-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OEOTbmIS5FuW1rC+CFwZdRS6coanmn07wx0wU3A4nxM6nX3UehoruwRgsdvtem8S 9xYnKcF+a+QqRauUKGKk2w== 0000912057-97-008889.txt : 19970317 0000912057-97-008889.hdr.sgml : 19970317 ACCESSION NUMBER: 0000912057-97-008889 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 19 FILED AS OF DATE: 19970314 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEXTLINK COMMUNICATIONS LLC CENTRAL INDEX KEY: 0001015126 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-23377 FILM NUMBER: 97557014 BUSINESS ADDRESS: STREET 1: 155 108TH AVE N E STREET 2: 8TH FLOOR CITY: BELLEVUE STATE: WA ZIP: 98004 BUSINESS PHONE: 2065198900 MAIL ADDRESS: STREET 1: 155 108TH AVE N E STREET 2: 8TH FLOOR CITY: BELLEVUE STATE: WA ZIP: 98004 S-4 1 S-4 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 14, 1997 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- NEXTLINK COMMUNICATIONS, INC. (Exact Name of Registrant as Specified in its Charter) WASHINGTON 4813 91-1738221 (State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code Number) Identification No.) Incorporation or Organization)
-------------------------- 155 108TH AVENUE N.E., 8TH FLOOR, BELLEVUE, WASHINGTON 98004, (206) 519-8900 (Address, including ZIP code, and telephone number, including area code, of the Registrant's principal executive offices) -------------------------- R. BRUCE EASTER JR., ESQ. 155 108TH AVENUE N.E., 8TH FLOOR BELLEVUE, WASHINGTON 98004 (206) 519-8900 (Name, address, including ZIP code, and telephone number, including area code, of agent for service) -------------------------- COPIES TO: BRUCE R. KRAUS, ESQ. WILLKIE FARR & GALLAGHER ONE CITICORP CENTER 153 EAST 53RD STREET NEW YORK, NEW YORK 10022 (212) 821-8000 -------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED OFFER TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. / / -------------------------- CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED MAXIMUM AMOUNT MAXIMUM AGGREGATE AMOUNT OF TITLE OF EACH CLASS OF SECURITIES TO BE OFFERING OFFERING REGISTRATION TO BE REGISTERED REGISTERED PRICE PER UNIT(1) PRICE FEE 14% Senior Exchangeable Redeemable Preferred Shares, par value $.01 per share................ 11,341,797(2) $48.07 $274,000,000(2) $83,031(2) 14% Senior Subordinated Notes due 2009............ $274,000,000 (3)(4) (3)(4) (3)(4)
(1) Estimated solely for the purpose of calculating the registration fee. (2) Includes 5,641,797 14% Senior Exchangeable Redeemable Preferred Shares, par value $.01 per share that may be issued as dividends on the 14% Senior Exchangeable Redeemable Preferred Shares. No additional registration fee is payable in respect thereof. (3) The 14% Senior Exchangeable Redeemable Preferred Shares are exchangeable, in whole but not in part, upon the occurrence of certain events, at the option of the Company, for the 14% Senior Subordinated Notes due 2009. No additional registration fee is payable in respect thereof. (4) Includes $272,114,826 principal amount of 14% Senior Subordinated Notes due 2009 that may be issued as interest payments on the 14% Senior Subordinated Notes due 2009. -------------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NEXTLINK COMMUNICATIONS, INC. CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
FORM S-4 ITEM NUMBER LOCATION IN PROSPECTUS - ---------------------------------------------------------------- ----------------------------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus..................... Forepart of the Registration Statement and Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus......................................... Inside Front and Outside Back Cover Pages of Prospectus 3. Risk Factors, Ratio of Earnings to Fixed Charges and Other Information.................................. Summary; Risk Factors; Business; Selected Consolidated Financial and Operating Data 4. Terms of the Transaction............................. Summary; Risk Factors; The Exchange Offer; Description of the New Preferred Shares; Description of the Exchange Notes; Plan of Distribution 5. Pro Forma Financial Information...................... Summary; Selected Consolidated Financial and Operating Data 6. Material Contracts with the Company Being Acquired... Not Applicable 7. Additional Information Required for Reoffering by Persons and Parties Deemed to be Underwriters...... Not Applicable 8. Interests of Named Experts and Counsel............... Not Applicable 9. Disclosure of Commission Position on Indemnification for Securities Act Liabilities..................... Not Applicable 10. Information with Respect to S-3 Registrants.......... Not Applicable 11. Incorporation of Certain Information by Reference.... Not Applicable 12. Information with Respect to S-2 or S-3 Registrants... Not Applicable 13. Incorporation of Certain Information by Reference.... Not Applicable 14. Information with Respect to Registrants Other than S-3 or S-2 Registrants............................. Summary; Risk Factors; Business; Capitalization; Selected Consolidated Financial and Operating Data; Management's Discussion and Analysis of Financial Condition and Results of Operations 15. Information with Respect to S-3 Companies............ Not Applicable
i
FORM S-4 ITEM NUMBER LOCATION IN PROSPECTUS - ---------------------------------------------------------------- ----------------------------------------------------- 16. Information with Respect to S-2 or S-3 Companies..... Not Applicable 17. Information with Respect to Companies Other Than S-3 or S-2 Companies................................... Not Applicable 18. Information if Proxies, Consents or Authorizations are to be Solicited................................ Not Applicable 19. Information if Proxies, Consents or Authorizations are not to be Solicited or in an Exchange Offer.... Summary; Management; Certain Relationships and Related Transactions; Security Ownership of Certain Beneficial Owners and Management; Description of Capital Stock
ii SUBJECT TO COMPLETION, DATED MARCH 14, 1997 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PROSPECTUS NEXTLINK COMMUNICATIONS, INC. OFFER TO EXCHANGE ALL OUTSTANDING 14% SENIOR EXCHANGEABLE REDEEMABLE PREFERRED SHARES ($285,000,000 AGGREGATE LIQUIDATION PREFERENCE) FOR 14% SENIOR EXCHANGEABLE REDEEMABLE PREFERRED SHARES OF NEXTLINK COMMUNICATIONS, INC. THAT WERE ISSUED AND SOLD IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NEXTLINK Communications, Inc., a Washington corporation (the "Company" or "NEXTLINK"), hereby offers, upon the terms and subject to the conditions set forth in this Prospectus and the accompanying letter of transmittal (the "Letter of Transmittal", and together with this Prospectus, the "Exchange Offer") to exchange one (1) 14% Senior Exchangeable Redeemable Preferred Share (collectively, the "New Preferred Shares"), which has been registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a Registration Statement (as defined herein) of which this Prospectus constitutes a part, for each outstanding 14% Senior Exchangeable Redeemable Preferred Share (collectively, the "Old Preferred Shares") of the Company. The New Preferred Shares and the Old Preferred Shares are collectively referred to herein as the "Preferred Shares". There will be no cash proceeds to the Company from the Exchange Offer. The Exchange Offer is not conditioned upon any minimum number of Old Preferred Shares being tendered or accepted for exchange. The Exchange Offer will expire at 5:00 p.m., New York City time, on , 1997, unless extended (the "Expiration Date"). The date of acceptance for exchange of the Old Preferred Shares (the "Exchange Date") will be the first business day following the Expiration Date, upon surrender of the Old Preferred Shares. Old Preferred Shares tendered pursuant to the Exchange Offer may be withdrawn at any time prior to the Expiration Date; otherwise such tenders are irrevocable. The Exchange Offer is subject to certain conditions which may be waived by the Company and to the terms and provisions of the Preferred Registration Rights Agreement (as defined herein). See "The Exchange Offer". The terms of the New Preferred Shares are the same in all respects (liquidation preference, dividend rate, mandatory redemption and ranking) as the terms of the Old Preferred Shares for which they may be exchanged pursuant to the Exchange Offer, except that the New Preferred Shares have been registered under the Securities Act and therefore will not be subject to certain restrictions on transfer applicable to the Old Preferred Shares and will not be entitled to registration rights. Following the completion of the Exchange Offer, none of the Preferred Shares will be entitled to the benefits of the Preferred Registration Rights Agreement relating to contingent increases in the dividend rate provided for pursuant thereto. See "The Exchange Offer". Dividends on the New Preferred Shares are payable out of legally available funds and are cumulative from the most recent dividend payment date to which dividends on the Old Preferred Shares were paid (the "Accrual Date"). Holders of Old Preferred Shares whose shares of Old Preferred Shares are accepted for exchange will be deemed to have waived the right to receive any payment in respect of dividends on the Old Preferred Shares accumulated from the Accrual Date to the date of the issuance of the New Preferred Shares. Consequently, holders who exchange their Old Preferred Shares for New Preferred Shares will receive the same dividend payment on the next dividend payment date (expected to be May 1, 1997) that they would have received had they not accepted the Exchange Offer, except that if such dividend is not paid in cash, it will be paid in shares of New Preferred Shares instead of Old Preferred Shares. Dividends on the New Preferred Shares are payable quarterly in arrears on February 1, May 1, August 1 and November 1 of each year, commencing May 1, 1997, accumulating from the Accrual Date at the annual rate of 14% per share of New Preferred Shares. Before February 1, 2002, dividends may, at the option of the Company, be paid in cash or by issuing fully paid and nonassessable New Preferred Shares with an aggregate liquidation preference equal to the amount of such dividends. After February 1, 2002, dividends must be paid in cash. The New Preferred Shares have a liquidation preference of $50 per share, plus accumulated and unpaid dividends thereon. (COVER CONTINUED ON FOLLOWING PAGE.) SEE "RISK FACTORS" ON PAGE FOR A DESCRIPTION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is , 1997 The Old Preferred Shares were originally issued and sold on January 31, 1997 in a transaction not registered under the Securities Act, in reliance upon the exemption provided in Section 4(2) of, and Rule 144A under, the Securities Act (the "Offering"). Accordingly, the Old Preferred Shares may not be reoffered, resold or otherwise pledged, hypothecated or transferred in the United States unless so registered or unless an applicable exemption from the registration requirements of the Securities Act is available. Based on no-action letters issued by the staff of the Securities and Exchange Commission (the "Commission") to third parties, the Company believes the New Preferred Shares issued pursuant to the Exchange Offer may be offered for resale, resold and otherwise transferred by holders thereof (other than a "Restricted Holder," being (i) a broker-dealer who acquires such New Preferred Shares directly from the Company to resell pursuant to Rule 144A or any other available exemption under the Securities Act, (ii) a person that is an affiliate of the Company within the meaning of Rule 405 under the Securities Act or (iii) broker-dealers who acquired Old Preferred Shares as a result of market-making or other trading activities), without compliance with the registration and prospectus delivery provisions of the Securities Act provided that such New Preferred Shares are acquired in the ordinary course of such holders' business and such holders have no arrangements with any person to participate in the distribution of such New Preferred Shares. Eligible holders wishing to accept the Exchange Offer must represent to the Company that such conditions have been met. Each broker-dealer that receives New Preferred Shares pursuant to the Exchange Offer in exchange for Old Preferred Shares acquired for its own account as a result of market-making activities or other trading activities may be a statutory underwriter and must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such New Preferred Shares. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Preferred Shares received in exchange for Old Preferred Shares where such Old Preferred Shares were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that it will make this Prospectus and any amendment or supplement to this Prospectus available to any broker-dealer for use in connection with any such resale for a period of 90 days from the date of this Prospectus, or such shorter period as will terminate when all Old Preferred Shares acquired by broker-dealers for their own accounts as a result of market-making activities or other trading activities have been exchanged for New Preferred Shares and resold by such broker-dealers. Any holder that cannot rely upon such interpretations must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction. See "Plan of Distribution". THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD PREFERRED SHARES IN ANY JURISDICTION IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION. The Old Preferred Shares and the New Preferred Shares constitute new issues of securities with no established public trading market. If a market for the New Preferred Shares should develop, the New Preferred Shares could trade at a discount from their aggregate liquidation preference. The Company does not intend to list the New Preferred Shares on a national securities exchange or to apply for quotation of the New Preferred Shares through the National Association of Securities Dealers Automated Quotation System. There can be no assurance that an active public market for the New Preferred Shares will develop. The Company has been advised by Merrill Lynch & Co. and Toronto Dominion Securities (USA) Inc. that they intend to make a market in the New Preferred Shares; however, such entities are under no obligation to do so and any market making activities with respect to the New Preferred Shares may be discontinued at any time. Any Old Preferred Shares not tendered and accepted in the Exchange Offer will remain outstanding. To the extent that Old Preferred Shares are tendered and accepted in the Exchange Offer, a holder's ability to sell untendered, and tendered but unaccepted, Old Preferred Shares could be adversely affected. Following consummation of the Exchange Offer, the holders of Old Preferred Shares will continue to be subject to the existing restrictions on transfer thereof and the Company will have no further obligation to such holders to provide for the registration under the Securities Act of the Old Preferred Shares except under certain limited circumstances. See "Description of the Preferred Shares -- Registration Covenant; Exchange Offer". No assurance can be given as to the liquidity of the trading market for either the Old Preferred Shares or the New Preferred Shares. (END OF COVER) AVAILABLE INFORMATION The Company has filed with the Commission a Registration Statement on Form S-4 (the "Registration Statement", which term shall include all amendments, exhibits, annexes and schedules thereto) pursuant to the Securities Act, and the rules and regulations promulgated thereunder, covering the New Preferred Shares being offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to in the Registration Statement are necessarily summaries of those documents, and, with respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. NEXTLINK has filed periodic reporting and other information pursuant to the requirements of the Securities Exchange Act of 1934 (the "Exchange Act"). Periodic reports and other information filed by the Company with the Commission may be inspected at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, or at its regional offices located at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New York 10048. In addition, the Commission maintains a website that contains periodic reports and other information filed by the Company. This website can be accessed at www.sec.gov. Copies of such material can be also be obtained from the Company upon request. The Company is required by the terms of the Certificate of Designations of the Powers, Preferences and Relative, Participating, Optional and Other Special Rights of the Preferred Shares and Qualifications, Limitations and Restrictions Thereof (the "Certificate of Designations") to furnish the transfer agent and registrar for the Preferred Shares (the "Transfer Agent") with annual reports containing consolidated financial statements audited by its independent certified public accountants and with quarterly reports containing unaudited condensed consolidated financial statements for each of the first three quarters of each fiscal year. NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE EXCHANGE OFFER COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE NEW PREFERRED SHARES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATIONS THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. NOTICE TO NEW HAMPSHIRE RESIDENTS ONLY NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF NEW HAMPSHIRE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH. i TABLE OF CONTENTS
PAGE ----- SUMMARY.................................................................................................... RISK FACTORS............................................................................................... Consequences of Exchange and Failure to Exchange......................................................... Negative Cash Flow and Operating Losses; Limited History of Operations................................... Significant Future Capital Requirements; Substantial Indebtedness........................................ Risk Associated with Implementation of Growth Strategy................................................... Need to Obtain and Maintain Permits and Rights-of-Way.................................................... Competition.............................................................................................. Regulation............................................................................................... Dependence on Large Customers............................................................................ Rapid Technological Changes.............................................................................. Dependence on Key Personnel.............................................................................. Variability of Quarterly Operating Results............................................................... Control by Mr. Craig O. McCaw; Potential Conflicts of Interests.......................................... Risks Associated with the Preferred Shares and the Exchange Notes........................................ Forward Looking Statements............................................................................... USE OF PROCEEDS............................................................................................ THE EXCHANGE OFFER......................................................................................... Purpose of the Exchange Offer............................................................................ Terms of the Exchange.................................................................................... Expiration Date; Extensions; Termination; Amendments..................................................... How to Tender............................................................................................ Terms and Conditions of the Letter of Transmittal........................................................ Withdrawal Rights........................................................................................ Acceptance of Old Preferred Shares for Exchange; Delivery of New Preferred Shares........................ Conditions to the Exchange Offer......................................................................... Exchange Agent........................................................................................... Solicitation of Tenders; Expenses........................................................................ Appraisal Rights......................................................................................... Federal Income Tax Consequences.......................................................................... Other.................................................................................................... CAPITALIZATION............................................................................................. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA......................................................... MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... Overview................................................................................................. Results of Operations.................................................................................... Liquidity and Capital Resources.......................................................................... BUSINESS................................................................................................... Overview.................................................................................................
