load or overflow traffic.
AT&T CONTRACT TARIFFS
The Company historically has obtained services from AT&T through
contract tariffs and has been able to obtain the services it seeks and to do so
at increasingly favorable contract tariff rates. The deployment of OBN decreases
the Company's dependence on AT&T contract tariffs or other service arrangements.
To the extent the Company will need future service from AT&T, there is no
guarantee the Company will be able to obtain favorable contract tariffs or other
service arrangements, although the Company has been successful in the past in
obtaining such arrangements.
In October 1996, the Company subscribed to a new AT&T contract tariff
("Contract Tariff No. 5776"), which was amended in December 1996 and May 1997
and which permits the Company to continue to resell AT&T long distance services,
including AT&T-SDN service, through mid-1998 and also includes, through late
2000, other AT&T services (such as international long distance, inbound and
outbound services) that will be used in the Company's network, OBN. The rates
that the Company pays under Contract Tariff No. 5776 are more favorable to the
Company than under previous tariffs. During its term, Contract Tariff No. 5776
enables the Company to minimize possible attrition that might result from moving
existing end users from the AT&T network to OBN. Contract Tariff No. 5776 also
permitted a more gradual introduction of OBN, which has reduced the expense of
providing the capacity required in a more rapid phase-in of OBN and lessened the
impact of any technical difficulties during the phase-in of OBN. Contract Tariff
No. 5776 commits the Company to purchase $285 million of service from AT&T over
its 4 year term, including at least $1 million per month of international
service. The Company can terminate Contract Tariff No. 5776 without liability to
AT&T effective April 30, 1998 if the Company has generated at least $105 million
in usage charges, including at least $15 million in international usage charges;
the Company had exceeded these thresholds by the end of 1997. If minimum usage
requirements are not met, the Company is obligated to pay shortfall fees to AT&T
based on a percentage of the difference between the minimum requirement and the
actual billed usage. In addition, if the contract tariffs with AT&T are
terminated prior to the end of the contract tariff term, either by the Company
or by AT&T for non-payment, the Company may be liable for "termination with
liability" or "termination charges" and subject to material monetary
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penalties. The Company also may discontinue Contract Tariff No. 5776 without
liability if, prior to April 30, 1998, the Company and AT&T enter into a new
contract tariff or another contract with a revenue commitment of at least $7.5
million per month and a term of at least the difference between 18 months and
the number of months that the Company subscribed to the contract tariff,
provided that the Company must purchase or pay for AT&T services under the
contract tariff of at least $6.7 million per month for the months prior to such
termination, including $1 million per month of international usage.
The Company is considering terminating Contract Tariff No. 5776 as of
April 30, 1998, since, based on its traffic growth to date, the Company has a
one-time opportunity to do so without termination liability and the Company
believes that it will be able to replace the services thereunder on more
favorable terms. Such termination would free the Company from the minimum usage
and other financial obligations to AT&T under that contract tariff. It also,
however, would require the Company to make other arrangements to obtain critical
services for the Company's operation and provision of service to its customers
with AT&T or with another carrier, either another large customer of AT&T or
another facilities-based carrier. The Company is in the process of negotiating a
new Master Carrier Agreement (MCA) with AT&T which would replace all of the
Company's existing tariffs with AT&T (including the interim agreement for
provision of CSP services) and is expected to include certain minimum usage
commitments. The Company has also engaged in discussions with other carriers to
explore alternative arrangements. There can be no assurance that the Company
will be successful in these negotiations with AT&T or other carriers. Should the
Company terminate Contract Tariff No. 5776 and not reach a new agreement with
AT&T by such termination, the Company could be forced to move its traffic to
other AT&T tariffs at rates significantly higher than the Company is paying
today. If the Company concludes an agreement with another carrier, the rates
could be higher or lower than the Company is paying today. If the other carrier
provides these services to the Company over its own network, end-user customers
of the Company who want to keep their service on an AT&T network-based carrier,
and partitions who want to remain on an AT&T network-based carrier, may choose
to terminate their service with the Company. In that circumstance, the Company
may also be obliged to notify customers of a change in underlying
facilities-based carrier and the Company's billing arrangements with AT&T and
ACUS would have to be replaced.
As a nondominant carrier, AT&T is subject to the same regulations as
other long distance service providers. AT&T remains subject to Title II of the
Communications Act (47 U.S.C. Section 151, et seq.) and is required to offer
service under rates, terms and conditions that are just, reasonable and not
unreasonably discriminatory. AT&T is also subject to the FCC's complaint process
and is required to file tariffs, though under streamlined procedures. In
addition, AT&T is also required to give notice to the FCC and to affected
customers prior to discontinuing, reducing, or impairing any services.
COMPETITION
The long distance telecommunications industry is highly competitive and
affected by the introduction of new services by, and the market activities of,
major industry participants. Competition in the long distance business is based
upon pricing, customer service, billing services and perceived quality. The
Company competes against various national and regional long distance carriers
composed of both facilities-based providers and switchless resellers offering
essentially the same services as the Company. Several of the Company's
competitors are substantially larger and have greater financial, technical and
marketing resources. Although the Company believes it has the human and
technical resources to pursue its strategy and compete effectively in this
competitive environment, its success will depend upon its continued ability to
provide profitably high quality, high value services at prices generally
competitive with, or lower than, those charged by its competitors.
End users are not obligated to purchase any minimum usage amount and
can discontinue service, without penalty, at any time. There can be no assurance
that end users will continue to buy their long distance telephone service
through the Company or through partitions that purchase service from the
Company. In the event that a significant portion of the Company's end users
decides to purchase long distance service from another long distance service
provider, there can be no assurance that the Company will be able to replace its
end user base from other sources.
A high level of attrition is inherent in the long distance industry,
and the Company's revenues are affected by such attrition. Attrition is
attributable to a variety of factors, including termination of customers by the
Company for non-payment and the initiatives of existing and new competitors as
they engage in, among other things, national advertising campaigns,
telemarketing programs and cash payments and other incentives.
AT&T and other carriers have announced new price plans aimed at
residential customers (the Company's primary target audience under the AOL
Agreement) with significantly simplified rate structures, which may have the
impact of lowering overall long distance prices. There can be no assurance that
AT&T or other carriers will not make similar offerings available to
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the small to medium-sized businesses that the Company serves. Additional pricing
pressure may come from a new technology, Internet telephony, which uses packet
switching to transmit voice communications at a cost today apparently below that
of traditional circuit-switched long distance service. While Internet telephony
is not yet available in all areas, requires the dialing of additional digits,
and produces sound quality inferior to traditional long distance service, it
could eventually be perceived as a substitute for traditional long distance
service, and put additional downward pricing pressure on long distance rates.
Although OBN makes the Company more price competitive, a reduction in long
distance prices still may have a material adverse impact on the Company's
profitability.
One of the Company's principal competitors, AT&T, is also a major
supplier of services to the Company. The Company links its switching equipment
with transmission facilities and services purchased or leased from AT&T and
resells services obtained from AT&T. The Company also utilizes AT&T and ACUS to
provide services. There can be no assurance that either AT&T or ACUS will
continue to offer services to the Company at competitive rates or on attractive
terms.
The Telecommunications Act of 1996 (the "Telecommunications Act") was
intended to introduce more competition to U.S. telecommunications markets. The
legislation opens the local services market by requiring LECs to permit
interconnection to their networks and establishing, among other things, LEC
obligations with respect to access, resale, number portability, dialing parity,
access to rights-of-way, and mutual compensation. The legislation also codifies
the LECs' equal access and nondiscrimination obligations and preempts most
inconsistent state regulation. The Company in the future may take advantage of
the opportunities provided by the Telecommunications Act for competition in the
local services market by reselling local services.
The Telecommunications Act also was intended to increase competition in
the market for long distance services by overturning the prohibition in the
Consent Decree on RBOC provision of interLATA interexchange telecommunications
services. See "INDUSTRY BACKGROUND." Under Section 271 of the Telecommunications
Act, RBOCs may provide certain interLATA services immediately, and other
interLATA services after state and federal regulators certify that the RBOCs
have satisfied certain conditions. No RBOC has yet been certified by both state
and federal regulators as having satisfied the conditions for provision of all
interLATA services. However, the FCC recently has indicated that it will work
more cooperatively with the RBOCs in helping them to satisfy the conditions
necessary for certification. Several members of Congress also have expressed
dissatisfaction over the slow pace of certification, and legislation is being
considered to speed up RBOC entry into the long distance market. In addition,
one federal district court has found that the restrictions on RBOC provision of
interLATA services are an unconstitutional bill of attainder, but this decision
has been stayed and is under appeal.
RBOC entry into the long distance market means that the Company will
face new competition from well-capitalized, well-known companies. The
Telecommunications Act includes certain safeguards against anticompetitive
conduct by the RBOCs in the provision of interLATA service. Anticompetitive
conduct could result, among other things, from a RBOC's access to all
subscribers on its existing network as well as its potentially lower costs
related to the termination and origination of calls within its territory. It is
impossible to predict whether such safeguards will be adequate to protect
against anticompetitive conduct by the RBOCs and the impact that any
anticompetitive conduct would have on the Company's business and prospects.
Because of the name recognition that the RBOCs have in their existing markets
and the established relationships that they have with their existing local
service customers, and their ability to take advantage of those relationships,
as well as the possibility of interpretations of the Telecommunications Act
favorable to the RBOCs, it may be more difficult for other providers of long
distance services, such as the Company, to compete to provide long distance
services to RBOC customers. At the same time, as a result of the
Telecommunications Act, RBOCs have become potential customers for the Company's
long distance services.
Consolidation and alliances across geographic regions (e.g., Bell
Atlantic/Nynex and SBC Communications Inc./Pacific Telesis Group) and in the
interexchange market (e.g., WorldCom/MCI domestically and France
Telecom/Deutsche Telekom/Sprint internationally) and across industry segments
(e.g., WorldCom/MFS/UUNet and AT&T/Teleport) may also intensify competition in
the telecommunications market from significantly larger, well-capitalized
carriers and materially adversely affect the position of the Company. Such
consolidation and alliances are providing some of the Company's competitors with
the capacity to offer a wide range of services, including local, long distance,
and wireless telephone service, as well as Internet access. The Company, which
currently offers only long distance service, may be at a competitive
disadvantage because of its inability to offer so-called "one stop shopping."
The Company's online marketing of long distance service is spawning
imitators that are attempting to copy its major features, including online
sign-up and billing and automatic payment through a credit card. The Company
cannot predict what effect these competitors will have on its online marketing
of long distance service.
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INDUSTRY BACKGROUND
The $82 billion U.S. long distance industry is dominated by the
nation's four largest long distance providers, AT&T, MCI, Sprint and WorldCom,
which together generated approximately 83% of the aggregate revenues of all U.S.
long distance interexchange carriers in 1996. Other long distance companies,
some with national capabilities, accounted for the remainder of the market.
Based on published FCC estimates, toll service revenues of U.S. long distance
interexchange carriers have grown from $38.8 billion in 1984 to $82 billion in
1996. The aggregate market share of all interexchange carriers other than AT&T,
MCI and Sprint has grown from 2.6% in 1984 to 22.5% in 1996. During the same
period, the market share of AT&T declined from 90.1% to 47.9%.
Prior to the Telecommunications Act, the long distance
telecommunications industry had been principally shaped by a court decree
between AT&T and the United States Department of Justice, known as the
Modification of Final Judgment (the "Consent Decree") that in 1984 required the
divestiture by AT&T of its 22 Bell operating companies and divided the country
into some 200 Local Access and Transport Areas ("LATAs"). The 22 operating
companies, which were combined into the RBOCs, were given the right to provide
local telephone service, local access service to long distance carriers and
intraLATA toll service (service within LATAs), but were prohibited from
providing interLATA service (service between LATAs). The right to provide
interLATA service was maintained by AT&T and other carriers.
To encourage the development of competition in the long distance
market, the Consent Decree and the FCC required most LECs to provide all
carriers with access to local exchange services that is "equal in type, quality
and price" to that provided to AT&T and with the opportunity to be selected by
customers as their preferred long distance carrier. These so-called "equal
access" and related provisions are intended to prevent preferential treatment of
AT&T. Further market opening, access and non-discrimination provisions were
built into the Telecommunications Act.
Regulatory, legislative, judicial and technological factors have helped
to create the foundation for smaller companies to emerge as competitive
alternatives to AT&T, MCI, and Sprint for long distance telecommunication
services. The FCC requires that AT&T not restrict the resale of its services,
and the Consent Decree, the Telecommunications Act and regulatory proceedings
have ensured that access to LEC networks is, in most cases, available to all
long distance carriers.
Long distance companies that have their own transmission facilities and
switches, such as AT&T, are referred to as facilities-based carriers.
Facilities-based carriers are switch-based carriers, meaning that they have at
least one switch to direct their long distance traffic. Nonfacilities-based
carriers either (i) depend upon facilities-based carriers for switching and
transmission facilities ("switchless resellers") or (ii) install and operate
their own switches but depend on facilities-based carriers for transmission
facilities ("switch-based resellers").
The relationship between resellers and the major long distance carriers
is predicated primarily upon the fact that the pricing strategies and cost
structures of the major long distance carriers have resulted historically in
their charging higher rates to the small to medium business customer. Small to
medium business customers typically are not able to make the volume commitments
necessary to negotiate reduced rates under individualized contracts. By
committing to large volumes of traffic, the reseller is guaranteeing traffic to
the major long distance carrier but the major long distance carrier is relieved
of the administrative burden of qualifying and servicing large numbers of medium
to small accounts. The successful reseller has lower overhead costs and is able
to market efficiently the long distance product, process orders, verify credit
and provide customer service to large numbers of accounts.
REGULATION
The Company's provision of communications services is subject to
government regulation. Federal law regulates interstate and international
telecommunications, while states have jurisdiction over telecommunications that
originate and terminate within the same state. Changes in existing policies or
regulations in any state or by the federal government could
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materially adversely affect the Company's financial condition or results of
operations, particularly if those policies make it more difficult for the
Company to obtain service from AT&T or other long distance companies at
competitive rates, make it more difficult for customers to change carriers or
otherwise increase the cost and regulatory burdens of marketing and providing
service. There can be no assurance that the regulatory authorities in one or
more states or the FCC will not take action having an adverse effect on the
business or financial condition or results of operations of the Company.
Regulatory action by the FCC or the states also could adversely affect the
partitions, or otherwise increase the partitions' cost and regulatory burdens of
marketing and providing long distance services.
The Company is classified by the FCC as a nondominant carrier. After
the recent reclassification of AT&T as nondominant, only the LECs are classified
as dominant carriers among domestic carriers. As a consequence, the FCC
regulates many of the rates, charges, and services of the LECs to a greater
degree than the Company's. Because AT&T is no longer classified as a dominant
carrier, certain pricing restrictions that formerly applied to AT&T have been
eliminated, which could make it easier for AT&T to compete with the Company for
low volume long distance subscribers.
The FCC generally does not exercise direct oversight over charges for
service of nondominant carriers, although it has the statutory power to do so.
Nondominant carriers are required by statute to offer interstate services under
rates, terms, and conditions that are just, reasonable and not unreasonably
discriminatory. The FCC has the jurisdiction to act upon complaints filed by
third parties, or brought on the FCC's own motion, against any common carrier,
including nondominant carriers, for failure to comply with its statutory
obligations. Nondominant carriers have been required to file tariffs listing the
rates, terms and conditions of service, which were filed pursuant to streamlined
tariffing procedures. The FCC also has the authority to impose more stringent
regulatory requirements on the Company and change its regulatory classification
from nondominant to dominant. In the current regulatory atmosphere, the Company
believes, however, that the FCC is unlikely to do so.
The FCC imposes only minimal reporting, accounting and record-keeping
obligations. International nondominant carriers, including the Company, must
maintain international tariffs on file with the FCC. The FCC has issued an order
requiring non-dominant carriers to withdraw their domestic tariffs, but as of
the date hereof, a court has stayed the FCC's order. The Company currently has
two tariffs on file with the FCC. Although the tariffs of nondominant carriers,
and the rates and charges they specify, are subject to FCC review, they are
presumed to be lawful and are seldom contested. The Company is permitted to make
tariff filings on a single day's notice and without cost support to justify
specific rates. IXCs are also subject to a variety of miscellaneous regulations
that, for instance, govern the documentation and verifications necessary to
change a subscriber's long distance carrier, limit the use of 800 numbers for
pay-per-call services, require disclosure of certain information if operator
assisted services are provided and govern interlocking directors and management.
The Telecommunications Act grants explicit authority to the FCC to "forbear"
from regulating any telecommunications services provider in response to a
petition and if the agency determines that enforcement is unnecessary and the
public interest will be served.
At present, the FCC exercises its regulatory authority to set rates
primarily with respect to the rates of dominant carriers, and it has
increasingly relaxed its control in this area. Even when AT&T was classified as
a dominant carrier, the FCC most recently employed a "price cap" system, which
essentially exempted most of AT&T's services, including virtually all of its
commercial and 800 services, from traditional rate of return regulation because
the FCC believes that these services were subject to adequate competition.
Similarly, the FCC is in the process of changing the regulation and pricing of
access charges including the local transport component of access charges (i.e.,
the fee for use of the LEC transmission facilities connecting the LECs' central
offices and the IXC's access points). In addition, the LECs have been afforded a
degree of pricing flexibility in setting interstate access charges where
adequate competition exists. The impact of such repricing and pricing
flexibility on IXCs, such as the Company, cannot be determined at this time.
The Company is subject to varying levels of regulation in the states in
which it is currently authorized to provide intrastate telecommunications
services. The vast majority of the states require the Company to apply for
certification to provide intrastate telecommunications services, or at least to
register or to be found exempt from regulation, before commencing intrastate
service. The vast majority of states also require the Company to file and
maintain detailed tariffs listing its rates for intrastate service. Many states
also impose various reporting requirements and/or require prior approval for
transfers of control of certified carriers, corporate reorganizations,
acquisitions of telecommunications operations, assignments of carrier assets,
including subscriber bases, carrier stock offerings and incurrence by carriers
of significant debt obligations. Certificates of authority can generally be
conditioned, modified, canceled, terminated or revoked by state regulatory
authorities for failure to comply with state law and the rules, regulations and
policies of the state regulatory authorities. Fines and other penalties,
including the return of all monies received for intrastate traffic from
residents of a state, may be imposed for such violations. In certain states,
prior regulatory approval may be required for acquisitions of telecommunications
operations. Currently, the Company is certificated and tariffed to provide
intrastate interLATA service in substantially all states where such
authorization can be obtained.
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The Company's prior direct marketing efforts, the Company's marketing
of its AOL and CompuServe-based services and the marketing efforts of the
Company's partitions require compliance with relevant federal and state
regulations that govern
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direct sales of telecommunications services. FCC rules prohibit switching a
customer from one long distance carrier to another without the customer's
consent and specify how that consent can be obtained and must be verified. Most
states also have consumer protection laws that further define the framework
within which the Company's marketing activities must be conducted. The
constraints of federal and state restrictions could impact the success of the
Company's direct marketing efforts.
Federal and state restrictions on the marketing of telecommunications
services are becoming stricter in the wake of widespread consumer complaints
throughout the industry about "slamming" (the unauthorized conversion of a
customer's preselected telecommunications carrier) and "cramming" (the
unauthorized provision of additional telecommunications services). Section 258
of the Telecommunications Act of 1996 authorized strengthened penalties against
slamming, and the FCC is expected shortly to issue rules implementing Section
258 and overhauling federal rules on the verification of orders for
telecommunications services. Congress is considering additional legislation that
would further increase penalties for slamming and cramming. Several states also
have been active in combating abusive marketing practices through new
legislation and regulation, as well as through enhanced enforcement activities.
In addition, to combat slamming, many local exchange carriers have initiated
"PIC freeze" programs that, once selected by the customer, then require a
customer seeking to change long distance carriers to contact the local carrier
directly in lieu of having the long distance carrier contact the local carrier
on behalf of the customer. While the Company vigorously supports curbs on
abusive marketing practices, such measures, unless carefully designed, can have
the incidental effect of entrenching incumbent carriers and hindering the
emergence of new competitors, such as the Company.
Statutes and regulations designed to protect consumer privacy also may
have the incidental effect of hindering the growth of newer telecommunications
carriers, such as the Company. The FCC recently released rules to implement
Section 222 of the Telecommunications Act of 1996 that severely restrict the use
of "customer proprietary network information" (information that a carrier
obtains about its customers through their use of the carrier's services). These
rules may make it more difficult for the Company to market additional services
(such as local and wireless) to its existing customers if and when the Company
begins to offer such services.
The FCC has announced rules implementing Section 254 of the
Telecommunications Act of 1996 that require the Company and other providers of
telecommunications services to contribute to the universal service fund, which
helps to subsidize the provision of local telecommunications services and other
services to low-income consumers, schools, libraries, health care providers, and
rural and insular areas that are costly to serve. The Company's required
contributions to the universal service fund could increase over time, and some
of the Company's potential competitors (such as providers of Internet telephony)
are not currently, and in the future may not be, required to contribute to the
universal service fund.
To the extent that the Company makes additional telecommunications
service offerings, the Company may encounter additional regulatory constraints.
EMPLOYEES
As of December 31, 1997, the Company employed 235 persons, of whom 5
were engaged in marketing and sales, 179 were engaged in partition and end user
support, and 51 were engaged in systems development, finance, administration and
management. None of the Company's employees is covered by collective bargaining
agreements. The Company considers relations with its employees to be good.
13
<PAGE>
GLOSSARY
ACUS: AT&T College and University Systems, a wholly owned strategic business
unit of AT&T Corp.
AIN: Advanced Intelligent Network.
Consent Decree: A 1984 U.S. Department of Justice decree that, among other
things, ordered AT&T to divest its wholly-owned local Bell operating
subsidiaries.
End users: Customers that utilize long distance telephone services.
Equal Access: Connection provided by a LEC permitting a customer to be
automatically connected to the IXC of the customer's choice when the customer
dials "1."
Facilities-based provider: Long distance service providers who own transmission
facilities.
5ESS-2000: The switching equipment manufactured by AT&T (now Lucent), which the
Company acquired from AT&T (now Lucent).
FCC: Federal Communications Commission.
Inbound "800" Service: A service that bills long distance telephone charges to
the called party.
IXC: Interexchange carrier, a long distance carrier providing services between
local exchanges.
LATA: Local Access and Transport Areas, the approximately 200 geographic areas
defined pursuant to the Consent Decree between which the RBOCs are generally
prohibited from providing long distance service.
LEC: Local Exchange Carrier, a company providing local telephone services.
MEGACOM: An outbound long distance service offering by AT&T that requires
dedicated access.
MEGACOM 800: An inbound 800 service offering provided by AT&T that requires
dedicated access.
MCI: MCI Communications Corporation.
MLCP: AT&T's multi-location calling plan (a discounted long distance program).
Network: An integrated system composed of switching equipment and transmission
facilities designed to provide for the direction, transport and recording of
telecommunications traffic.
Nonfacilities-based provider: Long distance service providers that do not own
transmission facilities.
OBN: One Better Net, the Company's nationwide long distance network.
Partition: An independent long distance and marketing company that contracts
with the Company to purchase or otherwise provide to end users the long distance
services provided by the Company.
Private Line: A full-time leased line directly connecting two points.
Provisioning: The process of initiating a carrier's service to an end user.
PUC: A state regulatory body empowered to establish and enforce rules and
regulations governing public utility companies and others, such as the Company
in many of its state jurisdictions.
RBOC: Regional Bell Operating Company -- Any of seven regional Bell holding
companies that the Consent Decree established to serve as parent companies for
the Bell operating companies.
14
<PAGE>
Readyline: An Inbound 800 service offering provided by AT&T.
SDN: The AT&T Software Defined Network.
Sprint: Sprint Corporation.
Switching Equipment: A computer that directs telecommunication traffic in
accordance with programmed instructions.
Tariff: The schedule of rates and regulations set by communications common
carriers and filed with the appropriate Federal and state regulatory agencies;
the published official list of charges, terms and conditions governing provision
of a specific communication service or facility, which functions in lieu of or
with a contract between the user and the supplier or carrier.
15
<PAGE>
ITEM 2. PROPERTIES
The Company owns the 24,000 square foot facility in New Hope,
Pennsylvania which serves as the Company's headquarters. The Company leases
properties in the cities in which OBN switches have been installed.
With respect to the Company's customer service operations with respect
to the AOL Agreement, the Company owns the 32,000 square foot facility located
in Clearwater, Florida.
With respect to the Company's Symetrics operations, Symetrics'
corporate office and primary engineering and manufacturing facility is a 40,000
square foot building, which it owns, on approximately five acres in Melbourne,
Florida. Symetrics uses 40% of this facility for its own business and leases
and/or offers for lease the balance of the building for terms typically of one
to five years. Rental rates charged by Symetrics are consistent with rates for
similar type buildings in the area. The Company also owns the adjoining property
to the east which consists of a 50,000 square foot building on a five-acre lot.
The Company leases a 14,500 square foot building for $6,360 per month, with 27
months remaining on the term thereof, for the Symetrics commercial contract
manufacturing operations. Symetrics' subsidiary leases a 14,428 square foot
building for approximately $7,500 per month, with 47 months remaining on the
lease.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to certain legal actions arising in the ordinary
course of business. The Company believes that the ultimate outcome of these
actions will not result in any liability that would have a material adverse
effect on the Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting of Stockholders was held on
December 1, 1997 ("Annual Meeting");
(b) Not applicable;
(c) At the Annual Meeting, the stockholders of the Company
considered and approved the following proposals:
(i) At the Annual Meeting, the stockholders approved a
proposal to amend the Company's Certificate of
Incorporation to increase the number of shares of
Common Stock that may be issued by the Company from
100,000,000 to 300,000,000. This proposal received
51,571,254 votes in favor, 4,483,173 votes opposed
such proposal and 27,485 votes abstained from such
matter.
(ii) Election of Directors. The following sets forth the
nominees who were elected directors of the Company
for the term expiring in the year indicated as well
as the number of votes cast for, against or withheld:
<TABLE>
<CAPTION>
VOTES
-----
Term (year expires) Name For Against Withheld
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000 Gary W. McCulla 55,981,895 0 100,017
2000 George P. Farley 55,981,952 0 99,960
1999 Harold First 55,981,952 0 99,960
</TABLE>
(iii) At the Annual Meeting the stockholders approved the
appointment of BDO Seidman LLP as independent
certified public accounts of the Company. The
appointment received 56,047,874 votes in favor, 6,180
votes in opposition and 27,858 votes abstained from
such matter.
16
<PAGE>
(iv) At the Annual Meeting the stockholders approved a
proposal to approve the grant of an option to
purchase 800,000 shares of the Company's Common Stock
to Edward B. Meyercord, III. This proposal received
55,776,343 votes in favor, 273,819 votes in
opposition and 31,750 votes abstained from such
matter.
17
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- --------------------------------------------------------------
<S> <C> <C>
Daniel Borislow 36 Chairman of the Board, Chief Executive Officer and Director
Gary W. McCulla 38 President and Director of Sales and Marketing and Director
Emanuel J. DeMaio 38 Chief Operations Officer and Director
George P. Farley 59 Chief Financial Officer, Treasurer and Director
Edward B. Meyercord, III 32 Executive Vice President, Marketing and Corporate Development
Mary Kennon 38 Director of Customer Care and Human Resources
Aloysius T. Lawn, IV 39 General Counsel and Secretary
Kevin R. Kelly 33 Controller
</TABLE>
DANIEL BORISLOW. Mr. Borislow founded the Company and has served as a
director and as Chief Executive Officer of the Company since its inception in
1989. Prior to founding the Company, Mr. Borislow formed and managed a cable
construction company.
GARY W. MCCULLA. Mr. McCulla currently serves as President and Director
of Sales and Marketing. In 1991, Mr. McCulla founded GNC and was its President.
Until March 1994, GNC was a privately-held independent marketing company and one
of the Company's partitions. At that time, the Company acquired certain assets
of GNC.
EMANUEL J. DEMAIO. Mr. DeMaio joined the Company in February 1992 and
currently serves as Chief Operations Officer. Prior to joining the Company, from
1981 through 1992, Mr. DeMaio held various technical and managerial positions
with AT&T.
GEORGE P. FARLEY. Mr. Farley became Chief Financial Officer and
Treasurer of Tel-Save effective October 29, 1997. Mr. Farley is formerly Group
Vice President of Finance/Chief Financial Officer of Twin County Grocers, Inc.
("Twin County"), a food distribution company. Prior to joining Twin County in
September 1995, Mr. Farley was a partner of BDO Seidman, LLP, where he had
served as a partner since 1974.
EDWARD B. MEYERCORD, III. Mr. Meyercord joined the Company in September
1996 and currently serves as Executive Vice President, Marketing and Corporate
Development. From 1993 until joining the Company, Mr. Meyercord worked in the
corporate finance department of Salomon Brothers, where he held various
positions, the most recent of which was Vice President. Prior to joining Salomon
Brothers, Mr. Meyercord worked in the corporate finance department at Paine
Webber Incorporated.
MARY KENNON. Ms. Kennon joined the Company in October 1994 and
currently serves as Director of Customer Care and Human Resources. Prior to
joining the Company, from 1984 through 1994, Ms. Kennon held various managerial
positions with AT&T.
ALOYSIUS T. LAWN, IV. Mr. Lawn joined the Company in January 1996 and
currently serves as General Counsel and Secretary of the Company. Prior to
joining the Company, from 1985 through 1995, Mr. Lawn was an attorney in private
practice.
KEVIN R. KELLY. Mr. Kelly joined the Company in April 1994 and
currently serves as Controller. From 1987 to 1994, Mr. Kelly held various
managerial positions with a major public accounting firm. Mr. Kelly is a
certified public accountant.
18
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, $.01 par value per share ("Common Stock"),
is traded on the Nasdaq National Market, and high and low quotations listed
below are actual sales prices as quoted in the Nasdaq National Market under the
symbol "TALK." The price per share in the following table sets forth the high
and low price in the Nasdaq National Market for the quarter indicated as
reported by Bloomberg L.P.:
<TABLE>
<CAPTION>
Price Range of Common Stock
High Low
---- ---
<S> <C> <C>
1995
First Quarter (from September 20, 1995) $ 5 21/64 $ 4 27/64
1996
First Quarter 8 7/16 4 5/64
Second Quarter 11 7/8 8 1/4
Third Quarter 14 3/4 9 5/8
Fourth Quarter 14 1/2 10 3/8
1997
First Quarter 20 1/2 12 5/8
Second Quarter 17 1/4 13 9/16
Third Quarter 24 1/16 14 1/4
Fourth Quarter 26 1/16 16 5/16
1998
First Quarter (through March 30, 1998) 30 19 1/4
</TABLE>
As of March, 1998, there were approximately 299 record holders of
Common Stock.
The Company has never declared or paid any cash dividends on its
capital stock. The Company currently intends to retain any future earnings to
finance the growth and development of its business and, therefore, does not
anticipate paying any cash dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
On November 26, 1997, the Company acquired all of the outstanding
shares of Compco for $15,000,000, comprised of a cash payment of $7,500,000 and
the issuance to Compco's stockholders of 339,982 shares of the Company's Common
Stock. The Company believes that such sale of stock was exempt from registration
under Section 4(2) under the Securities Act.
On December 10, 1997, the Company sold $200,000,000 aggregate principal
amount of 5% Convertible Subordinated Notes due 2004 (the "5% Notes") to Smith
Barney Inc., Deutsche Morgan Grenfell Inc. and UBS Securities LLC, who acted as
Initial Purchasers in an offering relying on the exemption in ss. 4(2) of the
Securities Act of 1933, as amended. Proceeds to the Company were $195,000,000.
The 5% Notes are convertible, at the option of the holder thereof, at any time
after 90 days following the date of issuance thereof and prior to maturity, into
shares of Common Stock at a conversion price of $25.47, subject to adjustment in
certain events.
19
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data should be read in conjunction
with, and are qualified in their entirety by, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Income Data:
Sales $304,768 $232,424 $180,102 $82,835 $31,940
Cost of sales 355,169 200,597 156,121 70,104 26,715
Gross profit (loss) (50,401) 31,827 23,981 12,731 5,225
Selling, general and administrative
expenses 34,650 10,039 6,280 3,442 2,060
Operating income (loss) (85,051) 21,788 17,701 9,289 3,165
Investment and other income, net 50,715 10,585 331 66 108
Income (loss) before income taxes (34,336) 32,373 18,032 9,355 3,273
Provision (benefit) for income taxes(1) (13,391) 12,205 7,213 3,742 1,309
Net income (loss) (1) $(20,945) $ 20,168 $ 10,819 $ 5,613 $ 1,964
Net income (loss) per share - Basic (1) $ (0.33) $ 0.38 $ 0.34 $ 0.20 $ 0.07
Weighted average common shares
outstandin- Basic 64,168 52,650 31,422 28,650 28,650
Net income (loss) per share - Diluted(1) $ (0.33) $ 0.35 $ 0.32 $ 0.18 $ 0.07
Weighted average common and common
equivalent shares outstanding -Diluted 64,168 57,002 33,605 30,663 29,452
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheets Data:
Working capital $634,788 $175,597 $38,171 $12,265 $4,502
Total assets 814,891 257,008 71,388 21,435 6,694
Convertible debt 500,000 -- -- -- --
Total stockholders' equity 222,828 230,720 41,314 14,042 4,687
</TABLE>
- ----------
(1) For the years and period ended December 31, 1993, 1994 and September 19,
1995, the Predecessor Corporation elected to report as an S corporation
for federal and state income tax purposes. Accordingly, the Predecessor
Corporation's stockholders included their respective shares of the
Company's taxable income in their individual income tax returns. The pro
forma income taxes reflect the taxes that would have been accrued if the
Company had elected to report as a C corporation. See Note 12 to the
Consolidated Financial Statements.
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements included elsewhere in this Form 10-K.
OVERVIEW
In 1997, the Company raised approximately $500 million in connection
with two private placements of convertible notes. In addition, as part of its
efforts to expand its business into the online market, the Company entered into
the AOL Agreement, under which the Company provides long distance
telecommunications services to be marketed by AOL. The Company's results of
operations for 1997 were negatively impacted by the pre-tax charges of $60.7
million primarily related to the AOL Agreement, $30.0 million primarily related
to the restructuring of its sales and marketing efforts and $11.5 million
primarily as a result of the Company's change in accounting for customer
acquisition costs. These charges were offset by $32 .1 million of other income,
net of related costs, associated with the break-up of a proposed merger between
the Company and Shared Technologies Fairchild, Inc. ("STF").
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
financial data as a percentage of sales:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of sales 116.5 86.3 86.7
----- ----- -----
Gross profit (loss) (16.5) 13.7 13.3
Selling, general and administrative expenses 11.4 4.3 3.5
----- ----- -----
Operating income (loss) (27.9) 9.4 9.8
Investment and other income, net 16.6 4.5 0.2
----- ----- -----
Income (loss) before income taxes (11.3) 13.9 10.0
Provision (benefit) for income taxes (4.4) 5.2 4.0(A)
----- ----- -----
Net income (loss) (6.9)% 8.7% 6.0%
===== ===== =====
</TABLE>
- ----------
(A) Pro forma tax provisions have been calculated as if the Company's results
of operations were taxable as a C corporation (the Company's current tax
status) for the year ended December 31, 1995. Prior to September 20, 1995,
the Company was an S Corporation with all earnings taxed directly to its
shareholders.
21
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Sales. Sales increased by 31.1% to $304.8 million in 1997 from $232.4
million in 1996. The increase in sales resulted primarily from the marketing of
the Company's OBN services and the addition of new partitions. One partition,
Group Long Distance Inc., accounted for approximately 13% of the Company's sales
in 1997.
Although the Company expects sales to increase by virtue of the AOL
Agreement and, based on its expertise to date, to have attracted approximately
1,000,000 lines to its service by June 30, 1998 as a result of its marketing
campaign under the AOL Agreement in view of the intense competition in this
industry, there can be no assurance that the Company will increase sales on a
quarter-to-quarter or year-to-year basis.
Cost of Sales. The Company's cost of sales increased by 77.1% to $355.2
million in 1997 from $200.6 million in 1996 as a result of increased sales and
charges of $11.5 million primarily as a result of the Company's change in its
accounting for customer acquisition costs (Note 3), $60.7 million primarily
related to the AOL Agreement (Note 4) and $30.0 million primarily related to the
restructuring of its sales and marketing efforts (Note 3).
Prior to 1997, network usage costs consisted solely of "bundled"
charges from AT&T. Beginning in 1997, the Company also incurred "unbundled"
charges, including local access fees, associated with the operation of OBN. Both
"bundled" and "unbundled" charges are directly related to calls made by the
Company's end users.
During 1997, the Company acquired most of the services purchased from
AT&T for resale or use in OBN under AT&T Contract Tariff No. 5776, which was
entered into in late 1996 and provides rates that are more favorable than under
previous tariffs. The Company has the opportunity to terminate this AT&T tariff
without termination liability effective as of April 30, 1998 and currently
expects it will do so since it believes that it can replace these services at
more favorable rates. While the Company is currently negotiating a new master
services contract with AT&T, which would replace all of the Company's existing
AT&T tariffs with what the Company expects would be lower rate tariffs, there
can be no assurance that such agreement can be reached. If the Company
terminates Contract Tariff No. 5776 and is unsuccessful in reaching a more
favorable agreement with AT&T, it would be required to pay more to obtain these
services from AT&T or negotiate an agreement with another carrier, either
another large customer of AT&T or another facilities based carrier, which may be
at rates higher or lower than the Company is paying today.
OBN and the operation of the Company's own switches and network have
to date and will in the future require the Company to incur systems and
equipment maintenance, lease and network personnel expenses significantly above
the levels historically experienced by the Company as a switchless reseller of
AT&T services. However, these per call costs, in combination with "unbundled"
charges paid to LECs and AT&T, were, in 1997, and are expected in the future, to
be less than the per call cost currently incurred by the Company as a switchless
reseller paying "bundled" charges to AT&T.
The Company made an initial payment of $100 million to AOL at the
signing of the AOL Agreement and issued to AOL at signing two warrants to
purchase shares of the Company's Common Stock at a premium over the market value
of such stock on the issuance date (See Note 4). Of the prepaid AOL marketing
costs, approximately $57.0 million was charged to expense in 1997. The remaining
portion of the prepaid AOL marketing costs (approximately $63.6 million at
December 31, 1997) will be recognized ratably over the balance of the term of
the AOL Agreement, the initial term of which expires on June 30, 2000, as
advertising services are received. The AOL warrant for up to 7 million shares
will be valued and charged to expense as and when subscribers to the Company's
services under the AOL Agreement sign-up and the shares under such warrant vest.
The amount of such charges, which could be significant, will be based on the
extent to which such AOL warrants vest and the market prices of the Company's
Common Stock at the time of vesting and therefore such charges are not currently
determinable. Generally, the higher the market price of the Company's Common
Stock at the time of vesting, the larger the amount of the charge will be. The
Company also anticipates that it may incur up to $100 million in additional AOL
marketing expenses in 1998 for such marketing efforts as direct mail, media
campaigns and special pricing and other promotions.
22
<PAGE>
The Company has traditionally operated primarily as a wholesale
reseller of long distance services. With the introduction of the AOL Agreement,
the Company has begun to focus on a more retail-oriented business plan. As
discussed above, the Company has incurred, and expects to continue to incur,
significant upfront expenses for marketing under the AOL Agreement, the revenues
from which may not be realized for some period of time after the expenditures.
In addition, approximately 15-20% of the orders under the AOL Agreement have
required special attention by the Company because of PIC freezes imposed by the
regional Bell operating companies. See "ITEM 1--BUSINESS--REGULATIONS." As the
Company focuses more on the retail market in 1998, continuing its activities
under the AOL and CompuServe Agreements and venturing into other
telecommunications services such as dial-around and local service, with the
increased development and promotional expenses, such as special pricing and
other promotion and retention devices, entailed in retail marketing and the
greater time period between expenditures and resulting revenues, the Company
anticipates that its 1998 revenues and income could be adversely affected.