ii
PAGE ----- Market Opportunity....................................................................................... Business Strategy........................................................................................ The Company's Telecommunications Services................................................................ Sales and Customer Care.................................................................................. Network Development...................................................................................... Network Architecture..................................................................................... Implementation of Local Telecommunications............................................................... Regulatory Overview...................................................................................... Competition.............................................................................................. Purchasing and Distribution.............................................................................. Properties............................................................................................... Employees................................................................................................ Trademarks and Trade Names............................................................................... Legal Proceedings........................................................................................ MANAGEMENT................................................................................................. Employment Agreements.................................................................................... NEXTLINK Communications, L.L.C. Equity Option Plan....................................................... NEXTLINK Communications, Inc. Stock Option Plan.......................................................... CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................................. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................. DESCRIPTION OF CERTAIN INDEBTEDNESS........................................................................ DESCRIPTION OF CAPITAL STOCK............................................................................... Common Stock............................................................................................. Preferred Stock.......................................................................................... Director and Officer Indemnification..................................................................... Provisions Affecting Acquisitions and Business Combinations.............................................. DESCRIPTION OF NEW PREFERRED SHARES........................................................................ Ranking.................................................................................................. Dividends................................................................................................ Mandatory Redemption..................................................................................... Permitted Amendments Relating to Optional Redemption..................................................... Procedure for Redemption................................................................................. Exchange................................................................................................. Liquidation Preference................................................................................... Voting Rights............................................................................................ Change of Control........................................................................................ Certain Covenants........................................................................................ Transfer Agent and Registrar............................................................................. DESCRIPTION OF THE EXCHANGE NOTES.......................................................................... General.................................................................................................. Subordination............................................................................................ Permitted Amendments Relating to Optional Redemption..................................................... Mandatory Redemption; Sinking Fund....................................................................... Covenants................................................................................................ Mergers, Consolidations and Certain Sales of Assets......................................................
iii
PAGE ----- Events of Default........................................................................................ Satisfaction and Discharge of the Indenture.............................................................. Defeasance............................................................................................... Modification and Waiver.................................................................................. No Personal Liability of Members, Managers, Officers, Employees and Stockholders......................... Governing Law............................................................................................ The Trustee.............................................................................................. DEFINITIONS................................................................................................ PLAN OF DISTRIBUTION....................................................................................... LEGAL MATTERS.............................................................................................. EXPERTS.................................................................................................... INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................................................. F-1 GLOSSARY................................................................................................... A-1
iv SUMMARY THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. REFERENCE IS MADE TO, AND THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION, INCLUDING THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, CONTAINED HEREIN. UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERMS "NEXTLINK" OR THE "COMPANY" REFER TO NEXTLINK COMMUNICATIONS, INC., A WASHINGTON CORPORATION, ITS CONSOLIDATED SUBSIDIARIES AND 40% MEMBERSHIP INTEREST IN TELECOMMUNICATIONS OF NEVADA, LLC, WHICH OWNS A NETWORK THAT IS MANAGED BY THE COMPANY. THE COMPANY IS THE SUCCESSOR TO NEXTLINK COMMUNICATIONS, L.L.C., A WASHINGTON LIMITED LIABILITY COMPANY THAT MERGED WITH AND INTO THE COMPANY EFFECTIVE JANUARY 31, 1997. ALL FINANCIAL AND OPERATIONAL DATA PRESENTED FOR PERIODS PRIOR TO JANUARY 31, 1997 RELATE TO NEXTLINK COMMUNICATIONS, L.L.C. ALL OPERATIONAL STATISTICS OF THE COMPANY INCLUDED IN THIS PROSPECTUS INCLUDE 100% OF THE OPERATIONAL STATISTICS OF TELECOMMUNICATIONS OF NEVADA, LLC. CAPITALIZED TERMS USED IN THIS PROSPECTUS, WHICH ARE NOT OTHERWISE DEFINED HEREIN, HAVE THE RESPECTIVE MEANINGS ASCRIBED TO THEM IN THE GLOSSARY INCLUDED AS ANNEX A HERETO. SEE "RISK FACTORS-- FORWARD LOOKING STATEMENTS" FOR CERTAIN INFORMATION RELATING TO STATEMENTS CONTAINED IN THIS PROSPECTUS THAT ARE NOT HISTORICAL FACTS. THE COMPANY NEXTLINK was founded in 1994 by Mr. Craig O. McCaw, its Chief Executive Officer and principal equity owner, to provide local facilities-based telecommunications services with a focus on delivering switched services to commercial customers. In July 1996, NEXTLINK became one of the first competitive local exchange carriers ("CLECs") in the United States to provide facilities-based local dial tone services under the Telecommunications Act of 1996 (the "Telecom Act"), which opened the entire local exchange market to competition. In each of the markets it serves, NEXTLINK's goal is to become the principal competitor to the incumbent local exchange carrier ("ILEC") for its targeted customer base of small and medium sized businesses by offering a single source for local, long distance and enhanced communications services. The Company currently offers a bundled package of switched local dial tone and long distance services in eight markets and anticipates launching these services in an additional 14 markets, 13 of which are anticipated to be launched by the end of June 1997. In addition, the Company offers dedicated transmission and competitive access services to long distance carriers and end users in 18 of its markets, including those markets where the Company has not yet launched switched local dial tone and long distance services. NEXTLINK also offers enhanced communications services, including a series of interactive voice response ("IVR") products, a virtual communications center for mobile professionals and workgroups and an interactive communications tool for the World Wide Web and intranet applications called the Intermind Communicator. To date, NEXTLINK has acquired and constructed telecommunications networks in seven states, with operations currently active or under construction in 22 markets containing an aggregate of approximately four million addressable business lines. As of December 31, 1996, the Company's operations included approximately 1,080 route miles of installed and operational high capacity fiber optic cable with a combined total of approximately 66,000 fiber miles which connect to 403 buildings and an additional 400 route miles under construction. The Company seeks to encompass the significant business concentrations in each area it serves, focusing on direct connections to end-user locations and ILEC central offices. The Company constructs its networks utilizing high capacity fiber optic cable, with a backbone density generally ranging from 72 to 240 fibers, and self-healing SONET transmission equipment. In addition, the Company employs a uniform technology platform for each of its networks that is based on the Nortel DMS 500 digital local and long distance combination switching system and associated distribution technology. As of December 31, 1996, the Company had five operational Nortel DMS 500 1 switches serving eight markets, had installed three switches during the first quarter of 1997 and anticipates installing one switch in the second quarter 1997, allowing the Company to service in the aggregate 14 additional markets. The Company plans to install a tenth switch in its NEXTLAB facility, a fully functional model of one of the Company's networks, which will serve as the Company's network operations control center and a testing facility for switch software and the Company's products and services. NEXTLINK has interconnection agreements covering 15 markets and is currently negotiating two additional interconnection agreements that will cover its seven additional markets. These agreements provide the Company with the ability to exchange telecommunications traffic between its customers and the customers of the ILEC. The Company accelerated its offering of switched local dial tone services by establishing initial interconnection agreements while longer term agreements are negotiated. The operating experience gained by the Company under these agreements gives the Company critical knowledge for negotiating longer term arrangements, which the Company believes provides it with an advantage over other CLECs in modifying its ongoing relationships with the ILECs. MARKET OPPORTUNITY Industry sources estimate that in 1995 the total revenues from local and long distance telecommunications services were approximately $175 billion, of which approximately $101 billion were derived from local exchange services and approximately $74 billion from long distance services. Although the Modified Final Judgment relating to the breakup of AT&T (the "MFJ") established the preconditions for competition in the market for long distance services in 1984, the market for local exchange services has until recently been virtually closed to competition and has largely been dominated by regulated monopolies. Efforts to open the local exchange market began in the late 1980s on a state-by-state basis when competitive access providers ("CAPs") began offering dedicated private line transmission and access services. These types of services together currently account for approximately 12% ($12 billion) of the total local exchange revenues. CAPs were restricted, often by state laws, from providing the other, more frequently used services such as basic dial tone and switched services, which today account for approximately 88% ($89 billion) of local exchange revenues. The Telecom Act and the FCC's issuance of rules for competition, particularly those requiring the interconnection of all networks and the interchange of traffic among the ILECs and the CLECs, as well as pro-competitive policies already developed by state regulatory commissions, have caused fundamental changes in the structure of the local exchange markets. Although the U.S. Court of Appeals for the Eighth Circuit has issued a partial stay of the FCC's rules implementing the local competition provisions of the Telecom Act, the stay is limited to issues relating to pricing of interconnection and a CLEC's ability to impose "most favored nation" requirements on ILECs. Both issues remain subject to scrutiny and oversight by state regulatory commissions. See "Business--Regulatory Overview." These developments create opportunities for new entrants offering local exchange services to capture a portion of the current monopolists' nearly 100% market share. The development of facilities-based switched local dial tone services competition, however, is in its early stages. Even though other CLECs have begun to offer on-network switched local services, the Company believes that to date less than 1% of the total business lines in the United States have changed from an ILEC to a CLEC for such switched services. As competition develops, the Company anticipates that the market will become increasingly segmented, with the ILECs and the CLECs focusing on particular customer and geographic segments. BUSINESS STRATEGY The Company has built an end user-focused, locally oriented organization dedicated to providing a broad range of products and services at competitive prices primarily to small and medium sized businesses. The key components of the Company's strategy to maximize penetration of its targeted customer base are: 2 FOCUS ON SMALL AND MEDIUM SIZED BUSINESSES. The Company primarily focuses marketing efforts for its switched local, long distance and enhanced communications services on small and medium sized businesses and professional groups with 10 to 50 business lines. The Company's market research indicates that these customers prefer a single source for all of their telecommunications requirements, including products, billing, installation, maintenance and customer service. The Company has chosen to focus on this segment, based on its expectations that higher gross margins will generally be available on services provided to these customers, as compared with larger businesses, and that ILECs may be less likely to apply significant resources towards retaining these customers. The Company expects to attract these customers through a direct sales effort by offering: (i) bundled facilities-based local dial tone and resold long distance services, as well as the Company's enhanced communications services; (ii) a 10% to 15% discount to comparable pricing by the ILEC, depending on the individual market; and (iii) responsive customer service and support provided on a local level. DEVELOP A DIRECT SALES FORCE AND A CUSTOMER CARE ORGANIZATION. NEXTLINK is building a highly motivated and experienced direct sales force and customer care organization that is designed to establish a direct and personal relationship with its customers. Salespeople are given incentives through a commission structure that targets 40% of a salesperson's compensation to be based on performance. To ensure customer satisfaction, each customer will have a single point of contact for customer care who is responsible for solving problems and responding to customer inquiries. Management believes that the quality of its sales force and the responsiveness of its customer care organization will help to attract and retain customers and provide a key competitive advantage in competing with the ILEC in the local exchange market. STANDARDIZE PROCESSES TO ACCELERATE REVENUE GROWTH. The Company believes that the immediate challenge for CLECs will be developing the ability to implement effective provisioning systems, which include the complex process of transitioning ILEC customers to the Company's switched local dial tone services. Accordingly, the Company has begun to identify and will focus, as a key competitive strategy, on implementing best provisioning practices in each of its markets that will provide for rapid and seamless transitions of customers from the ILEC to the Company. To support the provisioning of its services, the Company has begun a long-term development program relating to a comprehensive information technology platform geared toward delivering information and automated ordering and provisioning capability directly to the end-user as well as to the Company's internal staff. The Company believes that these practices and its comprehensive information technology platform, as developed, will provide the Company with a long-term competitive advantage and allow it to implement more rapidly switched local dial tone services in its markets and to shorten the time between the sale of its services and the generation of revenues. DEVELOP HIGH CAPACITY NETWORKS WITH BROAD MARKET COVERAGE. NEXTLINK has and intends to continue to approach network design with a long-term view focusing on three key elements. First, the Company designs and builds its networks to provide extensive coverage of principal business concentrations, featuring direct physical connection of the Company's network to a high percentage of the commercial buildings and a majority of the ILEC central offices. This broad coverage is expected to result in a higher proportion of traffic that is both originated and terminated on the Company's networks, which should provide higher long-term operating margins. Second, the Company constructs high capacity networks that utilize large fiber bundles capable of carrying high volumes of voice, data, video and Internet traffic as well as other high bandwidth services. This strategy should reduce potential "overbuild" costs and provide added network capacity as the Company adds high bandwidth services in the future. Third, the Company employs a uniform technology platform based on Nortel DMS 500 switches, associated distribution technology and other common transmission technologies enabling the Company to (i) deploy features and functions quickly in all of its networks, (ii) expand switching capacity in a cost effective manner and 3 (iii) lower maintenance costs through reduced training and spare parts requirements. The Company also utilizes unbundled loops from the ILEC to connect the Company's switch and network to end user buildings and is evaluating other alternatives for building connectivity, including wireless connections, for the "last mile" of transport. OFFER ENHANCED COMMUNICATIONS SERVICES. NEXTLINK offers customers value-added services that are not dependent on the Company's local facilities. As a result, the Company believes it can establish a customer base in a market in advance of constructing network facilities as well as offer additional services in markets where the Company has constructed facilities. These enhanced communications services include: (i) IVR services, which provide an interface between NEXTLINK's clients and their customers for a variety of applications; (ii) Xpress (formerly Magic Number), NEXTLINK's virtual communications center that allows mobile professionals and workgroups to access a suite of commonly used communications services from any telephone in the public switched network; and (iii) the Intermind Communicator, an interactive communications tool for the World Wide Web and intranet applications. The Company plans to focus the marketing of its enhanced communications service offerings in all of its markets, as well as in areas of planned network expansion. This should increase the Company's visibility, develop customer relationships and assist the Company in attracting local exchange customers when it operates networks in these markets. CONTINUE MARKET EXPANSION. The Company currently operates or is constructing networks in 22 markets in seven states. These markets, in the aggregate, have approximately four million addressable business lines. The Company's goal is to add or expand markets and market clusters in order to increase its market potential to approximately 11 million addressable business lines by the end of 1998. NEXTLINK believes that its strategy of operating its networks in clusters (i) offers substantial advantages including economies of scale in management, marketing, sales and network operations, (ii) enables the Company to capture a greater percentage of regional traffic and to develop regional pricing plans, because the Company believes that a significant level of traffic terminates within 300 miles of its origination and (iii) provides opportunities in smaller markets and those markets that are too small to develop on a stand alone basis. The Company anticipates continuing to expand into new geographic areas as opportunities arise either through building new networks, acquiring existing networks or acquiring capacity. Most recently, the Company acquired an 80 mile fiber optic network located in Los Angeles and six adjacent markets and reached an agreement in principle to acquire an existing operational fiber optic network in downtown Philadelphia in order to extend its existing network in Pennsylvania. The Company believes that a critical factor in the successful implementation of the Company's strategy is the quality of its management team and their extensive experience in the telecommunications industry. The Company has built a management team that it believes is well suited to challenge the dominance of the ILECs in the local exchange market. Mr. Craig O. McCaw, the Company's Chief Executive Officer, and Mr. James F. Voelker, the Company's President, each has in excess of 17 years of experience in leading companies in competitive segments of the telecommunications industry. In addition, the Company has recruited experienced entrepreneurs and industry executives to head each of its operating subsidiaries, many of whom have previously built and led their own start-up telecommunications businesses. Many of the Company's mid-level and senior managers were associated with Mr. McCaw during the early years at McCaw Cellular Communications, Inc. (now known as AT&T Wireless Services, Inc.), where the organizational themes included an unyielding focus on the customer, developing a first-class, differentiated product offering, decentralized management decision-making and building a high capacity system. 4 RECENT DEVELOPMENTS Since the offering in April 1996 of the Company's 12 1/2% Senior Notes due April 15, 2006, the Company has achieved the following: - launched switched on-network local dial tone services and long distance services in eight markets; - acquired substantially all of the assets of Linkatel Pacific, L.P. ("Linkatel"), an operator of an 80 mile fiber optic network in Los Angeles and six adjacent markets, and obtained access to rights-of-way for approximately 250 miles; - reached an agreement in principle to acquire an existing three mile operational fiber optic network in downtown Philadelphia in order to extend its existing network in Pennsylvania; - acquired the ITC Companies ("ITC"), a long distance reseller located in Salt Lake City, Utah with annual revenues for 1996 of approximately $11.4 million; - executed six interconnection agreements covering 15 markets; - acquired exclusive marketing rights to the Intermind Communicator in NEXTLINK's service areas; and - increased its property and equipment from approximately $56 million to approximately $112 million on a pro forma basis after giving effect to the acquisition of Linkatel. THE EXCHANGE OFFER Issuer....................... NEXTLINK Communications, Inc. The principal office of the Company is located at 155 108th Avenue, N.E., 8th Floor, Bellevue, Washington 98004, and its telephone number at that address is (206) 519-8900. The Exchange Offer........... The Company is offering to exchange up to 5,700,000 14% Senior Exchangeable Redeemable Preferred Shares (the "New Preferred Shares") for up to 5,700,000 14% Senior Exchangeable Redeemable Preferred Shares that were issued and sold on January 31, 1997 in a transaction (the "Offering") exempt from registration under the Securities Act (the "Old Preferred Shares" and, collectively with the New Preferred Shares, the "Preferred Shares"). The terms of the New Preferred Shares are substantially identical in all respects (including liquidation preference, dividend rate, mandatory redemption and ranking) to the terms of the Old Preferred Shares for which they may be exchanged pursuant to the Exchange Offer, except that the New Preferred Shares have been registered under the Securities Act and therefore will not be subject to certain restrictions on transfer except as provided herein (see "The Exchange Offer--Terms of the Exchange") and will not be entitled to registration rights. In addition, following completion of the Exchange Offer, none of the Preferred Shares will be entitled to the benefits of the Preferred Registration Rights Agreement (as defined), relating to contingent increases in the dividend rate provided pursuant thereto. New Preferred Shares issued pursuant to the Exchange Offer in exchange for Old Preferred Shares may be offered for resale, resold
5 and otherwise transferred by holders thereof (other than any holder which is (i) an affiliate of the Company within the meaning of Rule 405 under the Securities Act (an "Affiliate"), (ii) a broker-dealer who acquired Old Preferred Shares directly from the Company or (iii) broker-dealers who acquired Old Preferred Shares as a result of market-making or other trading activities) without compliance with the registration and prospectus delivery provisions of the Securities Act provided that such New Preferred Shares are acquired in the ordinary course of such holders' business and such holders are not engaged in, and do not intend to engage in, and have no arrangement or understanding with any person to participate in, a distribution of such New Preferred Shares. Accrued Dividends on the New Preferred Shares and the Old Preferred Shares....... Dividends on the New Preferred Shares will accumulate from the most recent dividend payment date to which dividends on the Old Preferred Shares were paid (the "Accrual Date"). Holders of Old Preferred Shares whose shares of Old Preferred Shares are accepted for exchange will be deemed to have waived the right to receive any payment in respect of dividends on such Old Preferred Shares accumulated from the Accrual Date to the date of the issuance of the New Preferred Shares. Consequently, holders who exchange their Old Preferred Shares for New Preferred Shares will receive the same dividend payment on the next dividend payment date (expected to be May 1, 1997) that they would have received had they not accepted the Exchange Offer, except that if such dividend is not paid in cash, it will be paid in shares of New Preferred Shares instead of Old Preferred Shares. See "The Exchange Offer-- Dividends on the New Preferred Shares". Minimum Condition............ The Exchange Offer is not conditioned upon any minimum number of Old Preferred Shares being tendered for exchange. Expiration Date.............. The Exchange Offer will expire at 5:00 p.m., New York City time, on , 1997 unless extended (the "Expiration Date"). Exchange Date................ The first date of acceptance for exchange for the Old Preferred Shares will be the first business day following the Expiration Date (the "Exchange Date"). Conditions to the Exchange Offer...................... The obligation of the Company to consummate the Exchange Offer is subject to certain conditions. See "The Exchange Offer-- Conditions to the Exchange Offer". The Company reserves the right to terminate or amend the Exchange Offer at any time prior to the Expiration Date upon the occurrence of any such condition. Withdrawal Rights............ Tenders may be withdrawn at any time prior to the Expiration Date. Any Old Preferred Shares not accepted for any reason will be returned without expense to the tendering holders thereof as promptly as practicable after the expiration or termination of the Exchange Offer.
6 Procedures for Tendering Old Preferred Shares........... See "The Exchange Offer--How to Tender". Federal Income Tax Consequences............... The exchange of Old Preferred Shares for New Preferred Shares by holders will not be a taxable exchange for federal income tax purposes, and holders should not recognize any taxable gain or loss or any interest income as a result of such exchange. See "The Exchange Offer--Federal Income Tax Consequences". Effect on Holders of Old Preferred Shares........... As a result of the making of this Exchange Offer, and upon acceptance for exchange of all validly tendered Old Preferred Shares pursuant to the terms of this Exchange Offer, the Company will have fulfilled a covenant contained in the Preferred Exchange and Registration Rights Agreement (the "Preferred Registration Rights Agreement") dated as of January 31, 1997, among the Company, Merrill Lynch & Co. and Toronto Dominion Securities (USA) Inc. (collectively, the "Initial Purchasers") and, accordingly, the holders of the Old Preferred Shares will have no further registration or other rights under the Preferred Registration Rights Agreement, except that under certain limited circumstances, the Company shall file with the Commission a shelf registration statement on an appropriate form under Rule 415 under the Securities Act (the "Shelf Registration Statement"). See "Description of Capital Stock--Preferred Shares--Old Preferred Shares". Holders of the Old Preferred Shares who do not tender their Old Preferred Shares in the Exchange Offer will continue to hold such Old Preferred Shares and will be entitled to all the rights and limitations applicable thereto. All untendered, and tendered but unaccepted, Old Preferred Shares will continue to be subject to the restrictions on transfer provided for in the Certificate of Designations. To the extent that Old Preferred Shares are tendered and accepted in the Exchange Offer, the trading market, if any, for the Old Preferred Shares could be adversely affected. See "Risk Factors-- Consequences of Failure to Exchange".
7 TERMS OF THE NEW PREFERRED SHARES AND EXCHANGE NOTES The Exchange Offer applies to 5,700,000 Old Preferred Shares. The terms of the New Preferred Shares are the same as the terms of the Old Preferred Shares except that the New Preferred Shares have been registered under the Securities Act and, therefore, will not bear legends restricting the transfer thereof. See "Description of the New Preferred Shares". THE NEW PREFERRED SHARES Liquidation Preference....... $50 per share. Optional Redemption.......... In the event certain covenants relating to the Company's 12 1/2% Senior Notes due April 15, 2006 (the "Senior Notes") shall have been defeased, extinguished or amended (a "Covenant Amendment"), the Company may at its election and without the consent of any holder of New Preferred Shares amend the Certificate of Designations to add provisions making the New Preferred Shares redeemable at the option of the Company: (i) in whole or in part, at any time on or after February 1, 2002 at the redemption prices set forth herein, plus, without duplication, accumulated and unpaid dividends to the date of redemption; and (ii) prior to February 1, 2000, in part, out of the net cash proceeds of one or more Qualifying Events (as defined) in an amount not to exceed 35% of the aggregate liquidation preference of the Old Preferred Shares originally issued in the Offering at a redemption price equal to 114.0% of the liquidation preference thereof, plus, without duplication, accumulated and unpaid dividends to the date of redemption; provided, however, that after any such redemption, the New Preferred Shares outstanding must equal at least 65% of the aggregate liquidation preference of the Old Preferred Shares originally issued in the Offering. Mandatory Redemption......... The Company is required, subject to certain conditions, to redeem all of the New Preferred Shares outstanding on February 1, 2009 at a redemption price equal to 100% of the liquidation preference thereof, plus, without duplication, accumulated and unpaid dividends to the date of redemption. Dividends.................... Dividends will accrue from the Accrual Date and will be payable quarterly commencing May 1, 1997 at a rate per annum of 14% of the liquidation preference thereof. Dividends may be paid, at the Company's option, on any dividend payment date occurring on or before February 1, 2002 either in cash or by issuing additional fully paid and nonassessable New Preferred Shares with an aggregate liquidation preference equal to the amount of such dividends. After February 1, 2002 dividends are payable only in cash. Voting....................... The New Preferred Shares will be non-voting, except as otherwise required by law and except in certain circumstances described herein, including (i) amending certain rights of the holders of the New Preferred Shares and (ii) the issuance of any class of equity securities that ranks senior to or, in certain circumstances, on a parity with the New Preferred Shares. In addition, if: (i) the Company
8 fails to pay dividends in cash or, to the extent permitted by the Certificate of Designations, by the issuance of additional New Preferred Shares in respect of six or more quarters in the aggregate (whether or not consecutive); (ii) the Company fails to make the mandatory redemption or an Offer to Purchase (as defined) upon a Change of Control; or (iii) the Company fails to comply with the covenants contained in the Certificate of Designations or make certain payments on its indebtedness, holders of a majority of the outstanding Preferred Shares, voting as a class, will be entitled to elect a number of directors of the Company equal to the lesser of two directors or that number of directors constituting at least 25% of the board of directors of the Company. Exchange Provision........... The New Preferred Shares will be exchangeable for Exchange Notes, at the Company's option, subject to certain conditions, in whole, but not in part, on any scheduled dividend payment date. Ranking...................... The New Preferred Shares will, with respect to dividend rights and rights upon liquidation, winding-up and dissolution of the Company, rank senior to all Junior Shares (as defined) of the Company. Change of Control............ Within 30 days following a Change of Control (as defined), the Company will be required to offer to purchase all outstanding New Preferred Shares at a purchase price equal to 101% of the liquidation preference thereof, plus, without duplication, accumulated and unpaid dividends to the date of purchase. The Company does not currently have adequate financial resources to effect a repurchase of the New Preferred Shares upon a Change of Control and there can be no assurance that the Company will have such resources in the future. In addition, there are currently and may be in the future restrictions contained in the instruments evidencing indebtedness incurred by the Company or its subsidiaries which restrict or prohibit the ability of the Company to effect any repurchase of New Preferred Shares required in connection with a Change of Control. Certain Covenants............ The Certificate of Designations contains covenants that limit the ability of the Company and its subsidiaries to incur indebtedness and the ability of the Company to merge or consolidate with or sell all or substantially all of its assets to any other person. The Certificate of Designations contains provisions that allow for the modification and amendment of the covenants contained in the Certificate of Designations by a vote of holders owning a majority of the outstanding Preferred Shares, including the covenant relating to a Change of Control, except during the pendency of an Offer to Purchase. In addition, the holders of a majority of the outstanding Preferred Shares, on behalf of all holders of New Preferred Shares, may waive compliance by the Company with certain provisions of the Certificate of Designations.
THE EXCHANGE NOTES Issue........................ 14% Senior Subordinated Notes due 2009 issuable in exchange
9 for the New Preferred Shares in an aggregate principal amount equal to the then aggregate liquidation preference of the New Preferred Shares, plus, without duplication, accumulated and unpaid dividends to the date fixed for the exchange thereof (the "Note Exchange Date"), plus any additional Exchange Notes issued in lieu of cash interest. Interest..................... Interest on the Exchange Notes will be payable semi-annually in cash or, at the option of the Company, on or prior to February 1, 2002, in additional Exchange Notes, in arrears on each February 1 and August 1, commencing on the first such date. Maturity..................... February 1, 2009. Ranking...................... The Exchange Notes will be subordinated to all existing and future Senior Debt (as defined) of the Company and effectively subordinated to obligations of the Company's subsidiaries. As of December 31, 1996, there was approximately $374.9 million of Senior Debt outstanding and $29.2 million of obligations of the Company's subsidiaries. Optional Redemption.......... Following a Covenant Amendment, the Company may at its election and without the consent of any holder of Exchange Notes amend the Exchange Indenture (as defined) to add provisions making the Exchange Notes redeemable at the option of the Company: (i) in whole or in part, at any time on or after February 1, 2002 at the redemption prices set forth herein, plus, without duplication, accrued and unpaid interest to the date of redemption; and (ii) prior to February 1, 2000, in part, out of the net cash proceeds of one or more Qualifying Events in an amount up to $99.75 million of the aggregate principal amount of Exchange Notes at a redemption price equal to 114.0% of the principal amount thereof, plus, without duplication, accrued and unpaid interest to the date of redemption; provided, however, that after any such redemption, the aggregate principal amount of the Exchange Notes outstanding must equal at least $185.25 million. Change of Control............ Within 30 days following a Change of Control, the Company will be required to offer to purchase all outstanding Exchange Notes at a purchase price equal to 101% of the principal amount thereof, plus, without duplication, accrued and unpaid interest to the date of purchase. The Company does not currently have adequate financial resources to effect a repurchase of the Exchange Notes upon a Change of Control and there can be no assurance that the Company will have such resources in the future. In addition, there are currently and may be in the future restrictions contained in the instruments evidencing indebtedness incurred by the Company or its subsidiaries which restrict or prohibit the ability of the Company to effect any repurchase of Exchange Notes required in connection with a Change of Control. Certain Covenants............ The Exchange Indenture will contain certain covenants that, among other things, limit the ability of the Company and its subsidiaries to (i) incur additional indebtedness, (ii) pay dividends or make certain other restricted payments, (iii) permit restrictions on the ability of
10 subsidiaries to pay dividends or make certain payments to the Company, (iv) sell assets, (v) create certain liens, (vi) enter into certain transactions with affiliates or (vii) merge or consolidate with or sell all or substantially all of its assets to any other person. The Exchange Indenture will contain provisions that allow for the modification and amendment of the covenants contained in the Exchange Indenture by a vote of holders owning a majority of the Exchange Notes (as defined in the Exchange Indenture), including the covenant relating to a Change of Control, except during the pendency of an Offer to Purchase. In addition, the holders of a majority in aggregate principal amount of the Exchange Notes, on behalf of all holders of Exchange Notes, may waive compliance by the Company with certain restrictive provisions of the Exchange Indenture. See "Description of the Exchange Notes--Modification and Waiver".