Gross Margin. Gross margin decreased to (16.5)% in 1997 from 13.7% in
1996. The decrease in gross margin was primarily due to the charges discussed
above. Absent these charges, gross margin increased to 17.0% in 1997 from 13.7%
in 1996, due to lower network costs for OBN services which were lower on a per
call basis when compared to those paid to AT&T. Price competition continues to
intensify for the Company's products and this trend can be expected to continue
to put downward pressure on gross margins.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by 245.2% to $34.7 million in 1997 from $10.0
million in 1996. The increase in selling, general and administrative expenses
was due primarily to compensation expenses related to the issuance of options to
and the purchase of shares of Company Common Stock by executive officers of the
Company in connection with the commencement of their employment with the
Company, the costs associated with hiring additional personnel to support the
Company's continuing growth, the development costs associated with AOL and
increased fees for professional services.
The Company expects selling, general and administrative expenses to
continue to increase as it operates and maintains OBN and as it markets the AOL
service offering. The additional selling, general and administrative expenses
may be offset by the increased sales and gross profit gained as a result of the
implementation of the components of the Company's strategic plan, but increased
costs may have an adverse impact on results of operations and there can be no
assurances of such increased sales and profits.
The Company granted options to purchase 810,000 shares of Company
Common Stock at an exercise price of $17.50 per share to an executive officer
and two outside directors. The options granted are subject to the approval of
the stockholders and are being submitted for approval at the Company's
stockholder meeting scheduled in May of 1998. Approval of the option grants will
result in compensation expense equal to the difference between the exercise
price and the market value of the Company Common Stock on the date of such
approval.
Other Income. Other income was $50.7 million in 1997 versus $10.6
million in 1996. Other income consists primarily of fees for customer service
and support for the marketing operations of the Company's carrier partitions in
1997 of $8.1 million and investment income earned by the Company. In 1997, other
income also includes $32.1 million, net of related costs, associated with the
break-up of a proposed merger between the Company and STF.
Provision for income taxes. The Company's effective tax rate increased
to 39.0% in 1997 from the effective tax rate of 37.7% in 1996 due to an
anticipated higher effective state tax rate in 1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Sales. Sales increased by 29.1% to $232.4 million in 1996 from $180.1
million in 1995. The increase in sales related primarily to the continued
expansion of the Company's distribution network of partitions, as well as
increases in the number of orders submitted by the Company's existing
partitions. One partition, The Furst Group, Inc., accounted for approximately
11% of the Company's sales in 1996 versus zero in 1995. In addition, significant
partition marketing efforts focused on inbound 800 service resulted in sales of
$75.3 million for the year ended December 31, 1996 versus $55.6 million for the
year ended December 31, 1995.
Cost of Sales. The Company's cost of sales, consisting primarily of
network usage charges for AT&T long distance services, increased by 28.5% to
$200.6 million in 1996 from $156.1 million in 1995 and is directly related to
the 29.1% increase in sales.
Gross Margin. Gross margin, the gross profit as a percentage of sales,
increased to 13.7% for the year ended December 31, 1996 from 13.3% for the year
ended December 31, 1995. The increase in gross margin was due to greater
discounts obtained from AT&T on network usage partially offset by direct
marketing expenses and higher volume discounts granted to certain partitions.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by 59.9% to $10.0 million in 1996 from $6.3
million in 1995. The increase in selling, general and administrative expenses
was due primarily to the costs associated with hiring additional management
personnel to support the Company's continuing growth and increased fees for
professional services.
Other Income. Other income was $10.6 million in 1996 versus $331,000 in
1995. Other income for the year ended December 31, 1996 includes two
nonrecurring gains: a $1.4 million gain on the sale of securities of another
long distance
23
<PAGE>
company and a $1.5 million gain on the sale of short term U.S. Treasury
securities. The remainder of other income consists primarily of investment
income earned on the Company's cash balances resulting primarily from the
unapplied proceeds of the Company's public offering in April and May 1996 and
excess cash from operations.
Provision for income taxes. The Company's effective tax rate declined
to 37.7% in 1996 from the pro forma effective tax rate of 40.0% in 1995 due to
the lower effective state tax rate in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has since September 1995 raised capital primarily through
public and private distributions of its securities. In fall 1995 and spring
1996, the Company consummated public offerings of shares of the Company's Common
Stock and received net proceeds of $42.8 million and $139.1 million,
respectively.
In September 1997, the Company privately sold $300 million of 4 1/2%
Convertible Subordinated Notes which mature on September 15, 2002 (the "2002
Convertible Notes"). Interest on the 2002 Convertible Notes is due and payable
semiannually on March 15 and September 15 of each year. The 2002 Convertible
Notes are convertible, at the option of the holder thereof, at any time after
December 9, 1997 and prior to maturity, unless previously redeemed, into shares
of the Company's Common Stock at a conversion price of $24.61875 per share. The
2002 Convertible Notes are redeemable, in whole or in part, at the Company's
option, at any time on or after September 15, 2000 at 101.80% of par prior to
September 14, 2001 and 100.90% of par thereafter.
In December 1997, the Company privately sold $200 million of 5%
Convertible Subordinated Notes which mature on December 15, 2004 (the "2004
Convertible Notes"). Interest on the 2004 Convertible Notes is due and payable
semiannually on June 15 and December 15 of each year. The 2004 Convertible Notes
are convertible, at the option of the holder thereof, at any time after March 5,
1998 and prior to maturity, unless previously redeemed, into shares of the
Company's Common Stock at a conversion price of $25.47 per share. The 2004
Convertible Notes are redeemable, in whole or in part at the Company's option,
at any time on or after December 15, 2002 at 101.43% of par prior to December
14, 2003 and 100.71% of par thereafter.
During 1996, certain options and warrants to purchase shares of the
Company's Common Stock were exercised and the Company repurchased approximately
428,000 shares, which are held as treasury shares, yielding to the Company net
proceeds of $7.8 million. During 1997, certain options and warrants to purchase
shares of the Company's Common Stock were exercised and the Company repurchased
certain Common Stock Warrants, yielding to the Company net proceeds of $16.9
million. In addition, during 1997 the Company repurchased approximately 3.5
million shares of the Company's Common Stock, which are held as treasury shares,
for approximately $72.0 million. The tax benefit realized from the options and
warrants was approximately $21.3 million in 1996 and $25.7 million in 1997 and
is reflected as an adjustment to additional paid-in capital.
The Company's working capital was $634.8 million and $175.6 million at
December 31, 1997 and December 31, 1996, respectively. The significant increase
in working capital is primarily a result of the sale of the 2002 and 2004
Convertibles Notes, discussed above. In the first quarter of 1998, the Company
invested $300 million in a tax exempt bond fund, $245 million in government bond
funds and incurred $155 million of margin account indebtedness in connection
with these investments.
While the Investment Company Act of 1940, as amended (the "Investment
Company Act"), principally regulates vehicles for pooled investments in
securities, such as mutual funds, it also may be deemed to be applicable to
companies that are not organized for the purpose of investing or trading in
securities but nonetheless have more than a specified percentage of their assets
in investment securities. The Company is engaged in the telecommunications
business, and the availability of cash and liquid securities is important to the
Company's ability to take advantage of opportunities to acquire other
telecommunications businesses, assets and technologies from time to time. The
Company believes, therefore, that its activities do not and will not subject the
Company to regulation under the Investment Company Act. However, if the Company
were to be deemed to be an investment company within the meaning of the
Investment Company Act, the Company would become subject to certain restrictions
relating to the Company's activities, including, but not limited to,
restrictions on the conduct of its business, the nature of its investments, the
issuance of securities and transactions with affiliates. Therefore, the
characterization of the Company as an investment company would have a material
adverse effect on the Company. In the Indenture governing the 2002 Convertible
Notes, the Company has covenanted that it will not become an investment company
within the meaning of the Investment Company Act and that it will take all such
actions as are necessary in order to continue not to be deemed an investment
company.
In light of the Company's cash position, the Company recently notified
its bank of its intention to terminate its line of credit.
The Company invested $28.9 million in capital equipment during 1997, of
which $17.1 million was used for the acquisition of capital equipment and
installation costs relating to the deployment of OBN and the remainder of which
was primarily used for the acquisition of computer equipment utilized in
connection with the offering of the Company's services on AOL. To date, through
December 31, 1997, the Company has invested $41.9 million for the acquisition of
capital equipment and installation costs relating to the deployment of OBN.
The Company generally does not have a significant concentration of
credit risk with respect to accounts receivable due to the large number of
partitions and end users comprising the Company's customer base and their
dispersion across different geographic regions. The Company maintains reserves
for potential credit losses and, to date, such losses have been within the
Company's expectations.
The Company has announced that its Board has authorized the repurchase
up to eight million shares of its Common Stock. It is anticipated that the
repurchased shares will be held in treasury for issuance upon exercise of
outstanding options and warrants and upon conversion, if any, of convertible
notes, and for other general corporate purposes. As noted above in connection
with the AOL Agreement, the Company issued two warrants to AOL to purchase
shares of the Company's Common Stock, including a warrant to purchase 5 million
shares at an exercise price of $15.50 per share. AOL is exercising this warrant
as to 1 million shares of Company Common Stock on a net issuance basis and the
Company is repurchasing from AOL all of the 380,624 shares issued upon such net
issuance exercise for $23 1/4 per share. In connection with such purchases, AOL
agreed not to dispose of any shares of the Company's Common Stock acquired by
AOL under any of these warrants until March 30, 1999.
24
<PAGE>
The Company believes that its current cash position, marketable
securities and the cash flow expected to be generated from operations, will be
sufficient to fund its capital expenditures, working capital and other cash
requirements for at least the next twelve months.
YEAR 2000
The "Year 2000" issue refers to the potential harm from computer
programs that identify dates by the last two digits of the year rather than
using the full four digits. As such, dates after January 1, 2000 could be
misidentified, and such programs could fail. The Company has examined its
computer-based systems and believes that the "Year 2000" problem is not present
in such systems. However, the Company is dependent upon computer systems
operated by third parties, such as LECs, AT&T, AOL and other vendors. If those
systems were to malfunction due to the "Year 2000" problem, the Company's
services could fail, as well. Such failures could have a material adverse effect
upon the Company's business, results of operations and financial condition. The
Company is inquiring of such third parties to determine the effect, if any, of
the "Year 2000" problem on the systems upon which the Company is dependent, and
to obtain appropriate assurances that no such problem exists.
* * * * *
Certain of the statements contained herein may be considered
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such
statements are identified by the use of forward-looking words or phrases,
including, but not limited to, "estimates," "expects," "expected,"
"anticipates," and "anticipated." These forward-looking statements are based on
the Company's current expectations. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, there
can be no assurance that such expectations will prove to have been correct.
Forward-looking statements involve risks and uncertainties and the Company's
actual results could differ materially from the Company's expectations.
Important factors that could cause such actual results to differ materially
include, among others, adverse developments in the Company's relationship with
AT&T or AOL, increased price competition for long distance services, failure of
the marketing of long distance services under the AOL Agreement, attrition in
the number of end users, and changes in government policy, regulation and
enforcement. The Company undertakes no obligation to update its forward-looking
statements.
25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Certified Public Accountants 27
Consolidated balance sheets as of December 31, 1997 and 1996 28
Consolidated statements of operations for the years ended December 31, 1997, 1996, and 1995 29
Consolidated statements of stockholders' equity for the years ended December 31, 1997, 1996 and 1995 30
Consolidated statements of cash flows for the years ended December 31, 1997, 1996 and 1995 31
Notes to consolidated financial statements 32
</TABLE>
26
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
and Stockholders of Tel-Save Holdings, Inc.
We have audited the accompanying consolidated balance sheets of
Tel-Save Holdings, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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 Tel-Save
Holdings, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
New York, New York
February 5, 1998
27
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1997 1996
---- ----
ASSETS
<S> <C> <C>
CURRENT:
Cash and cash equivalents $316,730 $ 8,023
Marketable securities 212,269 149,237
Accounts receivable, trade net of allowance for uncollectible
accounts of $2,419 and $987, respectively 44,587 19,971
Advances to partitions and note receivables 26,110 13,410
Due from broker 21,087 867
Prepaid AOL marketing costs - current 30,857 --
Deferred taxes - current 30,916 --
Prepaid expenses and other current assets 8,495 10,377
-------- --------
Total current assets 691,051 201,885
Property and equipment, net 55,835 30,097
Intangibles, net 10,590 21,102
Prepaid AOL marketing costs 32,722 --
Other assets 24,693 3,924
-------- --------
Total assets $814,891 $257,008
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Accounts payable and accrued expenses:
Trade and other $ 16,858 $ 19,404
Partitions 7,740 4,398
Interest and other 10,578 1,619
Securities sold short 21,087 867
--------- ---------
Total current liabilities 56,263 26,288
Convertible debt 500,000 --
Deferred revenue 35,800 --
- ---------------- --------- ---------
Total liabilities 592,063 26,288
--------- ---------
Commitments and Contingencies
Stockholders' equity
Preferred stock, $.01 par value, 5,000,000 shares authorized;
no shares outstanding -- --
Common stock - $.01 par value, 300,000,000 shares authorized;
67,249,635 and 62,237,998 issued, respectively 672 622
Additional paid-in capital 291,952 210,616
Retained earnings 3,097 24,042
Treasury stock (72,893) (4,560)
-------- --------
Total stockholders' equity 222,828 230,720
-------- --------
Total liabilities and stockholders' equity $814,891 $257,008
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Sales $304,768 $232,424 $180,102
Cost of sales 355,169 200,597 156,121
-------- -------- --------
Gross profit (loss) (50,401) 31,827 23,981
Selling, general and administrative expenses 34,650 10,039 6,280
-------- -------- --------
Operating income (loss) (85,051) 21,788 17,701
Investment and other income, net 50,715 10,585 331
-------- -------- --------
Income (loss) before provision for income taxes (34,336) 32,373 18,032
Provision (benefit) for income taxes (13,391) 12,205 8,997
-------- -------- --------
Net income (loss) $(20,945) $ 20,168 $ 9,035
======== ======== ========
Net income (loss) per share - Basic $ (.33) $ .38
======== ========
Weighted average common shares outstanding - Basic 64,168 52,650
======== ========
Net income (loss) per share - Diluted $ (.33) $ .35
======== ========
Weighted average common and common equivalent shares 64,168 57,002
========= ========
outstanding - Diluted
Pro forma:
Income before provision for income taxes $ 18,032
Pro forma provision for income taxes 7,213
--------
Pro forma net income $ 10,819
========
Pro forma net income per share - Basic $ .34
========
Weighted average common share outstanding - Basic 31,422
========
Pro forma net income per share - Diluted $ .32
========
Weighted average common and common equivalent shares 33,605
========
outstanding - Diluted
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
-------------------------- PAID-IN RETAINED --------------------------
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT TOTAL
----------- ----------- ------------- ----------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 9,550 $ 95 $ -- $ 13,947 -- $ -- $ 14,042
Net income -- -- -- 9,035 -- -- 9,035
Cash distributions -- -- -- (13,200) -- -- (13,200)
Stock redemption -- -- -- (11,400) -- -- (11,400)
Reclassification of S
Corporation deficit -- -- (5,492) 5,492 -- -- --
Sale of common stock 3,450 35 42,802 -- -- -- 42,837
Three-for-two stock
split 6,500 65 (65) -- -- --
--------- ------ --------- -------- ----- -------- ---------
Balance, December 31,
1995 19,500 195 37,245 3,874 -- -- 41,314
Net income -- -- -- 20,168 -- -- 20,168
Issuance of warrants
to partitions . -- -- 1,077 -- -- -- 1,077
Sale of common stock 8,534 85 138,984 -- -- -- 139,069
Exercise of common
stock options 1,079 11 4,927 -- -- -- 4,938
Exercise of
warrants 2,006 20 7,383 -- -- -- 7,403
Income tax benefit
related to
exercise of common -- -- 21,311 -- -- -- 21,311
stock options and
warrants
Acquisition of
treasury stock -- -- -- -- (428) (4,560) (4,560)
Two-for-one stock
split 31,119 311 (311) -- -- -- --
-------- --------- ---------- -------- ----- -------- --------
Balance, December 31, 62,238 622 210,616 24,042 (428) (4,560) 230,720
1996
Net loss -- -- -- (20,945) -- -- (20,945)
Issuance of warrants
to AOL -- -- 21,200 -- -- -- 21,200
Issuance of common
stock for acquired business 141 1 2,217 -- -- -- 2,218
Exercise of common
stock warrants 2,662 27 11,977 -- -- -- 12,004
Exercise of common
stock options 2,209 22 9,318 -- -- -- 9,340
Purchase of common
stock warrants -- -- (4,400) -- -- -- (4,400)
Issuance of common
stock options for
compensation -- -- 13,372 -- -- -- 13,372
Acquisition of -- -- -- -- (3,520) (71,959) (71,959)
treasury stock
Issuance of treasury
stock for acquired business -- -- 1,999 -- 340 3,626 5,625
Income tax benefit
related to
exercise of common
stock options and
warrants -- -- 25,653 -- -- -- 25,653
-------- -------- --------- -------- ------- --------- ---------
Balance, December 31,
1997 67,250 $672 $291,952 $ 3,097 (3,608) $(72,893) $222,828
======== ========= ========= ======== ======= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (20,945) $ 20,168 $ 9,035
Adjustment to reconcile net income to net cash
provided by operating activities:
Unrealized loss on securities 1,865 179 234
Provision for bad debts 1,579 38 (28)
Depreciation and amortization 5,429 2,462 1,287
Charge for customer acquisition costs 11,550 -- --
Write-off of intangibles 23,032 -- --
Compensation charges 13,372 -- --
AOL marketing costs 58,185 -- --
Deferred credits -- (280) --
Income tax benefit related to exercise of options
and warrants 25,653 21,311 --
(Increase) decrease in:
Accounts receivable, trade (26,048) (1,065) (2,996)
Advances to partitions and note receivables (12,700) (20,797) (1,700)
Prepaid AOL marketing costs (100,564)
Prepaid expenses and other current assets (38,259) (10,183) 1,400
Other assets (20,769) (3,924) --
Increase (decrease) in:
Accounts and partition payables and accrued
expenses 9,608 7,978 12,047
Deferred revenue 35,800 -- --
Income taxes payable -- (5,184) 5,184
--------- ------- --------
Net cash (used in) provided by operating
activities (33,212) 10,703 24,463
--------- ------- --------
Cash flows from investing activities:
Acquisition of intangibles (9,293) (9,800) (1,057)
Capital expenditures, net (28,876) (27,679) (2,330)
Securities sold short 17,700 (411) 866
Due from broker (20,220) 233 (1,100)
Loans to stockholder -- (3,034) (2,075)
Repayment of stockholder loans -- 5,109 --
Purchase of marketable securities (62,377) (149,238) --
--------- -------- --------
Net cash used in investing activities (103,066) (184,820) (5,696)
--------- -------- --------
Cash flows from financing activities:
Proceeds from sale of convertible subordinated notes 500,000 -- --
Payments to related parties -- -- (1,725)
Payment of note payable to stockholder -- (5,921) (979)
Proceeds from sale of common stock -- 139,069 42,837
Proceeds from exercise of options and warrants 21,344 12,341 --
Purchase of common stock warrants (4,400) -- --
Acquisition of treasury stock (71,959) (4,560) --
Distributions to stockholders -- -- (13,200)
Stock redemption -- -- (4,500)
--------- --------- --------
Net cash provided by financing activities 444,985 140,929 22,433
--------- --------- --------
Net increase (decrease) in cash and cash equivalents 308,707 (33,188) 41,200
Cash and cash equivalents, at beginning of period 8,023 41,211 11
--------- ---------- --------
Cash and cash equivalents, at end of period $316,730 $ 8,023 $ 41,211
========= ========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES
(a) Business
Tel-Save Holdings, Inc. (the "Company"), which is incorporated in
Delaware, provides long distance services to small and medium-sized businesses
located throughout the United States. The Company's long distance service
offerings include outbound service, inbound toll-free 800 service and dedicated
private line services for data.
(b) Reorganization
On September 21, 1995, the Company consummated its initial public
offering ("IPO") (Note 10(b)). The shares of Tel-Save, Inc., a Pennsylvania
corporation (the "Predecessor Corporation"), owned by the two founding
stockholders were contributed to the Company as of the date of the IPO. The
majority stockholder exchanged all of his shares of the Predecessor Corporation
for 21,060,000 shares of the common stock of the Company plus loans of up to
$5,000,000. The majority stockholder repaid his outstanding indebtedness,
including interest, using a portion of his proceeds from the sale of 1,500,000
shares of common stock in connection with the Company's public offering in April
1996 (Note 10(a)).
The minority stockholder exchanged all his shares of the Predecessor
Corporation for 7,590,000 shares of the common stock of the Company, $4,500,000
in cash plus a note (the "Cash Flow Note") in the original principal amount of
$6,900,000 bearing interest at 10% per annum which was guaranteed by the
majority stockholder. The payment and the issuance of the Cash Flow Note to the
minority stockholder are accounted for as a distribution of capital. In January
1996, the Company paid the remaining balance of $5,921,000 due under the Cash
Flow Note. The transactions described above are collectively referred to as the
"Reorganization."
(c) Basis of financial statements presentation
The consolidated financial statements include the accounts of Tel-Save
Holdings, Inc. and its wholly-owned subsidiaries and have been prepared as if
the entities had operated as a single consolidated group since their respective
dates of incorporation. All intercompany balances and transactions have been
eliminated.
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
(d) Recognition of revenue
The Company recognizes revenue upon completion of telephone calls by
end users. Allowances are provided for estimated uncollectible usage.
(e) Cash and cash equivalents
The Company considers all temporary cash investments purchased with a
maturity of three months or less to be cash equivalents.
(f) Marketable securities
The Company buys and holds securities principally for the purpose of
selling them in the near term and therefore, they are classified as trading
securities and carried at market. Unrealized holding gains and losses
(determined by specific identification) on investments classified as trading
securities are included in earnings.
(g) Advances to partitions and note receivables
The Company makes advances to partitions to support their marketing
activities. The advances are secured by partition assets, including contracts
with end users and collections theron.
(h) Property and equipment and depreciation
Property and equipment are recorded at cost. Depreciation and
amortization is calculated using the straight-line method over the estimated
useful lives of the assets, as follows:
Buildings and building improvement 39 years
Switching equipment 15 years
Equipment, vehicles and other 5-7 years
32
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(i) Intangibles and amortization
Intangibles include the costs to acquire billing bases of customer
accounts, long-distance service contract pricing plans and goodwill arising from
business acquisitions. Amortization is computed on a straight-line basis over
the estimated useful lives of the intangibles which is 15 years.
(j) Deferred revenue
Deferred revenue is recorded for a prepayment for telecommunications
services under an agreement with Shared Technologies Fairchild, Inc. ("STF") and
is amortized over the five year term of the agreement. This agreement is
terminable by either party on thirty days notice. Termination by either party
would accelerate recognition of the deferred revenue.
(k) Long-lived assets
The Company adopted SFAS No. 121, "Accounting For the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" as of January 1,
1996 and its implementation did not have a material effect on the consolidated
financial statements.
(l) Income taxes
Deferred tax assets and liabilities are recorded for the estimated
future tax effects attributable to temporary differences between the basis of
assets and liabilities recorded for financial and tax reporting purposes (Note
12).
(m) Net income per share
During 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS No. 128"). "Earnings per
Share," which provides for the calculation of "basic" and "diluted" earnings per
share. This Statement is effective for financial statements issued for periods
ending after December 15, 1997. Basic earnings per share includes no dilution
and is computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflect, in periods in which they have a dilutive effect, the
effect of common shares issuable upon exercise of stock options. As required by
this Statement, all periods presented have been restated to comply with the
provisions of SFAS No. 128.
The computation of basic net income per share is based on the weighted
average number of common shares outstanding during the period. In 1996 and 1995,
diluted earnings per share also includes the effect of 4,352,000 and 2,183,000
common shares, respectively, issuable upon exercise of common stock options and
warrants. Net income per share for the year ended December 31, 1995 is based on
pro forma net income.
All references in the consolidated financial statements with regard to
average number of common stock and related per share amounts have been
calculated giving retroactive effect to the exchange of shares in the
Reorganization and the stock splits.
(n) Financial instruments and risk concentration
Financial instruments which potentially subject the Company to
concentrations of credit risk are cash investments and marketable securities. At
December 31, 1997, a large majority of the Company's cash investments and
marketable securities were invested in money market funds and commercial paper.
The carrying amount of these cash investments approximates the fair value due to
their short maturity. The Company believes no significant concentration of
credit risk exists with respect to these cash investments and marketable
securities.
In the first quarter of 1998, the Company invested $300 million in a
tax exempt bond fund, $245 million in government bond funds and incurred $155
million of margin account indebtedness in connection with these investments.
(o) Securities sold short/financial investments with off-balance sheet
risk
At December 31, 1997, securities sold short by the Company, which
consist of equity securities valued at market, resulted in an obligation to
purchase such securities at a future date. Securities sold short may give rise
to off-balance sheet market risk. The Company may incur a loss if the market
value of these securities subsequently increases.
(p) Stock-based Compensation
The Company accounts for its stock option awards under the intrinsic
value based method of accounting prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." Under the intrinsic
value based method, compensation cost is the excess. if any, of the quoted
market price of the stock at grant date or other measurement date over the
amount an employee must pay to acquire the stock. The Company makes pro forma
disclosures of net income and earnings per share as if the fair value based
method of accounting had been applied as required by Statement of Financial
Accounting Standards ("SFAS") 123, "Accounting for Stock-Based Compensation."
(q) New Accounting Pronouncements
In June 1997, the FASB issued SFAs No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income, its components and accummulated balances, comprehensive income is
defined to include all changes in equity except those resulting from investments
by owners and distributions to owners. Among other disclosures, SFAS 130
requires that all items that are required to be rocognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominance as other
financial statements.
SFAS 130 is effective for financial statements for periods beginning
after December 25, 1997 and requires comparative information for earlier years
to be restated. Because of the recent issuance of this standard, management has
been unable to fully evaluate the impact, if any, the standard may have on
future financial statement disclosures. Results of operations and financial
position, however, will be unaffected by implementation of this standard.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131. Disclosures about Segments of an Enterprise and Related Information, (SFAS
131) which supercedes SFAS No. 14, Financial Reporting for Segments of a
Business Enterprise. SFAS 131 establishes standards for the way that public
companies report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for customers. SFAS 131 defines operating segments as
components of a company about which separate financial information is available
that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and is assessing performance.
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997 and requires comparative information for earlier years to be
restated. Because of the relatively recent issuance of this standard, management
has been unable to fully evaluate the impact, if any, it may have on future
financial statement disclosures. Results of operations and financial position,
however, will be unaffected by implementation of this standard.
33
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 2 -- MAJOR PARTITIONS
Partitions who provided end user accounts, which in the aggregate
account for more than 10% of sales, are as follows:
<TABLE>
<CAPTION>
Number of Total Percentage
Partitions Of Sales
----------------------- -----------------------
<S> <C> <C>
Year ended December 31, 1997 1 13%
Year ended December 31, 1996 1 11%
Year ended December 31, 1995 -- --
</TABLE>
NOTE 3 -- CUSTOMER ACQUISITION
The Company determined in the second quarter of 1997 to de-emphasize
the use of direct marketing to solicit customers for the Company as the carrier
and to focus the majority of its existing direct marketing resources on customer
service and support for the marketing operations of its carrier partitions, on a
fee basis. The Company recognized fees of $8.1 million for the year ended
December 31, 1997, included in other income, from the services net of related
costs of $14.6 million for the year ended December 31, 1997.
The Company recorded a one-time charge of $11.5 million in the quarter
ended June 30, 1997, primarily as a result of the Company as cost of sales
changing its accounting for customer acquisition costs to expense them in the
period incurred versus the Company's prior treatment of capitalizing customer
acquisition costs and amortizing them over a six month period.
In October 1997, the Company decided to discontinue its internal
telemarketing operations which were primarily conducted through American
Business Alliance (which was acquired by the Company in December 1996), as part
of its restructuring of its sales and marketing efforts and wrote-off as cost of
sales approximately $23.0 million of intangible assets.
NOTE 4 -- AOL AGREEMENT
In conjunction with the Telecommunications Marketing Agreement (the
"AOL Agreement") with America Online, Inc. ("AOL"), the Company paid AOL a total
of $100 million and issued two warrants to purchase shares of the Company's
stock, one warrant (the "First Warrant") to purchase, at an exercise price of
$15.50 per share, up to 5,000,000 shares, which vested as to 2,500,000 shares on
October 9, 1997 ("Commercial Launch Date"), when the Company's service was
launched on the AOL online network, and as to 2,500,000 shares on February 22,
1998, and one warrant (the "Second Warrant") to purchase, at an exercise price
of $14.00 per share, up to 7,000,000 shares, which will vest, commencing
December 31, 1997, based on the number of subscribers to the Company's service
and would vest fully if there are at least 3.5 million such subscribers at any
one time. As of December 31, 1997 the second warrant was vested as to
approximately 120,000 shares. The initial term of the AOL Agreement runs to June
30, 2000, and the AOL Agreement provides for annual extensions by AOL of its
term thereafter.
The $100 million cash payment, the $20.0 million value of the First
Warrant and $0.6 million of agreement related costs is accounted for as follows:
(i) $35.9 million was charged to expense ratably over the period from the
signing of the AOL Agreement to December 31, 1997, as payment for certain
exclusivity rights for that period; (ii) $13.2 million was treated as production
of advertising costs and was charged to expense on October 9, 1997, the
Commercial Launch Date; and (iii) $71.5 million, the balance of the cash payment
and the value of the First Warrant and AOL Agreement related costs, represents
the combined value of advertising and exclusivities which extend over the term
of the AOL Agreement and will be recognized ratably after the Commercial Launch
Date as advertising services are received. For the year ended December 31, 1997,
the Company recognized $57.0 million of expense, related to items discussed
above.
The AOL Agreement also provides for marketing payments to AOL based on
the "pre-tax profit" (as defined in the AOL Agreement) in each calendar quarter
from the telecommunications services provided by the Company. AOL's share of the
pre-tax profit will vary from 50% to 70%, depending upon the level of revenues
from such services. The Company will withhold a portion of AOL's share of the
pre-tax profit as a recovery of the initial $100 million cash payment. The
Company is permitted to withhold up to $4.3 million in each of the 10 quarters
ending after December 31, 1997 and to withhold 33% of AOL's share of the pre-tax
profits for every quarter ending after June 30, 2002 until the entire $100
million cash payment has been recovered. AOL's share of pre-tax profits in
excess of the $4.3 million and 33% will be distributed as earned.
The AOL Agreement also provides for the grant to AOL of additional
warrants to purchase up to an aggregate of 2 million shares if AOL extends its
obligations under the AOL Agreement beyond June 30, 2000. The fair value of any
such additional warrants that may be granted to AOL will be charged as an
expense in the statement of operations.
34
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 5 -- PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1997 1996
--------------------- ----------------------
(In thousands)
<S> <C> <C>
Land $ 220 $ 220
Buildings and building improvements 4,259 3,398
Switching equipment 41,915 --
Switching equipment under construction -- 24,861
Equipment, vehicles and other 13,078 2,117
-------- ---------
59,472 30,596
Less: Accumulated depreciation (3,637) (499)
-------- ---------
$ 55,835 $30,097
======== =========
</TABLE>
NOTE 6 -- INTANGIBLES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1997 1996
--------------------- ----------------------
(In thousands)
<S> <C> <C>
Goodwill $10,590 $18,356
Other -- 6,533
------- -------
10,590 24,889
Less: Accumulated depreciation -- 3,787
------- -------
$10,590 $21,102
======= =======
</TABLE>
NOTE 7 -- ACQUISITIONS
In November 1997 the Company acquired Compco, Inc. ("Compco") a
provider of communications software in the college and university marketplace,
for a total purchase price of $13,125,000, comprised of a cash payment of
$7,500,000 and 339,982 shares of Company common stock. This transaction was
accounted for as a purchase with the results of Compco included in the
consolidated financial statements from acquisition date. The cost in excess of
the net asset acquired (goodwill) was approximately $10,590,000.
In February 1998, the Company completed the acquisition of Symetrics
Industries, Inc. ("Symetrics"), a Florida corporation for approximately $25
million in cash, plus assumed liabilities. Symetrics designs, develops and
manufactures electronic systems, system components and related software for
defense-related products and for telecommunication applications. This
transaction will be accounted for as a purchase. The Company is in the process
of allocating the purchase price among the assets of Symetrics.
35
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 8 -- CONVERTIBLE DEBT
In September 1997, the Company sold $300 million of 4 1/2% Convertible
Subordinated Notes which mature on September 15, 2002 (the "2002 Convertible
Notes"). Interest on the 2002 Convertible Notes are due and payable semiannually
on March 15 and September 15 of each year. The 2002 Convertible Notes are
convertible, at the option of the holder thereof, at any time after December 9,
1997 and prior to maturity, unless previously redeemed, into shares of the
Company's Common Stock at a conversion price of $24.61875 per share. The 2002
Convertible Notes are redeemable, in whole or in part, at the Company's option,
at any time on or after September 15, 2000 at 101.80% of par prior to September
14, 2001 and 100.90% of par thereafter.
In December 1997, the Company sold $200 million of 5% Convertible
Subordinated Notes which mature on December 15, 2004 (the "2004 Convertible
Notes"). Interest on the 2004 Convertible Notes are due and payable semiannually
on June 15 and December 15 of each year. The 2004 Convertible Notes are
convertible, at the option of the holder thereof, at any time after March 5,
1998 and prior to maturity, unless previously redeemed, into shares of the
Company's Common Stock at a conversion price of $25.47 per share. The 2004
Convertible Notes are redeemable, in whole or in part at the Company's option,
at any time on or after December 15, 2002 at 101.43% of par prior to December
14, 2003 and 100.71% of par thereafter.
NOTE 9 -- RELATED PARTY TRANSACTIONS
At December 31, 1997, executive officers of the Company had outstanding
loans from the Company of $4,237,000 which were repaid during the first quarter
of 1998.
In connection with the Reorganization (Note 1(b)), the Company made
distributions of the Company's 1995 taxable income through September 19, 1995 of
approximately $13,200,000 in 1995 to its two founding stockholders.
NOTE 10 -- STOCKHOLDERS' EQUITY
(a) 1996 Public Offering
The Company consummated a public offering (the "1996 Offering") of
18,568,000 shares of common stock (adjusted to reflect the most recent stock
split, Note 10(c)), including the underwriter's over-allotment, at a price of
$8.75 per share in April and May, 1996. Of the 18,568,000 shares offered,
17,068,000 were sold by the Company and 1,500,000 were sold by the majority
stockholder. Proceeds of the 1996 Offering to the Company, less underwriting
discounts of approximately $9,302,000, were approximately $140,043,000. Expenses
for the 1996 Offering were approximately $974,000 resulting in net proceeds to
the Company of approximately $139,069,000. The majority stockholder used a
portion of his proceeds to repay his outstanding indebtedness, including
interest, to the Company.
(b) Initial Public Offering
In September and October, 1995, the Company consummated its IPO of
10,350,000 shares of common stock (adjusted to reflect stock splits, Note
10(c)), including the underwriter's overallotment option, at a price of $4.59
per share. Proceeds of the offering less underwriting discounts of approximately
$3,151,000 were $44,287,000. Expenses for the IPO totaled approximately
$1,450,000, resulting in net proceeds to the Company of approximately
$42,837,000.
In connection with the IPO, the Company issued warrants to purchase
900,000 shares of common stock to the underwriter. The exercise price of the
warrants is $5.73 per share of common stock and such warrants expire on
September 21, 2000.
(c) Stock Splits
On January 3, 1997, the Company's Board of Directors approved a
two-for-one split of the common stock in the form of a 100% stock dividend. The
additional shares resulting from the stock split were distributed on January 31,
1997 to all stockholders of record at the close of business on January 17, 1997.
The consolidated balance sheet as of December 31, 1996 and the consolidated
statement of stockholders' equity for the year ended December 31, 1996 reflect
the recording of the stock split as if it had occurred on December 31, 1996.
36
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On February 16, 1996, the Company's Board of Directors approved a
three-for-two split of the common stock in the form of a 50% stock dividend. The
additional shares resulting from the stock split were distributed on March 15,
1996, to all stockholders of record at the close of business on February 29,
1996. The consolidated balance sheet as of December 31, 1995 and the
consolidated statement of stockholders' equity for the year ended December 31,
1995 reflect the recording of the stock split as if it had occurred on December
31, 1995.
Further, all references in the consolidated financial statements to
average number of shares outstanding and related prices, per share amounts,
warrant and stock option data have been restated for all periods to reflect the
stock splits.
(d) Authorized Shares
During 1997, the Board of Directors and stockholders approved the
increase in the number of authorized shares of the Company's $0.01 par value
common stock to 300,000,000 shares.
NOTE 11 -- STOCK OPTIONS AND WARRANTS
(a) Stock Options
The Company has both qualified and non-qualified stock option
agreements with most of its key employees.
Prior to the Company's Initial Public Offering in September, 1995, the
Company granted ten key employees options to purchase shares of the Company's
common stock. The exercise price of the options, was based on the fair market
value of the Company at the date of grant. The options vest 22 months from the
date of issuance and expire five years from the date of grant. All options were
vested as of December 31, 1996.
In 1995, 1996 and 1997, the Company granted options to purchase a total
of 100,000 shares of common stock to each of the two nonemployee directors of
the Company.
In September 1995, the Company's Board of Directors and stockholders
adopted the Company's 1995 Employee Stock Option Plan (the "Option Plan") which
provided for the granting of up to 1,950,00 shares of common stock. An amendment
to the Option Plan was approved by the Board of Directors and stockholders in
April 1996 increasing the authorized number of options which can be granted
under the Option Plan to 5,000,000 shares of common stock. As of December 31,
1997, 4,985,000 options had been granted under the Option Plan.
In 1996 and 1997 the Company granted certain employees 3,561,000 and
2,741,000, respectively, non-qualified options to purchase shares of the
Company's common stock. These options become exercisable from one to three years
from the date of the grant. During 1997, The company recognized $13,371,785 of
compensation expenses related to the grant of options or the purchase of the
Company's stock at prices below the quoted market price at date of grant or
purchase date.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
Company to provide pro forma information regarding net income and earnings per
share as if compensation cost for the Company's stock options had been
determined in accordance with the fair value-based method prescribed in SFAS No.
123. The Company estimates the fair value of each stock option at the grant date
by using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1995, 1996 and 1997,
respectively: no dividends paid for all years; expected volatility of 40.4% in
1995 and 1996 and 55.8% in 1997; weighted average risk-free interest rates of
5.8%, 5.7%, and 5.49%, respectively; and expected lives of 1 to 5 years.