11 SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA ($ IN THOUSANDS) The summary historical consolidated financial data presented below (other than the pro forma data) as of and for the period from inception (September 16, 1994) to December 31, 1994 and for the years ended December 31, 1995 and 1996 are derived from and qualified by reference to the audited Consolidated Financial Statements of the Company contained elsewhere in this Prospectus. The Company's Consolidated Financial Statements as of December 31, 1995 and 1996, for the period from inception (September 16, 1994) to December 31, 1994, and for the years ended December 31, 1995 and 1996, have been audited by Arthur Andersen LLP, independent public accountants. The unaudited pro forma consolidated statements of operations data for the years ended December 31, 1995 and 1996 give effect to certain acquisitions that are described in the Pro Forma Consolidated Financial Information using the purchase method of accounting and assuming that such transactions were consummated on January 1, 1995 and 1996, respectively. The operating data presented below are derived from the Company's records. All of the data should be read in conjunction with and are qualified by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Consolidated Financial Statements of the Company and notes thereto contained elsewhere in this Prospectus.
PERIOD FROM INCEPTION (SEPTEMBER 16, YEAR ENDED DECEMBER 31, 1994) TO ------------------------------------------------ DECEMBER 31, PRO FORMA PRO FORMA 1994 1995 1996 1995(1) 1996(2) ----------------- ---------- ---------- ----------- ----------- STATEMENT OF OPERATIONS DATA: Revenue...................................... $ -- $ 7,552 $ 25,686 $ 25,620 $ 36,277 Costs and expenses: Operating.................................. 106 6,618 25,094 16,507 32,400 Selling, general and administrative........ 232 9,563 31,353 15,367 35,238 Deferred compensation...................... -- 375 9,914 375 9,914 Depreciation and amortization.............. 14 3,458 10,340 8,663 14,966 ------ ---------- ---------- ----------- ----------- Loss from operations......................... (352) (12,462) (51,015) (15,292) (56,241) Interest expense, net........................ -- (499) (20,430) (814) (22,851) ------ ---------- ---------- ----------- ----------- Loss before minority interest................ (352) (12,961) (71,445) (16,106) (79,092) Minority interest............................ 3 230 344 114 344 ------ ---------- ---------- ----------- ----------- Net loss..................................... $ (349) $ (12,731) $ (71,101) $ (15,992) $ (78,748) ------ ---------- ---------- ----------- ----------- ------ ---------- ---------- ----------- ----------- OTHER DATA: EBITDA(3).................................... $ (338) $ (8,629) $ (30,761) $ (6,254) $ (31,361) Summary Cash Flow Information: Net cash used in operating activities...... (396) (9,180) (40,563) -- -- Net cash used in investing activities...... (600) (35,417) (227,012) -- -- Net cash provided by financing activities............................... 1,021 45,922 343,032 -- -- Capital expenditures, including acquisitions of businesses (net of cash acquired) and investments in affiliates (4).............. 600 49,230 85,872 -- -- Ratio of earnings to combined fixed charges (5)........................................ -- -- -- -- --
(FOOTNOTES BEGIN ON FOLLOWING PAGE) 12
AS OF DECEMBER 31, ------------------------------------------------- PRO FORMA PRO FORMA AS ADJUSTED 1995 1996 1996(6) 1996(7) --------- ----------- ----------- ------------ BALANCE SHEET DATA: Cash, cash equivalents and marketable securities............... $ 1,350 $ 124,520 $ 89,524 $ 363,524 Working capital................................................ (6,232) 137,227 100,542 374,542 Property and equipment, net.................................... 29,664 97,784 111,950 111,950 Total assets................................................... 53,461 390,683 392,753 666,753 Long-term debt and capital lease obligations, less current portion...................................................... 1,590 356,262 356,262 356,262 Preferred Shares, net of issuance costs........................ -- -- -- 274,000 Equity units subject to redemption............................. -- 4,950 4,950 4,950 Members' equity (deficit): Contributed capital.......................................... 49,799 65,527 65,527 65,527 Accumulated deficit.......................................... (13,080) (84,181) (84,181) (84,181) --------- ----------- ----------- ------------ Total members' equity (deficit)............................ 36,719 (18,654) (18,654) (18,654)
PRO FORMA AS OF AS OF AS OF AS OF AS OF MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1996 1996 1996 1996 1996(8) ----------- ----------- --------------- -------------- -------------- OPERATING DATA(9): Route miles(10).......................... 496 801 900 1,080 1,160 Fiber miles(11).......................... 39,681 42,217 55,701 66,046 71,655 Buildings connected(12).................. 206 277 299 403 411 Switches installed(13)................... 6 6 6 7 7 Employees................................ 255 387 456 568 580
- ------------------------ (1) Gives effect to the following transactions as if each had occurred on January 1, 1995: (i) the acquisitions of Tel-West Central Services, Inc. and Sound Response Corporation, which were completed during 1995, (ii) the recapitalization of the Company and four of the Company's operating subsidiaries which was completed effective January 1, 1996 (the "Recapitalization"), (iii) the acquisition of ITC which was completed in December 1996 and (iv) the acquisition of Linkatel which was completed in February 1997. See "Pro Forma Consolidated Financial Information." (2) Gives effect to the acquisitions of ITC and Linkatel as if those transactions had occurred on January 1, 1996. See "Pro Forma Consolidated Financial Information." (3) EBITDA consists of earnings (loss) before interest expense, minority interests, depreciation, amortization and deferred compensation expense. EBITDA is commonly used to analyze companies on the basis of operating performance, leverage and liquidity. While EBITDA should not be construed as a substitute for operating income or a better measure of liquidity than cash flow from operating activities, which are determined in accordance with generally accepted accounting principles, it is included herein to provide additional information with respect to the ability of the Company to meet future debt service, capital expenditures and working capital requirements. See "Consolidated Statement of Cash Flows." 13 (4) Total capital expenditures, acquisitions, and investments in affiliates were funded as follows:
PERIOD FROM INCEPTION (SEPTEMBER 16, YEAR ENDED DECEMBER 1994) TO 31, DECEMBER 31, ---------------------- 1994 1995 1996 ----------------- ---------- ---------- Cash expended............................................................ $ 600 $ 35,417 $ 72,042 Debt issued and assumed.................................................. -- 6,554 8,228 Equity issued............................................................ -- 7,259 5,602 ----- ---------- ---------- Total.................................................................... $ 600 $ 49,230 $ 85,872 ----- ---------- ---------- ----- ---------- ----------
(5) For the period from inception (September 16, 1994) to December 31, 1994 and for the years ended December 31, 1995 and 1996, earnings were insufficient to cover fixed charges during the periods presented by the amount of loss before minority interests of $352, $12,961 and $71,445, respectively. (6) Gives effect to the acquisition of Linkatel as if that transaction had occurred on December 31, 1996. See "Pro Forma Consolidated Financial Information." (7) As adjusted to give effect to the Offering as if the Offering had occurred on December 31, 1996 and net of approximately $11,000 in estimated issuance costs. (8) Gives effect to the acquisition of Linkatel. (9) The operating data for all periods subsequent to March 1996 include the statistics of the Las Vegas network, which the Company manages and in which the Company has a 40% membership interest. (10) Route miles refers to the number of miles of the telecommunications path in which the Company-owned or leased fiber optic cables are installed. (11) Fiber miles refers to the number of route miles installed along a telecommunications path, multiplied by the Company's estimate of the number of fibers along that path. (12) Represents on-net building connections. (13) Represents four (five as of December 31, 1996) Nortel DMS 500 switches that are currently operational as well as two Siemens EWSD switches which were included as part of the Company's acquisition of its Ohio operations and are currently being replaced by the Company with Nortel DMS 500 switches. 14 RISK FACTORS IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, BEFORE TENDERING THEIR OLD PREFERRED SHARES FOR THE NEW PREFERRED SHARES OFFERED HEREBY, HOLDERS OF OLD PREFERRED SHARES SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS, WHICH (OTHER THAN "CONSEQUENCES OF EXCHANGE AND FAILURE TO EXCHANGE" AND "ABSENCE OF PUBLIC MARKET") ARE GENERALLY APPLICABLE TO THE OLD PREFERRED SHARES AS WELL AS THE NEW PREFERRED SHARES. THIS PROSPECTUS CONTAINS STATEMENTS WHICH CONSTITUTE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS PROSPECTUS AND INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY, ITS DIRECTORS OR ITS OFFICERS PRIMARILY WITH RESPECT TO THE FUTURE OPERATING PERFORMANCE OF THE COMPANY. PROSPECTIVE PARTICIPANTS IN THE EXCHANGE OFFER ARE CAUTIONED THAT ANY SUCH FORWARD LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE IN THE FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. THE ACCOMPANYING INFORMATION CONTAINED IN THIS PROSPECTUS, INCLUDING THE INFORMATION SET FORTH BELOW, IDENTIFIES IMPORTANT FACTORS THAT COULD CAUSE SUCH DIFFERENCES. SEE "RISK FACTORS-- FORWARD LOOKING STATEMENTS." CONSEQUENCES OF EXCHANGE AND FAILURE TO EXCHANGE Holders of Old Preferred Shares who do not exchange their Old Preferred Shares for New Preferred Shares pursuant to the Exchange Offer will continue to be subject to the restrictions on transfer of such Old Preferred Shares as set forth in the legend thereon as a consequence of the issuance of the Old Preferred Shares pursuant to exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws. In general, the Old Preferred Shares may not be offered or sold, unless registered under the Securities Act and applicable state securities laws, or pursuant to an exemption therefrom. Except under certain limited circumstances, the Company does not intend to register the Old Preferred Shares under the Securities Act. In addition, any holder of Old Preferred Shares who tenders in the Exchange Offer for the purpose of participating in a distribution of the New Preferred Shares may be deemed to have received restricted securities and, if so, will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. To the extent Old Preferred Shares are tendered and accepted in the Exchange Offer, the trading market, if any, for the Old Preferred Shares could be adversely affected. See "The Exchange Offer" and "Description of Capital Stock--Preferred Shares--Old Preferred Shares". NEGATIVE CASH FLOW AND OPERATING LOSSES; LIMITED HISTORY OF OPERATIONS The development of the Company's businesses and the installation and expansion of its networks require significant expenditures, a substantial portion of which must be made before any revenues may be realized. Certain of the expenditures are expensed as incurred, while certain other expenditures are capitalized. These expenditures, together with the associated early operating expenses, result in negative cash flow and operating losses until an adequate revenue base is established. There can be no assurance that an adequate revenue base will be established for any of the Company's networks. Since inception, the Company's operations have resulted in net losses of $0.3 million for the period from September 16, 1994 through December 31, 1994, $12.7 million for the year ended December 31, 1995 and $71.1 million for the year ended December 31, 1996. The Company will continue to incur significant expenditures in the future in connection with the acquisition, development and expansion of its networks, services and customer base. There can be no assurance that the Company will achieve or sustain profitability or generate sufficient positive cash flow to service its debt and to pay cash dividends on the Preferred Shares. The Company was formed in September 1994. A significant portion of the Company's revenue for the years ended December 31, 1995 and 1996 was derived from the operations of the Company's IVR 15 enhanced service offering, which was acquired by the Company in September 1995. Prospective investors, therefore, have very limited historical financial information about the Company upon which to base an evaluation of the Company's performance. Although the Company generates revenues from its current operations, the Company has only recently commenced operations as a single source service provider of telecommunications services in eight markets and will not commence such operations in 14 additional markets until later in 1997. Given the Company's limited operating history, there can be no assurance that it will be able to compete successfully in the telecommunications business and to generate sufficient cash flow to service its debt and to pay cash dividends on the Preferred Shares. SIGNIFICANT FUTURE CAPITAL REQUIREMENTS; SUBSTANTIAL INDEBTEDNESS Expansion of the Company's existing networks and services and the development and acquisition of new networks and services will require significant capital expenditures. The Company estimates that the cash required to fund its anticipated capital expenditures and operating losses (excluding acquisitions) for 1997 will approximate $200 million. The Company's planned growth subsequent to 1997 will require substantial additional capital. The Company will also continue to evaluate additional revenue opportunities in each of its markets and, as and when attractive additional opportunities develop, the Company plans to make capital investments in its networks that might be required to pursue such opportunities. The Company expects to meet its additional capital needs with the proceeds from credit facilities and other borrowings, the proceeds from sales of debt securities, the sale or issuance of equity securities and through joint ventures. There can be no assurance, however, that the Company will be successful in raising sufficient additional capital on terms that it will consider acceptable or that the Company's operations will produce positive cash flow in sufficient amounts to service its debt and to pay cash dividends on the Preferred Shares. Failure to raise and generate sufficient funds may require the Company to delay or abandon some of its planned future expansion or expenditures, which could have a material adverse effect on the Company's growth and its ability to compete in the telecommunications services industry. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources". The Company expects to incur substantial additional indebtedness (including secured indebtedness) during the next few years to finance the acquisition, construction and expansion of networks, the purchase of additional switches, the offering of local dial tone and Centrex services, the introduction of other new service offerings and the development and implementation of a comprehensive information technology platform. The debt service requirements of any additional indebtedness could make it more difficult for the Company to service its debt and to pay cash dividends on the Preferred Shares. The future funding requirements discussed above are based on the Company's current estimates. There can be no assurance that actual expenditures and funding requirements will not be significantly higher or lower. RISK ASSOCIATED WITH IMPLEMENTATION OF GROWTH STRATEGY The expansion and development of the Company's operations (including the construction and acquisition of additional networks) will depend on, among other things, the Company's ability to assess markets, identify, finance and complete suitable acquisitions, design fiber optic network backbone routes, install fiber optic cable and facilities, including switches, and obtain rights-of-way, building access rights and any required government authorizations, franchises and permits, all in a timely manner, at reasonable costs and on satisfactory terms and conditions. In addition, the Company has experienced rapid growth since its inception, and the Company believes that sustained growth places a strain on operational, human and financial resources. In order to manage its growth, NEXTLINK must continue to improve its operating and administrative systems including the continued development of effective systems relating to ordering, provisioning and billing for telecommunications services. NEXTLINK must also continue to attract and retain qualified managerial, professional and technical 16 personnel. As a result, there can be no assurance that the Company will be able to implement and manage successfully its growth strategy. The Company's growth strategy also involves the following risks: QUALIFIED PERSONNEL. NEXTLINK believes that a critical component for its success will be the attraction and retention of qualified managerial, professional and technical personnel. During the last six months the Company has experienced significant competition in the attraction and retention of personnel that possess the skill sets that the Company is seeking. Although the Company has been successful in attracting and retaining qualified personnel, there can be no assurance that NEXTLINK will not experience a shortage of qualified personnel in the future. SWITCH AND EQUIPMENT INSTALLATION. An essential element of the Company's current strategy is the provision of switched local dial tone service. To provide dial tone service, the Company has installed eight Nortel DMS 500 switches and intends to install an additional two Nortel DMS 500 switches during the second quarter of 1997. There can be no assurance, however, that the installation of the required switches, fiber optic cable and associated electronics will be completed on time or that, during the testing of these switches and related equipment, the Company will not experience technological problems that cannot be resolved. The failure of the Company to have its switches and related equipment operational could have a material adverse effect upon the Company's ability to enter rapidly the telecommunications market as a single source provider of telecommunications services. INTERCONNECTION AGREEMENTS. The Company has executed agreements for the interconnection of its networks with the networks of the ILEC covering each market in which NEXTLINK either has or is constructing a network, with the exception of those markets in California. NEXTLINK may be required to negotiate new interconnection agreements as it enters new markets in the future. There can be no assurance that the Company will successfully negotiate such other agreements for interconnection with the ILEC or renewals of existing interconnection agreements. The failure to negotiate required interconnection agreements could have a material adverse effect upon the Company's ability to enter rapidly the telecommunications market as a single source provider of telecommunications services. ORDERING, PROVISIONING AND BILLING. The Company has developed processes and procedures and is working with external vendors in the implementation of customer orders for services, the provisioning, installation and delivery of such services and monthly billing for those services. In connection with its development of a comprehensive information technology platform, the Company is developing automated internal systems for processing customer orders, provisioning and billing. The failure to develop effective internal processes and systems for these service elements or the failure of the Company's current vendors to deliver effectively ordering, provisioning and billing services could have a material adverse effect upon the Company's ability to achieve its growth strategy. PRODUCTS AND SERVICES. The Company expects to continue to enhance its systems in order to offer its customers switched local dial tone and other enhanced products and services in all of its networks as quickly as practicable and as permitted by applicable regulations. The Company believes its ability to offer, market and sell these additional products and services will be important to the Company's ability to meet its long-term strategic growth objectives, but is dependent on the Company's ability to obtain the needed capital, additional favorable regulatory developments and the acceptance of such products and services by the Company's customers. No assurance can be given that the Company will be able to obtain such capital or that such developments or acceptance will occur. ACQUISITIONS. The Company intends to use the net proceeds of the Offering to expand its networks and service offerings through internal development and acquisitions. Such acquisitions, if made, could divert the resources and management time of the Company and would require integration with the Company's existing networks and services. There can be no assurance that any such acquisitions will 17 occur or that any such acquisitions, if made, would be on terms favorable to the Company or would be successfully integrated into the Company's operations. NEED TO OBTAIN AND MAINTAIN PERMITS AND RIGHTS-OF-WAY In order to acquire and develop its networks the Company must obtain local franchises and other permits, as well as rights to utilize underground conduit and pole space and other rights-of-way and fiber capacity from entities such as ILECs and other utilities, railroads, long distance companies, state highway authorities, local governments and transit authorities. There can be no assurance that the Company will be able to maintain its existing franchises, permits and rights or to obtain and maintain the other franchises, permits and rights needed to implement its business plan on acceptable terms. Although the Company does not believe that any of the existing arrangements will be canceled or will not be renewed as needed in the near future, cancellation or non-renewal of certain of such arrangements could materially adversely affect the Company's business in the affected metropolitan area. In addition, the failure to enter into and maintain any such required arrangements for a particular network, including a network which is already under development, may affect the Company's ability to acquire or develop that network. See "Business--Company Network Architecture." COMPETITION In each of the markets served by the Company's networks, the Company competes principally with the ILEC serving that area. ILECs are established providers of local telephone services to all or virtually all telephone subscribers within their respective service areas. ILECs also have long-standing relationships with regulatory authorities at the federal and state levels. While recent FCC administrative decisions and initiatives provide increased business opportunities to telecommunications providers such as the Company, they also provide the ILECs with increased pricing flexibility for their private line and special access and switched access services. In addition, with respect to competitive access services (as opposed to dial tone local exchange services) the FCC recently proposed a rule that would provide for increased ILEC pricing flexibility and deregulation for such access services either automatically or after certain competitive levels are reached. If the ILECs are allowed by regulators to offer discounts to large customers through contract tariffs, engage in aggressive volume and term discount pricing practices for their customers, and/or seek to charge competitors excessive fees for interconnection to the ILECs' networks, the income of competitors to the ILECs, including the Company, could be materially adversely affected. If future regulatory decisions afford the ILECs increased access services pricing flexibility or other regulatory relief, such decisions could also have a material adverse effect on competitors to the ILEC, including the Company. The Company also faces, and expects to continue to face, competition from other current and potential market entrants, including long distance carriers seeking to enter, reenter or expand entry into the local exchange market place such as AT&T Corp. ("AT&T"), MCI Communications Corporation ("MCI"), Sprint Corporation ("Sprint") and from other CLECs, CAPs, cable television companies, electric utilities, microwave carriers, wireless telephone system operators and private networks built by large end-users. In addition, a continuing trend toward combinations and strategic alliances in the telecommunications industry could give rise to significant new competitors. The Telecom Act includes provisions which impose certain regulatory requirements on all local exchange carriers, including competitors such as the Company, while granting the FCC expanded authority to reduce the level of regulation applicable to any or all telecommunications carriers, including ILECs. The manner in which these provisions of the Telecom Act are implemented and enforced could have an adverse effect on the Company's ability to successfully compete against ILECs and other telecommunications service providers. The Company also competes with equipment vendors and installers, and telecommunications management companies with respect to certain portions of its business. Many of the Company's current and potential 18 competitors have financial, personnel and other resources substantially greater than those of the Company, as well as other competitive advantages over the Company. REGULATION The Company is subject to varying degrees of federal, state and local regulation. The Company is not currently subject to price cap or rate of return regulation, nor is it currently required to obtain FCC authorization for the installation, acquisition or operation of its network facilities. Further, the FCC has determined that non-dominant carriers, such as the Company and its subsidiaries, are not required to file interstate tariffs for domestic long distance service on an ongoing basis. On February 13, 1997, the United States Court of Appeals for the District of Columbia granted motions for stay of the FCC detariffing order pending judicial review of that order. The result of this stay is that carriers must continue to file tariffs for interstate long distance services. The FCC requires the Company and its subsidiaries to file interstate tariffs on an ongoing basis for international traffic and access services. The Company's subsidiaries that provide or will provide intrastate services are also generally subject to certification and tariff or price list filing requirements by state regulators. Although passage of the Telecom Act should result in increased opportunities for companies that are competing with the ILECs, no assurance can be given that changes in current or future regulations adopted by the FCC or state regulators or other legislative or judicial initiatives relating to the telecommunications industry would not have a material adverse effect on the Company. In addition, although the Telecom Act provides incentives to the ILECs that are subsidiaries of Regional Bell Operating Companies ("RBOCs") to enter the long distance service market, there can be no assurance that these ILECs will negotiate quickly with competitors such as the Company for the required interconnection of the competitor's networks with those of the ILEC. See "Business--Regulatory Overview." The Federal-State Joint Board on Universal Service consisting of FCC, state PUC commissioners and state consumer advocates (the "Joint Board") in its Recommended Decision that was issued on November 8, 1996 (the "Recommended Decision") recommended that the FCC establish a federal telecommunications subsidy regime for schools and libraries that would probably significantly expand the current subsidy program. The Joint Board recommended the adoption of a cap of $2.25 billion per year for the program. The Joint Board also recommended the expansion of federal subsidies to low-income consumers of telecommunications services. In addition, the Telecom Act requires the FCC to adopt a subsidy scheme for the provision of telecommunications services to rural health care providers. The Joint Board recommended that the FCC require all providers of interstate telecommunications services, including in all likelihood the Company, to pay for these and other subsidy programs based on their gross revenues from the sale of telecommunications services minus payments made to other telecommunications carriers. The FCC must establish final universal service rules by May 8, 1997. The Company cannot at this time predict the level of its mandatory contribution, but the Company believes that it will likely be a significant expenditure if the FCC adopts the Joint Board recommendations. DEPENDENCE ON LARGE CUSTOMERS To date the Company has been dependent on certain large customers of its IVR enhanced communication service offerings, the loss of one or more of which could have a material adverse effect on the Company. The Company's 10 largest customers accounted for approximately 66% and 51% of the Company's revenues in 1995 and 1996, respectively. The Company does not have service contracts with all of these customers. The Company will continue to be dependent upon a small number of customers for the majority of its revenues until such time as the Company generates substantial revenues from the provision of switched local and long distance communications services, which there can be no assurance the Company will be able to do. 19 RAPID TECHNOLOGICAL CHANGES The telecommunications industry is subject to rapid and significant changes in technology. The effect of technological changes, including changes relating to emerging wireline and wireless transmission and switching technologies, on the businesses of the Company cannot be predicted. DEPENDENCE ON KEY PERSONNEL The Company's businesses are managed by a small number of key executive officers, the loss of certain of whom could have a material adverse effect on the Company. The Company believes that its future success will depend in large part on its ability to develop a large and sophisticated sales force and its ability to attract and retain highly skilled and qualified personnel. Most of the executive officers of the Company, including the presidents of its operating subsidiaries, do not have employment agreements. Although the Company has been successful in attracting and retaining qualified personnel, there can be no assurance that NEXTLINK will not experience a shortage of qualified personnel in the future. VARIABILITY OF QUARTERLY OPERATING RESULTS As a result of the significant expenses associated with the expansion and development of its networks and services and the variability of the level of revenues generated through sales of NEXTLINK's IVR enhanced communications services, the Company anticipates that its operating results could vary significantly from period to period. CONTROL BY MR. CRAIG O. MCCAW; POTENTIAL CONFLICTS OF INTERESTS Mr. Craig O. McCaw, primarily through his majority ownership and control of Eagle River Investments, L.L.C., a Washington limited liability company ("Eagle River"), controls approximately 88% of the Company's total voting power. As a result, Mr. McCaw will have the ability to control the direction and future operations of the Company. In addition to his investment in the Company through Eagle River, Mr. McCaw has significant investments in other communications companies, including Nextel Communications, Inc., Teledesic Corporation and AT&T, some of which could compete with the Company as a single source provider of telecommunications services or act as a supplier to the Company of certain telecommunications services. The Company does not have a noncompetition agreement with either Mr. McCaw or Eagle River. In addition, although Mr. McCaw is the Company's Chief Executive Officer, Mr. McCaw devotes only a portion of his time to the business of the Company. RISKS ASSOCIATED WITH THE PREFERRED SHARES AND THE EXCHANGE NOTES HOLDING COMPANY STRUCTURE; EFFECTIVE SUBORDINATION OF THE EXCHANGE NOTES.The Company is a holding company that derives substantially all of its revenues from its subsidiaries. The Company intends to lend or contribute substantially all of the net proceeds from the Offering to certain of its subsidiaries. The Company will be dependent upon payments from its subsidiaries to generate the funds necessary to meet its obligations, including the payment of cash dividends on the Preferred Shares, the redemption price of the Preferred Shares, as well as principal of, and cash interest on, the Exchange Notes. The ability of the Company's subsidiaries to make such payments will be subject to, among other things, the availability of sufficient cash and may be subject to restrictive covenants in future debt agreements. The Company's subsidiaries are party to certain capital lease obligations and the Company may borrow funds at the subsidiary level in the future. RESTRICTIONS ON THE COMPANY'S ABILITY TO PAY DIVIDENDS ON THE PREFERRED SHARES. To date, the Company has not paid dividends on its shares of capital stock. In addition, the Indenture (the "Senior Indenture") pursuant to which the Company's Senior Notes were issued contains covenants that restrict the Company's ability to pay, or prevent the payment of, cash dividends on the Preferred Shares. In 20 addition to the limitations imposed on the payment of dividends by the Senior Indenture, under Washington law the Company is permitted to pay dividends on its capital stock, including the Preferred Shares, only if after giving effect to the dividend, the Company would be able to pay its debts as they become due in the usual course of business or the Company's total assets would not be less than the sum of its total liabilities plus, unless the Company's Articles of Incorporation permit otherwise, the amount that would be needed, if the Company were to be dissolved at the time of the dividend, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the dividend. There can be no assurance that the Company will be able to pay cash dividends on the Preferred Shares. SUBORDINATION OF EXCHANGE NOTES. The payment of principal, premium, if any, and interest on and any other amounts owing in respect of, the Exchange Notes, if issued, will be subordinated to the prior payment in full of all existing and future Senior Debt and effectively subordinated to obligations of the Company's subsidiaries insofar as the assets of that subsidiary are concerned. As of December 31, 1996, there was approximately $374.9 million of Senior Debt outstanding and $29.2 million of obligations of the Company's subsidiaries. The Senior Indenture and the Indenture pursuant to which the Exchange Notes would be issued permit the incurrence by the Company and its subsidiaries of additional indebtedness, all of which may constitute Senior Debt, under certain circumstances. In the event of the bankruptcy, liquidation, dissolution, reorganization or winding-up of the Company, the assets of the Company will be available to pay obligations of the Exchange Notes only after all Senior Debt has been paid in full, and there may not be sufficient assets remaining to pay amounts due on any or all of the Exchange Notes. In addition, under certain circumstances, the Company may not pay principal of, premium, if any, or interest on, or any other amounts owing in respect of, the Exchange Notes, or purchase, redeem or otherwise retire the Exchange Notes, if a payment default or a non-payment default exists with respect to certain Senior Debt, including Senior Debt under the Senior Indenture and, in the case of non-payment default, if a payment blockage notice has been received by the Trustee (as defined). CERTAIN FEDERAL INCOME TAX CONSEQUENCES. Dividends on the Preferred Shares that are paid to Non-U.S. Holders may be subject to a 30% withholding tax. Unless a Non-U.S. Holder provides the Company with appropriate documentation indicating its exemption from the withholding tax, such Non-U.S. Holder will be required to pay the Company the amount of this withholding tax and, in the event such payment is not timely made, the Company will withhold a number of Preferred Shares sufficient to reimburse it for the withholding tax obligation. For purposes of this Prospectus, a Non-U.S. Holder is any holder that is not an individual who is a citizen or resident of the United States, a corporation, partnership or other entity created under the laws of the United States or any political subdivision thereof, an estate that is subject to United States federal income taxation without regard to the source of income, or a trust, the income of which is includible in gross income for United States federal income tax purposes, regardless of source or, for tax years beginning after December 31, 1996 (and, if the trustee so elects, for tax years beginning after August 20, 1996), a trust if a United States court is able to exercise primary supervision over the administration of that trust and one or more United States fiduciaries have the authority to control all substantial decisions of such trust. ABSENCE OF A PUBLIC MARKET FOR THE PREFERRED SHARES; POSSIBLE VOLATILITY OF PRICE. The Preferred Shares are new securities for which there is currently no market. The Company does not intend to apply for listing of Preferred Shares on any securities exchange or for the inclusion of the Preferred Shares in any automated quotation system. The Old Preferred Shares have been designated for trading in