37
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Under the accounting provisions of SFAS No. 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(In thousands, except for per share data)
<S> <C> <C> <C>
NET INCOME:
As reported $ (20,945) $20,168 $10,819
Pro forma (30,942) $16,521 $10,436
BASIC EARNINGS PER SHARE:
As reported $ (.33) $ .38 $ .34
Pro forma $ (.48) $ .31 $ .31
DILUTED EARNINGS PER SHARE:
As reported $ (.33) $ .35 $ .32
Pro forma $ (.48) $ .29 $ .31
</TABLE>
The following tables contain information on stock options for the three year
period ended December 31, 1997:
<TABLE>
<CAPTION>
EXERCISE WEIGHTED
OPTION PRICE RANGE AVERAGE
SHARES PER SHARE EXERCISE PRICE
---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1994 2,455,800 $ .32-$1.57 $ .48
Granted 1,950,000 $ 4.58 $ 4.58
---------------- ---------------- ----------------
Outstanding, December 31, 1995 4,405,800 $ .32-$4.58 $ 2.30
Granted 6,736,000 $ 4.09-$12.00 $ 7.96
Exercised (2,158,000) $ .32-$5.67 $ 2.28
---------------- ---------------- ----------------
Outstanding, December 31, 1996 8,983,800 $ .32-$12.00 $ 6.54
Granted 2,801,000 $ 5.67-$22.06 $16.02
Exercised (2,208,812) $ .32-$12.78 $ 4.25
Cancelled (690,000) $ 5.67-$13.25 $11.98
---------------- ---------------- ----------------
Outstanding, December 31, 1997 8,885,988 .32-$22.06 $ 9.26
=== ==== ================ ================ ================
<CAPTION>
EXERCISE WEIGHTED
OPTION PRICE RANGE AVERAGE
EXERCISABLE AT YEAR ENDED DECEMBER 31, SHARES PER SHARE EXERCISE PRICE
- ------------------------------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
1995 1,515,600 $ .32 $ .32
1996 2,649,800 $ .32-$4.58 $ 2.82
1997 3,866,987 $ .32-$14.50 $ 7.24
<CAPTION>
WEIGHTED-AVERAGE
OPTIONS GRANTED IN FAIR VALUE
- ------------------ ----------
1995 $1.14
1996 $2.39
1997 $6.99
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
RANGE OF EXERCISE PRICE
---------------------------------------------------------------------------------------
$.32-$5.00 $5.01-$10.00 $10.01-$15.00 $15.00-$22.06 $.32-$22.06
------------- ------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
OUTSTANDING OPTIONS:
Number outstanding at
December 31, 1997 2,776,988 2,382,000 1,989,500 1,742,500 8,885,988
Weighted-Average remaining
contractual life (Years) 1.94 1.69 2.11 3.12 2.18
Weighted-average exercise price $ 3.48 $ 8.52 $ 11.47 $ 17.57 $ 9.26
EXERCISABLE OPTIONS:
Number outstanding at
December 31, 1997 1,596,988 779,000 1,490,999 - 3,866,987
Weighted-average exercise price $ 2.68 $ 8.66 11.37 - $ 7.23
</TABLE>
(b) Warrants
38
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
At December 31, 1996, the Company had warrant agreements with certain
partitions and the underwriter for its IPO (Note 10(b)). All warrants were
issued with exercise prices equal to or above the market price of the underlying
stock at the date of the grant. These warrants are accounted for based on their
fair value. At December 31, 1996, 3,712,000 warrants were outstanding with
exercise prices ranging from $4.67 to $5.73 and an average weighted exercise
price of $5.00 and 600,000 which were currently exercisable at a weighted
exercise price of $5.73. The remaining warrants are exercisable over a one to
two year period beginning in January 1997. In January 1997, 800,000 of these
warrants were purchased by the Company and recorded as a reduction in additional
paid-in capital and 2,662,000 warrants were exercised. At December 31, 1997,
warrants to purchase 12,250,000 shares were outstanding; these consisted of the
12,000,000 AOL warrants (Note 4) and 250,000 of the warrants issued to the
underwriter for the Company's IPO (Note 10(b)).
NOTE 12 -- INCOME TAXES
On June 1, 1991, the Company, with the consent of its stockholders,
elected to be taxed as an S Corporation. As a result of the election, all
earnings of the Predecessor Corporation were taxed directly to the stockholders.
Accordingly, the statements of operations prior to September 20, 1995 did not
include provisions for income taxes. In connection with the Company's IPO, as
described in Note 10(b), on September 19, 1995, the Company terminated its S
Corporation status. Pro forma tax provisions have been calculated as if the
Company's results of operations were taxable as a C Corporation under the
Internal Revenue Code for the year ended December 31, 1995.
The following summarizes the provision for pro forma income taxes:
YEAR ENDED
DECEMBER 31,
---------------
1995
----
(In thousands)
Current:
Federal $5,574
State and local 1,639
-------
Pro forma provision for income taxes $7,213
=======
39
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The provision for pro forma income taxes on adjusted historical income
for the year ended December 31, 1995 differs from the amounts computed by
applying the applicable Federal statutory rates due to the following:
YEAR ENDED
DECEMBER 31,
----------------
1995
----
(In thousands)
Provision for Federal income taxes at the statutory rate $6,311
State and local income taxes, net of Federal benefit 1,082
Other (180)
-------
Pro forma provision for income taxes $7,213
========
As a result of the termination, the Company was required to provide for
taxes on income for the period subsequent to September 19, 1995 and for the
previously earned and untaxed S Corporation income which has been deferred
primarily as a result of reporting on a cash basis. The provision (benefit) for
income taxes for the years ended December 31, 1997, 1996 and 1995 consisted of
the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Current:
Federal $ - $10,995 $4,379
State and local - 1,817 1,809
------- ------- ------
Total current - 12,812 6,188
======= ======= ======
Deferred:
Federal (11,111) (607) 2,201
State and local (2,280) - 608
------- ------- ------
Total deferred (13,391) (607) 2,809
------- ------- ------
$(13,391) $12,205 $8,997
======= ======= ======
</TABLE>
A reconciliation of the Federal statutory rate to the provision
(benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995
----------------------- --------------------------- -------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal income taxes computed at the
statutory rate $(12.018) (35.0)% $11,331 35.0% $6,311 35.0%
Increase (decrease):
Federal income taxes at the statutory rate
from January 1, 1995 to September 19, 1995 - - - - (4,086) (22.7)
Federal and state taxes resulting from cash
to Accrual basis for tax reporting - - - - 6,399 35.5
State income taxes less Federal benefit (1.482) (4.3) 1,199 3.7 373 2.1
Other 109 .3 (325) (1.0) - -
--------- -------- -------- ------ -------- ------
Total provision (benefit) for income taxes $(13,391) (39.0)% $12,205 37.7% $8,997 49.9%
======= ===== ======= ==== ====== ====
</TABLE>
40
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Deferred tax (assets) liabilities at December 31, 1997, 1996 and 1995
are comprised of the following elements:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Taxable loss carryforwards $ (21,548) $ (3,705) $ --
Deferred revenue taxable currently (13,897) -- --
Stock based compensation (4,951) -- --
Allowance for uncollectible accounts (2,198) -- --
Federal and state taxes resulting from cash to accrual
basis for tax reporting 1,337 2,342 3,130
Amortization of certain intangibles - (85) (227)
Other 869 (55) (94)
------------ ------------ ----------
Deferred tax (assets) liabilities $ (40,388) $ (1,503) $ 2,809
============ ============ ==========
</TABLE>
The Company has recorded net deferred tax assets as December 31, 1997
and 1996 primarily representing net operating loss carryforwards and other
temporary differences. Management believes that no valuation allowance is
required for these assets due to future reversals of existing taxable temporary
differences and the exception that the Company will generate taxable income in
future years.
NOTE 13 -- STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $915 $ 47 $ 24
Income taxes $ -- $ 1,090 $ 3,813
</TABLE>
During 1997, the Company recorded an asset of $20,000,000 in connection
with the issuance of warrants to AOL (Note 4). In connection with the
acquisition of Compco in 1997, the Company issued 339,982 shares of Company
common stock with a value of $5,625,000 (Note 7).
In connection with the acquisition of the assets of ABA in 1996, the
Company released ABA of its outstanding obligations to the Company of
$10,949,000. During 1996, the Company recorded an intangible of $1,077,000 in
connection with the issuance of warrants to certain partitions (Note 11(b)).
During 1995, the Company issued the Cash Flow Note in the amount of
$6,900,000 to the minority stockholder of the Predecessor Corporation in
connection with the IPO and Reorganization (Note 1(b)).
NOTE 14 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER(2)
------- ------- ------- -------
(In thousands, except for per share data)
<S> <C> <C> <C> <C>
1997
Sales $71,160 $75,032 $80,314 $78,262
Gross profit (loss) 9,375 (9,264)(1) 2,097 (52,609)(1)
Operating income (loss) 6,082 (13,924) (3,243) (73,966)
Net income (loss) 5,430 (5,865) 721 (21,231)
Net income (loss) per share - Basic 0.09 (0.09) 0.01 (0.32)
Net income (loss) per share - Diluted 0.08 (0.09) 0.01 (0.32)
1996
Sales $51,065 $57,015 $60,079 $64,265
Gross profit 6,832 7,387 8,323 9,285
Operating income 4,546 4,882 5,871 6,489
Net income 3,377 4,058 7,032 5,701
Net income per share - Basic 0.09 0.08 0.12 0.10
Net income per share - Diluted 0.08 0.07 0.11 0.09
</TABLE>
(1) See Note 3.
(2) Includes $321.1 million (pre-tax) of other income associated with the break-
up of a proposed merger between the Company and STF.
41
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10 THROUGH 13
Information required by Part III (Items 10 through 13) of this Form
10-K is incorporated by reference to the Company's definitive proxy statement
for the Annual Meeting of Stockholders to be held in May, 1998, which will be
filed with the Securities and Exchange Commission not later than 120 days after
the end of the fiscal year to which this Form 10-K relates.
42
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on
Form 10-K.
1. Consolidated Financial Statements:
The Consolidated Financial Statements filed as part of this Form 10-K
are listed in the "Index to Consolidated Financial Statements" in Item 8.
2. Consolidated Financial Statement Schedule:
The Consolidated Financial Statement Schedule filed as part of this
report is listed in the "Index to S-X Schedule."
Schedules other than those listed in the accompanying Index to S-X
Schedule are omitted for the reason that they are either not required, not
applicable, or the required information is included in the Consolidated
Financial Statements or notes thereto.
43
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO S-X SCHEDULE
PAGE
----
Report of Independent Certified Public Accountants 55
Schedule II -- Valuation & Qualifying Accounts 56
44
<PAGE>
[LOGO]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
and Stockholders of Tel-Save Holdings, Inc.
The audits referred to in our report dated February 5, 1998 relating to
the consolidated financial statements of Tel-Save Holdings, Inc. and
subsidiaries, which is contained in Item 8 of this Form 10-K, included the
audits of the financial statement schedule listed in the accompanying index for
each of the three years in the period ended December 31, 1997. This financial
statement schedule is the responsibility of management. Our responsibility is to
express an opinion on this schedule based on our audits.
In our opinion, the financial statement Schedule II -- Valuation and
Qualifying Accounts, presents fairly, in all material respects, the information
set forth therein.
BDO Seidman, LLP
New York, New York
February 5, 1998
45
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES CHANGES DEDUCTIONS PERIOD
----------- ------ -------- ------- ---------- ------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Reserves and allowances deducted from as-
set accounts:
Allowance for uncollectible accounts $987 $1,285 $ 147 (a) $-- $2,419
==== ====== ========== === ======
Year ended December 31, 1996:
Reserves and allowances deducted from as-
set accounts:
Allowance for uncollectible accounts $804 $ 38 $ 145 (a) $-- $ 987
==== ======= ========== === ======
Year ended December 31, 1995:
Reserves and allowances deducted from as-
set accounts:
Allowance for uncollectible accounts $987 $ (13) $(170)(a) $-- $ 804
==== ========= ========= === ======
</TABLE>
- ----------
(a) Amount represents portion of change in allowance for uncollectible accounts
applied against Accounts Payable Partitions.
46
<PAGE>
(3) EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1 Plan of Reorganization between and among Tel-Save Holdings, Inc., a
Delaware corporation, Tel-Save, Inc., a Pennsylvania corporation,
Daniel Borislow and Paul Rosenberg, and Exhibits Thereto (incorporated
by reference to Exhibit 2.1 to the Company's registration statement on
Form S-1 (File No. 33-94940)).
3.1 Amended and Restated Certificate of Incorporation of the Company, as
amended (incorporated by reference to Exhibit 3.1 to the Company's
registration statement on Form S-4 (File No. 333-38943)).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the
Company's registration statement on Form S-1 (File No. 33-94940)).
9.1 Voting Trust Agreement between Daniel Borislow and Paul Rosenberg
(included as part of Exhibit 2.1).
10.1* Employment Agreement between the Company and Daniel Borislow and
related Agreement (incorporated by reference to Exhibit 10.1 to the
Company's registration statement on Form S-1 (File No. 33-94940)).
10.2 * Employment Agreement between the Company and Emanuel J. DeMaio
(incorporated by reference to Exhibit 10.2 to the Company's
registration statement on Form S-1 (File No. 33-94940)).
10.3 * Employment Agreement between the Company and Gary W. McCulla
(incorporated by reference to Exhibit 10.3 to the Company's
registration statement on Form S-1 (File No. 33-94940)).
10.4 * Employment Agreement between the Company and George P. Farley
(incorporated by reference to Exhibit 10 to the Company's report on
Form 10-Q for the Quarter ended September 30, 1997).
10.5 * Employment Agreement between the Company and Aloysius T. Lawn, IV
(incorporated by reference to Exhibit 10.5 to the Company's
registration statement on Form S-1 (File No. 333-2738)).
10.6 * Employment Agreement between the Company and Edward B. Meyercord, III
(incorporated by reference to Exhibit 10.6 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996).
10.7 Indemnification Agreement between the Company and Daniel Borislow
(incorporated by reference to Exhibit 10.4 to the Company's
registration statement on Form S-1 (File No. 33-94940)).
10.8 Indemnification Agreement between the Company and Emanuel J. DeMaio
(incorporated by reference to Exhibit 10.5 to the Company's
registration statement on Form S-1 (File No. 33-94940)).
10.9 Indemnification Agreement between the Company and Gary W. McCulla
(incorporated by reference to Exhibit 10.6 to the Company's
registration statement on Form S-1 (File No. 33-94940)).
10.10 Indemnification Agreement between the Company and Joseph M. Morena
(incorporated by reference to Exhibit 10.7 to the Company's
registration statement on Form S-1 (File No. 33-94940)).
10.11 Indemnification Agreement between the Company and Peter K. Morrison
(incorporated by reference to Exhibit 10.8 to the Company's
registration statement on Form S-1 (File No. 33-94940)).
10.12 Indemnification Agreement between the Company and Kevin R. Kelly
(incorporated by reference to Exhibit 10.9 to the Company's
registration statement on Form S-1 (File No. 33-94940)).
10.13 Indemnification Agreement between the Company and Aloysius T. Lawn, IV
(incorporated by reference to Exhibit 10.12 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995).
10.14 Indemnification Agreement between the Company and Edward B. Meyercord,
III (incorporated by reference to Exhibit 10.14 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996).
10.15 Agreement dated as of March 15, 1994 between the Company and Global
Network Communications (incorporated by reference to Exhibit 10.10 to
the Company's registration statement on Form S-1 (File No. 33-94940)).
10.16 AT&T Contract Tariff No. 516 (incorporated by reference to Exhibit
10.11 to the Company's registration statement on Form S-1 (File No.
33-94940)).
10.17 AT&T Contract Tariff No. 1715 (incorporated by reference to Exhibit
10.15 to the Company's registration statement on Form S-1 (File No.
333-2738)).
10.18 AT&T Contract Tariff No. 2039 (incorporated by reference to Exhibit
10.16 to the Company's registration statement on Form S-1 (File No.
333-2738)).
10.19 AT&T Contract Tariff No. 2432 (incorporated by reference to Exhibit
10.17 to the Company's registration statement on Form S-1 (File No.
333-2738)).
10.20 AT&T Contract Tariff No. 3628 (incorporated by reference to Exhibit
10.18 to the Company's registration statement on Form S-1 (File No.
333-2738)).
10.21 AT&T Contract Tariff No. 5776 (incorporated by reference to Exhibit
10.21 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996).
47
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.22 General Agreement between Tel-Save, Inc. and AT&T Corp. dated June 26,
1995 (incorporated by reference to Exhibit 10.14 to the Company's
registration statement on Form S-1 (File No. 33-94940)).
10.23* Tel-Save Holdings, Inc. 1995 Employee Stock Option Plan (incorporated
by reference to Exhibit 10.15 to the Company's registration statement
on Form S-1 (File No. 33-94940)).
10.24* Tel-Save Holdings, Inc. Employee Bonus Plan (incorporated by reference
to page 13 of the Company's Proxy Statement for the Company's 1996
Annual Meeting of Stockholders dated April 3, 1996).
10.25* Non-Qualified Stock Option Agreement between the Company and Daniel
Borislow (incorporated by reference to Exhibit 10.17 to the Company's
registration statement on Form S-1 (File No. 33-94940)).
10.26* Non-Qualified Stock Option Agreement between the Company and Emanuel J.
DeMaio (incorporated by reference to Exhibit 10.18 to the Company's
registration statement on Form S-1 (File No. 33-94940)).
10.27* Non-Qualified Stock Option Agreement between the Company and Mary
Kennon (incorporated by reference to Exhibit 10.19 to the Company's
registration statement on Form S-1 (File No. 33-94940)).
10.28* Non-Qualified Stock Option Agreement between the Company and Gary W.
McCulla (incorporated by reference to Exhibit 10.20 to the Company's
registration statement on Form S-1 (File No. 33-94940)).
10.29* Non-Qualified Stock Option Agreement between the Company and Peter K.
Morrison (incorporated by reference to Exhibit 10.22 to the Company's
registration statement on Form S-1 (File No. 33-94940)).
10.30+ Telecommunications Marketing Agreement by and among the Company,
Tel-Save, Inc. and America Online, Inc., dated February 22, 1997
(incorporated by reference to Exhibit 10.32 to the Company's Form 10-K
for the year ended December 31, 1996).
10.31++ Amendment No 1, dated as of January 25, 1998, to the Telecommunications
Marketing Agreement dated as of February 22, 1997 by and among the
Company, Tel-Save, Inc. and America Online, Inc.
10.32 Indenture dated as of September 9, 1997 between the Company and First
Trust of New York, N.A. (incorporated by reference to Exhibit 4.3 to
the Company's registration statement on Form S-3 (File No. 333-39787)).
10.33 Registration Agreement dated as of September 3, 1997 between the
Company and Salomon Brothers Inc, Deutsche Morgan Grenfell Inc., Bear,
Stearns & Co. Inc., Smith Barney Inc., Robertson Stephens & Company LLC
(incorporated by reference to the Company's registration statement on
Form S-3 (File No. 333-39787)).
10.34 Indenture dated as of December 10, 1997 between the Company and First
Trust of New York, N.A.
10.35 Registration Agreement dated as of December 10, 1997 between the
Company and Smith Barney Inc.
11.1 Net Income Per Share Calculation.
21.1 Subsidiaries of the Company.
23.1 Consent of BDO Seidman, LLP.
27 Financial Data Schedule.
- ----------
* Management contract or compensatory plan or arrangement.
+ Confidential treatment previously has been granted for a portion of this
exhibit.
++ Confidential treatment has been requested for portions of this exhibit.
(b) Reports on Form 8-K.
The following Current Reports on Form 8-K were filed by the Company during
the three months ended December 31, 1997:
1. Current Report on Form 8-K dated December 5, 1997.
2. Current Report on Form 8-K dated November 25, 1997.
3. Current Report on Form 8-K dated November 20, 1997.
4. Current Report on Form 8-K dated October 29, 1997.
5. Current Report on Form 8-K dated October 26, 1997.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: TEL-SAVE HOLDINGS, INC.
By: /s/ Daniel Borislow
---------------------------
Daniel Borislow
Chairman of the Board of
Directors, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C>
/s/ Daniel Borislow Chairman of the Board
- ----------------------------- of Directors, Chief Executive Officer and
Daniel Borislow Director (Principal Executive Officer)
/s/ Gary W. McCulla President, Director of Sales and
- ----------------------------- Marketing and Director
Gary W. McCulla
/s/ Emanuel J. DeMaio Chief Operations Officer and Director
- -----------------------------
Emanuel J. DeMaio
/s/ George P. Farley Chief Financial Officer and Director
- ----------------------------- (Principal Financial Officer)
George P. Farley
/s/ Kevin R. Kelly Controller (Principal Accounting Officer)
- -----------------------------
Kevin R. Kelly
/s/ Harold First Director
- -----------------------------
Harold First
/s/ Ronald R. Thoma Director
- -----------------------------
Ronald R. Thoma
</TABLE>
49
AMENDMENT NO. 1
This AMENDMENT NO. 1 (the "Amendment"), dated as of January 25, 1998
(the "Amendment Effective Date"), by and among Tel-Save, Inc. ("TS"), a
Pennsylvania corporation, and Tel-Save Holdings, Inc. ("Holdings"), a Delaware
corporation, with their principal offices at 6805 Route 202, New Hope,
Pennsylvania 18938, on the one hand, and America Online, Inc., a Delaware
corporation with its principal offices at 22000 AOL Way, Dulles, Virginia 20166
("AOL"), on the other hand (each a "party" and, collectively, the "parties").
INTRODUCTION
TS, Holdings and AOL are parties to the Telecommunications Marketing
Agreement, dated as of February 22, 1997, as heretofore corrected and amended by
letter, dated April 23, 1997 (as so corrected and amended to the date hereof,
but without giving effect to this Amendment, the "Agreement"). Capitalized terms
used in this Amendment without other definition are defined as in the Agreement.
The parties have since considered further the marketing and advertising
expenditures provided in the Agreement, and, in light of both parties' desire to
increase the number of End Users of the Long Distance Telecommunications
Services, hereby agree as follows:
TERMS
1. The Agreement is amended to provide that references in the Agreement to
"this Agreement" or "the Agreement" (including indirect references such as
"hereunder," "hereby," "herein" and "hereof") shall be deemed to be
references to the Agreement as amended hereby.
2. Section I.A of the Agreement is hereby amended to add the following
definitions:
"1.A. "Additional Promotion Period" means the period from the
Amendment Effective Date through March 31, 1998 (as such period may be
shortened as provided herein).
"5.A. "Amendment" means the Amendment No. 1 to the Agreement dated as
of the Amendment Effective Date.
"5.B. "Amendment Effective Date" means January 25, 1998."
3. Section I.A.19 of the Agreement is amended to read in its entirety as
follows:
"19. "Gross Revenues" for any calendar quarter shall mean the sum of
(a) total billings by TS to End Users for the provision of Services
during such quarter and (b) if such billings are in a material amount,
total billings by TS to any other end users of telecommunications
services provided by TS that would meet the definition of "Restricted
Services," which such other end users became such as a direct result
of marketing by TS that used the AOL Marks or any variation of the
<PAGE>
AOL name (whether or not such marketing has been approved by AOL or is
otherwise in compliance with this Agreement, and without waiver of
AOL's rights hereunder with respect to such approval or compliance)
("Other End Users"), less * * * "
4. Section III.A.1 of the Agreement is amended to add "(a)" before "During
each" at the beginning of such section and to add the following at the end
of such section:
"(b) Notwithstanding anything to the contrary in this Agreement, the
parties agree that, commencing February 1, 1998 and until the end of
the Additional Promotion Period, AOL shall provide TS with additional
online promotions and advertisements, including Pop-Up Ads, in form
and substance as determined pursuant to the foregoing portion of this
Section III.A.1, with an Ad Value of at least * * * per month (or the
pro-rata amounts thereof for portions of months) in addition to the Ad
Values to be provided pursuant to Section III.A.1(a) (the "Additional
Promotions"). Pop-Up Ads during the Additional Promotion Period shall
be made available onscreen for at least * * * days (instead of the
number required pursuant to Section I.A.31 hereof), and any Pop-Up Ads
included by AOL during the Additional Promotion Period in excess of *
* * Pop-Up Ads per month and any Pop-Up Ads included by AOL with TS's
approval during the remainder of the Introductory Period in excess of
* * * per month shall be counted toward AOL's satisfaction of the * *
* monthly requirement set forth in Section III.A.1(a) above. Following
the expiration of the Additional Promotion Period, AOL shall not be
obligated to provide any promotions or advertisements other than those
promotions or advertisements that were required of AOL pursuant to the
Agreement, but without regard to this Section III.A.1.(b).
(c) In the event that AOL has not delivered each of the "AOL
Deliverables" (as set forth in Attachment A) in accordance with the
terms hereof or has not delivered the Ad Values of promotions and
advertisements required by Sections III.A.1(a) and (b) to be provided
during the Additional Promotion Period, in each case, on or before
February 28, 1998, TS may elect in its sole discretion that the
Additional Promotion Period end as of February 28, 1998 so long as TS
has provided AOL with written notice of such election by fascimile to
the attention of David Colburn (fax no. 703-265-1202) no later than
5:00 p.m. EST on February 28, 1998. In such case: (i) TS will be
relieved of any obligation to pay AOL the bounties provided for
hereunder with respect to any customers who first signed up for
Services subsequent to February 28, 1998, (ii) the additional
guaranteed amount to be paid by TS pursuant to this Amendment shall be
as adjusted as described below and (iii) AOL will not deliver the
additional promotions contemplated hereunder thereafter.
(d) Except for those AOL Deliverables noted as "ongoing" obligations
on Attachment A ("Ongoing Deliverables"), an AOL Deliverable shall be
deemed delivered in the event AOL completes delivery of the AOL
Deliverable on or before the due date specified on Attachment A;
provided that AOL shall be
2
<PAGE>
entitled to a cure period of five (5) business days following such due
date within which to complete its delivery. Any Ongoing Deliverable
shall be deemed delivered if AOL has commenced delivery of such item
and is continuing without default its delivery as of February 28,
1998; provided that AOL shall be entitled to a cure period of five (5)
business days following any interruption in delivery of such AOL
Deliverable within which to restore its ongoing delivery of such item.
Notwithstanding the foregoing, the cure periods with respect to the
AOL Deliverable relating to * * * requirements and the AOL Deliverable
relating to * * * shall be only one (1) day. AOL shall be entitled to
only one (1) cure period with respect to each AOL Deliverable;
provided that (i) AOL shall be entitled to two (2) one-day cure
periods with respect to the AOL Deliverable relating to * * * and (ii)
there shall be no cure period with respect to the AOL Deliverable
relating to* * *.
(e) In the event that TS fails to deliver any "TS Deliverable" (as set
forth in Attachment A), AOL may extend the due date set forth on
Attachment A for any AOL Deliverable that (as indicated in Attachment
A) depends on receipt of a TS Deliverable specified in Attachment A
for a period equal to the number of days by which TS's delivery is
overdue. AOL may toll its delivery of any Ongoing Deliverable until TS
has delivered the TS Deliverable specified on Attachment A as
necessary for the delivery of such AOL Deliverable. In the event that
TS has not delivered any TS Deliverable as of February 28, 1998, any
AOL Deliverable specified on Attachment A as corresponding to such TS
Deliverable shall be deemed delivered by AOL as of such date. Except
as otherwise expressly provided herein, (a) either party's failure to
deliver its respective deliverables set forth in Attachment A shall
not be deemed a breach of the Agreement and (b) following the
expiration of the Additional Promotion Period, neither party shall be
obligated with respect to any deliverables set forth on Attachment A
other than (x) those deliverables that were required of such party
pursuant to the Agreement (other than by reason of the Amendment) and
(y) the * * * or the * * * program (each, as described herein), if
any, that may be provided in the Extended Offline Promotion Period (as
defined in Section V.C.1)."
(f) Notwithstanding anything to the contrary herein, in connection
with any * * * efforts directed to subscribers to the AOL Service that
may be provided hereunder, AOL reserves the right to (i) approve all
procedures, scripts and other materials used in connection with any
such effort, such approval not to be unreasonably withheld, (ii)
subject to the proviso at the end of this clause (ii), cease, or
otherwise limit the amount, duration or frequency of, any such effort
in the event AOL determines in its reasonable discretion that such
effort (including, without limitation, any statement or claim made by
TS in connection with such effort or the Services (e.g., comments made
during a * * *call) is false or inaccurate or misrepresents or
mischaracterizes the true nature of the Services or of any party's
role in providing the Services and has resulted or is resulting in
significant complaints by recipients of such efforts or material
disruptions of AOL's relations with existing and potential customers,
provided that AOL shall
3
<PAGE>
have provided to TS at least five (5) days prior written notice of its
intention so to cease or limit such effort, which notice shall include
a specific statement of the basis for such action, including
reasonable evidence of such basis, and TS shall not have, within five
(5) days of such notice, modified the terms of such effort or taken
such other actions as shall be reasonably likely, in AOL's discretion,
to (x) prevent a continuation or recurrence of the circumstances
forming the basis of such notice or (y) remedy material harm to AOL's
business arising from such prior occurrence (as the case may be); and
(iii) monitor such efforts for quality assurance and for compliance
with the terms and conditions hereof.
5. Section III.A.2 of the Agreement is amended to add at the end thereof the
following:
"Notwithstanding anything to the contrary in this Agreement, the
parties agree that any Pop-Up Ads included by AOL with TS's approval
subsequent to the Introductory Period and during the Term in excess of
* * * shall be counted toward AOL's satisfaction of the * * * monthly
requirement set forth in this Section III.A.2. The total Ad Value of
all promotions and advertisements to be provided by AOL pursuant to
this Section III.A.2 during the period from July 1, 1999, through June
30, 2000, shall be reduced by the amount of the Ad Value of the
Additional Promotions provided by AOL pursuant to Section III.A.1
above, such reduction to be applied ratably to the Ad Value to be
provided during such period."
6. Section III.A.4(a) of the Agreement is amended to add at the end thereof
the following:
"Notwithstanding the preceding sentence, during the Additional
Promotion Period, AOL shall not deploy Pop-Up Ads having * * * ."
7. Section III.A.4 of the Agreement is amended to add the following new
Section III.A.4(d):
"(d) Notwithstanding anything to the contrary in this Agreement, the
parties agree that AOL may in its sole discretion replace any Pop-Up
Ad required hereunder (or otherwise scheduled to be provided by AOL)
with * * * (e.g., for purposes of fulfilling requirements of law or
court order or issuing announcements regarding AOL members or AOL
policies) (each an "Excluded Pop-Up"); provided that AOL delivers the
replaced Pop-Up Ad as soon as reasonably possible thereafter (without
resulting in simultaneous Pop-Up Ads) * * * ."
8. Section V of the Agreement is amended to add the following new Section
V.B.6:
"6. TS shall provide AOL biweekly with information with respect to any
* * * efforts during the Additional Promotion Period and the Extended
Offline Promotion Period (as defined herein) which is reasonably
required for (a) measuring TS's efforts hereunder or (b) delivery of
the applicable AOL Deliverable (and any other information mutually
agreed upon by the parties), but
4
<PAGE>
in no event less information than would be required of TS pursuant to
Section V.B.4 hereof."
9. Section V of the Agreement is amended to add the following new Section V.C:
"C. Additional Promotion Period.
1. In addition to any other payments required hereunder (and in addition
to any Warrant Shares due AOL pursuant to the Supplemental Warrant and
any amendments thereto), TS shall pay to AOL Bounty Fees (as defined
below) as follows:
a. TS shall pay to AOL the applicable Bounty Fee for each Qualified
End User (as defined below) who subscribes to the Long Distance
Telecommunications Services (i) during the Additional Promotion
Period or (ii) following the Additional Promotion Period but only
insofar as such subscription following the Additional Promotion
Period is the result of * * * efforts directed to subscribers to
the AOL Service that may be provided hereunder; provided however,
that, from and after the total number of Qualified End Users for
which TS has paid AOL a Bounty Fee pursuant to this Amendment
equals one million (1,000,000), , TS shall not, subsequent to
such date, be required to pay any further Bounty Fees with
respect to End Users acquired as a result of any such * * *
efforts.
b. A "Qualified End User" is an End User who remains an End User for
at least thirty (30) consecutive days.
c. On the first day of each month commencing March 1, 1998, TS shall
pay AOL the aggregate amount of such Bounty Fees owing to AOL
with respect to the preceding month (or the preceding 35 days, in
the case of the first such payment).
2. "Bounty Fee" means (i) with respect to any Qualified End User who
subscribed to the Services on or before the Change Time (as defined below),
$* * * and (ii) with respect to any Qualified End User who subscribed to
the Services after the Change Time, $* * * , provided that the amount of
any Bounty Fee payable to any Qualified End User (i) whose subscription is
the result of * * * efforts directed to subscribers to the AOL Service and
(ii) who subscribes to any Services at any time after the 120th day after
the commencement of such * * * efforts will be one-half (1/2) of the amount
set forth in clause (i) or (ii), as the case may be. "Change Time" means
the time at which an aggregate of * * * persons or entities shall have
subscribed to the Services since the Effective Date and become End Users
(and regardless of whether such persons or entities shall then be End
Users).
3. In addition to any other payments required hereunder (and in
addition to any Warrant Shares due AOL pursuant to the Supplemental Warrant
and any amendments thereto) and provided that AOL shall have delivered the
Ad Values of promotions and advertisements required by Sections III.A.1(a)
and (b)
5
<PAGE>
to be provided during the Additional Promotion Period, on April 3, 1998, in
consideration of the Additional Promotions and any additional promotion or
marketing provided by AOL to TS during the Additional Promotion Period, TS
shall pay to AOL a guaranteed, non-refundable amount (the "Excess Amount")
equal to (i) $10,000,000 (or $3,000,000 in the event that the Additional
Promotion Period is terminated as of February 28, 1998 pursuant to Section
III.A.1(c) hereof) less (ii) the sum of (x) the aggregate Bounty Fees, if
any, paid to AOL by TS prior to April 3, 1998, and (y) the product of (i)
the Adjustment Value (as defined below) times (ii) the number of the
Warrant Shares, if any, that shall have vested pursuant to the Supplemental
Warrant as of March 31, 1998, with respect to the period between the
Amendment Effective Date and the end of the Additional Promotion Period.
"Holdings Share Price" shall mean the average of the closing prices (as
defined in Section 6(d) of the Supplemental Warrant) for one (1) share of
Holdings' Common Stock during each of the four (4) consecutive business
days prior to April 3, 1998. The "Adjustment Value" shall mean the dollar
figure that shall be determined using the schedule set forth in Attachment
B. The Excess Amount shall be credited against any subsequent TS
obligations to pay Bounty Fees pursuant to the Agreement on or after April
3, 1998 until the full amount of such Excess Amount shall have been so
credited and, following payment of the Excess Amount to AOL, TS shall not
be required to pay the Bounty Fees otherwise payable to AOL hereunder until
such time as the aggregate amount of otherwise payable Bounty Fees equals
the Excess Amount. TS shall thereafter commence payment of Bounty Fees to
AOL as otherwise provided herein."
10. The following new Section V.D is added to Section V of the Agreement:
"D. Offline Marketing Costs. TS shall be responsible for all costs and
expenses associated with (a) any * * * efforts by TS or AOL or either
party's agents, (b) any * * * efforts by AOL or its agents (including,
without limitation, any related * * * efforts) and (c) any * * * efforts by
AOL or its agents (specifically including Incentive Payments, as defined
below, if any, and specifically excluding any television or print media
marketing campaigns) (collectively, the "Offline Marketing Costs");
provided that all Offline Marketing Costs incurred by AOL shall be approved
in writing in advance by TS. The Offline Marketing Costs shall not be
included in the calculation of Actual Services Costs. Except with respect
to the Estimated * * * Costs (as defined below), TS shall pay AOL within
thirty (30) days of receipt of a monthly invoice from AOL detailing the
Offline Marketing Costs for the preceding month. Subject to TS' right to
approve in advance all Offline Marketing Costs, as provided above, TS shall
pay AOL in advance with respect to the Offline Marketing Costs for any * *
* efforts in an amount equal to AOL's reasonable estimate for the costs of
each effort that AOL provides to TS reasonably in advance of the dates
payments are due (such estimated costs, the "Estimated * * * Costs"). which
Estimated * * * Costs shall be payable on the first day of each month
(subject to AOL's having provided the estimate for such month), commencing
March 1, 1998, with respect to Estimated * * * Costs for such
6
<PAGE>
month. As promptly as reasonably possible after the end of each month, AOL
shall provide TS with a statement detailing the Offline Marketing Costs
incurred for any * * * efforts in such month and, to the extent the
aggregate Costs included on such statement are less than the Estimated * *
* Costs previously paid by TS to AOL with respect to such month, AOL shall
promptly pay to TS the amount of such difference and, to the extent the
aggregate Costs included on such statement are greater than the Estimated *
* * Costs previously paid by TS to AOL with respect to such month, TS shall
promptly pay to AOL the amount of such difference. The parties will
mutually agree on how to allocate any costs and expenses other than the
Offline Marketing Costs associated with any further offline marketing and
promotional activities occurring during the remainder of the Term,
including, without limitation, any joint promotional offers with respect to
both the AOL Service and the Long Distance Telecommunications Services."
"Incentive Payments" shall mean such payments as TS may elect to fund, at
its option, pursuant to incentive programs to be implemented for * * *
agents, which programs will be in form and substance to be mutually agreed
upon by the parties.
11. The following new Sections V.F.1 and V.F.2 are added to Section V of the
Agreement:
"1. Substantially concurrently herewith, TS and Holdings are entering
into a written agreement with CompuServe Interactive Services, Inc.
("CompuServe") with respect to the exclusive marketing of TS's
telecommunications services by CompuServe (the "CompuServe Agreement") on
the CompuServe Service (as defined in the CompuServe Agreement). In the
event a Change Event occurs, AOL shall pay, or shall cause CompuServe to
pay, TS within thirty (30) days of such Change Event an amount (the
"Repayment Amount") which shall be calculated in accordance with Attachment
E hereto; provided that, with respect to that portion of the Repayment
Amount allocable to the Base Payment (the "Base Payment Portion"),, AOL
may, at its option, elect, in lieu of paying the Base Payment Portion, to
provide TS with an additional amount of promotion and marketing with
respect to either the AOL Service or the CompuServe Service (as mutually
agreed upon by the parties) (the "Change Event Promotions") with a value,
as measured and calculated using the Ad Value, as defined herein, if the
parties elect to deliver the Change Event Promotions with respect to the
AOL Service, and the "Ad Value" (as defined in the CompuServe Agreement),
if the parties elect to deliver such promotions with respect to the
CompuServe Service, equal to (a) * * * times (b) the amount of the Base
Payment Portion. For purposes of Attachment E: (i) "Credit Amount" shall
mean, as of the date of the Change Event, the aggregate amounts theretofore
credited to TS pursuant to Sections V.C.1(b) and (c); (ii) "Measurement
Date" means the date sixty (60) days subsequent to the Effective Date; and
(iii) "Change Event" means * * *. Immediately following the Change Event,
the parties shall cause the CompuServe Agreement to be terminated; provided
that such termination shall not affect the advertising to be delivered
pursuant to Section V.F.1 (in the event AOL elects to deliver such
advertising in lieu of paying the Base Payment Portion due to TS in
connection with a Change Event). TS hereby expressly
7
<PAGE>
acknowledges and agrees that neither the CompuServe online service (however
defined in this Agreement or the CompuServe Agreement) nor the end users
thereof (including, without limitation, "End Users" as defined in the
CompuServe Agreement) are or shall be deemed to be within the scope of this
Agreement (including, without limitation, the exclusivity provisions set
forth in Section VI.A hereof), (i) by reason of the consummation of AOL's
recent acquisition of CompuServe Interactive Services, Inc. (or the fact of
such acquisition) or (ii) based on the facts known to TS existing as of the
execution date of this Amendment.
3. Unless and until a Change Event shall have occurred, (a) no user of
the TS telecommunications services marketed thereunder pursuant to the
CompuServe Agreement (the "TS/CS Services") shall for any purposes of this
Agreement (excluding any purpose related to the Supplemental Warrant) be,
or be deemed to be, an "End User" as defined and used herein, (b) the TS/CS
Services shall not be, or be deemed to be, "Services" as defined and used
herein, (c) no revenues generated under or by reason of the CompuServe
Agreement shall form a part of, or in any respect be included in, "Gross
Revenues" as defined and used herein, and (d) TS's exclusivity rights set
forth in Section VII.A herein shall not apply in any manner to CompuServe's
marketing of the TS/CS Services.
4. From and after the date a Change Event shall have occurred, (a)
each user of the TS/CS Services shall for all purposes of this Agreement
and the Warrants be, and shall be deemed to be, an "End User" as defined
and used herein, (b) the TS/CS Services shall be, and shall be deemed to
be, "Services" as defined and used herein, (c) all revenues generated under
or by reason of the CompuServe Agreement shall form a part of, and be
included in, "Gross Revenues" as defined and used herein, and (d) TS's
exclusivity rights set forth in Section VII.A herein shall apply to
CompuServe's marketing of the TS/CS Services; provided that, to the extent
that the CompuServe Service shall be operated as a separately accessible
online service (e.g., subscribers are not required to access the service by
first accessing the America Online brand service) (and without
acknowledgment or agreement by AOL that such CompuServe Service satisfies
the definition of AOL Service set forth Section I.A.9 hereof), AOL agrees
that TS shall continue to have the access, linkage, designated area,
display and other similar rights within and with respect to such CompuServe
and the billing and servicing of any End Users thereon that are provided in
the CompuServe Agreement."