the PORTAL market as part of a unit. Although the Company has been advised by the Initial Purchasers that the Initial Purchasers intend to make a market in the Preferred Shares, they are not obligated to do so and any such market making activities may be discontinued at any time without notice. Accordingly, there can be no assurance as to the development or liquidity of any market for the Preferred Shares. If a market for the Preferred Shares were to develop, the Preferred Shares could trade at prices that may be 21 higher or lower than their initial offering price depending upon many factors, including prevailing interest rates, the Company's operating results and the markets for similar securities. Historically, the market for securities such as the Preferred Shares has been subject to disruptions that have caused substantial volatility in the prices of securities similar to the Preferred Shares. There can be no assurance that, if a market for the Preferred Shares were to develop, such a market would not be subject to similar disruptions. FORWARD LOOKING STATEMENTS The statements contained in this Prospectus that are not historical facts are "forward-looking statements" (as such term is defined in the Private Securities Litigation Reform Act of 1995), which can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. Management wishes to caution the reader that these forward-looking statements, such as the Company's plans to build and acquire networks in new areas, the market opportunity presented by larger metropolitan areas, its anticipation of installation of local exchange service lines and revenues from designated markets during 1997, and statements regarding the development of the Company's businesses, the markets for the Company's services and products, the Company's anticipated capital expenditures, regulatory reform and other statements contained above and herein in this Prospectus regarding matters that are not historical facts, are only predictions. No assurance can be given that the future results will be achieved; actual events or results may differ materially as a result of risks facing the Company. Such risks include, but are not limited to, the Company's ability to successfully market its services to current and new customers, access markets, identify, finance and complete suitable acquisitions, design and construct fiber optic networks, install cable and facilities, including switching electronics, and obtain rights-of-way, building access rights and any required governmental authorizations, franchises and permits, all in a timely manner, at reasonable costs and on satisfactory terms and conditions, as well as regulatory, legislative and judicial developments that could cause actual results to vary materially from the future results indicated, expressed or implied, in such forward-looking statements. USE OF PROCEEDS There will be no proceeds to the Company from the Exchange Offer. 22 THE EXCHANGE OFFER PURPOSE OF THE EXCHANGE OFFER The sole purpose of the Exchange Offer is to fulfill the obligations of the Company with respect to the Preferred Registration Rights Agreement. The Old Preferred Shares were originally issued and sold on January 31, 1997 (the "Issue Date"). Such sales were not registered under the Securities Act in reliance upon the exemption provided by Section 4(2) of, and Rule 144A under, the Securities Act. In connection with the sale of the Old Preferred Shares, the Company agreed to file with the Commission a registration statement relating to an exchange offer (the "Exchange Offer Registration Statement") pursuant to which preferred shares of the Company covered by such registration statement and containing the same terms as the Old Preferred Shares, except as set forth in this Prospectus, would be offered in exchange for Old Preferred Shares tendered at the option of the holders thereof. TERMS OF THE EXCHANGE The Company hereby offers to exchange, upon the terms and subject to the conditions set forth herein and in the Letter of Transmittal accompanying this Exchange Offer Registration Statement of which this Prospectus is a part (the "Letter of Transmittal"), one (1) New Preferred Share for each Old Preferred Share. The terms of the New Preferred Shares are identical in all respects to the terms of the Old Preferred Shares for which they may be exchanged pursuant to this Exchange Offer, except that (i) the New Preferred Shares will generally be freely transferable by holders thereof and (ii) the holders of the New Preferred Shares will not be entitled to registration rights under the Registration Rights Agreement. See "Description of Capital Stock--Preferred Shares--Old Preferred Shares". The Exchange Offer is not conditioned upon any minimum number of Old Preferred Shares being tendered or accepted for exchange. Based on no-action letters issued by the staff of the Securities and Exchange Commission (the "Commission") to third parties, the Company believes the New Preferred Shares issued pursuant to the Exchange Offer may be offered for resale, resold and otherwise transferred by holders thereof (other than a "Restricted Holder," being (i) a broker-dealer who acquires such New Preferred Shares directly from the Company to resell pursuant to Rule 144A or any other available exemption under the Securities Act, (ii) a person that is an Affiliate or (iii) a broker-dealer who acquired Old Preferred Shares as a result of market-making or other trading activities), without compliance with the registration and prospectus delivery provisions of the Securities Act provided that such New Preferred Shares are acquired in the ordinary course of such holders' business and such holders have no arrangements with any person to participate in the distribution of such New Preferred Shares. Eligible holders wishing to accept the Exchange Offer must represent to the Company that such conditions have been met. Each broker-dealer that receives New Preferred Shares pursuant to the Exchange Offer in exchange for Old Preferred Shares acquired for its own account as a result of market-making activities or other trading activities may be a statutory underwriter and must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such New Preferred Shares. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Preferred Shares received in exchange for Old Preferred Shares where such Old Preferred Shares were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that it will make this Prospectus and any amendment or supplement to this Prospectus available to any broker-dealer for use in connection with any such resale for a period of 90 days from the date of this Prospectus, or such shorter period as will terminate when all Old Preferred Shares acquired by broker-dealers for their own accounts as a result of market-making 23 activities or other trading activities have been exchanged for New Preferred Shares and resold by such broker-dealers. Any holder that cannot rely upon such interpretations must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction. See "Plan of Distribution." Tendering holders of Old Preferred Shares will not be required to pay brokerage commissions or fees or, subject to the instructions in the Letter of Transmittal, transfer taxes with respect to the exchange of the Old Preferred Shares pursuant to the Exchange Offer. Dividends on the New Preferred Shares are payable out of legally available funds and are cumulative from the Accrual Date. Holders of Old Preferred Shares whose shares of Old Preferred Shares are accepted for exchange will be deemed to have waived the right to receive any payment in respect of dividends on the Old Preferred Shares accumulated from the Accrual Date to the date of the issuance of the New Preferred Shares. Consequently, holders who exchange their Old Preferred Shares for New Preferred Shares will receive the same dividend payment on the next dividend payment date (expected to be May 1, 1997) that they would have received had they not accepted the Exchange Offer, except that if such dividend is not paid in cash, it will be paid in shares of New Preferred Shares instead of Old Preferred Shares. Dividends on the New Preferred Shares are payable quarterly in arrears on February 1, May 1, August 1 and November 1 of each year, commencing May 1, 1997, if applicable, accumulating from the Accrual Date at the annual rate of 14% per share of New Preferred Shares. EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS THE EXCHANGE OFFER WILL EXPIRE ON THE EXPIRATION DATE. The term "Expiration Date" means 5:00 p.m., New York City time, on , 1997 unless the Company in its sole discretion extends the period during which the Exchange Offer is open, in which event the term "Expiration Date" means the latest time and date on which the Exchange Offer, as so extended by the Company, expires. The Company reserves the right to extend the Exchange Offer at any time and from time to time prior to the Expiration Date by giving written notice to Continental Stock Transfer & Trust Company (the "Exchange Agent") and by timely public announcement communicated by no later than 5:00 p.m. on the next business day following the Expiration Date, unless otherwise required by applicable law or regulation, by making a release to the Dow Jones News Service. During any extension of the Exchange Offer, all Old Preferred Shares previously tendered pursuant to the Exchange Offer will remain subject to the Exchange Offer. The initial Exchange Date will be the first business day following the Expiration Date. The Company expressly reserves the right to (i) terminate the Exchange Offer and not accept for exchange any Old Preferred Shares for any reason, including if any of the events set forth below under "--Conditions to the Exchange Offer" shall have occurred and shall not have been waived by the Company and (ii) amend the terms of the Exchange Offer in any manner, whether before or after any tender of the Old Preferred Shares. If any such termination or amendment occurs, the Company will notify the Exchange Agent in writing and will either issue a press release or give written notice to the holders of the Old Preferred Shares as promptly as practicable. Unless the Company terminates the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date, the Company will exchange the New Preferred Shares for the Old Preferred Shares on the Exchange Date. If the Company waived any material condition to the Exchange Offer, or amends the Exchange Offer in any other material respect, and if at the time that notice of such waiver or amendment is first published, sent or given to holders of Old Preferred Shares in the manner specified above, the Exchange Offer is scheduled to expire at any time earlier than the expiration of a period ending on the fifth business day from, and including, the date that such notice is first so published, sent or given, then the Exchange Offer will be extended until the expiration of such period of five business days. This Prospectus and the related Letter of Transmittal and other relevant materials will be mailed by the Company to record holders of Old Preferred Shares and will be furnished to brokers, banks and 24 similar persons whose names, or the names of whose nominees, appear on the lists of holders for subsequent transmittal to beneficial owners of Old Preferred Shares. HOW TO TENDER The tender to the Company of Old Preferred Shares by a holder thereof pursuant to one of the procedures set forth below will constitute an agreement between such holder and the Company in accordance with the terms and subject to the conditions set forth herein and in the Letter of Transmittal. GENERAL PROCEDURES. A holder of an Old Preferred Share may tender the same by (i) properly completing and signing the Letter of Transmittal or a facsimile thereof (all references in this Prospectus to the Letter of Transmittal shall be deemed to include a facsimile thereof) and delivering the same, together with the certificate or certificates representing the Old Preferred Shares being tendered and any required signature guarantees (or a timely confirmation of a book-entry transfer (a "Book-Entry Confirmation") pursuant to the procedure described below), to the Exchange Agent at its address set forth on the back cover of this Prospectus on or prior to the Expiration Date or (ii) complying with the guaranteed delivery procedures described below. If tendered Old Preferred Shares are registered in the name of the signer of the Letter of Transmittal and the New Preferred Shares to be issued in exchange therefor are to be issued (and any untendered Old Preferred Shares are to be reissued) in the name of the registered holder, the signature of such signer need not be guaranteed. In any other case, the tendered Old Preferred Shares must be endorsed or accompanied by written instruments of transfer in form satisfactory to the Company and duly executed by the registered holder and the signature on the endorsement or instrument of transfer must be guaranteed by a bank, broker, dealer, credit union, savings association, clearing agency or other institution (each an "Eligible Institution") that is a member of a recognized signature guarantee medallion program within the meaning of Rule 17Ad-15 under the Exchange Act. If the New Preferred Shares and/or Old Preferred Shares not exchanged are to be delivered to an address other than that of the registered holder appearing on the transfer books for the Old Preferred Shares, the signature on the Letter of Transmittal must be guaranteed by an Eligible Institution. Any beneficial owner whose Old Preferred Shares are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender Old Preferred Shares should contact such holder promptly and instruct such holder to tender Old Preferred Shares on such beneficial owner's behalf. If such beneficial owner wishes to tender such Old Preferred Shares himself, such beneficial owner must, prior to completing and executing the Letter of Transmittal and delivering such Old Preferred Shares, either make appropriate arrangements to register ownership of the Old Preferred Shares in such beneficial owner's name or follow the procedures described in the immediately preceding paragraph. The transfer of record ownership may take considerable time. BOOK-ENTRY TRANSFER. The Exchange Agent will make a request to establish an account with respect to the Old Preferred Shares at The Depository Trust Company (the "Book-Entry Transfer Facility") for purpose of the Exchange Offer within two business days after receipt of this Prospectus, and any financial institution that is a participant in the Book-Entry Transfer Facility's systems may make book-entry delivery of Old Preferred Shares by causing the Book-Entry Transfer Facility to transfer such Old Preferred Shares into the Exchange Agent's account at the Book-Entry Transfer Facility in accordance with the Book-Entry Transfer Facility's procedures for transfer. However, although delivery of Old Preferred Shares may be effected through book-entry transfer at the Book-Entry Transfer Facility, the Letter of Transmittal, with any required signature guarantees and any other required documents, must, in any case, be transmitted to 25 and received by the Exchange Agent at the address specified on the back cover page of this Prospectus on or prior to the Expiration Date or the guaranteed delivery procedures described below must be complied with. THE METHOD OF DELIVERY OF OLD PREFERRED SHARES AND ALL OTHER DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER. IF SENT BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE USED, PROPER INSURANCE BE OBTAINED, AND THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR BEFORE THE EXPIRATION DATE. GUARANTEED DELIVERY PROCEDURES. If a holder desires to accept the Exchange Offer and time will not permit a Letter of Transmittal or Old Preferred Shares to reach the Exchange Agent before the Expiration Date, a tender may be effected if the Exchange Agent has received at its office listed on the back cover hereof on or prior to the Expiration Date a letter, telegram or facsimile transmission from an Eligible Institution setting forth the name and address of the tendering holder, the principal amount of the Old Preferred Shares being tendered, the names in which the Old Preferred Shares are registered and, if possible, the certificate numbers of the Old Preferred Shares to be tendered, and stating that the tender is being made thereby and guaranteeing that within three New York Stock Exchange trading days after the date of execution of such letter, telegram or facsimile transmission by the Eligible Institution, the Old Preferred Shares, in proper form for transfer, will be delivered by such Eligible Institution together with a properly completed and duly executed Letter of Transmittal (and any other required documents). Unless Old Preferred Shares being tendered by the above-described method (or a timely Book-Entry Confirmation) are deposited with the Exchange Agent within the time period set forth above (accompanied or preceded by a properly completed Letter of Transmittal and any other required documents), the Company may, at its option, reject the tender. Copies of a Notice of Guaranteed Delivery which may be used by Eligible Institutions for the purposes described in this paragraph are available from the Exchange Agent. A tender will be deemed to have been received as of the date when the tendering holder's properly completed and duly signed Letter of Transmittal accompanied by the Old Preferred Shares (or a timely Book-Entry Confirmation) is received by the Exchange Agent. Issuances of New Preferred Shares in exchange for Old Preferred Shares tendered pursuant to a Notice of Guaranteed Delivery or letter, telegram or facsimile transmission to similar effect (as provided above) by an Eligible Institution will be made only against deposit of the Letter of Transmittal (and any other required documents) and the tendered Old Preferred Shares (or a timely Book-Entry Confirmation). All questions as to the validity, form, eligibility (including time of receipt) and acceptance for exchange of any tender of Old Preferred Shares will be determined by the Company, whose determination will be final and binding. The Company reserves the absolute right to reject any or all tenders not in proper form or the acceptances for exchange of which may, in the opinion of counsel to the Company, be unlawful. The Company also reserves the absolute right to waive any of the conditions of the Exchange Offer or any defect or irregularities in tenders of any particular holder whether or not similar defects or irregularities are waived in the case of other holders. Neither the Company, the Exchange Agent nor any other person will be under any duty to give notification of any defects or irregularities in tenders or shall incur any liability for failure to give any such notification. The Company's interpretation of the terms and conditions of the Exchange Offer (including the Letter of Transmittal and the instructions thereto) will be final