5. AOL hereby consents to TS' and Holdings' entering into, and
performing under, the CompuServe Agreement and agrees that, in and of
itself, such conduct shall not constitute a breach by TS or Holdings of
Section VII.A.6 of this Agreement or require the payment of any override
pursuant thereto.
8
<PAGE>
12. The following clause (iv) is added to the end of Section XI.A.2 of the
Agreement:
"and (iv) any claim relating to (a) the content of any statement or
claim made by TS in connection with the Services or (b) the content of
any promotion, advertisement or other marketing (whether offline or
online, including * * *) relating to the Services (excluding any
content that was submitted by AOL), which content AOL (x) advised TS
that it was not reviewing, (y) did not receive from TS or was not
otherwise provided a reasonable opportunity to review or (z) reviewed
and provided comments, suggestions or input that were not reflected by
TS in the content (and the claim is based on the content that was not
reflected)."
13. The parties hereby agree to execute an amendment to the Supplemental
Warrant (the "Warrant Amendment"), as soon as reasonably practicable
following the Amendment Effective Date, which shall provide that each "End
User" (as defined in the CompuServe Agreement) acquired through the
CompuServe Service shall be included in the calculation of Warrant Shares
pursuant to Section 1(a) of the Supplemental Warrant. Until such time as
the parties have executed the Warrant Amendment, this paragraph shall serve
as a valid amendment to the Supplemental Warrant and shall be fully
self-executing in all respects.
14. The parties hereby agree that (a) the number of End Users who subscribed to
the Long Distance Telecommunications Services between the Effective Date
and December 31, 1997, is a minimum of * * * and (b) the number of End
Users who subscribed to the Long Distance Telecommunications Services
between December 31, 1997, and January 25, 1998 is * * *. The parties
acknowledge that AOL is utilizing the figure of * * * net End Users as of
December 31, 1997 for purposes of calculating the number of Warrant Shares
due to AOL as of such date; provided that, to the extent the actual number
of net End Users from the period between the Effective Date and December
31, 1997 is greater than * * * (the "Excess End Users"), then TS shall
continue to be responsible to provide AOL Warrant Shares in consideration
of such actual Excess End Users as of December 31, 1998.
15. This Amendment does not, and shall not be construed to, modify any term or
condition of the Agreement (including, without limitation, any payment
obligations under the Agreement) other than those specific terms and
conditions expressly referenced in this Amendment. Except as herein
provided, the Agreement shall remain unchanged and in full force and
effect. In the event of any inconsistency or discrepancy between the
Agreement and this Amendment, the terms and conditions set forth in this
Amendment shall control. Neither party shall be bound by, and each party
specifically objects to, any term, condition or other provision that is
different from or in addition to the provisions of this Amendment and the
Agreement (whether or not it would materially alter this Amendment or the
Agreement) and which is proffered by the other party in any correspondence
or other document, unless the party to be bound thereby specifically agrees
to such provision in writing in accordance with the terms of the Agreement.
This Amendment may be executed in multiple counterparts, each of which
shall be deemed an original, but all of which together shall constitute one
and the same document. This
9
<PAGE>
Amendment shall be governed by the internal laws of the State of New York,
without giving effect to the principles of conflict of laws thereof.
10
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Amendment to be signed
on their behalf as of the Amendment Effective Date.
AMERICA ONLINE, INC.
By /s/ David M. Colburn
----------------------------
Name: David M. Colburn
Title: Senior Vice-President
TEL-SAVE, INC.
By /s/ Daniel Borislow
----------------------------
Name: Daniel Borislow
Title: Chairman & CEO
TEL-SAVE HOLDINGS, INC.
By /s/ Daniel Borislow
----------------------------
Name: Daniel Borislow
Title: Chairman & CEO
11
<PAGE>
ATTACHMENT A
DELIVERABLES DURING THE ADDITIONAL PROMOTION PERIOD
AOL Deliverables
Date Description Status as of Signing
* * * * * * * * *
TS Deliverables
Date Description Status as of Signing
* * * * * * * * *
[Endnotes* * * ]
<PAGE>
Attachment B
Adjustment Value Schedule
The "Adjustment Value" shall mean, as of any date of calculation thereof,
the average of the amounts set forth in the TS column and the AOL column below
with respect to the Holdings Share Price as of such calculation date, provided
that such Adjustment Value with respect to a Holdings Share Price between the
prices set forth in the column below shall be determined by interpolation.
<TABLE>
<CAPTION>
SHARE
PRICE
HOLDINGS TS AOL AVERAGE
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
$ 15.00 $ 8.93 $ 8.13 $ 8.53
$ 16.00 $ 9.77 $ 8.98 $ 9.38
$ 17.00 $ 10.62 $ 9.83 $ 10.23
$ 18.00 $ 11.48 $ 10.68 $ 11.08
$ 19.00 $ 12.35 $ 11.54 $ 11.95
$ 20.00 $ 13.22 $ 12.39 $ 12.81
$ 21.00 $ 14.11 $ 13.29 $ 13.70
$ 22.00 $ 15.00 $ 14.21 $ 14.61
$ 23.00 $ 15.89 $ 15.12 $ 15.51
$ 24.00 $ 16.79 $ 16.04 $ 16.42
$ 25.00 $ 17.70 $ 16.96 $ 17.33
$ 26.00 $ 18.61 $ 17.87 $ 18.24
$ 27.00 $ 19.53 $ 18.79 $ 19.16
$ 28.00 $ 20.45 $ 19.70 $ 20.08
$ 29.00 $ 21.37 $ 20.62 $ 21.00
$ 30.00 $ 22.30 $ 21.57 $ 21.94
$ 31.00 $ 23.23 $ 22.53 $ 22.88
$ 32.00 $ 24.17 $ 23.48 $ 23.83
$ 33.00 $ 25.11 $ 24.44 $ 24.78
$ 34.00 $ 26.05 $ 25.40 $ 25.73
$ 35.00 $ 26.99 $ 26.35 $ 26.67
</TABLE>
<PAGE>
Attachment E
The Repayment Amount shall be calculated as the sum of the amounts with respect
to the Initial Payment, the Base Payment and the Midterm Payment, as each are
determined as follows (and subject to Section __ of the Agreement):
Initial Payment
With respect to any date on which the Change Event occurs:
1. If before MD IA
2. If after MD but before CL IA x [1 - ((#M GREATER THAN MD) /22)] - CA
3. If after CL IA x [1 - ((#M GREATER THAN MD) /22)] - CA
Base Payment
With respect to any date on which the Change Event occurs:
1. If before MD and after CL BP
2. If after MD and after CL BP x [1 - ((#M GREATER THAN CL) / (24 - #M@CL)]
Midterm Advance
With respect to any date on which the Change Event occurs:
1. At all times: MA x [1 - (#M GREATER THAN MA) / 12]
Key:
IA = Initial Advance
BP = Base Payment
MA = Midterm Advance
CE = Change Event
CA = Credit Amount
CL = Commercial Launch Date
MD = Measurement Date
#M GREATER THAN = Number of months (or portions of months) since [X]
#M@cl = Number of months (or portions of months) since
Effective Date in which CL occurs
================================================================================
TEL-SAVE HOLDINGS, INC.
TO
FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION
TRUSTEE
-----------
INDENTURE
DATED AS OF DECEMBER 10, 1997
5% CONVERTIBLE SUBORDINATED NOTES DUE 2004
================================================================================
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
ARTICLE I
Definitions and Incorporation by Reference
- ------------------------------------------
<S> <C> <C>
SECTION 1.01. Definitions..............................................1
SECTION 1.02. Other Definitions........................................6
SECTION 1.03. Incorporation by Reference of Trust Indenture Act........7
SECTION 1.04. Rules of Construction....................................7
ARTICLE II
The Securities
- --------------
SECTION 2.01. Form and Dating..........................................7
SECTION 2.02. Execution, Authentication and Delivery...................9
SECTION 2.03. Registrars, Paying Agents and Conversion Agents.........10
SECTION 2.04. Paying Agent to Hold Money in Trust.....................10
SECTION 2.05. Noteholder Lists........................................10
SECTION 2.06. Transfer and Exchange...................................10
SECTION 2.07. Replacement Securities..................................13
SECTION 2.08. Outstanding Securities..................................14
SECTION 2.09. Treasury Securities.....................................14
SECTION 2.10. Temporary Securities; Exchange of Global Security for
Certificated Securities...............................14
SECTION 2.11. Cancellation............................................15
SECTION 2.12. Defaulted Interest......................................15
ARTICLE III
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Redemption
- ----------
<S> <C> <C>
SECTION 3.01. Notices to Trustee......................................15
SECTION 3.02. Selection of Securities to be Redeemed..................15
SECTION 3.03. Notice of Redemption....................................17
SECTION 3.04. Effect of Notice of Redemption..........................17
SECTION 3.05. Deposit of Redemption Price.............................17
SECTION 3.06. Securities Redeemed in Part.............................17
SECTION 3.07. Optional Redemption.....................................17
SECTION 3.08. Designated Event Offer..................................17
ARTICLE IV
Covenants
- ---------
SECTION 4.01. Payment of Securities...................................19
SECTION 4.02. SEC Reports.............................................19
SECTION 4.03. Compliance Certificate..................................20
SECTION 4.04. Stay, Extension and Usury Law...........................20
SECTION 4.05. Corporate Existence.....................................21
SECTION 4.06. Taxes...................................................21
SECTION 4.07. Designated Event........................................21
SECTION 4.08. Investment Company Act..................................23
ARTICLE V
Conversion
- ----------
SECTION 5.01. Conversion Privilege....................................22
SECTION 5.02. Conversion Procedure....................................22
SECTION 5.03. Fractional Shares.......................................22
ii
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 5.04. Taxes on Conversion.....................................23
SECTION 5.05. Company to Provide Stock................................23
SECTION 5.06. Adjustment of Conversion Price..........................24
SECTION 5.07. No Adjustment...........................................27
SECTION 5.08. Other Adjustments.......................................27
SECTION 5.09. Adjustments for Tax Purposes............................27
SECTION 5.10. Adjustments by the Company..............................27
SECTION 5.11. Notice of Adjustment....................................28
SECTION 5.12. Notice of Certain Transactions..........................28
SECTION 5.13. Effect of Reclassifications, Consolidations, Mergers
or Sales on Conversion Privilege.......................28
SECTION 5.14. Trustee's Disclaimer....................................29
ARTICLE VI
Subordination
- -------------
SECTION 6.01. Agreement to Subordinate................................29
SECTION 6.02. No Payment on Securities if Senior Debt in Default......30
SECTION 6.03. Distribution on Acceleration of Securities;
Dissolution and Reorganization; Subrogation
of Securities..........................................31
SECTION 6.04. Reliance by Senior Debt on Subordination Provisions.....34
SECTION 6.05. No Waiver of Subordination Provisions...................34
SECTION 6.06. Trustee's Relation to Senior Debt.......................34
SECTION 6.07. Other Provisions Subject Hereto.........................35
ARTICLE VII
Successors
- ----------
SECTION 7.01. Merger, Consolidation or Sale of Assets.................35
iii
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 7.02. Successor Corporation Substituted.......................36
ARTICLE VIII
Defaults and Remedies
- ---------------------
SECTION 8.01. Events of Default.......................................36
SECTION 8.02. Acceleration............................................38
SECTION 8.03. Other Remedies..........................................38
SECTION 8.04. Waiver of Past Defaults.................................38
SECTION 8.05. Control by Majority.....................................38
SECTION 8.06. Limitation on Suits.....................................39
SECTION 8.07. Rights of Noteholders to Receive Payment................39
SECTION 8.08. Collection Suit by Trustee..............................39
SECTION 8.09. Trustee May File Proofs of Claim........................39
SECTION 8.10. Priorities..............................................40
SECTION 8.11. Undertaking for Costs...................................40
ARTICLE IX
Trustee
- -------
SECTION 9.01. Duties of Trustee.......................................40
SECTION 9.02. Rights of Trustee.......................................41
SECTION 9.03. Individual Rights of Trustee............................41
SECTION 9.04. Trustee's Disclaimer....................................42
SECTION 9.05. Notice of Defaults......................................42
SECTION 9.06. Reports by Trustee to Noteholders.......................42
SECTION 9.07. Compensation and Indemnity..............................42
SECTION 9.08. Replacement of Trustee..................................43
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 9.09. Successor Trustee by Merger, Etc........................44
SECTION 9.10. Eligibility; Disqualification...........................44
SECTION 9.11. Preferential Collection of Claims Against Company.......44
ARTICLE X
Discharge of Indenture
- ----------------------
SECTION 10.01. Termination of Company's Obligations...................44
SECTION 10.02. Repayment to Company...................................44
ARTICLE XI
Amendments, Supplements and Waivers
- -----------------------------------
SECTION 11.01. Without Consent of Noteholders.........................45
SECTION 11.02. With Consent of Noteholders............................45
SECTION 11.03. Compliance with Trust Indenture Act....................46
SECTION 11.04. Revocation and Effect of Consents......................46
SECTION 11.05. Notation on or Exchange of Securities..................47
SECTION 11.06. Trustee Protected......................................47
ARTICLE XII
Miscellaneous
- -------------
SECTION 12.01. Trust Indenture Act Controls...........................47
SECTION 12.02. Notices................................................47
SECTION 12.03. Communication by Noteholders with Other Noteholders....48
SECTION 12.04. Certificate and Opinion as to Conditions Precedent.....48
SECTION 12.05. Statements Required in Certificate or Opinion..........48
SECTION 12.06. Rules by Trustee and Agents............................49
SECTION 12.07. Legal Holidays.........................................49
</TABLE>
v
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 12.08. No Recourse Against Others.............................49
SECTION 12.09. Counterparts...........................................49
SECTION 12.10. Variable Provisions....................................49
SECTION 11.11. GOVERNING LAW..........................................50
SECTION 12.12. No Adverse Interpretation of Other Agreements..........50
SECTION 12.13. Successors.............................................50
SECTION 12.14. Severability...........................................50
SECTION 12.15. Table of Contents, Headings, Etc.......................50
</TABLE>
vi
<PAGE>
EXHIBIT A FORM OF CONVERTIBLE SUBORDINATED NOTE.........................A-1
EXHIBIT B FORM OF TRANSFER CERTIFICATE..................................B-1
EXHIBIT C FORM OF ACCREDITED INVESTOR TRANSFEREE CERTIFICATE............C-1
EXHIBIT D FORM OF REGISTRATION AGREEMENT ...............................E-1
vii
<PAGE>
INDENTURE dated as of December 10, 1997 between Tel-Save
Holdings, Inc., a Delaware corporation (the "Company"), and First Trust of New
York, National Association, as trustee (the "Trustee").
Each party agrees as follows for the benefit of the other
party and for the equal and ratable benefit of the Noteholders of the Company's
5% Convertible Subordinated Notes Due 2004 (the "Securities"):
ARTICLE I
Definitions and Incorporation by Reference
SECTION 1.01. Definitions. "Affiliate" of any specified person
means any other person directly or indirectly controlling or controlled by or
under direct or indirect common control with such specified person. For the
purposes of this definition, "control" (including, with correlative meanings,
the terms "controlling", "controlled by" and "under common control with"), 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 securities or
by agreement or otherwise.
"Agent" means any Registrar, Paying Agent or Conversion Agent.
"Board of Directors" means the Board of Directors of the
Company or any authorized committee of the Board.
"Board Resolution" means a copy of a resolution of the Board
of Directors certified by the Secretary or an Assistant Secretary of the Company
to be in full force and effect on the date of such certification and delivery to
the Trustee.
"Business Day" means any day that is not a Legal Holiday.
"Capital Stock" means any and all shares, interests,
participations, rights or other equivalents (however designated) of equity
interests in any entity, including, without limitation, corporate stock and
partnership interests.
"Change of Control" means any event where: (i) any "person" or
"group" (as such terms are used in Section 13(d) and 14(d) of the Exchange Act)
is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under
the Exchange Act) of shares representing more than 50% of the combined voting
power of the then-outstanding securities entitled to vote generally in elections
of directors of the Company ("Voting Stock"), (ii) the Company consolidates with
or merges into any other corporation, or any other person merges into the
Company, and, in the case of any such transaction, the outstanding Common Stock
of the Company is reclassified into or exchanged for any other property or
security, unless the stockholders of the Company immediately before such
transaction own, directly or indirectly immediately following such transaction,
at least a majority of the combined voting power of the
<PAGE>
outstanding voting securities of the corporation resulting from such transaction
in substantially the same proportion as their ownership of the Voting Stock
immediately before such transaction, (iii) the Company conveys, transfers or
leases all or substantially all of its assets to any person (other than to one
or more wholly-owned subsidiaries of the Company) or (iv) any time the
Continuing Directors do not constitute a majority of the Board of Directors of
the Company (or, if applicable, a successor corporation to the Company).
"Common Stock" means the common stock of the Company as the
same exists at the date of the execution of this Indenture or as such stock may
be constituted from time to time.
"Company" means the party named as such above until a
successor replaces it in accordance with Article VII and thereafter means the
successor.
"Continuing Directors" means as of any date of determination,
any member of the Board of Directors of the Company who (i) was a member of such
Board of Directors on the date of this Indenture or (ii) was nominated for
election or elected to such Board of Directors with the approval of a majority
of the Continuing Directors who were members of such board at the time of such
nomination or election.
"Daily Market Price" means the price of a share of Common
Stock on the relevant date, determined (a) on the basis of the last reported
sale price regular way of the Common Stock as reported on the Nasdaq Stock
Market's National Market (the "NNM"), or if the Common Stock is not then listed
on the NNM, as reported on such national securities exchange upon which the
Common Stock is listed, or (b) if there is no such reported sale on the day in
question, on the basis of the average of the closing bid and asked quotations
regular way as so reported, or (c) if the Common Stock is not listed on the NNM
or on any national securities exchange, on the basis of the average of the high
bid and low asked quotations regular way on the day in question in the
over-the-counter market as reported by the National Association of Securities
Dealers Automated Quotation System, or if not so quoted, as reported by National
Quotation Bureau, Incorporated, or a similar organization.
"Default" means any event that is, or with the passage of time
or the giving of notice or both, would be an Event of Default.
"Depositary" means The Depository Trust Company, its nominees
and their respective successors.
"Designated Event" means the occurrence of a Change of Control
or a Termination of Trading.
"Designated Senior Debt" means (i) any Senior Debt which, as
of the date of this Indenture, has an aggregate principal amount outstanding of
at least $15 million, and (ii) any Senior Debt which, at the date of
determination, has an aggregate principal amount outstanding of, or commitments
to lend up to, at least $15 million and is specifically designated by the
Company in the instrument evidencing or governing such Senior Debt as
"Designated Senior
2
<PAGE>
Debt" for purposes of this Indenture (provided, that such instrument may place
limitations and conditions on the right of such Senior Debt to exercise the
rights of Designated Senior Debt).
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"GAAP" means generally accepted accounting principles 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 approved by a significant segment of the
accounting profession, which are in effect from time to time.
"Global Securities Legend" means the legend labeled as such
and that is set forth in Exhibit A hereto.
"Guarantee" means a guarantee (other than by endorsement of
negotiable instruments for collection in the ordinary course of business),
direct or indirect, in any manner (including, without limitation, letters of
credit and reimbursement agreements in respect thereof), of all or any part of
any Indebtedness.
"Indebtedness" means, with respect to any person, all
obligations, whether or not contingent, of such person (i)(a) for borrowed money
(including, but not limited to, any indebtedness secured by a security interest,
mortgage or other lien on the assets of such person which is (1) given to secure
all or part of the purchase price of property subject thereto, whether given to
the vendor of such property or to another, or (2) existing on property at the
time of acquisition thereof), (b) evidenced by a note, debenture, bond or
written instrument, (c) under a lease required to be capitalized on the balance
sheet of the lessee under GAAP or under any lease or related document (including
a purchase agreement) which provides that such person is contractually obligated
to purchase or to cause a third party to purchase such leased property, (d) in
respect of letters of credit, bank guarantees or bankers' acceptances (including
reimbursement obligations with respect to any of the foregoing), (e) with
respect to Indebtedness secured by a mortgage, pledge, lien, encumbrance, charge
or adverse claim affecting title or resulting in an encumbrance to which the
property or assets of such person are subject, whether or not the obligation
secured thereby shall have been assumed or Guaranteed by or shall otherwise be
such person's legal liability, (f) in respect of the balance of the deferred and
unpaid purchase price of any property or assets, and (g) under interest rate or
currency swap agreements, cap, floor and collar agreements, spot and forward
contracts and similar agreements and arrangements; (ii) with respect to any
obligation of others of the type described in the preceding clause (i) or under
clause (iii) below assumed by or guaranteed in any manner by such person or in
effect guaranteed by such person through an agreement to purchase (including,
without limitation, "take or pay" and similar arrangements), contingent or
otherwise (and the obligations of such person under any such assumptions,
guarantees or other such arrangements); and (iii) any and all deferrals,
renewals, extensions, refinancings and refundings of, or amendments,
modifications or supplements to, any of the foregoing.
"Indenture" means this Indenture as amended from time to time.
3
<PAGE>
"Initial Purchasers" means Smith Barney Inc., Deutsche Morgan
Grenfell Inc. and UBS Securities
LLC.
"Issuance Date" means the date on which the Securities are
first authenticated and issued.
"Material Subsidiary" means any Subsidiary of the Company
which, at the date of determination, is a "significant subsidiary" as defined in
Rule 1-02(w) of Regulation S-X under the Securities Act and the Exchange Act (as
such Regulation is in effect on the date hereof).
"Noteholder" or "holder" means a person in whose name a
Security is registered.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Offering Memorandum" means the offering memorandum relating
to the Securities dated December 5, 1997.
"Officers' Certificate" means a certificate signed by two
Officers, one of whom must be the Chairman of the Board, the Chief Executive
Officer, the President, the Chief Financial Officer or the Treasurer of the
Company. See Sections 12.04 and 12.05 hereof.
"Opinion of Counsel" means a written opinion from legal
counsel who is acceptable to the Trustee. The counsel may be an employee of or
counsel to the Company or the Trustee. See Sections 12.04 and 12.05 hereof.
"person" means any individual, corporation, partnership, joint
venture, association, joint stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"principal" of a debt security means the principal of the
security plus the premium, if any, on the security.
"Registration Agreement" means the Registration Agreement
relating to the Securities dated December 10, 1997, between the Company and the
Initial Purchasers, a form of which is attached as Exhibit D hereto.
"Representative" means the trustee, agent or representative
(if any) for an issue of Senior Debt.
"Restricted Securities Legend" means the legend labeled as
such and that is set forth in Exhibit A hereto.
"SEC" means the Securities and Exchange Commission.
4
<PAGE>
"Securities" means the Securities described in the preamble
above that are issued, authenticated and delivered under this Indenture.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Debt" means the principal of, interest on and other
amounts due on Indebtedness of the Company, whether outstanding on the date of
the Indenture or thereafter created, incurred, assumed or Guaranteed by the
Company; unless, in the instrument creating or evidencing or pursuant to which
Indebtedness is outstanding, it is expressly provided that such Indebtedness is
not senior in right of payment to the Securities. Senior Debt includes, with
respect to the obligations described above, interest accruing, pursuant to the
terms of such Senior Debt, on or after the filing of any petition in bankruptcy
or for reorganization relating to the Company, whether or not post-filing
interest is allowed in such proceeding, at the rate specified in the instrument
governing the relevant obligation. Notwithstanding anything to the contrary in
the foregoing, Senior Debt shall not include: (a) Indebtedness of or amounts
owed by the Company for compensation to employees, or for goods, services or
materials purchased in the ordinary course of business; (b) Indebtedness of the
Company to a Subsidiary of the Company; or (c) any liability for Federal, state,
local or other taxes owed or owing by the Company.
"Shelf Registration Statement" shall have the meaning set
forth in the Registration Agreement.
"Subsidiary" means any corporation, association or other
business entity of which more than 50% of the total voting power of shares of
Capital Stock entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by any person or one or more of the
other Subsidiaries of that person or a combination thereof.
"Termination of Trading" means an event where the Common Stock
(or other securities into which the Securities are then convertible) is neither
listed for trading on a United States national securities exchange nor approved
for trading on an established automated over-the-counter trading market in the
United States.
"TIA" means the Trust Indenture Act of 1939 (15 U.S. Code
ss.ss. 77aaa-77bbbb) as in effect on the date of execution of this Indenture.
"Trading Day" shall mean (A) if the applicable security is
listed or admitted for trading on the New York Stock Exchange or another
national securities exchange, a day on which the New York Stock Exchange or such
other national securities exchange is open for business, (B) if the applicable
security is quoted on the NNM, a day on which trades may be made thereon or (C)
if the applicable security is not so listed, admitted for trading or quoted, any
day other than a Saturday or Sunday or a day on which banking institutions in
the State of New York are authorized or obligated by law or executive order to
close.
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"Trustee" means the party named as such above until a
successor replaces it in accordance with the applicable provisions of this
Indenture and thereafter means the successor.
"Trust Officer" means any officer or assistant officer of the
Trustee assigned by the Trustee to administer this Indenture.
SECTION 1.02. Other Definitions.
Defined in
Term Section
- ---- -------
"Agent Members".........................................................2.01
"Bankruptcy Law"........................................................8.01
"Cedel Bank"............................................................2.01
"Commencement Date".....................................................3.08
"Conversion Agent"......................................................2.03
"Conversion Date".......................................................5.02
"Conversion Price"......................................................5.01
"Conversion Shares".....................................................5.06
"Current Market Price"..................................................5.06
"Custodian".............................................................8.01
"Designated Event Offer"................................................4.07
"Designated Event Payment"..............................................4.07
"Designated Event Payment Date".........................................3.08
"Distribution Date".....................................................5.06
"Distribution Record Date"..............................................5.06
"Excess Payment"...................................................... 5.06
"Euroclear".............................................................2.01
"Event of Default"......................................................8.01
"Global Security".......................................................2.01
"Legal Holiday"........................................................12.07
"Non-Global Purchasers".................................................2.01
"Offer Amount"..........................................................3.08
"Officer"..............................................................12.10
"Paying Agent"..........................................................2.03
"Payment Blockage Notice"...............................................6.02
"Payment Blockage Period"...............................................6.02
"Payment Default".......................................................8.01
"Purchase Agreement"....................................................2.01
"Purchase Date".........................................................5.06
"QIBs"..................................................................2.01
"Registrar".............................................................2.03
"Regulation S"..........................................................2.01
"Restricted Securities".................................................2.01
"Rights"................................................................5.06
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"Rule 144A".............................................................2.01
"Tender Period".........................................................3.08
SECTION 1.03. Incorporation by Reference of Trust Indenture
Act. Whenever this Indenture refers to a provision of the TIA, the provision is
incorporated by reference in and made a part of this Indenture.
The following TIA terms used in this Indenture have the
following meanings:
"indenture securities" means the Securities;
"indenture security holder" means a Noteholder;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the
Trustee; and
"obligor" on the Securities means the Company or any other
obligor on the Securities.
All other terms used in this Indenture that are defined by the
TIA, defined by TIA reference to another statute or defined by SEC rule under
the TIA have the meanings so assigned to them.
SECTION 1.04. Rules of Construction. Unless the context
otherwise requires:
(a) a term has the meaning assigned to it;
(b) an accounting term not otherwise defined has the meaning
assigned to it in accordance with GAAP consistently applied;
(c) "or" is not exclusive;
(d) words in the singular include the plural, and words in the
plural include the singular; and
(e) provisions apply to successive events and transactions.
ARTICLE II
The Securities
SECTION 2.01. Form and Dating. The Securities and the
Trustee's certificate of authentication shall be substantially in the form of
Exhibit A which is hereby incorporated in and expressly made a part of this
Indenture.
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The Securities may have notations, legends or endorsements
required by law, stock exchange rule, agreements to which the Company is
subject, if any, or usage (provided that any such notation, legend or
endorsement is in a form acceptable to the Company). The Company shall furnish
any such legend not contained in Exhibit A to the Trustee in writing. Each
Security shall be dated the date of its authentication. The terms and provisions
of the Securities set forth in Exhibit A are part of the terms of this Indenture
and to the extent applicable, the Company and the Trustee, by their execution
and delivery of this Indenture, expressly agree to such terms and provisions and
to be bound thereby.
(a) Global Securities. The Securities are being offered and
sold by the Company pursuant to a Purchase Agreement relating to the Securities,
dated December 5, 1997, among the Company and the Initial Purchasers (the
"Purchase Agreement").
Securities offered and sold (i) in reliance on Regulation S
under the Securities Act ("Regulation S") shall be issued in the form of one or
more permanent global Securities in definitive, fully registered form without
interest coupons with the Global Securities Legend set forth in Exhibit A hereto
or (ii) to Qualified Institutional Buyers ("QIBs") in reliance on Rule 144A
under the Securities Act ("Rule 144A"), each as provided in the Purchase
Agreement, shall be issued in the form of one or more permanent global
Securities in definitive, fully registered form without interest coupons with
the Global Securities Legend and Restricted Securities Legend set forth in
Exhibit A hereto (together, the "Global Securities"). Each Global Security shall
be deposited on behalf of the purchasers of the Securities represented thereby
with the Trustee, at its New York office, as custodian for the Depositary, and
registered in the name of the Depositary or a nominee of the Depositary (and, in
the case of Regulation S, for the accounts of designated agents holding on
behalf of the Euroclear System ("Euroclear") or Cedel Bank, societe anonyme
("Cedel Bank")), duly executed by the Company and authenticated by the Trustee
as hereinafter provided. The aggregate principal amount of the Global Security
may from time to time be increased or decreased by adjustments made on the
records of the Trustee and the Depositary or its nominee as hereinafter
provided.
(b) Book-Entry Provisions. This Section 2.01(b) shall apply
only to a Global Security deposited with or on behalf of the Depositary.
The Company shall execute and the Trustee shall, in accordance
with this Section 2.01(b) and the written order of the Company, authenticate and
deliver initially one or more Global Securities that (i) shall be registered in
the name of Cede & Co. or other nominee of such Depositary and (ii) shall be
delivered by the Trustee to such Depositary or pursuant to such Depositary's
instructions or held by the Trustee as custodian for the Depositary pursuant to
a FAST Balance Certificate Agreement between the Depositary and the Trustee.
Members of, or participants in, the Depositary ("Agent
Members") shall have no rights under this Indenture with respect to any Global
Security held on their behalf by the Depositary or by the Trustee as the
custodian of the Depositary or under such Global Security, 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 Security for all purposes
whatsoever.
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Notwithstanding the foregoing, nothing herein shall 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 impair, as between the Depositary and its Agent Members, the operation of
customary practices of such Depositary governing the exercise of the rights of a
holder of a beneficial interest in any Global Security.
(c) Certificated Securities. Except as provided in Section
2.10, owners of beneficial interests in Global Securities will not be entitled
to receive physical delivery of certificated Securities. Purchasers of
Securities who are not QIBs and did not purchase Securities sold in reliance on
Regulation S under the Securities Act (referred to herein as the "Non-Global
Purchasers") will receive certificated Securities bearing the Restricted
Securities Legend set forth in Exhibit A hereto ("Restricted Securities").
Restricted Securities will bear the Restricted Securities Legend set forth on
Exhibit A unless removed in accordance with Section 2.06(b) hereof and may not
be exchanged for a Global Security, or interest therein, at any time.
After a transfer of any Securities during the period of the
effectiveness of a Shelf Registration Statement with respect to the Securities,
all requirements pertaining to legends on such Security will cease to apply, the
requirements requiring any such Security issued to certain holders to be issued
in global form will cease to apply, and a certificated Security without legends
will be available to the holder of such Securities.
SECTION 2.02. Execution, Authentication and Delivery. Two
Officers shall sign the Securities for the Company by manual or facsimile
signature. The Company's seal shall be reproduced on the Securities.
If an Officer whose signature is on a Security no longer holds
that office at the time the Security is authenticated, the Security shall
nevertheless be valid.
A Security shall not be valid until authenticated by the
manual signature of an authorized officer of the Trustee. The signature shall be
conclusive evidence that the Security has been authenticated under this
Indenture.
Upon a written order of the Company signed by two Officers,
the Trustee shall authenticate the Securities for original issue up to an
aggregate principal amount of $240,000,000 and deliver such authenticated
securities as directed in such order. The aggregate principal amount of
Securities outstanding at any time shall not exceed such amount except as
provided in Section 2.07.
The Trustee may appoint one or more authenticating agents
acceptable to the Company to authenticate Securities. An authenticating agent
may authenticate Securities whenever the Trustee may do so. Each reference in
this Indenture to authentication by the Trustee includes authentication by such
agent. An authenticating agent has the same rights as an Agent to deal with the
Company or an Affiliate.
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SECTION 2.03. Registrar, Paying Agent and Conversion Agent.
The Company shall maintain in the Borough of Manhattan, City of New York, State
of New York (i) an office or agency where Securities may be presented for
registration of transfer or for exchange (the "Registrar"), (ii) an office or
agency where Securities may be presented for payment (the "Paying Agent") and
(iii) an office or agency where Securities may be presented for conversion (the
"Conversion Agent"). The Registrar shall keep a register of the Securities and
of their transfer and exchange. The Company has initially appointed the Trustee
as its Registrar, Paying Agent and Conversion Agent in New York. The Company may
appoint one or more co-registrars, one or more additional paying agents and one
or more additional conversion agents in such other locations as it shall
determine. The term "Registrar" includes any co-registrar, the term "Paying
Agent" includes any additional paying agent and the term "Conversion Agent"
includes any additional conversion agent. The Company may change any Paying
Agent, Registrar or Conversion Agent without prior notice to any Noteholder. The
Company shall notify the Trustee of the name and address of any newly-appointed
Agent not a party to this Indenture. If the Company fails to appoint or maintain
another entity as Registrar, Paying Agent or Conversion Agent, the Trustee shall
act as such.
SECTION 2.04. Paying Agent to Hold Money in Trust. The Company
shall require each Paying Agent other than the Trustee to agree in writing that
the Paying Agent will hold in trust for the benefit of Noteholders or the
Trustee all money held by the Paying Agent for the payment of principal or
interest on the Securities, and will notify the Trustee of any default by the
Company in making any such payment. While any such default continues, the
Trustee may require a Paying Agent to pay all money held by it to the Trustee.
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 money disbursed by it. Upon payment over
to the Trustee, the Paying Agent (if other than the Company or an Affiliate of
the Company) shall have no further liability for the money. If the Company or an
Affiliate of the Company acts as Paying Agent, it shall segregate and hold in a
separate trust fund for the benefit of the Noteholders all money held by it as
Paying Agent.
SECTION 2.05. Noteholder Lists. The Trustee shall preserve in
as current a form as is reasonably practicable the most recent list available to
it of the names and addresses of Noteholders. If the Trustee is not the
Registrar, the Company shall furnish to the Trustee on or before each interest
payment date and at such other times as the Trustee may request in writing a
list in such form and as of such date as the Trustee may reasonably require of
the names and addresses of Noteholders.
SECTION 2.06. Transfer and Exchange. Where Securities are
presented to the Registrar with a request to register a transfer or to exchange
them for an equal principal amount of Securities of other denominations, such
Registrar shall register the transfer or make the exchange if its requirements
for such transactions are met. To permit registrations of transfers and
exchanges, the Company shall issue and the Trustee shall authenticate Securities
at the Registrar's request. No service charge shall be made for any registration
of transfer or exchange (except as otherwise expressly permitted herein), but
the Company may require payment of a sum sufficient to cover any transfer tax or
similar governmental charge payable in connection
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therewith (other than any such transfer tax or similar governmental charge
payable upon exchanges pursuant to Sections 2.10, 3.06, 3.08, 5.02 or 11.05
hereof).
The Company shall not be required (i) to issue, register the
transfer of, or exchange Securities during a period beginning at the opening of
business 15 days before the day of any selection of Securities for redemption
under Section 3.02 hereof and ending at the close of business on the day of
selection, or (ii) to exchange or register the transfer of any Security so
selected for redemption in whole or in part, except the unredeemed portion of
any Security being redeemed in part.
(a) Notwithstanding any provision to the contrary herein, so
long as a Global Security remains outstanding and is held by or on behalf of the
Depositary, transfers of a Global Security, in whole or in part, or of any
beneficial interest therein, shall only be made in accordance with Section
2.01(b) and this Section 2.06(a); provided, however, that beneficial interests
in a Global Security may be transferred to persons who take delivery thereof in
the form of a beneficial interest in the same Global Security in accordance with
the transfer restrictions set forth under the heading "Notice to Investors" in
the Offering Memorandum and, if applicable, in the Restricted Securities Legend.
(i) Except for transfers or exchanges made in accordance with
any of clauses (ii) through (iv) of this Section 2.06(a), transfers of
a Global Security shall be limited to transfers of such Global Security
in whole, but not in part, to nominees of the Depositary or to a
successor of the Depositary or such successor's nominee.
(ii) Global Security to Restricted Security. If an owner of a
beneficial interest in a Global Security deposited with the Depositary
or with the Trustee as custodian for the Depositary wishes at any time
to transfer its interest in such Global Security to a person who is
required to take delivery thereof in the form of a Restricted Security,
such owner may, subject to the rules and procedures of Euroclear or
Cedel Bank, if applicable, and the Depositary, cause the exchange of
such interest for one or more Restricted Securities of any authorized
denomination or denominations and of the same aggregate principal
amount at maturity. Upon receipt by the Registrar of (1) instructions
from Euroclear or Cedel Bank, if applicable, and the Depositary
directing the Trustee to authenticate and deliver one or more
Restricted Securities of the same aggregate principal amount at
maturity as the beneficial interest in the Global Security to be
exchanged, such instructions to contain the name or names of the
designated transferee or transferees, the authorized denomination or
denominations of the Restricted Securities to be so issued and
appropriate delivery instructions, (2) a certificate substantially in
the form of Exhibit B attached hereto given by the owner of such
beneficial interest and stating that the person transferring such
interest in such Global Security reasonably believes that the person
acquiring the Restricted Securities for which such interest is being
exchanged is an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act)
and is acquiring such Restricted Securities having an aggregate
principal amount of not less than $250,000 for its own account or for
one or more accounts as to which the transferee exercises sole
investment discretion, (3) a
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certificate in the form of Exhibit C attached hereto given by the
person acquiring the Restricted Securities for which such interest is
being exchanged, to the effect set forth therein, and (4) such other
certifications, legal opinions or other information as the Company may
reasonably require to confirm that such transfer is being made pursuant
to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act, then Euroclear or
Cedel Bank, if applicable, or the Registrar, as the case may be, will
instruct the Depositary to reduce or cause to be reduced such Global
Security by the aggregate principal amount at maturity of the
beneficial interest therein to be exchanged and to debit or cause to be
debited from the account of the person making such transfer the
beneficial interest in the Global Security that is being transferred,
and concurrently with such reduction and debit the Company shall
execute, and the Trustee shall authenticate and deliver, one or more
Restricted Securities of the same aggregate principal amount at
maturity in accordance with the instructions referred to above.
(iii) Restricted Security to Restricted Security. If a holder
of a Restricted Security wishes at any time to transfer such Restricted
Security to a person who is required to take delivery thereof in the
form of a Restricted Security, such holder may, subject to the
restrictions on transfer set forth herein and in such Restricted
Security, cause the exchange of such Restricted Security for one or
more Restricted Securities of any authorized denomination or
denominations and of the same aggregate principal amount at maturity.
Upon receipt by the Registrar of (1) such Restricted Security, duly
endorsed as provided herein, (2) instructions from such holder
directing the Trustee to authenticate and deliver one or more
Restricted Securities of the same aggregate principal amount at
maturity as the Restricted Security to be exchanged, such instructions
to contain the name or names of the designated transferee or
transferees, the authorized denomination or denominations of the
Restricted Securities to be so issued and appropriate delivery
instructions, (3) a certificate from the holder of the Restricted
Security to be exchanged in the form of Exhibit B attached hereto, (4)
a certificate in the form of Exhibit C attached hereto given by the
person acquiring the Restricted Securities for which such interest is
being exchanged, to the effect set forth therein, and (5) such other
certifications, legal opinions or other information as the Company may
reasonably require to confirm that such transfer is being made pursuant
to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act, then the Registrar,
shall cancel or cause to be canceled such Restricted Security and
concurrently therewith, the Company shall execute, and the Trustee
shall authenticate and deliver, one or more Restricted Securities of
the same aggregate principal amount at maturity, in accordance with the
instructions referred to above.
(iv) Other Exchanges. In the event that a Global Security is
exchanged for Securities in definitive registered form pursuant to
Section 2.10, prior to the effectiveness of a Shelf Registration
Statement with respect to such Securities, such Securities may be
exchanged only in accordance with such procedures as are substantially
consistent with the provisions of clauses (ii) and (iii) above
(including the certification requirements intended to ensure that such
transfers comply with Rule 144A or Regulation S under the
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Securities Act, as the case may be) and such other procedures as may
from time to time be adopted by the Company.
(b) Except in connection with a Shelf Registration Statement
contemplated by and in accordance with the terms of the Registration Agreement,
if Securities are issued upon the registration of transfer, exchange or
replacement of Securities bearing the Restricted Securities Legend set forth in
Exhibit A hereto, or if a request is made to remove such Restricted Securities
Legend on Securities, the Securities so issued shall bear the Restricted
Securities Legend, or the Restricted Securities Legend shall not be removed, as
the case may be, unless there is delivered to the Company such satisfactory
evidence, which may include an opinion of counsel licensed to practice law in
the State of New York, as may be reasonably required by the Company, that
neither the legend nor the restrictions on transfer set forth therein are
required to ensure that transfers thereof comply with the provisions of Rule
144A, Rule 144 or Regulation S under the Securities Act or, with respect to
Restricted Securities, that such Securities are not "restricted" within the
meaning of Rule 144 under the Securities Act. Upon provision to the Company of
such satisfactory evidence, the Trustee, at the written direction of the
Company, shall authenticate and deliver Securities that do not bear the legend.
(c) Neither the Trustee nor any Agent shall have any
responsibility for any actions taken or not taken by the Depositary.
SECTION 2.07. Replacement Securities. If the holder of a
Security claims that the Security has been lost, destroyed or wrongfully taken
or if such Security is mutilated and is surrendered to the Registrar, the
Company shall issue and the Trustee shall authenticate a replacement Security if
the Trustee's and the Company's requirements (as shall have been previously
communicated to the Trustee in a written letter of standing instruction) are
met. If required by the Trustee, the Registrar or the Company, an indemnity bond
must be sufficient in the judgment of each of the foregoing to protect the
Company, the Trustee, any Agent or any authenticating agent from any loss which
any of them may suffer if a Security is replaced. The Company may charge for its
expenses in replacing a Security.
In case any such mutilated, destroyed, lost or stolen Security
has become or is about to become due and payable, or is about to be redeemed or
purchased by the Company pursuant to Article III hereof or converted into shares
of Common Stock pursuant to Article V hereof, the Company in its discretion may,
instead of issuing a new Security, pay, redeem or convert such Security, as the
case may be.
Every replacement Security is an additional obligation of the
Company.
SECTION 2.08. Outstanding Securities. The Securities
outstanding at any time are all the Securities authenticated by the Trustee
except for those canceled by it, those delivered to it for cancellation, and
those described in this Section as not outstanding.
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If a Security is replaced, paid, redeemed or converted
pursuant to Section 2.07 hereof, it ceases to be outstanding unless, in the case
of a replaced Security, the Trustee receives proof satisfactory to it that the
replaced Security is held by a bona fide purchaser.
If Securities are considered paid under Section 4.01 hereof,
they cease to be outstanding and interest on them ceases to accrue.
A Security does not cease to be outstanding because the
Company or an Affiliate of the Company holds the Security.
SECTION 2.09. Treasury Securities. In determining whether the
Noteholders of the required principal amount of Securities have concurred in any
direction, waiver or consent, Securities owned by the Company or an Affiliate of
the Company shall be considered as though they are not outstanding, except that
for the purposes of determining whether the Trustee shall be protected in
relying on any such direction, waiver or consent, only Securities which a Trust
Officer knows are so owned shall be so disregarded.
SECTION 2.10. Temporary Securities; Exchange of Global
Security for Certificated Securities. (a) Until definitive Securities are ready
for delivery, the Company may prepare and the Trustee shall authenticate
temporary Securities. Temporary Securities shall be substantially in the form of
definitive Securities but may have variations that the Company considers
appropriate for temporary Securities. Without unreasonable delay, the Company
shall prepare and the Trustee shall authenticate definitive Securities in
exchange for temporary Securities.
(b) A Global Security deposited with the Depositary or with
the Trustee as custodian for the Depositary pursuant to Section 2.01 shall be
transferred to the beneficial owners thereof in the form of certificated
securities only if such transfer complies with Section 2.06 and (i) the
Depositary notifies the Company that it is unwilling or unable to continue as
Depositary for such Global Security or if at any time such Depositary ceases to
be a "clearing agency" registered under the Exchange Act and a successor
Depositary is not appointed by the Company within 90 days of such notice, or
(ii) an Event of Default has occurred and is continuing.
(c) Any Global Security that is transferable to the beneficial
owners thereof in the form of certificated Securities pursuant to this Section
2.10 shall be surrendered by the Depositary to the Trustee located in the
Borough of Manhattan, The City of New York, to be so transferred, in whole or
from time to time in part, without charge, and the Trustee shall authenticate
and deliver, upon such transfer of each portion of such Global Security, an
equal aggregate principal amount at maturity of Securities of authorized
denominations in the form of certificated Securities. Any portion of a Global
Security transferred pursuant to this Section shall be executed, authenticated
and delivered only in denominations of $1,000 and any integral multiple thereof
and registered in such names as the Depositary shall direct. Any Securities in
the form of certificated Securities delivered in exchange for an interest in the
Global Security
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shall, except as otherwise provided by Section 2.06(b), bear the Restricted
Securities Legend set forth in Exhibit A hereto.
(d) Prior to any transfer pursuant to Section 2.10(b), the
registered holder of a Global Security may grant proxies and otherwise authorize
any person, including Agent Members and persons that may hold interests through
Agent Members, to take any action which a holder is entitled to take under this
Indenture or the Securities.
(e) In the event of the occurrence of either of the events
specified in Section 2.10(b), the Company will promptly make available to the
Trustee a reasonable supply of certificated Securities in definitive form
without interest coupons.
SECTION 2.11. Cancellation. The Company at any time may
deliver Securities to the Registrar for cancellation. The Registrar, Paying
Agent and Conversion Agent shall forward to the Trustee any Securities
surrendered to them for registration of transfer, redemption, conversion,
exchange or payment. The Trustee shall promptly cancel all Securities
surrendered for registration of transfer, redemption, conversion, exchange,
payment, replacement or cancellation and shall destroy all canceled Securities
unless the Company otherwise directs. The Company may not issue new Securities
to replace Securities that it has paid or that have been delivered to the
Registrar for cancellation or that any holder has converted.
SECTION 2.12. Defaulted Interest. If the Company fails to make
a payment of interest on the Securities, it shall pay such defaulted interest
plus any interest payable on the defaulted interest, in any lawful manner. It
may pay such defaulted interest, plus any such interest payable on it, to the
persons who are Noteholders on a subsequent special record date. The Company
shall fix any such record date and payment date. At least 15 days before any
such record date, the Company shall mail to Noteholders a notice that states the
record date, payment date, and amount of such interest to be paid.
ARTICLE III
Redemption
SECTION 3.01. Notices to Trustee. If the Company elects to
redeem Securities pursuant to Section 3.07 hereof, it shall notify the Trustee
of the redemption date and the principal amount of Securities to be redeemed.
The Company shall give each notice provided for in this Section 3.01 at least 45
days before the redemption date (unless a shorter notice period shall be
satisfactory to the Trustee).
SECTION 3.02. Selection of Securities to be Redeemed. If less
than all the Securities are to be redeemed, the Trustee shall select the
Securities to be redeemed by a method that complies with the requirements of the
principal national securities exchange, if any, on which the Securities are
listed, or, if the Securities are not so listed, on a pro rata basis, by lot or
by such other method as the Trustee considers fair and appropriate. The Trustee
shall make the selection not more than 60 days and not less than 30 days before
the redemption date from
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Securities outstanding not previously called for redemption. The Trustee may
select for redemption portions of the principal of Securities that have
denominations larger than $1,000. Securities and portions of them it selects
shall be in amounts of $1,000 or integral multiples of $1,000. Provisions of
this Indenture that apply to Securities called for redemption also apply to
portions of Securities called for redemption. The Trustee shall notify the
Company promptly of the Securities or portions of Securities to be called for
redemption.
If any Security selected for partial redemption is converted
in part after such selection, the converted portion of such Security shall be
deemed (so far as may be) to be the portion to be selected for redemption. The
Securities (or portions thereof) so selected shall be deemed duly selected for
redemption for all purposes hereof, notwithstanding that any such Security is
converted in whole or in part before the mailing of the notice of redemption.
Upon any redemption of less than all the Securities, the Company and the Trustee
may treat as outstanding any Securities surrendered for conversion during the
period 15 days next preceding the mailing of a notice of redemption and need not
treat as outstanding any Security authenticated and delivered during such period
in exchange for the unconverted portion of any Security converted in part during
such period.
SECTION 3.03. Notice of Redemption. At least 30 days but not
more than 60 days before a redemption date, the Company shall mail a notice of
redemption to each holder whose Securities are to be redeemed at such holder's
registered address.
The notice shall identify the Securities to be redeemed and
shall state:
(a) the redemption date;
(b) the redemption price;
(c) if any Security is being redeemed in part, the portion of
the principal amount of such Security to be redeemed and that, after
the redemption date, upon cancellation of such Security, a new Security
or Securities in principal amount equal to the unredeemed portion will
be issued in the name of the holder thereof;
(d) the name and address of the Paying Agent;
(e) that Securities called for redemption must be surrendered
to the Paying Agent to collect the redemption price plus accrued
interest;
(f) that, unless the Company defaults in making such
redemption payment or the Paying Agent is prohibited from making such
payment pursuant to the terms of this Indenture, by law or otherwise,
interest on Securities called for redemption ceases to accrue on and
after the redemption date; and
(g) the paragraph of the Securities pursuant to which the
Securities called for redemption are being redeemed.
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Such notice shall also state the current Conversion Price and
the date on which the right to convert such Securities or portions thereof into
Common Stock of the Company will expire.
At the Company's request, the Trustee shall give notice of
redemption in the Company's name and at its expense.
SECTION 3.04. Effect of Notice of Redemption. Once notice of
redemption is mailed, Securities called for redemption become due and payable on
the redemption date at the price set forth in the Security.
SECTION 3.05. Deposit of Redemption Price. On or before the
redemption date, the Company shall deposit with the Trustee or the Paying Agent
money sufficient to pay the redemption price of and accrued interest up to but
not including the redemption date on all Securities to be redeemed on that date
(subject to the right of holders of record on the relevant record date to
receive interest due on an interest payment date) unless theretofore converted
into Common Stock pursuant to the provisions hereof. The Trustee or such Paying
Agent shall return to the Company any money not required for that purpose.
SECTION 3.06. Securities Redeemed in Part. Upon surrender of a
Security that is redeemed in part, the Company shall issue and the Trustee shall
authenticate for the holder at the expense of the Company a new Security equal
in principal amount to the unredeemed portion of the Security surrendered.
SECTION 3.07. Optional Redemption. The Company may redeem all
or any portion of the Securities, upon the terms and at the redemption prices
set forth in each of the Securities. Any redemption pursuant to this Section
3.07 shall be made pursuant to the provisions of Section 3.01 through 3.06
hereof.
SECTION 3.08. Designated Event Offer. (a) In the event that,
pursuant to Section 4.07 hereof, the Company shall commence a Designated Event
Offer, the Company shall follow the procedures in this Section 3.08.
(b) The Designated Event Offer shall remain open for a period
specified by the Company which shall be no less than 30 calendar days and no
more than 40 calendar days following its commencement on the date of the mailing
of notice in accordance with Section 4.07(b) hereof (the "Commencement Date"),
except to the extent that a longer period is required by applicable law (the
"Tender Period"). Upon the expiration of the Tender Period (the "Designated
Event Payment Date"), the Company shall purchase the principal amount of
Securities required to be purchased pursuant to Section 4.07 hereof (the "Offer
Amount").
(c) If the Designated Event Payment Date is on or after an
interest payment record date and on or before the related interest payment date,
any accrued interest to the related interest payment date will be paid to the
person in whose name a Security is registered at the
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close of business on such record date, and no additional interest will be
payable to Noteholders who tender Securities pursuant to the Designated Event
Offer.
(d) The Company shall provide the Trustee with written notice
of the Designated Event Offer at least 10 Business Days before the Commencement
Date.
(e) Subject to Section 4.07(b), on or before the Commencement
Date, the Company or the Trustee (at the request and expense of the Company)
shall send, by first class mail, a notice to each of the Noteholders, which
shall govern the terms of the Designated Event Offer and shall state:
(i) that the Designated Event Offer is being made pursuant to
this Section 3.08 and Section 4.07 hereof and that all Securities
tendered will be accepted for payment;
(ii) the Offer Amount, the purchase price (as determined in
accordance with Section 4.07 hereof), the length of time the Designated
Event Offer will remain open and the Designated Event Payment Date;
(iii) that any Security or portion thereof not tendered or
accepted for payment will continue to accrue interest;
(iv) that, unless the Company defaults in the payment of the
Designated Event Payment, any Security or portion thereof accepted for
payment pursuant to the Designated Event Offer shall cease to accrue
interest after the Designated Event Payment Date;
(v) that Noteholders electing to have a Security or portion
thereof purchased pursuant to any Designated Event Offer will be
required to surrender the Security, with the form entitled "Option of
Noteholder To Elect Purchase" on the reverse of the Security 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 Designated
Event Payment Date;
(vi) that Noteholders 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 Designated Event
Payment Date, or such longer period as may be required by law, a letter
or a telegram, telex, facsimile transmission (receipt of which is
confirmed and promptly followed by a letter) setting forth the name of
the Noteholder, the principal amount of the Security or portion thereof
the Noteholder delivered for purchase and a statement that such
Noteholder is withdrawing his election to have the Security or portion
thereof purchased; and
(vii) that Noteholders whose Securities are being purchased
only in part will be issued new Securities equal in principal amount to
the unpurchased portion of the Securities surrendered, which
unpurchased portion must be equal to $1,000 in principal amount or an
integral multiple thereof.
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In addition, the notice shall contain all instructions and
materials that the Company shall reasonably deem necessary to enable such
Noteholders to tender Securities pursuant to the Designated Event Offer.
(f) At least one Business Day prior to the Designated Event
Payment Date, the Company shall irrevocably deposit with the Trustee or the
Paying Agent in immediately available funds an amount equal to the Offer Amount
to be held for payment in accordance with the terms of this Section 3.08. On the
Designated Event Payment Date, the Company shall, to the extent lawful, (i)
accept for payment the Securities or portions thereof tendered pursuant to the
Designated Event Offer, (ii) deliver or cause to be delivered to the Trustee
Securities so accepted and (iii) deliver to the Trustee an Officers' Certificate
stating such Securities or portions thereof have been accepted for payment by
the Company in accordance with the terms of this Section 3.08. The Paying Agent
shall promptly (but in any case not later than five calendar days after the
Designated Event Payment Date) mail or deliver to each tendering Noteholder an
amount equal to the purchase price of the Securities tendered by such
Noteholder, and the Trustee shall promptly authenticate and mail or deliver to
such Noteholders a new Security equal in principal amount to any unpurchased
portion of the Security surrendered, if any; provided, that each new Security
shall be in a principal amount of $1,000 or an integral multiple thereof. Any
Securities not so accepted shall be promptly mailed or delivered by or on behalf
of the Company to the holder thereof. The Company will publicly announce the
results of the Designated Event Offer on, or as soon as practicable after, the
Designated Event Payment Date.
(g) The Designated Event Offer shall be made by the Company in
compliance with all applicable provisions of the Exchange Act, and all
applicable tender offer rules promulgated thereunder, and shall include all
instructions and materials that the Company shall reasonably deem necessary to
enable such Noteholders to tender their Securities.
ARTICLE IV
Covenants
SECTION 4.01. Payment of Securities. The Company shall pay the
principal of and interest on the Securities on the dates and in the manner
provided in the Securities. Principal and interest shall be considered paid on
the date due if the Paying Agent (other than the Company or an Affiliate of the
Company) holds on that date money designated for and sufficient to pay all
principal and interest then due and such Paying Agent is not prohibited from
paying such money to the Noteholders on that date pursuant to the terms of this
Indenture. To the extent lawful, the Company shall pay interest (including
post-petition interest in any proceeding under any Bankruptcy Law) on overdue
installments of interest (without regard to any applicable grace period) at the
rate borne by the Securities, compounded semiannually.
SECTION 4.02. SEC Reports. Whether or not required by the
rules and regulations of the SEC, so long as any Securities are outstanding, the
Company will file with the SEC and furnish to the Trustee and to the holders of
Securities all quarterly and annual financial
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information required to be contained in a filing with the SEC on Forms 10-Q and
10-K, including a "Management's Discussion and Analysis of Financial Conditions
and Results of Operations" and, with respect to annual information only, a
report thereon by the Company's certified independent accountants.
SECTION 4.03. Compliance Certificate. The Company shall
deliver to the Trustee, within 120 days after the end of each fiscal year of the
Company, an Officers' Certificate stating that a review of the activities of the
Company and its subsidiaries during the preceding fiscal year has been made
under the supervision of the signing Officers with a view to determining whether
the Company has kept, observed, performed and fulfilled its obligations under,
and complied with the covenants and conditions contained in, this Indenture, and
further stating, as to each such Officer signing such certificate, that to the
best of such Officer's knowledge the Company has kept, observed, performed and
fulfilled each and every covenant, and complied with the covenants and
conditions contained in this Indenture and is not in default in the performance
or observance of any of the terms, provisions and conditions hereof (or, if a
Default or Event of Default shall have occurred, describing all such Defaults or
Events of Default of which such Officer may have knowledge) and that to the best
of such Officer's knowledge no event has occurred and remains in existence by
reason of which payments on account of the principal or of interest, if any, on
the Securities are prohibited.
One of the Officers signing such Officers' Certificate shall
be either the Company's principal executive officer, principal financial officer
or principal accounting officer.
The Company will, so long as any of the Securities are
outstanding, deliver to the Trustee, forthwith upon becoming aware of:
(a) any Default, Event of Default or default in the
performance of any covenant, agreement or condition contained in this
Indenture; or
(b) any event of default under any other mortgage, indenture
or instrument as that term is used in Section 8.01(e),
an Officers' Certificate specifying such Default, Event of Default or default.
Immediately upon the occurrence of any event giving rise to an
increase in the interest rate on the Securities in accordance with paragraph 11
of the form thereof or the termination of any such increase, the Company shall
give the Trustee notice of such increase or termination, of the interest rate
borne by the Securities after giving effect to such increase or termination and
of the event giving rise to such increase or termination (such notice to be
contained in an Officers' Certificate), and prior to receipt of such Officers'
Certificate the Trustee shall be entitled to assume that no such increase or
termination has occurred, as the case may be.
SECTION 4.04. Stay, Extension and Usury Law. The Company
covenants (to the extent that it may lawfully do so) that it will not at any
time insist upon, plead, or in any
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manner whatsoever claim or take the benefit or advantage of, any stay, extension
or usury 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 it may lawfully do so) hereby expressly waives all benefit or
advantage of any such law, and covenants that it will not, by resort to any such
law, hinder, delay or impede the execution of any power herein granted to the
Trustee, but will suffer and permit the execution of every such power as though
no such law has been enacted.
SECTION 4.05. Corporate Existence. Except as provided in
Article VII hereof, the Company will do or cause to be done all things necessary
to preserve and keep in full force and effect its corporate existence and the
corporate, partnership or other existence of each Subsidiary of the Company in
accordance with the respective organizational documents of each Subsidiary and
the rights (charter and statutory), licenses and franchises of the Company and
its Subsidiaries; provided, however, that the Company shall not be required to
preserve any such right, license or franchise, or the corporate, partnership or
other existence of any Subsidiary, 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 its Subsidiaries taken as a whole and that the loss
thereof is not adverse in any material respect to the Noteholders.
SECTION 4.06. Taxes. The Company shall, and shall cause each
of its Subsidiaries to, pay prior to delinquency all taxes, assessments and
governmental levies, except as contested in good faith and by appropriate
proceedings.
SECTION 4.07. Designated Event. (a) Upon the occurrence of a
Designated Event, each holder of Securities shall have the right, in accordance
with this Section 4.07 and Section 3.08 hereof, to require the Company to
repurchase all or any part (equal to $1,000 or an integral multiple thereof) of
such holder's Securities pursuant to the terms of Section 3.08 (the "Designated
Event Offer") at a purchase price equal to 101% of the principal amount thereof,
plus accrued and unpaid interest thereon to the Designated Event Payment Date
(the "Designated Event Payment").
(b) Within 30 days following any Designated Event, the Company
shall mail to each holder the notice provided by Section 3.08(e).
SECTION 4.08. Investment Company Act. As long as any Notes are
outstanding, the Company will conduct its business and operations so as not to
become an "investment company" within the meaning of the Investment Company Act
of 1940, as amended (the "Investment Company Act"), and will take all steps
required in order for it to continue not to be an "investment company" and not
to be required to be registered under the Investment Company Act, including, if
necessary, redeployment of the assets of the Company.
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ARTICLE V
Conversion
SECTION 5.01. Conversion Privilege. A holder of a Security may
convert the principal amount thereof (or any portion thereof that is an integral
multiple of $1,000) into fully paid and nonassessable shares of Common Stock of
the Company at any time after 90 days following the Issuance Date and prior to
the close of business on the Business Day immediately preceding the maturity
date of the Security at the Conversion Price then in effect, except that, with
respect to any Security called for redemption, such conversion right shall
terminate at the close of business on the Business Day immediately preceding the
redemption date (unless the Company shall default in making the redemption
payment when it becomes due, in which case the conversion right shall terminate
on the date such default is cured). The number of shares of Common Stock
issuable upon conversion of a Security is determined by dividing the principal
amount of the Security converted by the conversion price in effect on the
Conversion Date (the "Conversion Price").
The initial Conversion Price is stated in paragraph 10 of the
Securities and is subject to adjustment as provided in this Article V.
Provisions of this Indenture that apply to conversion of all
of a Security also apply to conversion of a portion of it. A holder of
Securities is not entitled to any rights of a holder of Common Stock until such
holder of Securities has converted such Securities into Common Stock, and only
to the extent that such Securities are deemed to have been converted into Common
Stock under this Article 5.
SECTION 5.02. Conversion Procedure. To convert a Security, a
holder must satisfy the requirements in paragraph 10 of the Securities. The date
on which the holder satisfies all of those requirements is the conversion date
(the "Conversion Date"). As soon as practicable after the Conversion Date, the
Company shall deliver to the holder through the Conversion Agent a certificate
for the number of whole shares of Common Stock issuable upon the conversion and
a check for any fractional share determined pursuant to Section 5.03. The person
in whose name the certificate is registered shall become the stockholder of
record on the Conversion Date and, as of such date, such person's rights as a
Noteholder with respect to the converted Security shall cease; provided,
however, that no surrender of a Security on any date when the stock transfer
books of the Company shall be closed shall be effective to constitute the person
entitled to receive the shares of Common Stock upon such conversion as the
stockholder of record of such shares of Common Stock on such date, but such
surrender shall be effective to constitute the person entitled to receive such
shares of Common Stock as the stockholder of record thereof for all purposes at
the close of business on the next succeeding day on which such stock transfer
books are open; provided further, however, that such conversion shall be at the
Conversion Price in effect on the date that such Security shall have been
surrendered for conversion, as if the stock transfer books of the Company had
not been closed.
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No payment or adjustment will be made for accrued and unpaid
interest on a converted Security or for dividends or distributions on shares of
Common Stock issued upon conversion of a Security, but if any holder surrenders
a Security for conversion after the close of business on the record date for the
payment of an installment of interest and prior to the opening of business on
the next interest payment date, then, notwithstanding such conversion, the
interest payable on such interest payment date shall be paid to the holder of
such Security on such record date. In such event, unless such Security has been
called for redemption on or prior to such interest payment date, such Security,
when surrendered for conversion, must be accompanied by payment in funds
acceptable to the Company of an amount equal to the interest payable on such
interest payment date on the portion so converted.
If a holder converts more than one Security at the same time,
the number of whole shares of Common Stock issuable upon the conversion shall be
based on the total principal amount of Securities converted.
Upon surrender of a Security that is converted in part, the
Trustee shall authenticate for the holder a new Security equal in principal
amount to the unconverted portion of the Security surrendered.
SECTION 5.03. Fractional Shares. The Company will not issue
fractional shares of Common Stock upon conversion of a Security. In lieu
thereof, the Company will pay an amount in cash based upon the Daily Market
Price of the Common Stock on the trading day prior to the date of conversion.
SECTION 5.04. Taxes on Conversion. The issuance of
certificates for shares of Common Stock upon the conversion of any Security
shall be made without charge to the converting Noteholder for such certificates
or for any tax in respect of the issuance of such certificates, and such
certificates shall be issued in the respective names of, or in such names as may
be directed by, the holder or holders of the converted Security; provided,
however, that in the event that certificates for shares of Common Stock are to
be issued in a name other than the name of the holder of the Security converted,
such Security, when surrendered for conversion, shall be accompanied by an
instrument of assignment or transfer, in form satisfactory to the Company, duly
executed by the registered holder thereof or his duly authorized attorney; and
provided further, however, that the Company shall not be required to pay any tax
which may be payable in respect of any transfer involved in the issuance and
delivery of any such certificates in a name other than that of the holder of the
converted Security, and the Company shall not be required to issue or deliver
such certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid or is
not applicable.
SECTION 5.05. Company to Provide Stock. The Company shall at
all times reserve and keep available, free from preemptive rights, out of its
authorized but unissued Common Stock, solely for the purpose of issuance upon
conversion of Securities as herein provided, a sufficient number of shares of
Common Stock to permit the conversion of all outstanding Securities for shares
of Common Stock.
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All shares of Common Stock which may be issued upon conversion
of the Securities shall be duly authorized, validly issued, fully paid and
nonassessable when so issued.
SECTION 5.06. Adjustment of Conversion Price. The Conversion
Price shall be subject to adjustment from time to time as follows:
(a) In case the Company shall (1) pay a dividend in shares of
Common Stock to holders of Common Stock, (2) make a distribution in shares of
Common Stock to holders of Common Stock, (3) subdivide its outstanding shares of
Common Stock into a greater number of shares of Common Stock or (4) combine its
outstanding shares of Common Stock into a smaller number of shares of Common
Stock, the Conversion Price in effect immediately prior to such action shall be
adjusted so that the holder of any Security thereafter surrendered for
conversion shall be entitled to receive the number of shares of Common Stock
which he would have owned immediately following such action had such Securities
been converted immediately prior thereto. Any adjustment made pursuant to this
subsection (a) shall become effective immediately after the record date in the
case of a dividend or distribution and shall become effective immediately after
the effective date in the case of a subdivision or combination.
(b) In case the Company shall issue rights or warrants to
substantially all holders of Common Stock entitling them (for a period
commencing no earlier than the record date for the determination of holders of
Common Stock entitled to receive such rights or warrants and expiring not more
than 45 days after such record date) to subscribe for or purchase shares of
Common Stock (or securities convertible into Common Stock) at a price per share
less than the Current Market Price (as determined pursuant to subsection (f)
below) of the Common Stock on such record date, the Conversion Price shall be
adjusted so that the same shall equal the price determined by multiplying the
Conversion Price in effect immediately prior to such record date by a fraction
of which the numerator shall be the number of shares of Common Stock outstanding
on such record date, plus the number of shares of Common Stock which the
aggregate offering price of the offered shares of Common Stock (or the aggregate
conversion price of the convertible securities so offered) would purchase at
such Current Market Price, and of which the denominator shall be the number of
shares of Common Stock outstanding on such record date plus the number of
additional shares of Common Stock offered (or into which the convertible
securities so offered are convertible). Such adjustments shall become effective
immediately after such record date.
(c) In case the Company shall distribute to all holders of
Common Stock shares of any class of Capital Stock of the Company other than
Common Stock, evidences of indebtedness or other assets (other than cash
dividends out of current or retained earnings), or shall distribute to
substantially all holders of Common Stock rights or warrants to subscribe for
securities (other than those Securities referred to in subsection (b) above),
then in each such case the Conversion Price shall be adjusted so that the same
shall equal the price determined by multiplying the Conversion Price in effect
immediately prior to the date of such distribution by a fraction of which the
numerator shall be the Current Market Price (determined as provided in
subsection (f) below) of the Common Stock on the record date mentioned below
less the then fair market value (as determined by the Board of Directors, whose
determination shall be conclusive
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evidence of such fair market value and described in a Board Resolution) of the
portion of the assets so distributed or of such subscription rights or warrants
applicable to one share of Common Stock, and of which the denominator shall be
such Current Market Price of the Common Stock. Such adjustment shall become
effective immediately after the record date for the determination of the holders
of Common Stock entitled to receive such distribution. Notwithstanding the
foregoing, in case the Company shall issue rights or warrants to subscribe for
additional shares of the Company's capital stock (other than those referred to
in subsection (b) above) ("Rights") to substantially all holders of Common
Stock, the Company may, in lieu of making any adjustment pursuant to this
Section 5.06, make proper provision so that each holder of a Security who
converts such Security (or any portion thereof) after the record date for such
distribution and prior to the expiration or redemption of the Rights shall be
entitled to receive upon such conversion, in addition to the shares of Common
Stock issuable upon such conversion (the "Conversion Shares"), a number of
Rights to be determined as follows: (i) if such conversion occurs on or prior to
the date for the distribution to the holders of Rights of separate certificates
evidencing such Rights (the "Distribution Date"), the same number of Rights to
which a holder of a number of shares of Common Stock equal to the number of
Conversion Shares is entitled at the time of such conversion in accordance with
the terms and provisions of and applicable to the Rights; and (ii) if such
conversion occurs after the Distribution Date, the same number of Rights to
which a holder of the number of shares of Common Stock into which the principal
amount of the Security so converted was convertible immediately prior to the
Distribution Date would have been entitled on the Distribution Date in
accordance with the terms and provisions of and applicable to the Rights.
(d) In case the Company shall, by dividend or otherwise, at
any time distribute to all holders of its Common Stock cash (including any
distributions of cash out of current or retained earnings of the Company but
excluding any cash that is distributed as part of a distribution requiring a
Conversion Price adjustment pursuant to paragraph (c) of this Section) in an
aggregate amount that, together with the sum of (x) the aggregate amount of any
other distributions to all holders of its Common Stock made in cash plus (y) all
Excess Payments, in each case made within the 12 months preceding the date fixed
for determining the stockholders entitled to such distribution (the
"Distribution Record Date") and in respect of which no Conversion Price
adjustment pursuant to paragraphs (c) or (e) of this Section or this paragraph
(d) has been made, exceeds 15% of the product of the Current Market Price per
share (determined as provided in paragraph (f) of this Section) of the Common
Stock on the Distribution Record Date multiplied by the number of shares of
Common Stock outstanding on the Distribution Record Date (excluding shares held
in the treasury of the Company), the Conversion Price shall be reduced so that
the same shall equal the price determined by multiplying such Conversion Price
in effect immediately prior to the effectiveness of the Conversion Price
reduction contemplated by this paragraph (d) by a fraction of which the
numerator shall be the Current Market Price per share (determined as provided in
paragraph (f) of this Section) of the Common Stock on the Distribution Record
Date less the amount of such cash and other consideration (including any Excess
Payments) so distributed applicable to one share of Common Stock (equal to the
aggregate amount of such cash and other consideration (including any Excess
Payments) divided by the number of shares of Common Stock outstanding
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on the Distribution Record Date) and the denominator shall be such Current
Market Price per share (determined as provided in paragraph (f) of this Section)
of the Common Stock on the Distribution Record Date, such reduction to become
effective immediately prior to the opening of business on the day following the
Distribution Record Date.
(e) In case a tender offer or other negotiated transaction
made by the Company or any Subsidiary of the Company for all or any portion of
the Common Stock shall be consummated, if an Excess Payment is made in respect
of such tender offer or other negotiated transaction and the amount of such
Excess Payment, together with the sum of (x) the aggregate amount of all Excess
Payments plus (y) the aggregate amount of all distributions to all holders of
the Common Stock made in cash (including any distributions of cash out of
current or retained earnings of the Company), in each case made within the 12
months preceding the date of payment of such current negotiated transaction
consideration or expiration of such current tender offer, as the case may be
(the "Purchase Date"), and as to which no adjustment pursuant to paragraph (c)
or paragraph (d) of this Section or this paragraph (e) has been made, exceeds
15% of the product of the Current Market Price per share (determined as provided
in paragraph (f) of this Section) of the Common Stock on the Purchase Date
multiplied by the number of shares of Common Stock outstanding (including any
tendered shares but excluding any shares held in the treasury of the Company or
any Subsidiary of the Company) on the Purchase Date, the Conversion Price shall
be reduced so that the same shall equal the price determined by multiplying such
Conversion Price in effect immediately prior to the effectiveness of the
Conversion Price reduction contemplated by this paragraph (e) by a fraction of
which the numerator shall be the Current Market Price per share (determined as
provided in paragraph (f) of this Section) of the Common Stock on the Purchase
Date less the amount of such Excess Payments and such cash distributions, if
any, applicable to one share of Common Stock (equal to the aggregate amount of
such Excess Payments and such cash distributions divided by the number of shares
of Common Stock outstanding on the Purchase Date) and the denominator shall be
such Current Market Price per share (determined as provided in paragraph (f) of
this Section) of the Common Stock on the Purchase Date, such reduction to become
effective immediately prior to the opening of business on the day following the
Purchase Date.
(f) The "Current Market Price" per share of Common Stock on
any date shall be deemed to be the average of the Daily Market Prices for the
shorter of (i) 30 consecutive Business Days ending on the last full Trading Day
on the exchange or market referred to in determining such Daily Market Prices
prior to the time of determination or (ii) the period commencing on the date
next succeeding the first public announcement of the issuance of such rights or
such warrants or such other distribution or such negotiated transaction through
such last full trading day on the exchange or market referred to in determining
such Daily Market Prices prior to the time of determination.
(g) "Excess Payment" means the excess of (A) the aggregate of
the cash and fair market value of other consideration paid by the Company or any
of its Subsidiaries with respect to the shares acquired in a tender offer or
other negotiated transaction over (B) the Daily Market
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Price on the Trading Day immediately following the completion of such tender
offer or other negotiated transaction multiplied by the number of acquired
shares.
(h) In any case in which this Section 5.06 shall require that
an adjustment be made immediately following a record date for an event, the
Company may elect to defer, until such event, issuing to the holder of any
Security converted after such record date the shares of Common Stock and other
Capital Stock of the Company issuable upon such conversion over and above the
shares of Common Stock and other Capital Stock of the Company issuable upon such
conversion only on the basis of the Conversion Price prior to adjustment; and,
in lieu of the shares the issuance of which is so deferred, the Company shall
issue or cause its transfer agents to issue due bills or other appropriate
evidence of the right to receive such shares.
SECTION 5.07. No Adjustment. No adjustment in the Conversion
Price shall be required until cumulative adjustments amount to 1% or more of the
Conversion Price as last adjusted; provided, however, that any adjustments which
by reason of this Section 5.07 are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
under this Article V shall be made to the nearest cent or to the nearest
one-hundredth of a share, as the case may be. No adjustment need be made for
rights to purchase Common Stock pursuant to a Company plan for reinvestment of
dividends or interest. No adjustment need be made for a change in the par value
or no par value of the Common Stock.
SECTION 5.08. Other Adjustments. (a) In the event that, as a
result of an adjustment made pursuant to Section 5.06 above, the holder of any
Security thereafter surrendered for conversion shall become entitled to receive
any shares of Capital Stock of the Company other than shares of its Common
Stock, thereafter the Conversion Price of such other shares so receivable upon
conversion of any Securities shall be subject to adjustment from time to time in
a manner and on terms as nearly equivalent as practicable to the provisions with
respect to Common Stock contained in this Article V.
(b) In the event that shares of Common Stock are not delivered
after the expiration of any of the rights or warrants referred to in Section
5.06(b) and Section 5.06(c) hereof, the Conversion Price shall be readjusted to
the Conversion Price which would otherwise be in effect had the adjustment made
upon the issuance of such rights or warrants been made on the basis of delivery
of only the number of shares of Common Stock actually delivered.
SECTION 5.09. Adjustments for Tax Purposes. The Company may,
at its option, make such reductions in the Conversion Price, in addition to
those required by Section 5.06 above, as it determines to be advisable in order
that any stock dividend, subdivision of shares, distribution of rights to
purchase stock or securities or distribution of securities convertible into or
exchangeable for stock made by the Company to its stockholders will not be
taxable to the recipients thereof.
SECTION 5.10. Adjustments by the Company. The Company from
time to time may, to the extent permitted by law, reduce the Conversion Price by
any amount for any period of at least 20 days, in which case the Company shall
give at least 15 days' notice of such
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reduction in accordance with Section 5.11, if the Board of Directors has made a
determination that such reduction would be in the best interests of the Company,
which determination shall be conclusive.
SECTION 5.11. Notice of Adjustment. Whenever the Conversion
Price is adjusted, the Company shall promptly mail to Noteholders at the
addresses appearing on the Registrar's books a notice of the adjustment and file
with the Trustee an Officers' Certificate briefly stating the facts requiring
the adjustment and the manner of computing it. The certificate shall be
conclusive evidence of the correctness of such adjustment.
SECTION 5.12. Notice of Certain Transactions. In the event
that:
(1) the Company takes any action which would require an
adjustment in the Conversion Price;
(2) the Company takes any action that would require a
supplemental indenture pursuant to Section 5.13; or
(3) there is a dissolution or liquidation of the Company;
a holder of a Security may wish to convert such Security into shares of Common
Stock prior to the record date for or the effective date of the transaction so
that he may receive the rights, warrants, securities or assets which a holder of
shares of Common Stock on that date may receive. Therefore, the Company shall
mail to Noteholders at the addresses appearing on the Registrar's books and the
Trustee a notice stating the proposed record or effective date, as the case may
be. The Company shall mail the notice at least 15 days before such date;
however, failure to mail such notice or any defect therein shall not affect the
validity of any transaction referred to in clause (1), (2) or (3) of this
Section 5.12.
SECTION 5.13. Effect of Reclassifications, Consolidations,
Mergers or Sales on Conversion Privilege. If any of the following shall occur,
namely: (i) any reclassification or change of outstanding shares of Common Stock
issuable upon conversion of Securities (other than a change in par value, or
from par value to no par value, or from no par value to par value, or as a
result of a subdivision or combination), (ii) any consolidation or merger to
which the Company is a party other than a merger in which the Company is the
continuing corporation and which does not result in any reclassification of, or
change (other than a change in name, or par value, or from par value to no par
value, or from no par value to par value or as a result of a subdivision or
combination) in, outstanding shares of Common Stock or (iii) any sale or
conveyance of all or substantially all of the property or business of the
Company as an entirety, then the Company, or such successor or purchasing
corporation, as the case may be, shall, as a condition precedent to such
reclassification, change, consolidation, merger, sale or conveyance, execute and
deliver to the Trustee a supplemental indenture in form satisfactory to the
Trustee providing that the holder of each Security then outstanding shall have
the right to convert such Security into the kind and amount of shares of stock
and other securities and property (including cash) receivable upon such
reclassification, change, consolidation, merger, sale or conveyance
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by a holder of the number of shares of Common Stock deliverable upon conversion
of such Security immediately prior to such reclassification, change,
consolidation, merger, sale or conveyance. Such supplemental indenture shall
provide for adjustments of the Conversion Price which shall be as nearly
equivalent as may be practicable to the adjustments of the Conversion Price
provided for in this Article V. The foregoing, however, shall not in any way
affect the right a holder of a Security may otherwise have, pursuant to clause
(ii) of the last sentence of subsection (c) of Section 5.06, to receive Rights
upon conversion of a Security. If, in the case of any such consolidation,
merger, sale or conveyance, the stock or other securities and property
(including cash) receivable thereupon by a holder of Common Stock includes
shares of stock or other securities and property of a corporation other than the
successor or purchasing corporation, as the case may be, in such consolidation,
merger, sale or conveyance, then such supplemental indenture shall also be
executed by such other corporation and shall contain such additional provisions
to protect the interests of the holders of the Securities as the Board of
Directors of the Company shall reasonably consider necessary by reason of the
foregoing. The provision of this Section 5.13 shall similarly apply to
successive consolidations, mergers, sales or conveyances.