and binding. TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL The Letter of Transmittal contains, among other things, the following terms and conditions, which are part of the Exchange Offer. The party tendering Old Preferred Shares for exchange (the "Transferor") exchanges, assigns and transfers the Old Preferred Shares to the Company and irrevocably constitutes and appoints the 26 Exchange Agent as the Transferor's agent and attorney-in-fact to cause the Old Preferred Shares to be assigned, transferred and exchanged. The Transferor represents and warrants that it has full power and authority to tender, exchange, assign and transfer the Old Preferred Shares and to acquire New Preferred Shares issuable upon the exchange of such tendered Old Preferred Shares, and that, when the same are accepted for exchange, the Company will acquire good and unencumbered title to the tendered Old Preferred Shares, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim. The Transferor also warrants that it will, upon request, execute and deliver any additional documents deemed by the Company to be necessary or desirable to complete the exchange, assignment and transfer of tendered Old Preferred Shares. The Transferor further agrees that acceptance of any tendered Old Preferred Shares by the Company and the issuance of New Preferred Shares in exchange therefor shall constitute performance in full by the Company of its obligations under the Preferred Registration Rights Agreement and that the Company shall have no further obligations or liabilities thereunder (except in certain limited circumstances). All authority conferred by the Transferor will survive the death or incapacity of the Transferor and every obligation of the Transferor shall be binding upon the heirs, legal representatives, successors, assigns, executors and administrators of such Transferor. By tendering Old Preferred Shares and executing the Letter of Transmittal, the Transferor certifies that it is not an Affiliate of the Company, that it is not a broker-dealer that owns Old Preferred Shares acquired directly from the Company or an Affiliate of the Company, that it is acquiring the New Preferred Shares offered hereby in the ordinary course of such Transferor's business and that such Transferor has no arrangement with any person to participate in the distribution of such New Preferred Shares. WITHDRAWAL RIGHTS Old Preferred Shares tendered pursuant to the Exchange Offer may be withdrawn at any time prior to the Expiration Date. For a withdrawal to be effective, a written or facsimile transmission notice of withdrawal must be timely received by the Exchange Agent at its address set forth on the back cover of this Prospectus prior to the Expiration Date. Any such notice of withdrawal must specify the person named in the Letter of Transmittal as having tendered Old Preferred Shares to be withdrawn, the certificate numbers of Old Preferred Shares to be withdrawn, the number of Old Preferred Shares to be withdrawn, a statement that such holder is withdrawing his election to have such Old Preferred Shares exchanged, and the name of the registered holder of such Old Preferred Shares, and must be signed by the holder in the same manner as the original signature on the Letter of Transmittal (including any required signature guarantees) or be accompanied by evidence satisfactory to the Company that the person withdrawing the tender has succeeded to the beneficial ownership of the Old Preferred Shares being withdrawn. The Exchange Agent will return the properly withdrawn Old Preferred Shares promptly following receipt of notice of withdrawal. All questions as to the validity of notices of withdrawal, including time of receipt, will be determined by the Company, and such determination will be final and binding on all parties. ACCEPTANCE OF OLD PREFERRED SHARES FOR EXCHANGE; DELIVERY OF NEW PREFERRED SHARES Upon the terms and subject to the conditions of the Exchange Offer, the acceptance for exchange of Old Preferred Shares validly tendered and not withdrawn and the issuance of the New Preferred Shares will be made on the Exchange Date. For the purposes of the Exchange Offer, the Company shall be deemed to have accepted for exchange validly tendered Old Preferred Shares when, as and if the Company has given written notice thereof to the Exchange Agent. The Exchange Agent will act as agent for the tendering holders of Old Preferred Shares for the purposes of receiving New Preferred Shares from the Company and causing the Old Preferred Shares to be assigned, transferred and exchanged. Upon the terms and subject to the conditions of the Exchange 27 Offer, delivery of New Preferred Shares to be issued in exchange for accepted Old Preferred Shares will be made by the Exchange Agent promptly after acceptance of the tendered Old Preferred Shares. Old Preferred Shares not accepted for exchange by the Company will be returned without expense to the tendering holders (or in the case of Old Preferred Shares tendered by book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the procedures described above, such non-exchanged Old Preferred Shares will be credited to an account maintained with such Book-Entry Transfer Facility) promptly following the Expiration Date or, if the Company terminates the Exchange Offer prior to the Expiration Date, promptly after the Exchange Offer is so terminated. CONDITIONS TO THE EXCHANGE OFFER Notwithstanding any other provision of the Exchange Offer, or any extension of the Exchange Offer, the Company will not be required to issue New Preferred Shares in respect of any properly tendered Old Preferred Shares not previously accepted and may terminate the Exchange Offer (by oral or written notice to the Exchange Agent and by timely public announcement, unless otherwise required by applicable law or regulation, by making a release to the Dow Jones News Service) or, at its option, modify or otherwise amend the Exchange Offer, if (a) there shall be threatened, instituted or pending any action or proceeding before, or any injunction, order or decree shall have been issued by, any court or governmental agency or other governmental regulatory or administrative agency or commission, (i) seeking to restrain or prohibit the making or consummation of the Exchange Offer or any other transaction contemplated by the Exchange Offer, (ii) assessing or seeking any damages as a result thereof, or (iii) resulting in a material delay in the ability of the Company to accept for exchange or exchange some or all of the Old Preferred Shares pursuant to the Exchange Offer; (b) any statute, rule, regulation, order or injunction shall be sought, proposed, introduced, enacted, promulgated or deemed applicable to the Exchange Offer or any of the transactions contemplated by the Exchange Offer by any government or governmental authority, domestic or foreign, or any action shall have been taken, proposed or threatened, by any government, governmental authority, agency or court, domestic or foreign, that in the sole judgment of the Company might directly or indirectly result in any of the consequences referred to in clauses (a)(i) or (ii) above or, in the sole judgment of the Company, might result in the holders of New Preferred Shares having obligations with respect to resales and transfers of New Preferred Shares which are greater than those described in the interpretations of the Commission referred to on the cover page of this Prospectus, or would otherwise make it inadvisable to proceed with the Exchange Offer; or (c) a material adverse change shall have occurred in the business, condition (financial or otherwise), operations, or prospects of the Company. The foregoing conditions are for the sole benefit of the Company and may be asserted by it with respect to all or any portion of the Exchange Offer regardless of the circumstances (including any action or inaction by the Company) giving rise to such condition or may be waived by the Company in whole or in part at any time or from time to time in its sole discretion. The failure by the Company at any time to exercise any of the foregoing rights will not be deemed a waiver of any such right, and each right will be deemed an ongoing right which may be asserted at any time or from time to time. In addition, the Company has reserved the right, notwithstanding the satisfaction of each of the foregoing conditions, to terminate or amend the Exchange Offer. Any determination by the Company concerning the fulfillment or non-fulfillment of any conditions will be final and binding upon all parties. In addition, the Company will not accept for exchange any Old Preferred Shares tendered and no New Preferred Shares will be issued in exchange for any such Old Preferred Shares, if at such time any stop order shall be threatened or in effect with respect to the Exchange Offer Registration Statement of which this Prospectus constitutes a part or qualification of the Exchange Note Indenture under the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). 28 EXCHANGE AGENT Continental Stock Transfer & Trust Company has been appointed as the Exchange Agent for the Exchange Offer. Letters of Transmittal must be addressed to the Exchange Agent at its address set forth on the back cover page of this Prospectus. Delivery to an address other than as set forth herein, or transmissions of instructions via a facsimile or telex number other than the ones set forth herein, will not constitute a valid delivery. SOLICITATION OF TENDERS; EXPENSES The Company has not retained any dealer-manager or similar agent in connection with the Exchange Offer and will not make any payments to brokers, dealers or others for soliciting acceptances of the Exchange Offer. The Company will, however, pay the Exchange Agent reasonable and customary fees for its services and will reimburse it for reasonable out-of-pocket expenses in connection therewith. The Company will also pay brokerage houses and other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding tenders for their customers. The expenses to be incurred in connection with the Exchange Offer, including the fees and expenses of the Exchange Agent and printing, accounting and legal fees, will be paid by the Company and are estimated at approximately $500,000. No person has been authorized to give any information or to make any representations in connection with the Exchange Offer other than those contained in this Prospectus. If given or made, such information or representations should not be relied upon as having been authorized by the Company. Neither the delivery of this Prospectus nor any exchange made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the respective dates as of which information is given herein. The Exchange Offer is not being made to (nor will tenders be accepted from or on behalf of) holders of Old Preferred Shares in any jurisdiction in which the making of the Exchange Offer or the acceptance thereof would not be in compliance with the laws of such jurisdiction. However, the Company may, at its discretion, take such action as it may deem necessary to make the Exchange Offer in any such jurisdiction and extend the Exchange Offer to holders of Old Preferred Shares in such jurisdiction. In any jurisdiction the securities laws or blue sky laws of which require the Exchange Offer to be made by a licensed broker or dealer, the Exchange Offer is being made on behalf of the Company by one or more registered brokers or dealers which are licensed under the laws of such jurisdiction. APPRAISAL RIGHTS HOLDERS OF OLD PREFERRED SHARES WILL NOT HAVE DISSENTERS' RIGHTS OR APPRAISAL RIGHTS IN CONNECTION WITH THE EXCHANGE OFFER. FEDERAL INCOME TAX CONSEQUENCES The exchange for New Preferred Shares by holders of Old Preferred Shares will not be a taxable exchange for federal income tax purposes, and such holders should not recognize any taxable gain or loss or any dividend income as a result of such exchange. OTHER Participation in the Exchange Offer is voluntary, and holders should carefully consider whether to accept the Exchange Offer and tender their Old Preferred Shares. Holders of the Old Preferred Shares are urged to consult their financial and tax advisors in making their own decisions on what action to take. As a result of the making of, and upon acceptance for exchange of all validly tendered Old Preferred Shares pursuant to the terms of this Exchange Offer, the Company will have fulfilled a covenant 29 contained in the Preferred Registration Rights Agreement. Holders of the Old Preferred Shares who do not tender their certificates in the Exchange Offer will continue to hold such certificates and will be entitled to all the rights, and subject to all the limitations applicable thereto, under the Certificate of Designations, except for any such rights under the Preferred Registration Rights Agreement, which by their terms terminate or cease to have further effect as a result of the making of this Exchange Offer. See "Description of Capital Stock--Preferred Shares--Old Preferred Shares". All untendered Old Preferred Shares will continue to be subject to the restriction on transfer set forth in the Certificate of Designations. To the extent that Old Preferred Shares are tendered and accepted in the Exchange Offer, the trading market, if any, for the Old Preferred Shares could be adversely affected. See "Risk Factors--Consequences of Failure to Exchange". The Company may in the future seek to acquire untendered Old Preferred Shares in the open market or privately negotiated transactions, through subsequent exchange offers or otherwise. The Company has no present plan to acquire any Old Preferred Shares which are not tendered in the Exchange Offer. 30 CAPITALIZATION ($ IN THOUSANDS) The following table sets forth at December 31, 1996 (i) the pro forma capitalization of the Company after giving effect to the merger of NEXTLINK Communications, L.L.C. with and into the Company and the acquisition of Linkatel, as if those transactions had occurred on December 31, 1996 and (ii) such pro forma capitalization as further adjusted to reflect the issuance of the Old Preferred Shares and the Contingent Warrants (as defined) pursuant to the Offering. This table should be read in conjunction with the Selected Consolidated Financial and Operating Data and the Consolidated Financial Statements and notes thereto included elsewhere in this Prospectus.
AS OF DECEMBER 31, 1996 ------------------------- PRO FORMA PRO FORMA AS ADJUSTED ----------- ------------ Cash, cash equivalents and marketable securities(1).................................... $ 89,524 $ 363,524 ----------- ------------ ----------- ------------ Current portion of long-term obligations and payable to affiliate...................... 2,694 2,694 Capital lease obligations, less current portion........................................ 6,262 6,262 12 1/2% Senior Notes due April 15, 2006................................................ 350,000 350,000 ----------- ------------ Total debt........................................................................... 358,956 358,956 ----------- ------------ Minority interests(2).................................................................. 308 308 Preferred Stock, par value $.01 per share, 25,000,000 authorized and 5,700,000 issued and outstanding, net of issuance costs(3)............................................ -- 274,000 Class B Common Stock, par value $.01 per share subject to redemption by the Company(4)........................................................................... 4,950 4,950 Shareholder's equity (deficit): Class A Common Stock, par value $.01 per share, 250,000,000 authorized and 0 issued and outstanding.................................................................... -- -- Class B Common Stock, par value $.01 per share, 100,000,000 authorized and 83,123,084(5) issued and outstanding............................................... 831 831 Additional paid in capital........................................................... 64,696 64,696 Accumulated deficit.................................................................. (84,181) (84,181) ----------- ------------ Total shareholders' equity (deficit)................................................. (18,654) (18,654) ----------- ------------ Total capitalization................................................................. $ 345,560 $ 619,560 ----------- ------------ ----------- ------------
- -------------------------- (1) Does not include $101,438 of pledged securities. (2) Minority interests primarily represent a nominal equity investment in substantially all of the Company's subsidiaries from a company that is wholly owned by Mr. Craig O. McCaw. (3) The Company has not ascribed any value to the Contingent Warrants to purchase an aggregate of 5% of each class of Junior Shares of the Company on a fully diluted basis as of February 1, 1998 (the "Contingent Warrants"). Issuance costs in the Offering were estimated to be approximately $11,000. (4) The Company issued 900,000 Class A Units valued at $5.50 per unit in connection with the acquisition of ITC, which were converted to 1,178,128 shares of Class B Common Stock, par value $.01 per share, of the Company as of January 31, 1997. The Company has provided the seller with the option to require the Company to repurchase such units at $11.50 per unit beginning three years from the date of closing of the acquisition in the event the Company has not completed a public offering of its equity securities prior to that time. (5) Does not include 3,571,364 shares of Class B Common Stock issuable upon exercise of an option granted to Mr. James F. Voelker. 31 SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA ($ IN THOUSANDS) The selected consolidated financial and operating data presented below (other than the pro forma data) as of and for the period from inception (September 16, 1994) to December 31, 1994 and for the years ended December 31, 1995 and 1996 are derived from and qualified by reference to the audited Consolidated Financial Statements of the Company contained elsewhere in this Prospectus. The Company's Consolidated Financial Statements as of December 31, 1995 and 1996, for the period from inception (September 16, 1994) to December 31, 1994, and for the years ended December 31, 1995 and 1996, have been audited by Arthur Andersen LLP, independent public accountants. The unaudited pro forma consolidated statements of operations data for the years ended December 31, 1995 and 1996 gives effect to certain acquisitions that are described in the Pro Forma Consolidated Financial Information using the purchase method of accounting and assuming that such transactions were consummated on January 1, 1995 and 1996, respectively. The operating data presented below are derived from the Company's records. All of the data should be read in conjunction with and are qualified by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Consolidated Financial Statements of the Company and notes thereto contained elsewhere in this Prospectus.