In the event the Company shall execute a supplemental
indenture pursuant to this Section 5.13, the Company shall promptly file with
the Trustee an Officers' Certificate briefly stating the reasons therefor, the
kind or amount of shares of stock or securities or property (including cash)
receivable by holders of the Securities upon the conversion of their Securities
after any such reclassification, change, consolidation, merger, sale or
conveyance and any adjustment to be made with respect thereto.
SECTION 5.14. Trustee's Disclaimer. The Trustee has no duty to
determine when an adjustment under this Article V should be made, how it should
be made or what such adjustment should be, but may accept as conclusive evidence
of the correctness of any such adjustment, and shall be protected in relying
upon the Officers' Certificate with respect thereto which the Company is
obligated to file with the Trustee pursuant to Section 5.11. The Trustee makes
no representation as to the validity or value of any securities or assets issued
upon conversion of Securities, and the Trustee shall not be responsible for the
Company's failure to comply with any provisions of this Article V.
The Trustee shall not be under any responsibility to determine
the correctness of any provisions contained in any supplemental indenture
executed pursuant to Section 5.13, but may accept as conclusive evidence of the
correctness thereof, and shall be protected in relying upon, the Officers'
Certificate with respect thereto which the Company is obligated to file with the
Trustee pursuant to Section 5.13.
ARTICLE VI
Subordination
SECTION 6.01. Agreement to Subordinate. The Company, for
itself and its successors, and each Noteholder, by his acceptance of Securities,
agree that the payment of the principal of or interest on or any other amounts
due on the Securities is subordinated in right of
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payment, to the extent and in the manner stated in this Article VI, to the prior
payment in full of all existing and future Senior Debt. The Securities shall
rank pari passu with the Company's 4 1/2% Convertible Subordinated Notes due
2002.
SECTION 6.02. No Payment on Securities if Senior Debt in
Default. Anything in this Indenture to the contrary notwithstanding, no payment
on account of principal of or redemption of, interest on or other amounts due on
the Securities (including the making of a deposit pursuant to Section 3.05), and
no redemption, purchase, or other acquisition of the Securities, shall be made
by or on behalf of the Company (i) unless full payment of amounts then due for
principal and interest and of all other amounts then due on all Senior Debt has
been made or duly provided for pursuant to the terms of the instrument governing
such Senior Debt, (ii) if, at the time of such payment, redemption, purchase or
other acquisition, or immediately after giving effect thereto, there shall exist
under any Senior Debt, or any agreement pursuant to which any Senior Debt is
issued, any default, which default shall not have been cured or waived and which
default shall have resulted in the full amount of such Senior Debt being
declared due and payable or (iii) if, at the time of such payment, redemption,
purchase or other acquisition, the Trustee shall have received written notice
from the Representative of the holders of Designated Senior Debt (a "Payment
Blockage Notice") that there exists under such Designated Senior Debt, or any
agreement pursuant to which such Designated Senior Debt is issued, any default,
which default shall not have been cured or waived, permitting the holders
thereof to declare any amounts of such Designated Senior Debt due and payable,
but only for the period (the "Payment Blockage Period") commencing on the date
of receipt of the Payment Blockage Notice and ending (unless earlier terminated
by notice given to the Trustee by the Representative of the holders of such
Designated Senior Debt) on the earlier of (a) the date on which such event of
default shall have been cured or waived or (b) 180 days from the receipt of the
Payment Blockage Notice. Notwithstanding the provisions described in the
immediately preceding sentence (other than in clauses (i) and (ii)), unless the
holders of such Designated Senior Debt or the Representative of such holders
shall have accelerated the maturity of such Designated Senior Debt, the Company
may resume payments on the Securities after the end of such Payment Blockage
Period. Not more than one Payment Blockage Notice may be given in any
consecutive 365-day period, irrespective of the number of defaults with respect
to Senior Debt during such period.
In the event that, notwithstanding the provisions of this
Section 6.02, payments are made by or on behalf of the Company in contravention
of the provisions of this Section 6.02, such payments shall be held by the
Trustee, any Paying Agent or the holders, as applicable, in trust for the
benefit of, and shall be paid over to and delivered to, the Representative of
the holders of Senior Debt or the trustee under the indenture or other agreement
(if any), pursuant to which any instruments evidencing any Senior Debt may have
been issued for application to the payment of all Senior Debt ratably according
to the aggregate amounts remaining unpaid to the extent necessary to pay all
Senior Debt in full in accordance with the terms of such Senior Debt, after
giving effect to any concurrent payment or distribution to or for the holders of
Senior Debt.
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The Company shall give prompt written notice to the Trustee
and any Paying Agent of any default or event of default under any Senior Debt or
under any agreement pursuant to which any Senior Debt may have been issued.
SECTION 6.03. Distribution on Acceleration of Securities;
Dissolution and Reorganization; Subrogation of Securities. (a) If the Securities
are declared due and payable because of the occurrence of an Event of Default,
the Company shall give prompt written notice to the holders of all Senior Debt
or to the trustee(s) for such Senior Debt of such acceleration. The Company may
not pay the principal of or interest on or any other amounts due on the
Securities until five Business Days after such holders or trustee(s) of Senior
Debt receive such notice and, thereafter, the Company may pay the principal of
or interest on or any other amounts due on the Securities only if the provisions
of this Article VI permit such payment.
(b) Upon (i) any acceleration of the principal amount due on
the Securities because of an Event of Default or (ii) any direct or indirect
distribution of assets of the Company upon any dissolution, winding up,
liquidation or reorganization of the Company (whether in bankruptcy, insolvency
or receivership proceedings or upon an assignment for the benefit of creditors
or any other dissolution, winding up, liquidation or reorganization of the
Company):
(1) the holders of all Senior Debt shall first be entitled to
receive payment in full of the principal thereof, the interest thereon and any
other amounts due thereon before the holders are entitled to receive payment on
account of the principal of or interest on or any other amounts due on the
Securities;
(2) any payment or distribution of assets of the Company of
any kind or character, whether in cash, property or securities (other than
securities of the Company as reorganized or readjusted or securities of the
Company or any other corporation provided for by a plan of reorganization or
readjustment the payment of which is subordinate, at least to the extent
provided in this Article with respect to the Securities, to the payment in full
without diminution or modification by such plan of all Senior Debt), to which
the holders or the Trustee would be entitled (other than in respect of amounts
payable to the Trustee pursuant to Section 9.07) except for the provisions of
this Article, shall be paid by the liquidating trustee or agent or other person
making such a payment or distribution, directly to the holders of Senior Debt
(or their representative(s) or trustee(s) acting on their behalf), ratably
according to the aggregate amounts remaining unpaid on account of the principal
of or interest on and other amounts due on the Senior Debt held or represented
by each, to the extent necessary to make payment in full of all Senior Debt
remaining unpaid, after giving effect to any concurrent payment or distribution
to the holders of such Senior Debt; and
(3) in the event that, notwithstanding the foregoing, any
payment or distribution of assets of the Company of any kind or character,
whether in cash, property or securities (other than securities of the Company as
reorganized or readjusted, or securities of the Company or any other corporation
provided for by a plan of reorganization or readjustment the payment of which is
subordinate, at least to the extent provided in this Article with respect to the
Securities, to the payment in full without diminution or modification by such
plan of Senior
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Debt), shall be received by the Trustee (other than in respect of amounts
payable to the Trustee pursuant to Section 9.07) or the holders before all
Senior Debt is paid in full, such payment or distribution shall be held in trust
for the benefit of, and be paid over to upon request by a holder of the Senior
Debt, the holders of the Senior Debt remaining unpaid (or their representatives)
or trustee(s) acting on their behalf, ratably as aforesaid, for application to
the payment of such Senior Debt until all such Senior Debt shall have been paid
in full, after giving effect to any concurrent payment or distribution to the
holders of such Senior Debt.
Subject to the payment in full of all Senior Debt, the holders
shall be subrogated to the rights of the holders of Senior Debt to receive
payments or distributions of cash, property or securities of the Company
applicable to the Senior Debt until the principal of and interest on the
Securities shall be paid in full and, for purposes of such subrogation, no such
payments or distributions to the holders of Senior Debt of cash, property or
securities which otherwise would have been payable or distributable to holders
shall, as between the Company, its creditors other than the holders of Senior
Debt, and the holders, be deemed to be a payment by the Company to or on account
of the Senior Debt, it being understood that the provisions of this Article are
and are intended solely for the purpose of defining the relative rights of the
holders, on the one hand, and the holders of Senior Debt, on the other hand.
Nothing contained in this Article or elsewhere in this
Indenture or in the Securities is intended to or shall (i) impair, as between
the Company and its creditors other than the holders of Senior Debt, the
obligation of the Company, which is absolute and unconditional, to pay to the
holders the principal of and interest on the Securities as and when the same
shall become due and payable in accordance with the terms of the Securities,
(ii) affect the relative rights of the holders and creditors of the Company
other than holders of Senior Debt or, as between the Company and the Trustee,
the obligations of the Company to the Trustee, or (iii) prevent the Trustee or
the holders from exercising all remedies otherwise permitted by applicable law
upon default under this Indenture, subject to the rights, if any, under this
Article of the holders of Senior Debt in respect of cash, property and
securities of the Company received upon the exercise of any such remedy.
Upon distribution of assets of the Company referred to in this
Article, the Trustee, subject to the provisions of Section 9.01 hereof, and the
holders shall be entitled to rely upon a certificate of the liquidating trustee
or agent or other person making any distribution to the Trustee or to the
holders for the purpose of ascertaining the persons entitled to participate in
such distribution, the holders of the Senior Debt and other indebtedness of the
Company, the amount thereof or payable thereon, the amount or amounts paid or
distributed thereon and all other facts pertinent thereto or to this Article.
The Trustee, however, shall not be deemed to owe any fiduciary duty to the
holders of Senior Debt. Nothing contained in this Article or elsewhere in this
Indenture, or in any of the Securities, shall prevent the good faith application
by the Trustee of any moneys which were deposited with it hereunder, prior to
its receipt of written notice of facts which would prohibit such application,
for the purpose of the payment of or on account of the principal of or interest
on, the Securities unless, prior to the date on which such application is
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made by the Trustee, the Trustee shall be charged with actual notice under
Section 6.03(d) hereof of the facts which would prohibit the making of such
application.
(c) The provisions of this Article shall not be applicable to
any cash, properties or securities received by the Trustee or by any holder when
received as a holder of Senior Debt and nothing in Section 9.11 hereof or
elsewhere in this Indenture shall deprive the Trustee or such holder of any of
its rights as such holder.
(d) The Company shall give prompt written notice to the
Trustee of any fact known to the Company which would prohibit the making of any
payment of money to or by the Trustee in respect of the Securities pursuant to
the provisions of this Article. The Trustee, subject to the provisions of
Section 9.01 hereof, shall be entitled to assume that no such fact exists unless
the Company or any holder of Senior Debt or any trustee therefor has given
notice thereof to the Trustee. Notwithstanding the provisions of this Article or
any other provisions of this Indenture, the Trustee shall not be charged with
knowledge of the existence of any fact which would prohibit the making of any
payment of moneys to or by the Trustee in respect of the Securities pursuant to
the provisions in this Article, unless, and until three Business Days after, the
Trustee shall have received written notice thereof from the Company or any
holder or holders of Senior Debt or from any trustee therefor; and, prior to the
receipt of any such written notice, the Trustee, subject to the provisions of
Section 9.01 hereof, shall be entitled in all respects conclusively to assume
that no such facts exist; provided that if on a date not less than three
Business Days immediately preceding the date upon which, by the terms hereof,
any such moneys may become payable for any purpose (including, without
limitation, the principal of or interest on any Security), the Trustee shall not
have received with respect to such moneys the notice provided for in this
Section 6.03(d), then anything herein contained to the contrary notwithstanding,
the Trustee shall have full power and authority to receive such moneys and to
apply the same to the purpose for which they were received, and shall not be
affected by any notice to the contrary which may be received by it on or after
such prior date.
The Trustee shall be entitled to rely conclusively on the
delivery to it of a written notice by a person representing himself to be a
holder of Senior Debt (or a trustee on behalf of such holder) to establish that
such notice has been given by a holder of Senior Debt (or a trustee on behalf of
any such holder or holders). In the event that the Trustee determines in good
faith that further evidence is required with respect to the right of any person
as a holder of Senior Debt to participate in any payment or distribution
pursuant to this Article, the Trustee may request such person to furnish
evidence to the reasonable satisfaction of the Trustee as to the amount of
Senior Debt held by such person, the extent to which such person is entitled to
participate in such payment or distribution and any other facts pertinent to the
rights of such person under this Article, and, if such evidence is not
furnished, the Trustee may defer any payment to such person pending judicial
determination as to the right of such person to receive such payment; nor shall
the Trustee be charged with knowledge or the curing or waiving of any default of
the character specified in Section 6.02 hereof or that any event or any
condition preventing any payment in respect of the Securities shall have ceased
to exist, unless and until the Trustee shall have received written notice to
such effect.
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(e) The provisions of this Section 6.03 applicable to the
Trustee shall (unless the context requires otherwise) also apply to any Paying
Agent for the Company.
SECTION 6.04. Reliance by Senior Debt on Subordination
Provisions. Each holder of any Security by his acceptance thereof acknowledges
and agrees that the foregoing subordination provisions are, and are intended to
be, an inducement and a consideration for each holder of any Senior Debt,
whether such Senior Debt was created or acquired before or after the issuance of
the Securities, to acquire and continue to hold, or to continue to hold, such
Senior Debt, and such holder of Senior Debt shall be deemed conclusively to have
relied on such subordination provisions in acquiring and continuing to hold, or
in continuing to hold, such Senior Debt. Notice of any default in the payment of
any Senior Debt, except as expressly stated in this Article, and notice of
acceptance of the provisions hereof are hereby expressly waived. Except as
otherwise expressly provided herein, no waiver, forbearance or release by any
holder of Senior Debt under such Senior Debt or under this Article shall
constitute a release of any of the obligations or liabilities of the Trustee or
holders of the Securities provided in this Article.
SECTION 6.05. No Waiver of Subordination Provisions. Except as
otherwise expressly provided herein, no right of any present or future holder of
any Senior Debt to enforce subordination as herein provided shall at any time in
any way be prejudiced or impaired by any act or failure to act on the part of
the Company or by any act or failure to act, in good faith, by any such holder,
or by any noncompliance by the Company with the terms, provisions and covenants
of this Indenture, regardless of any knowledge thereof any such holder may have
or be otherwise charged with.
Without in any way limiting the generality of the foregoing
paragraph, the holders of Senior Debt may, at any time and from time to time,
without the consent of, or notice to, the Trustee or the holders of the
Securities, without incurring responsibility to the holders of the Securities
and without impairing or releasing the subordination provided in this Article VI
or the obligations hereunder of the holders of the Securities to the holders of
Senior Debt, do any one or more of the following: (i) change the manner, place
or terms of payment of, or renew or alter, Senior Debt, or otherwise amend or
supplement in any manner Senior Debt or any instrument evidencing the same or
any agreement under which Senior Debt is outstanding; (ii) sell, exchange,
release or otherwise dispose of any property pledged, mortgaged or otherwise
securing Senior Debt; (iii) release any person liable in any manner for the
collection of Senior Debt; and (iv) exercise or refrain from exercising any
rights against the Company or any other person.
SECTION 6.06. Trustee's Relation to Senior Debt. The Trustee
in its individual capacity shall be entitled to all the rights set forth in this
Article in respect of any Senior Debt at any time held by it, to the same extent
as any holder of Senior Debt, and nothing in Section 9.11 hereof or elsewhere in
this Indenture shall deprive the Trustee of any of its rights as such holder.
Anything in this Indenture to the contrary notwithstanding, amounts payable to
the Trustee from time to time pursuant to Section 9.07 shall be treated for
purposes of this Article as if such amounts constituted Senior Debt hereunder.
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With respect to the holders of Senior Debt, the Trustee
undertakes to perform or to observe only such of its covenants and obligations,
as are specifically set forth in this Article, and no implied covenants or
obligations with respect to the holders of Senior Debt shall be read into this
Indenture against the Trustee. The Trustee shall not owe any fiduciary duty to
the holders of Senior Debt but shall have only such obligations to such holders
as are expressly set forth in this Article.
Each holder of a Security by his acceptance thereof authorizes
and directs the Trustee on his behalf to take such action as may be necessary or
appropriate to effectuate the subordination provided in this Article and
appoints the Trustee his attorney-in-fact for any and all such purposes,
including, in the event of any dissolution, winding up or liquidation or
reorganization under any applicable bankruptcy law of the Company (whether in
bankruptcy, insolvency or receivership proceedings or otherwise), the timely
filing of a claim for the unpaid balance of such holder's Securities in the form
required in such proceedings and the causing of such claim to be approved. If
the Trustee does not file a claim or proof of debt in the form required in such
proceedings prior to 30 days before the expiration of the time to file such
claims or proofs, then any holder or holders of Senior Debt or their
representative or representatives shall have the right to demand, sue for,
collect, receive and receipt for the payments and distributions in respect of
the Securities which are required to be paid or delivered to the holders of
Senior Debt as provided in this Article and to file and prove all claims
therefor and to take all such other action in the name of the holders or
otherwise, as such holders of Senior Debt or representative thereof may
determine to be necessary or appropriate for the enforcement of the provisions
of this Article. Anything in this Indenture to the contrary notwithstanding,
amounts payable to the Trustee from time to time pursuant to Section 9.07 shall
be treated for purposes of this Article as if such amounts constituted Senior
Debt hereunder.
SECTION 6.07. Other Provisions Subject Hereto. Except as
expressly stated in this Article, notwithstanding anything contained in this
Indenture to the contrary, all the provisions of this Indenture and the
Securities are subject to the provisions of this Article. However, nothing in
this Article shall apply to or adversely affect the claims of, or payment to,
the Trustee pursuant to Section 9.07. Notwithstanding the foregoing, the failure
to make a payment on account of principal of or interest on the Securities by
reason of any provision of this Article VI shall not be construed as preventing
the occurrence of an Event of Default under Section 8.01.
ARTICLE VII
Successors
SECTION 7.01. Merger, Consolidation or Sale of Assets. The
Company may not consolidate or merge with or into any person (whether or not the
Company is the surviving corporation), or sell, assign, transfer, lease, convey
or otherwise dispose of all or substantially all of its properties or assets
unless:
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(a) the Company is the surviving corporation or the Person
formed by or surviving any such consolidation or merger (if other than
the Company) or to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made is a corporation
organized or existing under the laws of the United States, any state
thereof or the District of Columbia;
(b) the corporation formed by or surviving any such
consolidation or merger (if other than the Company) or the corporation
to which such sale, assignment, transfer, lease, conveyance or other
disposition will have been made assumes all the Obligations of the
Company, pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee, under the Securities and the Indenture;
(c) any such sale, assignment, transfer, lease, conveyance or
other disposition of all or substantially all of the Company's
properties or assets shall be as an entirety or virtually as an
entirety to one corporation;
(d) immediately after such transaction no Default or Event of
Default exists; and
(e) the Company or such corporation shall have delivered to
the Trustee an Officers' Certificate and an Opinion of Counsel, each
stating that such transaction and the supplemental indenture comply
with the Indenture and that all conditions precedent in the Indenture
relating to such transaction have been satisfied.
SECTION 7.02. Successor Corporation Substituted. Upon any
consolidation or merger, or any sale, assignment, transfer, lease, conveyance or
other disposition of all or substantially all of the assets of the Company in
accordance with Section 7.01 hereof, the successor corporation formed by such
consolidation or into or with which the Company is merged or the corporation to
which such sale, 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; provided, however, that
the predecessor Company in the case of a sale, assignment, transfer, lease,
conveyance or other disposition shall not be released from the obligation to pay
the principal of and interest on the Securities.
ARTICLE VIII
Defaults and Remedies
SECTION 8.01. Events of Default. An "Event of Default" occurs
if:
(a) the Company defaults in the payment of interest on any
Security when the same becomes due and payable, and the Default
continues for a period of 30 days after the date due and payable;
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(b) the Company defaults in the payment of the principal of
any Security when the same becomes due and payable at maturity, upon
redemption or otherwise;
(c) the Company fails to observe or perform any covenant or
agreement contained in Section 4.07 hereof;
(d) the Company fails to observe or perform any other covenant
or agreement contained in this Indenture or the Securities required by
it to be performed and the Default continues for a period of 60 days
after the receipt of written notice from the Trustee to the Company or
from the holders of 25% in aggregate principal amount of the then
outstanding Securities to the Company and the Trustee stating that such
notice is a "Notice of Default";
(e) there is a default under any mortgage, indenture or
instrument under which there may be issued or by which there may be
secured or evidenced any Indebtedness for money borrowed by the Company
or any Material Subsidiary of the Company (or the payment of which is
guaranteed by the Company or any Material Subsidiary of the Company),
whether such Indebtedness or guarantee now exists or is created after
the Issuance Date, which default (i) is caused by a failure to pay when
due principal of or interest on such Indebtedness within the grace
period provided for in such Indebtedness (which failure continues
beyond any applicable grace period) (a "Payment Default") or (ii)
results in the acceleration of such Indebtedness prior to its express
maturity (without such acceleration being rescinded or annulled) and,
in each case, the principal amount of any such Indebtedness, together
with the principal amount of any other such Indebtedness under which
there is a Payment Default or the maturity of which has been so
accelerated, aggregates $10 million or more;
(f) a final, non-appealable judgment or final non-appealable
judgments (other than any judgment as to which a reputable insurance
company has accepted full liability) for the payment of money are
entered by a court or courts of competent jurisdiction against the
Company or any Material Subsidiary of the Company and remain
undischarged for a period (during which execution shall not be
effectively stayed) of 60 days, provided that the aggregate of all such
judgments exceeds $5 million;
(g) the Company or any Material Subsidiary pursuant to or
within the meaning of any Bankruptcy Law: (i) commences a voluntary
case, (ii) consents to the entry of an order for relief against it in
an involuntary case in which it is the debtor, (iii) consents to the
appointment of a Custodian of it or for all or substantially all of its
property, (iv) makes a general assignment for the benefit of its
creditors, or (v) makes the admission in writing that it generally is
unable to pay its debts as the same become due; or
(h) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that: (i) is for relief against the
Company or any Material Subsidiary of the Company in an involuntary
case, (ii) appoints a Custodian of the Company or any Material
Subsidiary of the Company or for all or substantially all of its
property, and the
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order or decree remains unstayed and in effect for 60 days or (iii)
orders the liquidation of the Company or any Material Subsidiary of the
Company, and the order or decree remains unstayed and in effect for 60
days.
The term "Bankruptcy Law" means Title 11, U.S. Code or any
similar Federal or state law for the relief of debtors. The term "Custodian"
means any receiver, trustee, assignee, liquidator or similar official under any
Bankruptcy Law.
SECTION 8.02. Acceleration. If an Event of Default (other than
an Event of Default specified in clauses (g) and (h) of Section 8.01 hereof)
occurs and is continuing, the Trustee by notice to the Company, or the
Noteholders of at least 25% in principal amount of the then-outstanding
Securities by notice to the Company and the Trustee, may declare all the
Securities to be due and payable. Upon such declaration, the principal of,
premium, if any, and accrued and unpaid interest on the Securities shall be due
and payable immediately. If an Event of Default specified in clause (g) or (h)
of Section 8.01 hereof occurs, such an amount shall ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any Noteholder. The Noteholders of a majority in aggregate
principal amount of the then-outstanding Securities by notice to the Trustee may
rescind an acceleration and its consequences if the rescission would not
conflict with any judgment or decree, if all amounts payable to the Trustee
pursuant to Section 9.07 hereof have been paid and if all existing Events of
Default have been cured or waived except nonpayment of principal or interest
that has become due solely because of the acceleration.
SECTION 8.03. Other Remedies. If an Event of Default occurs
and is continuing, the Trustee may pursue any available remedy to collect the
payment of principal or interest on the Securities or to enforce the performance
of any provision of the Securities or this Indenture.
The Trustee may maintain a proceeding even if it does not
possess any of the Securities or does not produce any of them in the proceeding.
A delay or omission by the Trustee or any Noteholder in exercising any right or
remedy accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. All remedies are
cumulative to the extent permitted by law.
SECTION 8.04. Waiver of Past Defaults. The Noteholders of a
majority in aggregate principal amount of the then-outstanding Securities by
notice to the Trustee may waive an existing Default or Event of Default and its
consequences except a continuing Default or Event of Default in the payment of
the Designated Event Payment or the principal of, or interest on, any Security.
When a Default or Event of Default is waived, it is cured and ceases; but no
such waiver shall extend to any subsequent or other Default or impair any right
consequent thereon.
SECTION 8.05. Control by Majority. The Noteholders of a
majority in principal amount of the then-outstanding Securities may direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee or exercising any trust or power
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conferred on it. However, the Trustee may refuse to follow any direction that
conflicts with law or this Indenture, is unduly prejudicial to the rights of
other Noteholders, or would involve the Trustee in personal liability.
SECTION 8.06. Limitation on Suits. A Noteholder may pursue a
remedy with respect to this Indenture or the Securities only if:
(a) the Noteholder gives to the Trustee notice of a continuing
Event of Default;
(b) the Noteholders of at least 25% in principal amount of the
then-outstanding Securities make a request to the Trustee to pursue the
remedy;
(c) such Noteholder or Noteholders offer to the Trustee
indemnity satisfactory to the Trustee against any loss, liability or
expense;
(d) the Trustee does not comply with the request within 60
days after receipt of the request and the offer of indemnity; and
(e) during such 60-day period the Noteholders of a majority in
principal amount of the then-outstanding Securities do not give the
Trustee a direction inconsistent with the request.
A Noteholder may not use this Indenture to prejudice the
rights of another Noteholder or to obtain a preference or priority over another
Noteholder.
SECTION 8.07. Rights of Noteholders to Receive Payment.
Notwithstanding any other provision of this Indenture, the right of any
Noteholder of a Security to receive payment of principal and interest on the
Security, on or after the respective due dates expressed in the Security, or to
bring suit for the enforcement of any such payment on or after such respective
dates, shall not be impaired or affected without the consent of the Noteholder
made pursuant to this Section.
SECTION 8.08. Collection Suit by Trustee. If an Event of
Default specified in Section 8.01(a) or (b) occurs and is continuing, the
Trustee may recover judgment in its own name and as trustee of an express trust
against the Company for the whole amount of principal and interest remaining
unpaid on the Securities and interest on overdue principal and interest and such
further amount as shall be sufficient to cover the costs and, to the extent
lawful, expenses of collection, including the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel.
SECTION 8.09. Trustee May File Proofs of Claim. The Trustee
may file such proofs of claim and other papers or documents as may be necessary
or advisable in order to have the claims of the Trustee and the Noteholders
allowed in any judicial proceedings relative to the Company, its creditors or
its property. Nothing contained herein shall be deemed to authorize the Trustee
to authorize or consent to or accept or adopt on behalf of any Noteholder any
plan of
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reorganization, arrangement, adjustment or composition affecting the Securities
or the rights of any Noteholder thereof, or to authorize the Trustee to vote in
respect of the claim of any Noteholder in any such proceeding.
SECTION 8.10. Priorities. If the Trustee collects any money
pursuant to this Article, it shall pay out the money in the following order:
First: to the Trustee for amounts due under Section 9.07
hereof;
Second: to the holders of Senior Debt to the extent required
by Article VI;
Third: to the Noteholders, for amounts due and unpaid on the
Securities for principal and interest, ratably, according to the
amounts due and payable on the Securities for principal and interest,
respectively; and
Fourth: to the Company.
Except as otherwise provided in Section 2.12 hereof, the
Trustee may fix a record date and payment date for any payment to Noteholders
made pursuant to this Section.
SECTION 8.11. Undertaking for Costs. 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 or omitted by it as a Trustee, a court in its
discretion may require the filing by any party litigant in the suit of an
undertaking to pay the costs of the suit, and the court in its discretion may
assess reasonable costs, including reasonable attorneys' fees, against any party
litigant in the suit, having due regard to the merits and good faith of the
claims or defenses made by the party litigant. This Section does not apply to a
suit by the Trustee, a suit by a holder pursuant to Section 8.07 hereof, or a
suit by Noteholders of more than 10% in principal amount of the then-outstanding
Securities.
ARTICLE IX
Trustee
SECTION 9.01. Duties of Trustee. (a) If an Event of Default
has occurred and is continuing, the Trustee shall exercise such of the rights
and powers vested in it by this Indenture, and 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 his or her own affairs.
(b) Except during the continuance of an Event of Default: (i)
the Trustee need perform only those duties that are specifically set forth in
this Indenture and no others 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, if required by the terms hereof, conforming to the
requirements of this Indenture. However, the Trustee shall examine the
certificates and opinions to determine whether or not they conform to the
requirements of this Indenture. During the continuance of an
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event of Default, the Trustee may consult with its legal counsel and rely upon
advice from such counsel with respect to legal matters.
(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, except that: (i) this paragraph does not limit the effect of
paragraph (b) of this Section 9.01; (ii) the Trustee shall not be liable for any
error of judgment made in good faith by a Trust Officer, unless it is proved
that the Trustee was negligent in ascertaining the pertinent facts and (iii) the
Trustee shall not be liable with respect to any action it takes or omits to take
in good faith in accordance with a direction received by it pursuant to Section
8.05 hereof.
(d) Every provision of this Indenture that in any way relates
to the Trustee is subject to paragraphs (a), (b) and (c) of this Section 9.01.
(e) The Trustee may refuse to perform any duty or exercise any
right or power unless it receives indemnity satisfactory to it against any loss,
liability or expense.
(f) 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.
Money held in trust by the Trustee need not be segregated from other funds
except to the extent required by law.
SECTION 9.02. 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. 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, or both. The Trustee
shall not be liable for any action it takes or omits to take in good faith in
reliance on such 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 agent appointed with due
care.
(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.
(e) The Trustee shall not be charged with knowledge of any
Event of Default under subsection (c), (d), (e), (f), (g) or (h) of Section 8.01
unless either (1) a Trust Officer assigned to its corporate trust department
shall have actual knowledge thereof, or (2) the Trustee shall have received
notice thereof in accordance with Section 12.02 hereof from the Company or any
holder.
SECTION 9.03. Individual Rights of Trustee. The Trustee in its
individual or any other capacity may become the owner or pledgee of Securities
and may otherwise deal with the Company or an Affiliate with the same rights it
would have if it were not Trustee. Any
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Agent may do the same with like rights. However, the Trustee is subject to
Sections 9.10 and 9.11 hereof.
SECTION 9.04. Trustee's Disclaimer. The Trustee makes no
representation as to the validity or adequacy of this Indenture or the
Securities, it shall not be accountable for the Company's use of the proceeds
from the Securities, and it shall not be responsible for any statement of the
Company in the Indenture or any statement in the Securities (other than its
authentication) or for compliance by the Company with the Registration
Agreement.
SECTION 9.05. Notice of Defaults. If a Default or Event of
Default occurs and is continuing and if it is known to the Trustee, the Trustee
shall mail to Noteholders a notice of the Default or Event of Default within 90
days after it occurs. Except in the case of a Default or Event of Default in
payment on any Security, the Trustee may withhold the notice if and so long as a
committee of its Trust Officers in good faith determines that withholding the
notice is in the interests of Noteholders.
SECTION 9.06. Reports by Trustee to Noteholders. Within 60
days after the reporting date stated in Section 12.10, the Trustee shall mail to
Noteholders a brief report dated as of such reporting date that complies with
TIA ss. 313(a) if and to the extent required by such ss. 313(a). The Trustee
also shall comply with TIA ss. 313(b)(2). The Trustee shall also transmit by
mail all reports as required by TIA ss. 313(c).
A copy of each report at the time of its mailing to
Noteholders shall be filed with the SEC and each stock exchange on which the
Securities are listed. The Company shall notify the Trustee when the Securities
are listed on any stock exchange.
SECTION 9.07. Compensation and Indemnity. The Company shall
pay to the Trustee from time to time reasonable compensation for its services
hereunder. The Trustee's compensation shall not be limited by any law on
compensation of a trustee of an express trust. The Company shall reimburse the
Trustee upon request for all reasonable disbursements, expenses and advances
incurred or made by it. Such disbursements and expenses may include the
reasonable disbursements, compensation and expenses of the Trustee's agents and
counsel.
The Company shall indemnify the Trustee against any loss or
liability incurred by it except as set forth in the next paragraph. The Trustee
shall notify the Company promptly of any claim for which it may seek indemnity.
The Company shall defend the claim and the Trustee shall cooperate in the
defense. The Trustee may have separate counsel and the Company shall pay the
reasonable fees, disbursements 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 or liability incurred by the Trustee through the Trustee's
negligence or bad faith.
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To secure the Company's payment obligations in this Section,
the Trustee shall have a lien equivalent to that of Senior Debt and prior to the
Securities on all money or property held or collected by the Trustee, except
money or property held in trust to pay principal and interest on particular
Securities.
When the Trustee incurs expenses or renders services after an
Event of Default specified in Section 8.01(g) or (h) occurs, the expenses and
the compensation for the services are intended to constitute expenses of
administration under any Bankruptcy Law.
SECTION 9.08. Replacement of Trustee. A resignation or removal
of the Trustee and appointment of a successor Trustee shall become effective
only upon the successor Trustee's acceptance of appointment as provided in this
Section.
The Trustee may resign by so notifying the Company. The
Noteholders of a majority in principal amount of the then-outstanding Securities
may remove the Trustee by so notifying the Trustee and the Company.
The Company may remove the Trustee if:
(a) the Trustee fails to comply with Section 9.10 hereof,
unless the Trustee's duty to resign is stayed as provided in TIA ss.
310(b);
(b) the Trustee is adjudged a bankrupt or an insolvent or an
order for relief is entered with respect to the Trustee under any
Bankruptcy Law;
(c) a Custodian or public officer takes charge of the Trustee
or its property; or
(d) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in
the office of Trustee for any reason, the Company shall promptly appoint a
successor Trustee. Within one year after the successor Trustee takes office, the
Noteholders of a majority in principal amount of the then-outstanding Securities
may appoint a successor Trustee to replace the successor Trustee appointed by
the Company.
If a successor Trustee does not take office within 60 days
after the retiring Trustee resigns or is removed, the retiring Trustee, the
Company or the Noteholders of at least 10% in principal amount of the
then-outstanding Securities may petition any court of competent jurisdiction for
the appointment of a successor Trustee.
If the Trustee fails to comply with Section 9.10 hereof,
unless the Trustee's duty to resign is stayed as provided in TIA ss. 310(b), any
Noteholder who has been a bona fide holder of a Security for at least six months
may petition any court of competent jurisdiction for the removal of the Trustee
and the appointment of a successor Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and
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duties of the Trustee under this Indenture. The successor Trustee shall mail a
notice of its succession to Noteholders. The retiring Trustee shall promptly
transfer all property held by it as Trustee to the successor Trustee, subject to
the lien provided for in Section 9.07 hereof. Notwithstanding the resignation or
replacement of the Trustee pursuant to this Section 9.08, the Company's
obligations under Section 9.07 hereof shall continue for the benefit of the
retiring trustee with respect to expenses and liabilities incurred by it prior
to such resignation or replacement.
SECTION 9.09. Successor Trustee by Merger, Etc. If the Trustee
consolidates, merges or converts into, or transfers all or substantially all of
its corporate trust business to, another corporation, the successor corporation
without any further act shall be the successor Trustee.
SECTION 9.10. Eligibility; Disqualification. This Indenture
shall always have a Trustee who satisfies the requirements of TIA ss. 310(a)(1)
and (5). The Trustee shall always have a combined capital and surplus as stated
in Section 12.10 hereof. The Trustee is subject to TIA ss. 310(b).
SECTION 9.11. Preferential Collection of Claims Against
Company. The Trustee is subject to TIA ss. 311(a), excluding any creditor
relationship listed in TIA ss. 311(b). A Trustee who has resigned or been
removed shall be subject to TIA ss. 311(a) to the extent indicated therein.
ARTICLE X
Discharge of Indenture
SECTION 10.01. Termination of Company's Obligations. This
Indenture shall cease to be of further effect (except that the Company's
obligations under Sections 9.07 and 10.02 hereof shall survive) when all
outstanding Securities theretofore authenticated and issued have been delivered
to the Trustee for cancellation and the Company has paid all sums payable
hereunder.
Thereupon, the Trustee upon request of the Company, shall
acknowledge in writing the discharge of the Company's obligations under this
Indenture, except for those surviving obligations specified above.
SECTION 10.02. Repayment to Company. The Trustee and the
Paying Agent shall promptly pay to the Company upon request any excess money or
securities held by them at any time.
The Trustee and the Paying Agent shall pay to the Company upon
written request any money held by them for the payment of principal or interest
that remains unclaimed for two years after the date upon which such payment
shall have become due; provided, however, that the Company shall have first
caused notice of such payment to the Company to be mailed to each
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Noteholder entitled thereto no less than 30 days prior to such payment. After
payment to the Company, the Trustee and the Paying Agent shall have no further
liability with respect to such money and Noteholders entitled to the money must
look to the Company for payment as general creditors unless any applicable
abandoned property law designates another person.
ARTICLE XI
Amendments, Supplements and Waivers
SECTION 11.01. Without Consent of Noteholders. The Company and
the Trustee may amend or supplement this Indenture or the Securities without the
consent of any Noteholder:
(a) to cure any ambiguity, defect or inconsistency;
(b) to comply with Sections 5.13 and 7.01 hereof;
(c) to provide for uncertificated Securities in addition to
certificated Securities;
(d) to make any change that does not adversely affect the
legal rights hereunder of any Noteholder;
(e) to qualify this Indenture under the TIA or to comply with
the requirements of the SEC in order to maintain the qualification of
the Indenture under the TIA; or
(f) to make any change that provides any additional rights or
benefits to the holders of Securities.
An amendment under this Section may not make any change that
adversely affects the rights under Article VI of any holder of Senior Debt then
outstanding unless the holders of such Senior Debt (or any group or
representative thereof authorized to give a consent) consent to such change.
SECTION 11.02. With Consent of Noteholders. Subject to Section
8.07 hereof, the Company and the Trustee may amend or supplement this Indenture
or the Securities with the written consent (including consents obtained in
connection with any tender or exchange offer for Securities) of the Noteholders
of at least a majority in principal amount of the then-outstanding Securities.
Subject to Sections 8.04 and 8.07 hereof, the Noteholders of a majority in
principal amount of the Securities then outstanding may also by their written
consent (including consents obtained in connection with any tender offer or
exchange offer for Securities) waive any existing Default as provided in Section
8.04 or waive compliance in a particular instance by the Company with any
provision of this Indenture or the Securities. However, without the consent of
each Noteholder affected, an amendment, supplement or waiver under this Section
may not (with respect to any Securities held by a nonconsenting Noteholder):
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(a) reduce the amount of Securities whose Noteholders must
consent to an amendment, supplement or waiver;
(b) reduce the rate of or change the time for payment of
interest on any Security;
(c) reduce the principal of or change the fixed maturity of
any Security or alter the redemption provisions with respect thereto;
(d) make any Security payable in money other than that stated
in the Security;
(e) make any change in Section 8.04, 8.07 or 11.02 hereof
(this sentence);
(f) waive a default in the payment of the Designated Event
Payment or principal of, or interest on, any Security (other than as
provided in Section 8.04);
(g) waive a redemption payment payable on any Security; or
(h) make any change that adversely affects the right of
Noteholders to convert Securities into Common Stock of the Company.
To secure a consent of the Noteholders under this Section
11.02, it shall not be necessary for the Noteholders to approve the particular
form of any proposed amendment, supplement or waiver, but it shall be sufficient
if such consent approves the substance thereof.
After an amendment, supplement or waiver under this Section
becomes effective, the Company shall mail to Noteholders a notice briefly
describing the amendment or waiver.
SECTION 11.03. Compliance with Trust Indenture Act. Every
amendment to this Indenture or the Securities shall be set forth in a
supplemental indenture that complies with the TIA as then in effect.
SECTION 11.04. Revocation and Effect of Consents. Until an
amendment, supplement or waiver becomes effective, a consent to it by a
Noteholder of a Security is a continuing consent by the Noteholder and every
subsequent Noteholder of a Security or portion of a Security that evidences the
same debt as the consenting Noteholder's Security, even if notation of the
consent is not made on any Security. However, any such Noteholder or subsequent
Noteholder may revoke the consent as to such Noteholder's Security or portion of
a Security if the Trustee receives the notice of revocation before the date on
which the Trustee receives an Officers' Certificate certifying that the
Noteholders of the requisite principal amount of Securities have consented to
the amendment, supplement or waiver.
The Company may, but shall not be obligated to, fix a record
date for the purpose of determining the Noteholders entitled to consent to any
amendment, supplement or waiver. If a record date is fixed, then notwithstanding
the provisions of the immediately preceding paragraph, those persons who were
Noteholders at such record date (or their duly designated proxies), and only
those persons, shall be entitled to consent to such amendment, supplement or
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waiver or to revoke any consent previously given, whether or not such persons
continue to be Noteholders after such record date. No consent shall be valid or
effective for more than 90 days after such record date unless consents from
Noteholders of the principal amount of Securities required hereunder for such
amendment or waiver to be effective shall have also been given and not revoked
within such 90-day period.
After an amendment, supplement or waiver becomes effective it
shall bind every Noteholder, unless it is of the type described in any of
clauses (a) through (h) of Section 11.02 hereof. In such case, the amendment or
waiver shall bind each Noteholder who has consented to it and every subsequent
Noteholder that evidences the same debt as the consenting Noteholder's Security.
SECTION 11.05. Notation on or Exchange of Securities. The
Trustee may place an appropriate notation about an amendment or waiver on any
Security thereafter authenticated. The Company in exchange for all Securities
may issue and the Trustee shall authenticate new Securities that reflect the
amendment or waiver.
SECTION 11.06. Trustee Protected. The Trustee shall sign all
supplemental indentures, except that the Trustee may, but need not, sign any
supplemental indenture that adversely affects its rights. As a condition to
executing, or accepting the additional trusts created by, any supplemental
indenture permitted by this Article or the modifications thereby of the trust
created by this Indenture, the Trustee shall be entitled to receive (in addition
to those documents required by Section 12.04), and (subject to Section 315 of
the TIA) shall be fully protected in relying upon, an Opinion of Counsel stating
that the execution of such supplemental indenture is authorized or permitted by
this Indenture.
ARTICLE XII
Miscellaneous
SECTION 12.01. Trust Indenture Act Controls. If any provision
of this Indenture limits, qualifies, or conflicts with another provision which
is automatically deemed to be incorporated in this Indenture by the TIA, the
incorporated provision shall control.
SECTION 12.02. Notices. Any notice or communication by the
Company or the Trustee to the other is duly given if in writing and delivered in
person or mailed by first-class mail to the other's address stated in Section
12.10 hereof. 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 to a Noteholder shall be mailed by
first-class mail to his address shown on the register kept by the Registrar.
Failure to mail a notice or communication to a Noteholder or any defect in it
shall not affect its sufficiency with respect to other Noteholders.
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If a notice or communication is mailed in the manner provided
above within the time prescribed, it is duly given, whether or not the addressee
receives it.
If the Company mails a notice or communication to Noteholders,
it shall mail a copy to the Trustee and each Agent at the same time.
All other notices or communications shall be in writing.
In case by reason of the suspension of regular mail service,
or by reason of any other cause, it shall be impossible to mail any notice as
required by the Indenture, then such method of notification as shall be made
with the approval of the Trustee shall constitute a sufficient mailing of such
notice.
SECTION 12.03. Communication by Noteholders with Other
Noteholders. Noteholders may communicate pursuant to TIA ss. 312(b) with other
Noteholders with respect to their rights under this Indenture or the Securities.
The Company, the Trustee, the Registrar and anyone else shall have the
protection of TIA ss. 312(c).
SECTION 12.04. Certificate and Opinion as to Conditions
Precedent. Upon any request or application by the Company to the Trustee to take
any action under this Indenture, the Company shall furnish to the Trustee:
(a) an Officers' Certificate stating that, in the opinion of
the signers, all conditions precedent, if any, provided for in this
Indenture relating to the proposed action have been complied with; and
(b) an Opinion of Counsel stating that, in the opinion of such
counsel, all such conditions precedent have been complied with.
SECTION 12.05. Statements Required in Certificate or Opinion.
Each certificate or opinion with respect to compliance with a condition or
covenant provided for in this Indenture (other than pursuant to Section 4.03)
shall include:
(a) a statement that the person signing such certificate or
rendering such 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 person, 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
person, such condition or covenant has been complied with.
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SECTION 12.06. Rules by Trustee and Agents. The Trustee may
make reasonable rules for action by, or a meeting of, Noteholders. The Registrar
or Paying Agent may make reasonable rules and set reasonable requirements for
its functions.
SECTION 12.07. Legal Holidays. A "Legal Holiday" is a
Saturday, a Sunday or a day on which banking institutions in the State of New
York are not required to be open. If a payment date is a Legal Holiday at a
place of payment, payment may be made at that place on the next succeeding day
that is not a Legal Holiday, and no interest shall accrue for the intervening
period. If any other operative date for purposes of this Indenture shall occur
on a Legal Holiday then for all purposes the next succeeding day that is not a
Legal Holiday shall be such operative date.
SECTION 12.08. No Recourse Against Others. A director,
Officer, employee or stockholder, as such, of the Company shall not have any
liability for any obligations of the Company under the Securities or the
Indenture or for any claim based on, in respect of or by reason of such
obligations or their creation. Each Noteholder by accepting a Security waives
and releases all such liability. The waiver and release are part of the
consideration for the issue of the Securities.
SECTION 12.09. Counterparts. This Indenture may be executed in
any number of counterparts and by the parties hereto in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same agreement.
SECTION 12.10. Variable Provisions. "Officer" means the
Chairman of the Board, the Chief Executive Officer, the President, any
Vice-President, the Chief Financial Officer, the Treasurer, the Secretary, any
Assistant Treasurer, any Assistant Secretary or the Controller of the Company.
The Company initially appoints the Trustee as Paying Agent,
Registrar and Conversion Agent, and the Trustee hereby accepts such
appointments.
The first certificate pursuant to Section 4.03 hereof shall be
for the fiscal year ending on December 31, 1997.
The reporting date for Section 9.06 hereof is April 15 of each
year. The first reporting date is April 15, 1998.
The Trustee shall always have a combined capital and surplus
of at least $50,000,000 as set forth in its most recent published annual report
of condition.
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The Company's address for purposes of the Indenture is:
Tel-Save Holdings, Inc.
6805 Route 202
New Hope, Pennsylvania 18938
The Trustee's address is:
First Trust of New York, National Association
100 Wall Street
New York, New York 10005
The Company or the Trustee may change its address for purposes
of this Indenture by written notice to the other.
SECTION 12.11. GOVERNING LAW. THE INTERNAL LAWS OF THE STATE
OF NEW YORK SHALL GOVERN THIS INDENTURE AND THE SECURITIES, WITHOUT REGARD TO
THE CONFLICT OF LAWS PROVISIONS THEREOF.
SECTION 12.12. No Adverse Interpretation of Other Agreements.
This Indenture may not be used to interpret another indenture, loan or debt
agreement of the Company or an Affiliate. Any such indenture, loan or debt
agreement may not be used to interpret this Indenture.
SECTION 12.13. Successors. All agreements of the Company in
this Indenture and the Securities shall bind its successor. All agreements of
the Trustee in this Indenture shall bind its successor.
SECTION 12.14. Severability. In case any provision in this
Indenture or in the Securities 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 12.15. Table of Contents, Headings, Etc. The Table of
Contents and headings of the Articles and Sections of this Indenture have been
inserted for convenience of reference only, are not to be considered a part
hereof, and shall in no way modify or restrict any of the terms or provisions
hereof.
50
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Indenture to be duly executed, all as of the date first written above.
Tel-Save Holdings, Inc., as Company,
by
-----------------------------------------------
Name:
Title:
First Trust of New York, National Association, as
Trustee,
by
-----------------------------------------------
Name:
Title:
51
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
Personally appeared before me, the undersigned authority in
and for the said county and state, on this day of December, 1997, within my
jurisdiction, the within named ____________________, who acknowledged that he is
a __________________ of ___________________, and that for and on behalf of the
said corporation, and as its act and deed he executed the above and foregoing
instrument, after first having been duly authorized by said corporation so to
do.
-----------------------------
NOTARY PUBLIC
[Notarial Seal]
<PAGE>
EXHIBIT A
FORM OF CONVERTIBLE SUBORDINATED NOTE
[FORM OF FACE OF NOTE]
[Global Securities Legend]
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"),
NEW YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF
CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE
OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC) ANY TRANSFER, PLEDGE OR OTHER
USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS
THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO
TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR
THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL
SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS
SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF.
[Restricted Securities Legend]
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING
THIS SECURITY, AGREES FOR THE BENEFIT OF THE COMPANY THAT THIS SECURITY MAY NOT
BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED (X) PRIOR TO THE SECOND ANNIVERSARY
OF THE ISSUANCE HEREOF (OR ANY PREDECESSOR SECURITY HERETO) OR (Y) BY ANY HOLDER
THAT WAS AN AFFILIATE OF THE COMPANY AT ANY TIME DURING THE THREE MONTHS
PRECEDING THE DATE OF SUCH TRANSFER, IN EITHER CASE, OTHER THAN (1) TO THE
COMPANY, (2) SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE
144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON WHOM THE SELLER
REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF
RULE 144A, PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED
INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR OTHER
TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A (AS INDICATED BY THE BOX CHECKED
BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS
SECURITY), (3) IN AN OFFSHORE TRANSACTION IN
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<PAGE>
ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX
CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS
SECURITY), (4) TO AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN
RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT (AS INDICATED BY THE
BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF
THIS SECURITY) THAT IS ACQUIRING THIS SECURITY FOR INVESTMENT PURPOSES AND NOT
FOR DISTRIBUTION, AND A CERTIFICATE IN THE FORM ATTACHED TO THIS SECURITY IS
DELIVERED BY THE TRANSFEREE TO THE COMPANY AND THE TRUSTEE, (5) PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 (IF
APPLICABLE) UNDER THE SECURITIES ACT, OR (6) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH
ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. AN
INSTITUTIONAL ACCREDITED INVESTOR HOLDING THIS SECURITY AGREES THAT IT WILL
FURNISH TO THE COMPANY AND THE TRUSTEE SUCH CERTIFICATES AND OTHER INFORMATION
AS THEY MAY REASONABLY REQUIRE TO CONFIRM THAT ANY TRANSFER BY IT OF THIS
SECURITY COMPLIES WITH THE FOREGOING RESTRICTIONS. THE HOLDER HEREOF, BY
PURCHASING THIS SECURITY, REPRESENTS AND AGREES FOR THE BENEFIT OF THE COMPANY
THAT IT IS (1) A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A
OR (2) AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE
501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT AND THAT IT IS HOLDING THIS
SECURITY FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION OR (3) A NON-U.S.
PERSON OUTSIDE THE UNITED STATES WITHIN THE MEANING OF (OR AN ACCOUNT SATISFYING
THE REQUIREMENTS OF PARAGRAPH (o)(2) OF RULE 902 UNDER) REGULATION S UNDER THE
SECURITIES ACT.
A-2
<PAGE>
No. _________
Cusip No.
TEL-SAVE HOLDINGS, INC.
5% CONVERTIBLE SUBORDINATED NOTE
DUE 2004
TEL-SAVE HOLDINGS, INC.
Tel-Save Holdings, Inc., a Delaware corporation (the
"Company"), promises to pay to
_________________________________________________________________ or registered
assigns, the principal sum [indicated on Schedule A hereof]* [of _________
Dollars]** on __________, ____.
Interest Payment Dates: June 15 and December 15, commencing June 15, 1998.
Record Dates: June 1 and December 1.
Reference is hereby made to the further provisions of this
Convertible 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.
- ---------------
* Applicable to Global Securities only.
** Applicable to certificated Securities only.
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<PAGE>
IN WITNESS WHEREOF, Tel-Save Holdings, Inc. has caused this
Convertible Note to be signed manually or by facsimile by its duly authorized
Officers and a facsimile of its corporate seal to be affixed hereto or imprinted
hereon.
Dated:
-------------------------------
TEL-SAVE HOLDINGS, INC.,
by
by
[Seal]
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
This is one of the
5% Convertible Subordinated Notes Due 2004
described in the within-
mentioned Indenture.
_____________, as Trustee,
by
Authorized Officer
A-4
<PAGE>
TEL-SAVE HOLDINGS, INC.
5% Convertible Subordinated Note Due 2004
1. Interest. TEL-SAVE HOLDINGS, INC., a Delaware corporation
(the "Company"), is the issuer of the 5% Convertible Subordinated Notes Due 2004
(the "Convertible Notes"), of which this Convertible Note is a part. The Company
promises to pay interest on the Convertible Notes in cash semiannually on each
June 15 and December 15, commencing on June 15, 1998, to holders of record on
the immediately preceding June 1 and December 1.
Interest on the Convertible Notes will accrue from the most
recent date to which interest has been paid, or if no interest has been paid,
from December 10, 1997. Interest will be computed on the basis of a 360-day year
of twelve 30-day months. To the extent lawful, the Company shall pay interest
(including post-petition interest in any proceeding under any Bankruptcy Law) on
overdue installments of interest (without regard to any applicable grace period)
at the rate borne by the Convertible Notes, compounded annually.
2. Method of Payment. The Company will pay interest on the
Convertible Notes (except defaulted interest) to the persons who are registered
holders of the Convertible Notes at the close of business on the record date for
the next interest payment date even though Convertible Notes are canceled after
the record date and on or before the interest payment date. The Noteholder
hereof must surrender Convertible Notes to a Paying Agent to collect principal
payments. The Company will pay principal and interest in money of the United
States that at the time of payment is legal tender for payment of public and
private debts. However, the Company may pay principal and interest by check
payable in such money. It may mail an interest check to a holders' registered
address.
3. Paying Agent and Registrar. The Trustee will act as Paying
Agent, Registrar and Conversion Agent. The Company may change any Paying Agent,
Registrar, or Conversion Agent without prior notice.
4. Indenture. The Company issued the Convertible Notes under
an indenture, dated as of December 10, 1997 (the "Indenture"), between the
Company and First Trust of New York, National Association, as Trustee. The terms
of the Convertible Notes include those stated in the Indenture and those made
part of the Indenture by the Trust Indenture Act of 1939 (15 U.S. Code ss.ss.
77aaa-77bbbb) as in effect on the date of the Indenture. The Convertible Notes
are subject to, and qualified by, all such terms, certain of which are
summarized hereon, and Noteholders are referred to the Indenture and such Act
for a statement of such terms. The Convertible Notes are general unsecured
obligations of the Company limited to an aggregate principal amount of
$240,000,000. The Indenture does not limit the ability of the Company or any of
its Subsidiaries to incur indebtedness or to grant security interests or liens
in respect of their assets.
5. Optional Redemption. The Convertible Notes are not
redeemable at the Company's option prior to December 18, 2002. Thereafter, the
Convertible Notes will be subject to redemption at the option of the Company, in
whole or in part (in any integral multiple
A-5
<PAGE>
of $1,000), at the following redemption prices (expressed as percentages of the
principal amount), if redeemed during the 12-month period beginning December 15
of the years indicated:
Redemption
Year Price
- ---- -----
2002........................................................ 101.43%
2003........................................................ 100.71%
and at 100% at December 15, 2004, in each case together with accrued interest to
the redemption date (subject to the right of holders of record on the relevant
record date to receive interest due on an interest payment date). On or after
the redemption date, interest will cease to accrue on the Convertible Notes, or
portion thereof, called for redemption.
6. Notice of Redemption. Notice of redemption will be mailed
at least 30 days but not more than 60 days before the redemption date to each
holder of the Convertible Notes to be redeemed at his address of record. The
Convertible Notes in denominations larger than $1,000 may be redeemed in part
but only in integral multiples of $1,000. In the event of a redemption of less
than all of the Convertible Notes, the Convertible Notes will be chosen for
redemption by the Trustee in accordance with the Indenture. Unless the Company
defaults in making such redemption payment, or a Paying Agent is prohibited from
making such payment pursuant to the Indenture, by law or otherwise, interest
ceases to accrue on the Convertible Notes or portions of them called for
redemption on and after the redemption date.
If this Convertible 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 to the
person in whose name this Convertible Note is registered at the close of
business on such record date.
7. Mandatory Redemption. The Company will not be required to
make mandatory redemption payments with respect to the Convertible Notes. There
are no sinking fund payments with respect to the Convertible Notes.
8. Repurchase at Option of Holder. If there is a Designated
Event, the Company shall be required to offer to purchase on the Designated
Event Payment Date all outstanding Convertible Notes at a purchase price equal
to 101% of the principal amount thereof on the date of purchase, plus accrued
and unpaid interest to the Designated Event Payment Date. Holders of Convertible
Notes that are subject to an offer to purchase will receive a Designated Event
Offer from the Company prior to any related Designated Event Payment Date and
may elect to have such Convertible Notes or portions thereof in authorized
denominations purchased by completing the form entitled "Option of Noteholder To
Elect Purchase" appearing below. Noteholders have the right to withdraw their
election by delivering a written notice of withdrawal to the Company or the
Paying Agent in accordance with the terms of the Indenture.
9. Subordination. The payment of the principal of, interest on
or any other amounts due on the Convertible Notes is subordinated in right of
payment to all existing and future Senior Debt of the Company, as described in
the Indenture. Each Noteholder, by
A-6
<PAGE>
accepting a Convertible Note, agrees to such subordination and authorizes and
directs the Trustee on its behalf to take such action as may be necessary or
appropriate to effectuate the subordination so provided and appoints the Trustee
as its attorney-in-fact for such purpose. The Securities shall rank pari passu
with the Company's 4 1/2% Convertible Subordinated Notes due 2002.
10. Conversion. The holder of any Convertible Note has the
right, exercisable at any time after 90 days following the Issuance Date and
prior to the close of business (New York City time) on the Business Day
immediately preceding the date of the Convertible Note's maturity, to convert
the principal amount thereof (or any portion thereof that is an integral
multiple of $1,000) into shares of Common Stock at the initial Conversion Price
of $25.47 per share, subject to adjustment under certain circumstances, except
that if a Convertible Note is called for redemption, the conversion right will
terminate at the close of business (New York City time) on the Business Day
immediately preceding the date fixed for redemption.
To convert a Convertible Note, a holder must (1) complete and
sign a notice of election to convert substantially in the form set forth below,
(2) surrender the Convertible Note to a Conversion Agent, (3) furnish
appropriate endorsements or transfer documents if required by the Registrar or
Conversion Agent and (4) pay any transfer or similar tax, if required. Upon
conversion, no adjustment or payment will be made for interest or dividends, but
if any Noteholder surrenders a Convertible Note for conversion after the close
of business on the record date for the payment of an installment of interest and
prior to the opening of business on the next interest payment date, then,
notwithstanding such conversion, the interest payable on such interest payment
date will be paid to the registered holder of such Convertible Note on such
record date. In such event, unless such Security has been called for redemption
on or prior to such interest payment date, such Convertible Note, when
surrendered for conversion, must be accompanied by payment in funds acceptable
to the Company of an amount equal to the interest payable on such interest
payment date on the portion so converted. The number of shares of Common Stock
issuable upon conversion of a Convertible Note is determined by dividing the
principal amount of the Convertible Note converted by the Conversion Price in
effect on the Conversion Date. No fractional shares will be issued upon
conversion but a cash adjustment will be made for any fractional interest.
A Convertible Note in respect of which a holder has delivered
an "Option of Noteholder to Elect Purchase" form appearing below exercising the
option of such holder to require the Company to purchase such Convertible Note
may be converted only if the notice of exercise is withdrawn as provided above
and in accordance with the terms of the Indenture. The above description of
conversion of the Convertible Notes is qualified by reference to, and is subject
in its entirety by, the more complete description thereof contained in the
Indenture.
11. Registration Agreement. The holder of this Convertible
Note is entitled to the benefits of a Registration Agreement, dated December 10,
1997, between the Company and the Initial Purchasers (the "Registration
Agreement"). Pursuant to the Registration Agreement the Company has agreed for
the benefit of the holders of the Convertible Notes, that (i) it will, at its
cost, within 120 days after the closing of the sale of the Convertible Notes
(the "Closing"), file a shelf registration statement (the "Shelf Registration
Statement") with the Securities and
A-7
<PAGE>
Exchange Commission (the "Commission") with respect to resales of the
Convertible Notes and the Common Stock issuable upon conversion thereof, (ii)
the Company will use its best efforts to ensure that within 180 days after the
Closing, such Shelf Registration Statement shall be declared effective by the
Commission and (iii) the Company will use its best efforts to keep such Shelf
Registration Statement continuously effective under the Securities Act until the
earliest of (a) the second anniversary of the date of the Closing, (b) the date
on which the Convertible Notes or the Common Stock issuable upon conversion
thereof may be sold pursuant to paragraph (k) of Rule 144 (or any successor
provision) promulgated by the Commission under the Securities Act and (c) the
date as of which all the Convertible Notes or the Common Stock issuable upon
conversion thereof have been sold pursuant to such Shelf Registration Statement
(the "Shelf Registration Period"). If the Company fails to comply with clause
(i) above then, at such time, the per annum interest rate on the Convertible
Notes will increase by 25 basis points. Such increase will remain in effect
until the date on which such Shelf Registration Statement is filed, on which
date the interest rate on the Convertible Notes will revert to the interest rate
originally borne by the Convertible Notes plus any increase in such interest
rate pursuant to the following sentence. If the Shelf Registration Statement is
not declared effective as provided in clause (ii) above, then, at such time and
on each date that would have been the successive 30th day following such time,
the per annum interest rate on the Convertible Notes (which interest rate will
be the original interest rate on the Convertible Notes plus any increase or
increases in such interest rate pursuant to the preceding sentence and this
sentence) will increase by an additional 25 basis points; provided that the
interest rate will not increase by more than 50 basis points pursuant to this
sentence and will not increase by more than 75 basis points pursuant to this
sentence and the preceding sentence. Such increase or increases will remain in
effect until the date on which such Shelf Registration Statement is declared
effective, on which date the interest rate on the Convertible Notes will revert
to the interest rate originally borne by the Convertible Notes. Pursuant to
clause (iii) above, however, if the Company fails to keep the Shelf Registration
Statement continuously effective for the period specified above, then at such
time as the Shelf Registration Statement is no longer effective and on each date
thereafter that is the successive 30th day subsequent to such time and until the
earlier of (i) the date that the Shelf Registration Statement is again deemed
effective or (ii) the termination of the Shelf Registration Period, the per
annum interest rate on the Convertible Notes will increase by an additional 25
basis points; provided, however, that the interest rate will not increase by
more than 50 basis points pursuant to this sentence.
Pursuant to the Registration Agreement, the Company may
suspend the use of the prospectus which is a part of the Shelf Registration
Statement for a period not to exceed 30 days in any three-month period or three
periods not to exceed an aggregate of 90 days in any twelve-month period under
certain circumstances. The holders of Convertible Notes will not be entitled to
additional interest as set forth in the preceding paragraph solely because of
such suspension.
12. Denominations, Transfer, Exchange and Replacement. The
Convertible Notes are in registered form, without coupons, in denominations of
$1,000 and integral multiples of $1,000. The transfer of Convertible Notes may
be registered, and Convertible Notes may be exchanged, as provided in the
Indenture. The Registrar may require a Noteholder, among other things, to
furnish appropriate endorsements and transfer documents and to pay any taxes and
fees
A-8
<PAGE>
required by law or permitted by the Indenture. The Registrar need not exchange
or register the transfer of any Convertible Note or portion of a Convertible
Note selected for redemption (except the unredeemed portion of any Convertible
Note being redeemed in part). Also, it need not exchange or register the
transfer of any Convertible Note for a period of 15 days before a selection of
Convertible Notes to be redeemed. Replacement Convertible Notes for lost, stolen
or mutilated Convertible Notes may be issued in accordance with the terms of the
Indenture.
13. Persons Deemed Owners. The registered Noteholder of a
Convertible Note may be treated as its owner for all purposes.
14. Unclaimed Money. If money for the payment of principal or
interest remains unclaimed for two years, the Trustee and the Paying Agent shall
pay the money back to the Company at its request. After that, Noteholders of
Convertible Notes entitled to the money must look to the Company for payment,
unless an abandoned property law designates another person, and all liability of
the Trustee and such Paying Agent with respect to such money shall cease.
15. Defaults and Remedies. The Convertible Notes shall have
the Events of Default as set forth in Section 8.01 of the Indenture. Subject to
certain limitations in the Indenture, if an Event of Default occurs and is
continuing, the Trustee by notice to the Company or the Noteholders of at least
25% in aggregate principal amount of the then-outstanding Convertible Notes by
notice to the Company and the Trustee may declare all the Convertible Notes to
be due and payable immediately, except that in the case of an Event of Default
arising from certain events of bankruptcy or insolvency, all unpaid principal
and interest accrued on the Convertible Notes shall become due and payable
immediately without further action or notice. Upon acceleration as described in
either of the preceding sentences, the subordination provisions of the Indenture
preclude any payment being made to Noteholders for at least 5 Business Days
except as otherwise provided in the Indenture.
The Noteholders of a majority in principal amount of the
Convertible Notes then outstanding by written notice to the Trustee may rescind
an acceleration and its consequences if the rescission would not conflict with
any judgment or decree and if all existing Events of Default have been cured or
waived except nonpayment of principal or interest that has become due solely
because of the acceleration. Noteholders may not enforce the Indenture or the
Convertible Notes except as provided in the Indenture. Subject to certain
limitations, Noteholders of a majority in principal amount of the
then-outstanding Convertible Notes issued under the Indenture may direct the
Trustee in its exercise of any trust or power. The Company must furnish
compliance certificates to the Trustee annually. The above description of Events
of Default and remedies is qualified by reference to, and subject in its
entirety by, the more complete description thereof contained in the Indenture.
16. Amendments, Supplements and Waivers. Subject to certain
exceptions, the Indenture or the Convertible Notes may be amended or
supplemented with the consent of the Noteholders of at least a majority in
principal amount of the then-outstanding Convertible Notes (including consents
obtained in
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<PAGE>
connection with a tender offer or exchange offer for Convertible Notes), and any
existing default may be waived with the consent of the Noteholders of a majority
in principal amount of the then-outstanding Convertible Notes, including
consents obtained in connection with a tender offer or exchange offer for
Convertible Notes. Without the consent of any Noteholder, the Indenture or the
Convertible Notes may be amended, among other things, to cure any ambiguity,
defect or inconsistency, to provide for assumption of the Company's obligations
to Noteholders, to make any change that does not adversely affect the rights of
any Noteholder, to qualify the Indenture under the TIA, or to comply with the
requirements of the SEC in order to maintain the qualification of the Indenture
under the TIA.
17. Trustee Dealings with the Company. The Trustee, in its
individual or any other capacity, may become the owner or pledgee of the
Convertible Notes and may otherwise deal with the Company or an Affiliate with
the same rights it would have, as if it were not Trustee, subject to certain
limitations provided for in the Indenture and in the TIA. Any Agent may do the
same with like rights.
18. No Recourse Against others. A director, Officer, employee
or stockholder, as such, of the Company shall not have any liability for any
obligations of the Company under the Convertible Notes or the Indenture or for
any claim based on, in respect of or by reason of such obligations or their
creation. Each Noteholder, by accepting a Convertible Note, waives and releases
all such liability. The waiver and release are part of the consideration for the
issue of the Convertible Notes.
19. Governing Law. THE INTERNAL LAWS OF THE STATE OF NEW YORK
SHALL GOVERN THE INDENTURE AND THE CONVERTIBLE NOTES WITHOUT REGARD TO CONFLICT
OF LAW PROVISIONS THEREOF.
20. Authentication. The Convertible Notes shall not be valid
until authenticated by the manual signature of an authorized officer of the
Trustee or an authenticating agent.
21. Abbreviations. Customary abbreviations may be used in the
name of a Noteholder or an assignee, such as: TEN COM (for tenants in common),
TEN ENT (for tenants by the entireties), JT TEN (for joint tenants with right of
survivorship and not as tenants in common), CUST (for Custodian), and U/G/M/A
(for Uniform Gifts to Minors Act).
22. Definitions. Capitalized terms not defined in this
Convertible Note have the meaning given to them in the Indenture.
The Company will furnish to any Noteholder of the Convertible
Notes upon written request and without charge a copy of the Indenture and the
Registration Agreement. Request may be made to:
Tel-Save Holdings, Inc.
Attn: General Counsel and Secretary
6805 Route 202
New Hope, Pennsylvania 18938
(215) 862-1500
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<PAGE>
ASSIGNMENT FORM
To assign this Convertible Note, fill in the form below:
(I) or (we) assign and transfer this Convertible Note to
- -----------------------------------------------------------------------------
(Insert assignee's social security or tax I.D. no.)
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
and irrevocably appoint ________________________________________ agent to
transfer this Convertible Note on the books of the Company. The agent may
substitute another to act for him.
Your Signature: _____________________________________________
(Sign exactly as your name appears on the
other side of this Convertible Note)
Date: ___________________
Medallion Signature Guarantee: _____________________________
In connection with any transfer of any of the Convertible
Notes evidenced by this certificate occurring prior to the date that is two
years after the later of the date of original issuance of such Convertible Notes
and the last date, if any, on which such
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<PAGE>
Convertible Notes were owned by the Company or any Affiliate of the Company, the
undersigned confirms that such Convertible Notes are being transferred:
CHECK ONE BOX BELOW
(1) [ ] to the Company; or
(2) [ ] pursuant to and in compliance with Rule 144A under the
Securities Act of 1933; or
(3) [ ] pursuant to and in compliance with Regulation S under the
Securities Act of 1933; or
(4) [ ] to an institutional "accredited investor" (as defined in
Rule 501(a)(1), (2), (3) or (7) under the Securities Act of
1933) that has furnished to the Trustee a signed letter
containing certain representations and agreements (the form
of which letter can be obtained from the Trustee); or
(5) [ ] pursuant to an exemption from registration under the
Securities Act of 1933 provided by Rule 144 thereunder.
Unless one of the boxes is checked, the Registrar will refuse to
register any of the Convertible Notes evidenced by this certificate in
the name of any person other than the registered holder thereof;
provided, however, that if box (3), (4) or (5) is checked, the Trustee
may require, prior to registering any such transfer of the Convertible
Notes such legal opinions, certifications and other information as the
Company has reasonably requested in writing, by delivery to the Trustee
of a standing letter of instruction, to confirm that such transfer is
being made pursuant to an exemption from,
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<PAGE>
or in a transaction not subject to, the registration requirements of
the Securities Act of 1933.
--------------------------
Signature
Medallion Signature Guarantee:
- ------------------------ --------------------------
Signature
- --------------------------------------------------------------------------------
TO BE COMPLETED BY PURCHASER IF (2) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing
this Convertible Note for its own account or an account with respect to which it
exercises sole investment discretion and that it and any such account is a
"qualified institutional buyer" within the meaning of Rule 144A under the
Securities Act of 1933, and is aware that the sale to it is being made in
reliance on Rule 144A and acknowledges that it has received such information
regarding the Company as the undersigned has requested pursuant to Rule 144A or
has determined not to request such information and that it is aware that the
transferor is relying upon the undersigned's foregoing representations in order
to claim the exemption from registration provided by Rule 144A.
Dated: ----------------------------
-------------------- NOTICE: To be executed by
an executive officer
- -----------------------------
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<PAGE>
[TO BE ATTACHED TO GLOBAL SECURITIES]
SCHEDULE A
The initial principal amount at maturity of this Global
Security shall be $200,000,000. The following increases or decreases in the
principal amount of this Global Security have been made:
<TABLE>
<CAPTION>
==============================================================================================================
Amount of increase
in Principal Amount
of this Global Amount of decrease in Principal Amount of Signature of
Security including Principal Amount of this Global Security authorized officer
Date Made upon exercise of this Global Security following such of Trustee or
over-allotment option decrease or increase Securities Custodian
<S> <C>
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</TABLE>
A-14
<PAGE>
OPTION OF NOTEHOLDER TO ELECT PURCHASE
If you want to elect to have this Convertible Note or a
portion thereof repurchased by the Company pursuant to Section 3.08 or 4.07 of
the Indenture, check the box: |_|
If the purchase is in part, indicate the portion ($1,000 or
any integral multiple thereof) to be purchased: ____________
Your Signature:
---------------------------------------------
(Sign exactly as your name appears on the
other side of this Convertible Note)
Date: ____________
Medallion Signature Guarantee: _______________________
A-15
<PAGE>
ELECTION TO CONVERT
To Tel-Save Holdings, Inc.:
The undersigned owner of this Convertible Note hereby
irrevocably exercises the option to convert this Convertible Note, or the
portion below designated, into Common Stock of TEL-SAVE HOLDINGS, INC. in
accordance with the terms of the Indenture referred to in this Convertible Note,
and directs that the shares issuable and deliverable upon conversion, together
with any check in payment for fractional shares, be issued in the name of and
delivered to the undersigned, unless a different name has been indicated in the
assignment below. If shares are to be issued in the name of a person other than
the undersigned, the undersigned will pay all transfer taxes payable with
respect thereto.
The undersigned agrees to be bound by the terms of the
Registration Agreement relating to the Common Stock issuable upon conversion of
the Convertible Notes.
Date:
In whole ____ or Portion of Convertible Note to be
converted ($1,000 or any integral multiple
thereof):
$
--------------
Your Signature:
--------------------------------------
(Sign exactly as your name appears on
the other side of this Convertible
Note.)
Please Print or Typewrite Name and
Address, Including Zip Code, and
Social Security or other Identifying
Number
Medallion Signature Guarantee:*
-------------------
- ------------------------
* Signature must be guaranteed by a commercial bank, trust company or
member firm of the New York Stock Exchange.
A-16
<PAGE>
EXHIBIT B
FORM OF TRANSFER CERTIFICATE FOR TRANSFER
FROM GLOBAL SECURITY OR RESTRICTED SECURITY
TO RESTRICTED SECURITY
(Transfers pursuant to ss. 2.06(a)(ii) or ss. 2.06(a)(iii) of
the Indenture)
__________, as Registrar
Attn: [ ] Department
Re: Tel-Save Holdings, Inc. 5% Convertible Subordinated Notes
Due 2004 (the "Convertible Notes")
---------------------------------------------------------
Reference is hereby made to the Indenture dated as of December
10, 1997 (the "Indenture") between Tel-Save Holdings, Inc., as Issuer, and First
Trust of New York, National Association, as Trustee. Capitalized terms used but
not defined herein shall have the meanings given them in the Indenture.
This letter relates to U.S. $200,000,000 aggregate principal
amount of Convertible Notes which are held [in the form of the [Restricted]
[Global] Security (CUSIP No. ) with the Depositary]* in the name of [name of
transferor] (the "Transferor") to effect the transfer of the Securities.
In connection with such request, and in respect of such
Convertible Notes, the Transferor does hereby certify that such Convertible
Notes are being transferred in accordance with (i) the transfer restrictions set
forth in the Convertible Notes and (ii) to a transferee that the Transferor
reasonably believes is an institutional "accredited investor" (as defined in
Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act of
1933, as amended) and is acquiring at least $250,000 principal amount of
Convertible Notes for its own account or for one or more accounts as to which
the transferee exercises sole investment discretion and (iii) in accordance with
applicable securities laws of any state of the United States.
[Name of Transferor],
by
-------------------------------------
Name:
Title:
Dated:
cc: Tel-Save Holdings, Inc.
Attn: Secretary
- ------------------------
* Insert, if appropriate
B-1
<PAGE>
EXHIBIT C
FORM OF ACCREDITED INVESTOR TRANSFEREE CERTIFICATE
(Transfers pursuant to ss. 2.06(a)(ii) and ss. 2.06(a)(iii))
__________, as Registrar
Attn: [ ] Department
Re: Tel-Save Holdings, Inc.
5% Convertible Subordinated Notes
Due 2004 (the "Convertible Notes")
----------------------------------
Reference is hereby made to the Indenture dated as of December
10, 1997 (the "Indenture") between Tel-Save Holdings, Inc., as Issuer, and First
Trust of New York, National Association, as Trustee. Capitalized terms used but
not defined herein shall have the meanings given them in the Indenture.
This letter relates to U.S. $200,000,000 aggregate principal
amount of Convertible Notes which are held in the form of the [Restricted]
[Global] Security (CUSIP No. _________) with the Depositary in the name of [name
of transferor] (the "Transferor") to effect the transfer of the Convertible
Notes to the undersigned.
In connection with such request, and in respect of such
Convertible Notes we confirm that:
1. We understand that the Convertible Notes have not been and
will not be registered under the U.S. Securities Act of 1933 (the
"Securities Act"), and are being sold to us in a transaction that is
exempt from the registration requirements of the Securities Act.
2. We are a corporation, partnership or other entity having
such knowledge and experience in financial and business matters as to
be capable of evaluating the merits and risks of an investment in the
Convertible Notes, and we are (or any account for which we are
purchasing under paragraph 4 below is) an institutional accredited
investor as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act, able to bear the economic risk of our proposed
investment in the Convertible Notes.
3. We are acquiring the Convertible Notes for our own account
(or for accounts as to which we exercise sole investment discretion and
have authority to make, and do make, the statements contained in this
letter) and not with a view to any distribution of the Convertible
Notes, subject, nevertheless, to the understanding that the disposition
of our property shall at all times be and remain within our control.
C-1
<PAGE>
4. We are, and each account (if any) for which we are
purchasing Convertible Notes is, purchasing Convertible Notes having an
aggregate principal amount of not less than $250,000.
5. We understand that (a) the Convertible Notes will be
delivered to us in registered form only and that the certificate
delivered to us with respect to the Convertible Notes will bear a
legend substantially to the following effect:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING
THIS SECURITY, AGREES FOR THE BENEFIT OF THE COMPANY THAT THIS SECURITY MAY NOT
BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED (X) PRIOR TO THE SECOND ANNIVERSARY
OF THE ISSUANCE HEREOF (OR ANY PREDECESSOR SECURITY HERETO) OR (Y) BY ANY HOLDER
THAT WAS AN AFFILIATE OF THE COMPANY AT ANY TIME DURING THE THREE MONTHS
PRECEDING THE DATE OF SUCH TRANSFER, IN EITHER CASE, OTHER THAN (1) TO THE
COMPANY, (2) SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE
144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON WHOM THE SELLER
REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF
RULE 144A, PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED
INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR OTHER
TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A (AS INDICATED BY THE BOX CHECKED
BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS
SECURITY), (3) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S UNDER
THE SECURITIES ACT (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE
CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS SECURITY), (4) TO AN INSTITUTION
THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7)
UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON
THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS SECURITY) THAT IS ACQUIRING
THIS SECURITY FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION, AND A
CERTIFICATE IN THE FORM ATTACHED TO THIS SECURITY IS DELIVERED BY THE TRANSFEREE
TO THE COMPANY AND THE TRUSTEE, (5) PURSUANT TO AN EXEMPTION FROM REGISTRATION
UNDER THE SECURITIES ACT PROVIDED BY RULE 144 (IF APPLICABLE) UNDER THE
SECURITIES ACT, OR (6) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS
OF ANY STATE OF THE UNITED STATES. AN INSTITUTIONAL ACCREDITED INVESTOR HOLDING
THIS SECURITY AGREES IT WILL FURNISH TO THE COMPANY AND THE TRUSTEE SUCH
CERTIFICATES AND OTHER INFORMATION AS THEY MAY REASONABLY REQUIRE TO CONFIRM
THAT ANY
C-2
<PAGE>
TRANSFER BY IT OF THIS SECURITY COMPLIES WITH THE FOREGOING RESTRICTIONS. THE
HOLDER HEREOF, BY PURCHASING THIS SECURITY, REPRESENTS AND AGREES FOR THE
BENEFIT OF THE COMPANY THAT IT IS (1) A QUALIFIED INSTITUTIONAL BUYER WITHIN THE
MEANING OF RULE 144A OR (2) AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS
DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT AND THAT IT
IS HOLDING THIS SECURITY FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION OR (3)
A NON-U.S. PERSON OUTSIDE THE UNITED STATES WITHIN THE MEANING OF (OR AN ACCOUNT
SATISFYING THE REQUIREMENTS OF PARAGRAPH (o)(2) OF RULE 902 UNDER) REGULATION S
UNDER THE SECURITIES ACT."
and (b) such certificates will be reissued without the foregoing legend
only in accordance with the terms of the Indenture.
6. We agree that in the event that at some future time we wish
to dispose of any of the Convertible Notes, we will not do so unless
the Convertible Notes are being transferred:
(a) to the Company or any Subsidiary thereof;
(b) pursuant to and in compliance with Rule 144A under
the Securities Act;
(c) pursuant to and in compliance with Regulation S
under the Securities Act;
(d) to an institution that is an "accredited investor"
as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act, that is acquiring at least $250,000 principal
amount of the Convertible Notes for investment purposes and not
for distribution and that, prior to such transfer, furnishes to
the Trustee a signed letter containing certain representations
and agreements relating to the restrictions on transfer of the
Convertible Notes (the form of which letter can be obtained
from such Trustee);
(e) pursuant to an exemption from registration under
the Securities Act provided by Rule 144 under the Securities
Act; or
(f) pursuant to an effective registration statement
under the Securities Act.
Very truly yours
[PURCHASER]
by
---------------------------------
C-3
<PAGE>
Name:
Title:
Dated:
cc: Tel-Save Holdings, Inc.
Attn: General Counsel and Secretary
6805 Route 202
New Hope, Pennsylvania 18938
Attn: Secretary
C-4
<PAGE>
EXHIBIT D
FORM OF REGISTRATION AGREEMENT
- --------
* Applicable to Global Securities only.
** Applicable to certificated Securities only.
* Signature must be guaranteed by a commercial bank, trust company or member
firm of the New York Stock Exchange.
* Insert, if appropriate.
TEL-SAVE HOLDINGS, INC.
5% Convertible Subordinated Notes Due 2004
REGISTRATION AGREEMENT
New York, New York
December 10, 1997
Smith Barney Inc.
As Representative of the Initial Purchasers Named in
Schedule I to the Purchase Agreement (as defined below)
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
Tel-Save Holdings, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell (such issuance and sale, the "Initial
Placement") to you (the "Initial Purchasers"), upon the terms set forth in a
purchase agreement of even date herewith (the "Purchase Agreement"),
$200,000,000 principal amount (plus an additional $40,000,000 principal amount
to cover over-allotments, if any) of its 5% Convertible Subordinated Notes Due
2004 (the "Securities"). The Securities will be convertible into shares of
Common Stock, par value $0.01 per share (the "Common Stock"), of the Company at
the conversion price set forth in the Offering Memorandum. As an inducement to
you to enter into the Purchase Agreement and in satisfaction of a condition to
your obligations thereunder, the Company agrees with you, (i) for your benefit
and (ii) for the benefit of the holders from time to time of the Securities or
the Common Stock issuable upon conversion of the Securities (including you)
(each of the foregoing, a "Holder" and together, the "Holders"), as follows:
1. Definitions. Capitalized terms used herein without
definition shall have the respective meanings set forth in the Purchase
Agreement. As used in this Agreement, the following capitalized terms shall have
the following meanings:
"Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the Commission promulgated thereunder.
"Affiliate" of any specified person means any other person
that, directly or indirectly, is in control of, is controlled by, or is under
common control with, such specified person. For purposes of this definition,
control of a person means the power, direct or indirect, to direct or cause the
direction of the management and policies of such person whether by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Closing Date" has the meaning set forth in the Purchase
Agreement.
"Commission" means the Securities and Exchange Commission.
1
<PAGE>
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission promulgated thereunder.
"Holder" has the meaning set forth in the preamble hereto.
"Indenture" means the Indenture relating to the Securities
dated as of December 10, 1997, between the Company and First Trust of New York,
National Association, as trustee, as the same may be amended from time to time
in accordance with the terms thereof.
"Initial Placement" has the meaning set forth in the preamble
hereto.
"Initial Purchasers" has the meaning set forth in the preamble
hereto.
"Majority Holders" means the Holders of a majority of the then
outstanding aggregate principal amount of Securities registered under a Shelf
Registration Statement; provided that Holders of Common Stock issued upon
conversion of Securities shall be deemed to be Holders of the aggregate
principal amount of Securities from which such Common Stock was converted.
"Managing Underwriters" means the Underwriter or Underwriters
that shall administer an Underwritten Offering.
"Offering Memorandum" has the meaning set forth in the
Purchase Agreement.
"Prospectus" means the prospectus included in any Shelf
Registration Statement (including, without limitation, a prospectus that
discloses information previously omitted from a prospectus filed as part of an
effective registration statement in reliance upon Rule 430A under the Act), as
amended or supplemented by any prospectus supplement, with respect to the terms
of the offering of any portion of the Securities or Common Stock issuable upon
conversion thereof, covered by such Shelf Registration Statement, and all
amendments and supplements to such prospectus, including post-effective
amendments.
"Purchase Agreement" has the meaning set forth in the preamble
hereto.
"Securities" has the meaning set forth in the preamble hereto.
"Shelf Registration" means a registration effected pursuant to
Section 2 hereof.
"Shelf Registration Period" has the meaning set forth in
Section 2(b) hereof.
"Shelf Registration Statement" means a "shelf" registration
statement of the Company pursuant to the provisions of Section 2 hereof which
covers some or all of the Securities and the Common Stock issuable upon
conversion thereof, as applicable, on
2
<PAGE>
an appropriate form under Rule 415 under the Act, or any similar rule that may
be adopted by the Commission, and all amendments and supplements to such
registration statement, including post-effective amendments, in each case
including the Prospectus contained therein, all exhibits thereto and all
material incorporated by reference therein.
"Trustee" means the trustee with respect to the Securities
under the Indenture.
"Underwriter" means any underwriter of Securities or Common
Stock issuable upon conversion thereof in connection with an offering thereof
under a Shelf Registration Statement.
"Underwritten Offering" means an offering in which the
Securities or Common Stock are sold to an Underwriter or with the assistance of
an Underwriter for reoffering to the public.
2. Shelf Registration; Suspension of Use of Prospectus.
(a) The Company shall prepare and, not later than 120 days
following the Closing Date, shall file with the Commission and
thereafter, but no later than 180 days following the Closing Date,
shall use its best efforts to cause to be declared effective under the
Act a Shelf Registration Statement relating to the offer and sale of
the Securities and the Common Stock issuable upon conversion thereof by
the Holders from time to time in accordance with the methods of
distribution elected by such Holders and set forth in such Shelf
Registration Statement.
(b) The Company shall use its best efforts to keep the Shelf
Registration Statement continuously effective in order to permit the
Prospectus forming part thereof to be usable by Holders until the
earliest of (i) the second anniversary of the Closing Date, (ii) the
date on which the Securities or Common Stock issuable upon conversion
thereof may be sold pursuant to paragraph (k) of Rule 144 (or any
successor provision) promulgated by the Commission under the Act and
(iii) such date as of which all the Securities or the Common Stock
issuable upon conversion thereof have been sold pursuant to the Shelf
Registration Statement (in any such case, such period being called the
"Shelf Registration Period"). The Company shall be deemed not to have
used its best efforts to keep the Shelf Registration Statement
effective during the requisite period if it voluntarily takes any
action that would result in Holders of Securities covered thereby not
being able to offer and sell such Securities during that period, unless
such action is required (x) by applicable law or (y) pursuant to
Section 2(c) hereof, and, in either case, so long as the Company
promptly thereafter complies with the requirements of Section 3(i)
hereof, if applicable.
(c) The Company may suspend the use of the Prospectus for a
period not to exceed 30 days in any three-month period or for three
periods not to exceed an aggregate of 90 days in any twelve-month
period for valid business reasons, to
3
<PAGE>
be determined by the Company in its sole reasonable judgment (not
including avoidance of the Company's obligations hereunder), including,
without limitation, the acquisition or divestiture of assets, public
filings with the Commission, pending corporate developments and similar
events; provided that the Company promptly thereafter complies with the
requirements of Section 3(i) hereof, if applicable.
3. Registration Procedures. In connection with any Shelf
Registration Statement, the following provisions shall apply:
(a) The Company shall furnish to you, prior to the filing
thereof with the Commission, a copy of any Shelf Registration
Statement, and each amendment thereof and each amendment or supplement,
if any, to the Prospectus included therein and shall use its best
efforts to reflect in each such document, when so filed with the
Commission, such comments as Smith Barney Inc. reasonably may propose.
(b) The Company shall ensure that (i) any Shelf Registration
Statement and any amendment thereto and any Prospectus forming part
thereof and any amendment or supplement thereto comply in all material
respects with the Act and the rules and regulations thereunder, (ii)
any Shelf Registration Statement and any amendment thereto does not,
when it becomes effective, contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and (iii) any
Prospectus forming part of any Shelf Registration Statement, and any
amendment or supplement to such Prospectus, does not include an untrue
statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in light of the circumstances
under which they were made, not misleading; provided that no
representation or agreement is made hereby with respect to information
with respect to you, any Underwriter or any Holder required to be
included in any Shelf Registration or Prospectus pursuant to the Act or
the rules and regulations thereunder.
(c) (1) The Company shall advise you and the Holders and, if
requested by you or any such Holder, confirm such advice in writing:
(i) when a Shelf Registration Statement and any
amendment thereto has been filed with the Commission and when
the Shelf Registration Statement or any post-effective
amendment thereto has become effective; and
(ii) of any request by the Commission for amendments
or supplements to the Shelf Registration Statement or the
Prospectus included therein or for additional information.
(2) The Company shall advise you and the Holders and,
if requested by you or any such Holder, confirm such advice in writing:
4
<PAGE>
(i) of the issuance by the Commission of any stop
order suspending the effectiveness of the Shelf Registration
Statement or the initiation of any proceedings for that
purpose;
(ii) of the receipt by the Company of any
notification with respect to the suspension of the
qualification of the Securities included in any Shelf
Registration Statement for sale in any jurisdiction or the
initiation or threat of any proceeding for such purpose; and
(iii) of the suspension of the use of the Prospectus
pursuant to Section 2(c) hereof or of the happening of any
event that requires the making of any changes in the Shelf
Registration Statement or the Prospectus so that, as of such
date, the statements therein are not misleading and do not
omit to state a material fact required to be stated therein or
necessary to make the statements therein (in the case of the
Prospectus, in light of the circumstances under which they
were made) not misleading (which advice shall be accompanied
by an instruction to suspend the use of the Prospectus until
the requisite changes have been made).
(d) The Company shall use its best efforts to obtain
the withdrawal of any order suspending the effectiveness of any Shelf
Registration Statement at the earliest possible time.
(e) The Company shall furnish to each Holder of Securities or
the Common Stock issued upon conversion thereof included within the
coverage of any Shelf Registration Statement, without charge, at least
one copy of such Shelf Registration Statement and any post-effective
amendment thereto, including financial statements and schedules, and,
if the Holder so requests in writing, all exhibits (including those
incorporated by reference).
(f) The Company shall, during the Shelf Registration Period,
deliver to each Holder of Securities or the Common Stock issued upon
conversion thereof included within the coverage of any Shelf
Registration Statement, without charge, as many copies of the
Prospectus (including each preliminary Prospectus) included in such
Shelf Registration Statement and any amendment or supplement thereto as
such Holder may reasonably request; and the Company consents to the use
of the Prospectus or any amendment or supplement thereto by each of the
selling Holders in connection with the offering and sale of the
Securities or the Common Stock issued upon conversion thereof covered
by the Prospectus or any amendment or supplement thereto.
(g) Prior to any offering of Securities or the Common Stock
issued upon conversion thereof pursuant to any Shelf Registration
Statement, the Company shall register or qualify or cooperate with the
Holders of Securities or the Common Stock issued upon conversion
thereof included therein and their respective counsel in connection
with the registration or qualification of such
5
<PAGE>
Securities or Common Stock for offer and sale under the securities or
blue sky laws of such jurisdictions as any such Holders reasonably
request in writing and do any and all other acts or things necessary or
advisable to enable the offer and sale in such jurisdictions of the
Securities and the Common Stock issued upon conversion thereof covered
by such Shelf Registration Statement; provided, however, that the
Company will not be required to qualify generally to do business in any
jurisdiction where it is not then so qualified or to take any action
which would subject it to general service of process or to taxation in
any such jurisdiction where it is not then so subject.
(h) The Company shall cooperate with the Holders to facilitate
the timely preparation and delivery of certificates representing
Securities or the Common Stock issued upon conversion thereof to be
sold pursuant to any Shelf Registration Statement free of any
restrictive legends and in such denominations and registered in such
names as Holders may request prior to sales of Securities or the Common
Stock issued upon conversion thereof pursuant to such Shelf
Registration Statement.
(i) Upon the occurrence of any event contemplated by paragraph
(c)(2)(iii) above, the Company shall promptly prepare a post-effective
amendment to any Shelf Registration Statement or an amendment or
supplement to the related Prospectus or file any other required
document so that, as thereafter delivered to purchasers of the
Securities or the Common Stock issued upon conversion thereof included
therein, the Prospectus will not include an untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading.
(j) The Company shall use its best efforts to cause The
Depository Trust Company ("DTC") on the first Business Day following
the effective date of any Shelf Registration Statement hereunder or as
soon as possible thereafter to remove (i) from any existing CUSIP
number assigned to the Securities any designation indicating that the
Securities are "restricted securities", which efforts shall include
delivery to DTC of a letter executed by the Company substantially in
the form of Exhibit A hereto and (ii) any other stop or restriction on
DTC's system with respect to the Securities. In the event the Company
is unable to cause DTC to take actions described in the immediately
preceding sentence, the Company shall take such actions as Smith Barney
Inc. may reasonably request to provide, as soon as practicable, a CUSIP
number for the Securities registered under such Shelf Registration
Statement and to cause such CUSIP number to be assigned to the
Securities (or to the maximum aggregate principal amount of the
securities to which such number may be assigned). Upon compliance with
the foregoing requirements of this Section 3(j), the Company shall
provide the Trustee with global certificates for such Securities, in a
form eligible for deposit with The Depository Trust Company.
(k) The Company shall use its best efforts to comply with all
applicable rules and regulations of the Commission and shall make
generally available to its
6
<PAGE>
security holders as soon as practicable after the effective date of the
applicable Shelf Registration Statement an earnings statement
satisfying the provisions of Section 11(a) of the Act and Rule 158
promulgated by the Commission thereunder.
(l) The Company shall use its best efforts to cause the
Indenture to be qualified under the Trust Indenture Act in a timely
manner.
(m) The Company may require each Holder of Securities or the
Common Stock issued upon conversion thereof to be sold pursuant to any
Shelf Registration Statement to furnish to the Company such information
regarding the Holder and the distribution of such Securities or Common
Stock as may, from time to time, be required by the Act and the rules
and regulations promulgated thereunder, and the obligations of the
Company to any Holder hereunder shall be expressly conditioned on the
compliance of such Holder with such request.
(n) The Company shall, if requested, use its best efforts to
promptly incorporate in a Prospectus supplement or post-effective
amendment to a Shelf Registration Statement (i) such information as the
Majority Holders provide or, if the Securities or Common Stock are
being sold in an Underwritten Offering, as the Managing Underwriters
and the Majority Holders reasonably agree should be included therein
and provide to the Company in writing for inclusion in the Shelf
Registration Statement or Prospectus, and (ii) such information as a
Holder may provide from time to time to the Company in writing for
inclusion in a Prospectus or any Shelf Registration Statement
concerning such Holder and the distribution of such Holder's Securities
and Common Stock and, in either case, shall make all required filings
of such Prospectus supplement or post-effective amendment as soon as
practicable after being notified in writing of the matters to be
incorporated in such Prospectus supplement or post-effective amendment.
(o) The Company shall enter into such agreements (including
underwriting agreements) and take all other appropriate actions as may
be reasonably requested in order to expedite or facilitate the
registration or the disposition of the Securities or the Common Stock
issuable upon conversion thereof, and in connection therewith, if an
underwriting agreement is entered into, cause the same to contain
indemnification provisions and procedures no less favorable than those
set forth in Section 5 (or such other provisions and procedures
acceptable to the Majority Holders and the Managing Underwriters, if
any, with respect to all parties to be indemnified pursuant to Section
5 from Holders of Securities or the Common Stock issuable upon
conversion thereof to the Company).
(p) The Company shall (i) make reasonably available for
inspection by the Holders of Securities or the Common Stock issued upon
conversion thereof to be registered under a Shelf Registration
Statement, any Underwriter participating in any disposition pursuant to
such Shelf Registration Statement, and any attorney, accountant or
other agent retained by the Holders or any such
7
<PAGE>
Underwriter all relevant financial and other records, pertinent
corporate documents and properties of the Company and its subsidiaries;
(ii) cause the Company's officers, directors and employees to supply
all relevant information reasonably requested by the Holders or any
such Underwriter, attorney, accountant or agent in connection with any
such Shelf Registration Statement as is customary for similar due
diligence examinations; provided, however, that any information that is
designated in writing by the Company, in its sole discretion, as
confidential at the time of delivery of such information shall be kept
confidential by the Holders or any such Underwriter, attorney,
accountant or agent, unless disclosure thereof is made in connection
with a court proceeding or required by law, or such information has
become available to the public generally through the Company or through
a third party without an accompanying obligation of confidentiality;
(iii) make such representations and warranties to the Holders of
Securities or the Common Stock issued upon conversion thereof
registered thereunder and the Underwriters, if any, in form, substance
and scope as are customarily made by issuers to Underwriters and
covering matters including, but not limited to, those set forth in the
Purchase Agreement; (iv) obtain opinions of counsel to the Company and
updates thereof (which counsel and opinions, in form, scope and
substance, shall be reasonably satisfactory to the Managing
Underwriters, if any) addressed to each selling Holder and the
Underwriters, if any, covering such matters as are customarily covered
in opinions requested in underwritten offerings and such other matters
as may be reasonably requested by such Holders and Underwriters; (v)
obtain "cold comfort" letters and updates thereof from the independent
certified public accountants of the Company (and, if necessary, any
other independent certified public accountants of any subsidiary of the
Company or of any business acquired by the Company for which financial
statements and financial data are, or are required to be, included in
the Shelf Registration Statement), addressed to each selling Holder of
Securities or the Common Stock issued upon conversion thereof
registered thereunder (provided such Holder furnishes the accountants
with such representations as the accountants customarily require in
similar situations) and the Underwriters, if any, in customary form and
covering matters of the type customarily covered in "cold comfort"
letters in connection with primary underwritten offerings; and (vi)
deliver such documents and certificates as may be reasonably requested
by the Majority Holders and the Managing Underwriters, if any,
including those to evidence compliance with Section 3(i) and with any
customary conditions contained in the underwriting agreement or other
agreement entered into by the Company. The foregoing actions set forth
in clauses (iii), (iv), (v) and (vi) of this Section 3(p) shall be
performed at (A) the effectiveness of such Shelf Registration Statement
and each post-effective amendment thereto and (B) each closing under
any underwriting or similar agreement as and to the extent required
thereunder.
4. Registration Expenses. The Company shall bear all expenses
incurred in connection with the performance of its obligations under Sections 2
and 3 hereof and shall reimburse the Holders for the reasonable fees and
disbursements of one firm or counsel designated by the Majority Holders to act
as counsel for the Holders in
8
<PAGE>
connection therewith. Notwithstanding the provisions of this Section 4, each
Holder shall bear the expense of any broker's commission, agency fee or
Underwriter's discount or commission.
5. Indemnification and Contribution.
(a) (i) In connection with any Shelf Registration Statement,
the Company agrees to indemnify and hold harmless each Holder of
Securities or Common Stock issued upon conversion thereof covered
thereby (including the Initial Purchasers), the directors, officers,
employees and agents of each such Holder and each person who controls
any such Holder within the meaning of either the Act or the Exchange
Act against any and all losses, claims, damages or liabilities, joint
or several, to which they or any of them may become subject under the
Act, the Exchange Act or other Federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of a
material fact contained in the Shelf Registration Statement as
originally filed or in any amendment thereof, or in any preliminary
Prospectus or Prospectus, or in any amendment thereof 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 agrees
to reimburse each such indemnified party, as incurred, for any legal or
other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the Company will not be liable in any
case to the extent that any such loss, claim, damage or liability
arises out of or is based upon (A) any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in
reliance upon and in conformity with written information furnished to
the Company by or on behalf of any such Holder or any Initial Purchaser
specifically for inclusion therein, (B) use of a Shelf Registration
Statement or the related Prospectus during a period when a stop order
has been issued in respect of such Shelf Registration or any
proceedings for that purpose have been initiated or use of a Prospectus
when use of such Prospectus has been suspended pursuant to Section
2(c); provided, further, in each case, that Holders received prior
notice of such stop order, initiation of proceedings or suspension or
(C) if the Holder fails to deliver a Prospectus or the then current
Prospectus. This indemnity agreement will be in addition to any
liability which the Company may otherwise have.
(ii) The Company also agrees to indemnify or contribute
to Losses, as provided in Section 5(d), of any Underwriters of
Securities or the Common Stock issued upon conversion thereof
registered under a Shelf Registration Statement, their officers and
directors and each person who controls such Underwriters on
substantially the same basis as that of the indemnification of the
Initial Purchasers and the selling Holders provided in this Section
5(a) and shall,
9
<PAGE>
if requested by any Holder, enter into an underwriting agreement
reflecting such agreement, as provided in Section 3(o) hereof.
(b) Each Holder of Securities or Common Stock issued
upon conversion thereof covered by a Shelf Registration Statement
(including the Initial Purchasers) severally agrees to indemnify and
hold harmless (i) the Company, (ii) each of its directors, (iii) each
of its officers who signs such Shelf Registration Statement and (iv)
each person who controls the Company within the meaning of either the
Act or the Exchange Act to the same extent as the foregoing indemnity
from the Company to each such Holder, but only with reference to
written information relating to such Holder furnished to the Company by
or on behalf of such Holder specifically for inclusion in the documents
referred to in the foregoing indemnity. This indemnity agreement will
be in addition to any liability which any such Holder may otherwise
have.
(c) Promptly after receipt by an indemnified party under this
Section 5 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section 5, notify the indemnifying party
in writing of the commencement thereof; but the failure so to notify
the indemnifying party (i) will not relieve it from liability under
paragraph (a) or (b) above unless and to the extent it did not
otherwise learn of such action and such failure results in the
forfeiture by the indemnifying party of substantial rights and defenses
and (ii) will not, in any event, relieve the indemnifying party from
any obligations to any indemnified party other than the indemnification
obligation provided in paragraph (a) or (b) above. The indemnifying
party shall be entitled to appoint counsel of the indemnifying party's
choice at the indemnifying party's expense to represent the indemnified
party in any action for which indemnification is sought (in which case
the indemnifying party shall not thereafter be responsible for the fees
and expenses of any separate counsel retained by the indemnified party
or parties except as set forth below); provided, however, that such
counsel shall be reasonably satisfactory to the indemnified party.
Notwithstanding the indemnifying party's election to appoint counsel to
represent the indemnified party in an action, the indemnified party
shall have the right to employ separate
10
<PAGE>
counsel (including local counsel), and the indemnifying party shall
bear the reasonable fees, costs and expenses of such separate counsel
(and local counsel) if (i) the use of counsel chosen by the
indemnifying party to represent the indemnified party would present
such counsel with a conflict of interest, (ii) the actual or potential
defendants in, or targets of, any such action include both the
indemnified party and the indemnifying party and the indemnified party
shall have reasonably concluded that there may be legal defenses
available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, (iii)
the indemnifying party shall not have employed counsel satisfactory to
the indemnified party to represent the indemnified party within a
reasonable time after notice of the institution of such action or (iv)
the indemnifying party shall authorize the indemnified party to employ
separate counsel at the expense of the indemnifying party; provided
further, that the indemnifying party shall not be responsible for the
fees and expenses of more than one separate counsel (together with
appropriate local counsel) representing all the indemnified parties
under paragraph (a)(i), paragraph (a)(ii) or paragraph (b) above. An
indemnifying party will not, without the prior written consent of the
indemnified parties, settle or compromise or consent to the entry of
any judgment with respect to any pending or threatened claim, action,
suit or proceeding in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified parties are
actual or potential parties to such claim or action) unless such
settlement, compromise or consent includes an unconditional release of
each indemnified party from all liability arising out of such claim,
action, suit or proceeding.
(d) In the event that the indemnity provided in paragraph (a)
or (b) of this Section 5 is unavailable to or insufficient to hold
harmless an indemnified party for any reason, then each applicable
indemnifying party, in lieu of indemnifying such indemnified party,
shall have a joint and several obligation to contribute to the
aggregate losses, claims, damages and liabilities (including legal or
other expenses reasonably incurred in connection with investigating or
defending same) (collectively "Losses") to which such indemnified party
may be subject in such proportion as is appropriate to reflect the
relative benefits received by such indemnifying party, on the one hand,
and such indemnified party, on the other hand, from the Initial
Placement and the Shelf Registration Statement which resulted in such
Losses; provided, however, that in no case shall the Initial Purchasers
be responsible, in the aggregate, for any amount in excess of the
purchase discount or commission applicable to such Security, as set
forth on the cover page of the Offering Memorandum, nor shall any
Underwriter be responsible for any amount in excess of the underwriting
discount or commission applicable to the Securities and Common Stock
issued upon conversion thereof purchased by such Underwriter under the
Shelf Registration Statement which resulted in such Losses. If the
allocation provided by the immediately preceding sentence is
unavailable for any reason, the indemnifying party and the indemnified
party shall contribute in such proportion as is appropriate to reflect
not only such relative benefits but also the relative fault of such
indemnifying party, on the one hand, and such indemnified party, on the
other hand, in connection with the statements or omissions which
resulted in such Losses as well as any other relevant equitable
considerations. Benefits received by the Company shall be deemed to be
equal to the sum of (x) the total net proceeds from the Initial
Placement (before deducting expenses) as set forth on the cover page of
the Offering Memorandum and (y) the total amount of additional interest
which the Company was not required to pay as a result of registering
the Securities and Common Stock issued upon conversion thereof covered
by the Shelf Registration Statement which resulted in such Losses.
Benefits received by the Initial Purchasers shall be deemed to be equal
to the total purchase discounts and commissions as set forth on the
cover page of the Offering Memorandum, and benefits received by any
other Holders shall be deemed to be equal to the value of
11
<PAGE>
receiving Securities or the Common Stock issuable upon conversion
thereof registered under the Act. Benefits received by any Underwriter
shall be deemed to be equal to the total underwriting discounts and
commissions, as set forth on the cover page of the Prospectus forming a
part of the Shelf Registration Statement which resulted in such Losses.
Relative fault shall be determined by reference to whether any alleged
untrue statement or omission relates to information provided by the
indemnifying party, on the one hand, or by the indemnified party, on
the other hand. The parties agree that it would not be just and
equitable if contribution were determined by pro rata allocation or any
other method of allocation which does not take account of the equitable
considerations referred to above. Notwithstanding the provisions of
this paragraph (d), no person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 5, each person who
controls a Holder within the meaning of either the Act or the Exchange
Act and each director, officer, employee and agent of such Holder shall
have the same rights to contribution as such Holder, and each person
who controls the Company within the meaning of either the Act or the
Exchange Act, each officer of the Company who shall have signed the
Shelf Registration Statement and each director of the Company shall
have the same rights to contribution as the Company, subject in each
case to the applicable terms and conditions of this paragraph (d).
(e) The provisions of this Section 5 will remain in full force
and effect, regardless of any investigation made by or on behalf of any
Holder or the Company or any of the officers, directors or controlling
persons referred to in Section 5 hereof, and will survive the sale by a
Holder of Securities covered by a Shelf Registration Statement.
6. Miscellaneous.
(a) No Inconsistent Agreements. The Company has not, as of the
date hereof, entered into nor shall it, on or after the date hereof,
enter into, any agreement with respect to its Securities that is
inconsistent with the rights granted to the Holders herein or otherwise
conflicts with the provisions hereof.
(b) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended,
qualified, modified or supplemented, and waivers or consents to
departures from the provisions hereof may not be given, unless the
Company has obtained the written consent of the Majority Holders;
provided that with respect to any matter that directly or indirectly
affects the rights of the Initial Purchasers hereunder, the Company
shall obtain the written consent of the Initial Purchasers against
which such amendment, qualification, supplement, waiver or consent is
to be effective. Notwithstanding the foregoing (except the foregoing
proviso), a waiver or consent to departure from the provisions hereof
with respect to a matter that relates exclusively to the rights of
Holders whose Securities are being sold pursuant to a
12
<PAGE>
Shelf Registration Statement and that does not directly or indirectly
affect the rights of other Holders may be given by the Majority
Holders, determined on the basis of Securities being sold rather than
registered under such Shelf Registration Statement.
(c) Notices. All notices and other communications provided for
or permitted hereunder shall be made in writing by hand-delivery,
first-class mail, telex, telecopier, or air courier guaranteeing
overnight delivery:
(1) if to you, initially at the address set forth in
the Purchase Agreement;
(2) if to any other Holder, at the most current address
given by such Holder to the Company in accordance with the
provisions of this Section 6(c), which address initially is,
with respect to each Holder, the address of such Holder
maintained by the Registrar under the Indenture, with a copy
in like manner to Smith Barney Inc.; and
(3) if to the Company, initially at its address set
forth in the Purchase Agreement.
All such notices and communications shall be deemed to have
been duly given when received, if delivered by hand or air courier, and when
sent, if sent by first-class mail, telex or telecopier.
The Initial Purchasers or the Company by notice to the other
may designate additional or different addresses for subsequent notices or
communications.
(d) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of each of
the parties, including, without the need for an express assignment or
any consent by the Company thereto, subsequent Holders. The Company
hereby agrees to extend the benefits of this Agreement to any Holder
and any such Holder may specifically enforce the provisions of this
Agreement as if an original party hereto.
(e) Counterparts. This agreement may be executed in any number
of counterparts and by the parties hereto in separate counterparts,
each of which when so executed shall be deemed to be an original and
all of which taken together shall constitute one and the same
agreement.
(f) Headings. The headings in this agreement are for
convenience of reference only and shall not limit or otherwise affect
the meaning hereof.
(g) Governing Law. This agreement 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,
without regard to the conflicts of law rules thereof.
13
<PAGE>
(h) Severability. In the event that any one of more of the
provisions contained herein, or the application thereof in any
circumstances, is held invalid, illegal or unenforceable in any respect
for any reason, the validity, legality and enforceability of any such
provision in every other respect and of the remaining provisions hereof
shall not be in any way impaired or affected thereby, it being intended
that all of the rights and privileges of the parties shall be
enforceable to the fullest extent permitted by law.
(i) Securities Held by the Company, etc. Whenever the consent
or approval of Holders of a specified percentage of principal amount of
Securities or the Common Stock issuable upon conversion thereof is
required hereunder, Securities or the Common Stock issued upon
conversion thereof held by the Company or its Affiliates (other than
subsequent Holders of Securities or the Common Stock issued upon
conversion thereof if such subsequent Holders are deemed to be
Affiliates solely by reason of their holdings of such Securities) shall
not be counted in determining whether such consent or approval was
given by the Holders of such required percentage.
14
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Company and you.
Very truly yours,
TEL-SAVE HOLDINGS, INC.
----------------------------
Name:
Title:
The foregoing Agreement is hereby
confirmed and accepted as of the date
first above written.
SMITH BARNEY INC.
For itself and the other Initial
Purchasers named in Schedule I to the
Purchase Agreement.
BY: SMITH BARNEY INC.
By
-------------------------
Name:
Title:
<PAGE>
EXHIBIT A
FORM OF LETTER TO BE PROVIDED BY ISSUER TO
THE DEPOSITORY TRUST COMPANY
The Depository Trust Company
7 Hanover Square, 23rd Floor
New York, NY 10004
Re: 5% Subordinated Convertible Notes Due 2004 (the "Securities") of
Tel-Save Holdings, Inc.
Ladies and Gentlemen:
Please be advised that the Securities and Exchange Commission
has declared effective a Registration Statement on Form S-3 under the Securities
Act of 1933, as amended, with regard to all of the Securities referenced above.
Accordingly, there is no longer any restriction as to whom such Securities may
be sold and any restrictions on the CUSIP designation are no longer appropriate
and may be removed. I understand that upon receipt of this letter, DTC will
remove any stop or restriction on its system with respect to this issue.
As always, please do not hesitate to call if we can of further
assistance.
Very truly yours,
Authorized Officer
EXHIBIT 11.1
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1997 1996 1995(A)
------------ ------------ ------------
<S> <C> <C> <C>
Net income (loss) $(20,945) $20,168 $10,819
======== ======= =======
BASIC
Weighted average common shares - Basic 64,168 52,650 31,422
======== ======= =======
Net income (loss) per share - Basic $ (0.33) $ 0.38 $ 0.34
======== ======= =======
DILUTED
Weighted average common and common equivalent
shares outstanding - Diluted:
Weighted average shares 64,168 52,650 31,422
Weighted average equivalent shares -- 4,352 2,183
-------- ------- -------
Weighted average common and common equivalent
shares - Diluted 64,168 57,002 33,605
====== ======= =======
Net income (loss) per share - Diluted $ (0.33) $ 0.35 $ 0.32
======= ======= =======
</TABLE>
- ----------
(A) Pro forma tax provisions have been calculated as if the Company's
results of operations were taxable as a C corporation (the Company's
current tax status) for the year ended December 31, 1995. Prior to
September 20, 1995, the Company was an S corporation with all earnings
taxed directly to its shareholders.
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Name State of Incorporation
- ---- ----------------------
Tel-Save, Inc. .........................................................Delaware
Emergency Transport, Inc. ..............................................Delaware
Compco, Inc. ...........................................................Delaware
Symetrics Industries, Inc. ..............................................Florida
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Tel-Save Holdings, Inc.
New Hope, Pennsylvania
We hereby consent to the incorporation by reference in the Prospectus
constituting a part of the Registration Statements on Forms S-8, Nos. 333-04479,
333-005923 and 333-42111 and Forms S-3, Nos. 333-14549, 333-23193 and 333-39787
of our reports dated February 5, 1998, relating to the consolidated financial
statements and schedule of Tel-Save Holdings, Inc. and subsidiaries, appearing
in the Company's Annual Report on Form 10-K for the year ended December 31,
1997.
We also consent to the reference to us under the caption "Experts" in the
Prospectuses.
BDO Seidman, LLP
New York, New York
March 31, 1998
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Tel-Save Holdings, Inc.
New Hope, Pennsylvania
We hereby consent to the incorporation by reference in the Prospectus
constituting a part of the Registration Statements on Forms S-8, Nos. 333-04479,
333-05923 and 333-4211 and Forms S-3, Nos. 333-14549, 333-23193 and 333-39787 of
our reports dated February 5, 1998, relating to the consolidated financial
statements and schedule of Tel-Save Holdings, Inc. and subsidiaries, appearing
in the Company's Annual Report on Form 10-K for the year ended December 31,
1997.
We also consent to the reference to us under the caption "Experts" in the
Prospectuses.
BDO Seidman, LLP
New York, New York
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 OF TEL-SAVE
HOLDINGS, INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 316,730,000
<SECURITIES> 212,269,000
<RECEIVABLES> 47,006,000
<ALLOWANCES> 2,419,000
<INVENTORY> 0
<CURRENT-ASSETS> 691,051,000
<PP&E> 59,472,000
<DEPRECIATION> 3,637,000
<TOTAL-ASSETS> 814,891,000
<CURRENT-LIABILITIES> 56,263,000
<BONDS> 500,000,000
0
0
<COMMON> 672,000
<OTHER-SE> 222,156,000
<TOTAL-LIABILITY-AND-EQUITY> 814,891,000
<SALES> 0
<TOTAL-REVENUES> 304,768,000
<CGS> 0
<TOTAL-COSTS> 355,169,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (34,336,000)
<INCOME-TAX> (13,391,000)
<INCOME-CONTINUING> (20,945,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,945,000)
<EPS-PRIMARY> (.33)
<EPS-DILUTED> (.33)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997 AND THE
UNAUDITED CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED
MARCH 31, 1997 OF TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> $15,719,000
<SECURITIES> 24,459,000
<RECEIVABLES> 32,520,000
<ALLOWANCES> 1,348,000
<INVENTORY> 0
<CURRENT-ASSETS> 165,654,000
<PP&E> 36,297,000
<DEPRECIATION> 706,000
<TOTAL-ASSETS> 274,310,000
<CURRENT-LIABILITIES> 24,112,000
<BONDS> 0
0
0
<COMMON> 630,000
<OTHER-SE> 249,568,000
<TOTAL-LIABILITY-AND-EQUITY> 274,310,000
<SALES> 0
<TOTAL-REVENUES> 71,160,000
<CGS> 0
<TOTAL-COSTS> 61,785,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 8,901,000
<INCOME-TAX> 3,471,000
<INCOME-CONTINUING> 5,430,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,430,000
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.08
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER, 1996 OF TEL-SAVE HOLDINGS, INC.
AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 8,023,000
<SECURITIES> 149,237,000
<RECEIVABLES> 20,958,000
<ALLOWANCES> 987,000
<INVENTORY> 0
<CURRENT-ASSETS> 201,885,000
<PP&E> 30,596,000
<DEPRECIATION> 499,000
<TOTAL-ASSETS> 257,008,000
<CURRENT-LIABILITIES> 26,288,000
<BONDS> 0
622,000
0
<COMMON> 0
<OTHER-SE> 230,098,000
<TOTAL-LIABILITY-AND-EQUITY> 257,008,000
<SALES> 0
<TOTAL-REVENUES> 232,424,000
<CGS> 0
<TOTAL-COSTS> 200,597,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 32,373,000
<INCOME-TAX> 12,205,000
<INCOME-CONTINUING> 20,168,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,168,000
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.35
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1996 AND THE UNAUDITED
CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 OF
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARES AND IS QUALIFIED IN ITS ENTIREITY BY
REFERNCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 160,226,000
<SECURITIES> 12,737,000
<RECEIVABLES> 22,883,000
<ALLOWANCES> 931,000
<INVENTORY> 0
<CURRENT-ASSETS> 212,137,000
<PP&E> 22,925,000
<DEPRECIATION> 398,000
<TOTAL-ASSETS> 239,378,000
<CURRENT-LIABILITIES> 28,583,000
<BONDS> 0
0
0
<COMMON> 290,000
<OTHER-SE> 207,506,000
<TOTAL-LIABILITY-AND-EQUITY> 239,378,000
<SALES> 0
<TOTAL-REVENUES> 168,159,000
<CGS> 0
<TOTAL-COSTS> 145,617,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 23,221,000
<INCOME-TAX> 8,754,000
<INCOME-CONTINUING> 14,467,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,467,000
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.27
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1996 AND THE UNAUDITED
CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1996 OF
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 9,422,000
<SECURITIES> 164,464,000
<RECEIVABLES> 20,611,000
<ALLOWANCES> 892,000
<INVENTORY> 0
<CURRENT-ASSETS> 206,947,000
<PP&E> 20,829,000
<DEPRECIATION> 336,000
<TOTAL-ASSETS> 230,903,000
<CURRENT-LIABILITIES> 28,781,000
<BONDS> 0
0
0
<COMMON> 290,000
<OTHER-SE> 199,061,000
<TOTAL-LIABILITY-AND-EQUITY> 230,903,000
<SALES> 0
<TOTAL-REVENUES> 108,080,000
<CGS> 0
<TOTAL-COSTS> 93,861,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 11,934,000
<INCOME-TAX> 4,499,000
<INCOME-CONTINUING> 7,435,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,435,000
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.15
</TABLE>