PERIOD FROM INCEPTION (SEPTEMBER 16, YEAR ENDED DECEMBER 31, 1994) TO ------------------------------------------------ DECEMBER 31, PRO FORMA PRO FORMA 1994 1995 1996 1995(1) 1996(2) ----------------- ---------- ---------- ----------- ----------- STATEMENT OF OPERATIONS DATA: Revenue.............................................. $ -- $ 7,552 $ 25,686 $ 25,620 $ 36,277 Costs and expenses: Operating.......................................... 106 6,618 25,094 16,507 32,400 Selling, general and administrative................ 232 9,563 31,353 15,367 35,238 Deferred compensation.............................. -- 375 9,914 375 9,914 Depreciation and amortization...................... 14 3,458 10,340 8,663 14,966 ------ ---------- ---------- ----------- ----------- Loss from operations................................. (352) (12,462) (51,045) (15,292) (56,241) Interest expense, net................................ -- (499) (20,430) (814) (22,851) ------ ---------- ---------- ----------- ----------- Loss before minority interest........................ (352) (12,961) (71,445) (16,106) (79,092) Minority interest.................................... 3 230 344 114 344 ------ ---------- ---------- ----------- ----------- Net loss............................................. $ (349) $ (12,731) $ (71,101) $ (15,992) $ (78,748) ------ ---------- ---------- ----------- ----------- ------ ---------- ---------- ----------- ----------- OTHER DATA: EBITDA(3)............................................ $ (338) $ (8,629) $ (30,761) $ (6,254) $ (31,361) Summary Cash Flow Information: Net cash used in operating activities.............. (396) (9,180) (40,563) -- -- Net cash used in investing activities.............. (600) (35,417) (227,012) -- -- Net cash provided by financing activities.......... 1,021 45,922 343,032 -- -- Capital expenditures, including acquisitions of businesses (net of cash acquired) and investments in affiliates (4).................................. 600 49,230 85,872 -- -- Ratio of earnings to combined fixed charges (5)........................................ -- -- -- -- --
(FOOTNOTES BEGIN ON FOLLOWING PAGE) 32
AS OF DECEMBER 31, -------------------------------------------------- PRO FORMA PRO FORMA AS ADJUSTED 1995 1996 1996(6) 1996(7) ---------- ----------- ----------- ------------ BALANCE SHEET DATA: Cash, cash equivalents and marketable securities............. $ 1,350 $ 124,520 $ 89,524 $ 363,524 Working capital.............................................. (6,232) 137,227 100,542 374,542 Property and equipment, net.................................. 29,664 97,784 111,950 111,950 Total assets................................................. 53,461 390,683 392,753 666,753 Long-term debt and capital lease obligations, less current portion.................................................... 1,590 356,262 356,262 356,262 Preferred Shares, net of issuance costs...................... -- -- -- 274,000 Equity units subject to redemption........................... -- 4,950 4,950 4,950 Members' equity (deficit): Contributed capital........................................ 49,799 65,527 65,527 65,527 Accumulated deficit........................................ (13,080) (84,181) (84,181) (84,181) ---------- ----------- ----------- ------------ Total members' equity (deficit).......................... 36,719 (18,654) (18,654) (18,654)
PRO FORMA AS OF AS OF AS OF AS OF AS OF MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1996 1996 1996 1996 1996(8) ----------- ----------- --------------- -------------- -------------- OPERATING DATA(9): Route miles(10).......................... 496 801 900 1,080 1,160 Fiber miles(11).......................... 39,681 42,217 55,701 66,046 71,655 Buildings connected(12).................. 206 277 299 403 411 Switches installed(13)................... 6 6 6 7 7 Employees................................ 255 387 456 568 580
- -------------------------- (1) Gives effect to the following transactions as if each had occurred on January 1, 1995: (i) the acquisitions of Tel-West Central Services, Inc. and Sound Response Corporation, which were completed during 1995, (ii) the recapitalization of the Company and four of the Company's operating subsidiaries which was completed effective January 1, 1996 (the "Recapitalization"), (iii) the acquisition of ITC which was completed in December 1996 and (iv) the acquisition of Linkatel, which was completed in February 1997. See "Pro Forma Consolidated Financial Information." (2) Gives effect to the acquisitions of ITC and Linkatel as if those transactions had occurred on January 1, 1996. See "Pro Forma Consolidated Financial Information." (3) EBITDA consists of earnings (loss) before interest expense, minority interests, depreciation, amortization and deferred compensation expense. EBITDA is commonly used to analyze companies on the basis of operating performance, leverage and liquidity. While EBITDA should not be construed as a substitute for operating income or a better measure of liquidity than cash flow from operating activities, which are determined in accordance with generally accepted accounting principles, it is included herein to provide additional information with respect to the ability of the Company to meet future debt service, capital expenditures and working capital requirements. See "Consolidated Statement of Cash Flows." 33 (4) Total capital expenditures, acquisitions, and investments in affiliates were funded as follows:
PERIOD FROM INCEPTION (SEPTEMBER 16, YEAR ENDED DECEMBER 1994) TO 31, DECEMBER 31, -------------------- 1994 1995 1996 ----------------- --------- --------- Cash expended........................................ $ 600 $ 35,417 $ 72,042 Debt issued and assumed.............................. -- 6,554 8,228 Equity issued........................................ -- 7,259 5,602 ----- --------- --------- Total................................................ $ 600 $ 49,230 $ 85,872 ----- --------- --------- ----- --------- ---------
(5) For the period from inception (September 16, 1994) to December 31, 1994 and for the years ended December 31, 1995 and 1996, earnings were insufficient to cover fixed charges during the periods presented by the amount of loss before minority interests of $352, $12,961 and $71,445, respectively. (6) Gives effect to the acquisition of Linkatel as if that transaction had occurred on December 31, 1996. See "Pro Forma Consolidated Financial Information." (7) As adjusted to give effect to the Offering as if the Offering had occurred on December 31, 1996 and net of approximately $11,000 in estimated issuance costs. (8) Gives effect to the acquisition of Linkatel. (9) The operating data for all periods subsequent to March 1996 include the statistics of the Las Vegas network, which the Company manages and in which the Company has a 40% membership interest. (10) Route miles refers to the number of miles of the telecommunications path in which the Company-owned or leased fiber optic cables are installed. (11) Fiber miles refers to the number of route miles installed along a telecommunications path, multiplied by the Company's estimate of the number of fibers along that path. (12) Represents on-net building connections. (13) Represents four (five as of December 31, 1996) Nortel DMS 500 switches that are currently operational as well as two Siemens EWSD switches which were included as part of the Company's acquisition of its Ohio operations and are currently being replaced by the Company with Nortel DMS 500 switches. 34 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Since its inception in 1994, the Company has executed a strategy of constructing and acquiring fiber optic networks and acquiring related telecommunications businesses. Over this period, the Company has begun construction of, acquired, or entered into agreements to acquire telecommunications networks in 22 markets in seven states. The Company commenced the offering of switched local dial tone telecommunications services in seven of its markets on July 4, 1996 and in an eighth market on January 1, 1997. The Company expects to commence the offering of switched local dial tone and long distance services in its remaining 14 markets later in 1997. See "Business--Network Development; --The Company's Networks." In addition, the Company offers enhanced communications services including: (i) interactive voice response services, which provide an interface between the Company's clients and their customers for a variety of applications; (ii) Xpress, the Company's virtual communications center that allows mobile professionals and workgroups to access a suite of commonly used communications services from any telephone in the public switched telephone network; and (iii) the Intermind Communicator, an interactive communications tool for the World Wide Web and intranet applications. The Company plans to acquire and build networks in new areas, expand its current networks, and also explore the acquisition or licensing of additional enhanced communications services and other telecommunications service providers. These efforts should allow the Company to increase its presence in the marketplace, and facilitate providing a single source solution for the telecommunications needs of its customers. The development of the Company's businesses and the construction, acquisition and expansion of its systems require significant expenditures, a substantial portion of which is incurred before the realization of revenues. These expenditures, together with the associated early operating expenses, result in negative cash flow until an adequate customer base is established. However, as the customer base grows, the Company expects that incremental revenues can be generated with decreasing incremental operating expenses, which may provide positive contributions to cash flow. The Company has made the strategic decision to build high capacity networks with broad market coverage, which initially increases its level of capital expenditures and operating losses. The Company believes that over the long term this will enhance the Company's financial performance by increasing the traffic flow over the Company's networks. See "Risk Factors--Significant Future Capital Requirements; Substantial Indebtedness." Prior to January 31, 1997, the Company was a limited liability company that was classified and taxed as a partnership for federal and state income tax purposes. On January 31, 1997, the Company was merged with and into NEXTLINK Communications, Inc., a Washington corporation, and will be subject to federal and state income tax. See Note 12 to Consolidated Financial Statements. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 31, 1995 Revenue increased 240% to $25.7 million for 1996, compared to $7.6 million in 1995. The increase was due to recording a full year of revenue during 1996 for acquisitions completed during 1995 as well as growth in dedicated and enhanced communications services revenues. The 1996 revenues included $15.3 million derived from enhanced communications services, $6.4 million from competitive access and dedicated line services, $3.8 million from local and long distance resale services and $0.2 million from switched local dial tone and other services. This compares to $3.4 million derived from enhanced communications services, $3.2 million from competitive access and dedicated line services and $1.0 35 million from local exchange resale services during 1995. The Company's interactive voice response subsidiary, which was acquired in September 1995, provided 52% of the Company's revenues during 1996, including one customer who accounted for 23% of the Company's total revenues. The revenues generated by this subsidiary, while generally increasing over time, have tended to fluctuate on a quarter to quarter basis as a substantial portion of the revenues are derived from a small number of customers and the revenues are generally nonrecurring in nature. The Company began offering switched local dial tone services in seven of its markets in July 1996. Revenues from the provision of local dial tone services, while not material during 1996, are expected to represent an increasing component of total revenues in future periods. Operating expenses consist of costs directly related to providing facilities-based network and enhanced communications services and include salaries and benefits, right-of-way fees and local and long distance service costs. Operating expenses increased 279% due to the effect of acquisitions and the Company's continued addition of employees as well as other related costs in order to expand the Company's switched local dial tone service businesses in its existing and planned markets. In addition, the Company experienced increased network costs related to the provision of local and long distance services. SG&A includes salaries and benefits, sales and marketing, consulting and legal fees, property taxes, facilities expense and billing and systems development costs. Selling, general and administrative expenses ("SG&A") increased 228% due to acquisitions completed during 1995, the Company's continued addition of employees as well as other related costs in order to expand the Company's switched local dial tone service businesses in its existing and planned markets and to a lesser degree due to activities associated with the marketing of the Company's enhanced communications service offerings. Deferred compensation expenses are recorded in connection with the Company's Equity Option Plan. The option grants under this plan are considered compensatory and are accounted for similar to stock appreciation rights. The Company recorded noncash charges of $9.9 million and $0.4 million during 1996 and 1995, respectively, resulting from an increase in value of the options as well as the grant of additional options. See Note 10 to Consolidated Financial Statements. Depreciation expense increased during 1996 primarily due to placement in service of additional telecommunications network assets, including switches, fiber optic cable, network electronics and related equipment as well as due to acquisitions completed during 1995 and early 1996. Amortization of intangible assets increased as a result of acquisitions completed during 1995 and 1996. Interest expense during 1996 (net of $0.9 million capitalized) primarily reflects the interest expense associated with the Senior Notes. See "Liquidity and Capital Resources." Pursuant to Statement of Financial Accounting Standards No. 34, the Company capitalizes a portion of its interest costs as part of the construction cost of its communications networks. Interest income results from certain securities that have been pledged as collateral for interest payments on the Senior Notes and investment of excess cash. PERIOD FROM INCEPTION (SEPTEMBER 16, 1994) TO DECEMBER 31, 1994 VS. DECEMBER 31, 1995 From inception through December 31, 1995, the Company acquired certain operating assets and one company. These acquisitions have been accounted for utilizing the purchase method of accounting, and accordingly, the Company's Consolidated Financial Statements include the results of operations of these acquisitions from the dates of acquisition. The acquired assets and liabilities were recorded at their estimated fair value on the acquisition dates, and appropriate amounts were allocated to intangible assets, including goodwill. 36 The Company generated its first revenues, a total of $7.6 million, in 1995. Of these revenues, $3.2 million were derived from competitive access and dedicated line services, $1.0 million from local exchange resale services and $3.4 million from interactive voice response services. As reflected in the Consolidated Financial Statements, operating expenses increased from $106,000 in 1994 to $6.6 million in 1995. This increase is due to the acquisitions described above and expansion of the business. SG&A increased from $232,000 in 1994 to $9.6 million in 1995. SG&A increased substantially as a result of acquisitions and the development of the Company's systems and structure to support the anticipated growth of its business. Depreciation increased from $6,500 in 1994 to $1.1 million in 1995 due to the added property, plant and equipment as a result of the acquisitions and expansion of the networks completed in 1995. Amortization of intangible assets increased from $7,000 in 1994 to $2.3 million in 1995 due to the acquisitions and the resulting increase in intangible assets. Interest expense was $499,000 in 1995 and related primarily to a note to Eagle River that was subsequently converted to contributed capital on December 1, 1995. Minority interest in net losses increased from $3,000 in 1994 to $230,000 in 1995, due to increases in losses and the addition of minority members' interest in certain of the Company's acquired subsidiaries. The net loss before minority interest was $13.0 million and the net loss was $12.7 million in 1995 compared to $352,000 and $349,000, respectively for 1994. LIQUIDITY AND CAPITAL RESOURCES The competitive local telecommunications service business is a capital intensive business. The Company's existing operations have required and will continue to require substantial capital investment for the acquisition and installation of fiber, electronics and related equipment in order to provide switched services in the Company's networks and the funding of operating losses during the start-up phase of each market. In addition, the Company's strategic plan calls for expansion into additional market areas. Such expansion will require significant additional capital for: potential acquisitions of businesses or assets; design, development and construction of new networks; and the funding of operating losses during the start-up phase of each market. During 1996, the Company used $40.6 million in cash for operating activities, compared to $9.2 million in 1995. The increase was primarily due to a substantial increase in the Company's activities associated with the development and initiation of competitive switched local dial tone services and to a lesser degree due to the activities associated with the marketing of the Company's enhanced communications service offerings. During 1996, the Company also invested an additional $72.0 million in property and equipment, acquisitions of telecommunications assets and equity investments in telecommunications businesses. During 1995, the Company invested $35.4 million in capital equipment and acquisitions of telecommunications assets and businesses. On February 4, 1997 the Company completed the acquisition of substantially all of the assets of Linkatel, a Los Angeles-based competitive access telecommunications provider. At the time of acquisition, Linkatel operated an 80 mile fiber optic telecommunications network covering several markets in the Orange and Los Angeles county areas. The total purchase price of $42.5 million consisted of a cash payment of $36.1 million (including the release of $6.0 million which was deposited into escrow during 1996) plus the payoff of debt of $5.6 million and the assumption of net liabilities totaling $0.8 million. In December 1996, the Company completed the acquisition of ITC, a switched-based long distance reseller based in Salt Lake City, Utah with operations in Utah, Colorado, Arizona, New Mexico and Idaho. ITC has approximately 9,000 long distance customers and recorded 1996 revenues of $11.4 million. The purchase price for ITC consisted of a cash payment of $4.0 million (of which $2.6 million was placed into 37 escrow to be paid during 1998) plus the issuance of 900,000 Class A Units of the Company, which were valued at $5.50 per unit. The Company has granted the seller an option to require the Company to repurchase such units at $11.50 per unit beginning three years from the date of closing of the acquisition in the event that the Company has not completed a public offering of its equity securities prior to that time. In January 1997, the Company obtained rights-of-way to expand its existing Salt Lake City network into Provo and Orem, Utah. In December 1996, the Company reached an agreement in principle to acquire an existing fiber optic network in downtown Philadelphia in order to extend its existing network in Pennsylvania, which acquisition is anticipated to be consummated during the second quarter of 1997. Since inception, the Company has funded its expenditures with approximately $55.0 million of cash equity investments from two entities that are controlled by Mr. Craig O. McCaw and with the proceeds from the issuance of long-term debt and redeemable preferred stock. On April 25, 1996, the Company raised net proceeds of approximately $190 million through the issuance of $350 million in Senior Notes. The Company used $117.7 million of the gross proceeds to purchase U.S. government securities, representing funds sufficient to provide for payment in full of interest on the Senior Notes through April 15, 1999 and used an additional $32.2 million to repay certain advances and accrued interest from Eagle River. In addition, the Company incurred costs of $9.8 million in connection with the financing. Interest payments on the Senior Notes are due semi-annually. On January 31, 1997, the Company completed the sale of $285 million of Old Preferred Shares which after deducting issuance costs, resulted in net proceeds to the Company of approximately $274 million. The Old Preferred Shares will accrue dividends at the rate of 14% per annum. Before February 1, 2002, dividends may, at the option of the Company, be paid in cash or by issuing additional Old Preferred Shares with an aggregate liquidation preference equal to the amount of such dividends. After February 1, 2002, dividends must be paid in cash. Since inception, the Company also has issued $15.5 million of Class A Units primarily for the acquisition of certain telecommunications assets and the stock of ITC, which Units were converted to shares of Class B Common Stock of the Company on January 31, 1997. The Company will continue to use the remaining proceeds from the sale of the Senior Notes and the Old Preferred Shares for expenditures relating to the construction, acquisition and operation of telecommunications networks and service providers and the offering of telecommunications services in those areas where the Company currently operates or intends to operate. Expenditures for the construction and operation of networks include (i) the purchase and installation of switches and related electronics in existing networks and in networks to be constructed or acquired in new or adjacent markets, (ii) the purchase and installation of fiber optic cable and electronics to expand existing networks and develop new networks, including the connection of new buildings, (iii) the development of its comprehensive information technology platform and (iv) the funding of operating losses and working capital. The Company may also acquire or invest in businesses that consist of existing networks or companies engaged in businesses similar to those engaged in by the Company and its subsidiaries or other complementary businesses. As of December 31, 1996, the Company had unrestricted cash and investments of $124.5 million. On a pro forma basis, after giving effect to the Linkatel acquisition and the Offering, the Company would have had $363.5 million of unrestricted cash and investments. The Company estimates that the cash required to fund its anticipated capital expenditures and operating losses (excluding acquisitions) for 1997 will approximate $200 million. The Company's planned growth subsequent to 1997 will require substantial additional capital to fund capital expenditures, acquisition opportunities, working capital and any future operating losses. The Company will continue to evaluate additional revenue opportunities in each of its markets and, as and when attractive additional opportunities develop, the Company plans to make additional capital investments in its networks to pursue such opportunities. The Company expects to meet its additional 38 capital needs with the proceeds from sales or issuance of equity securities, credit facilities and other borrowings, sales of additional debt securities, and through joint ventures. There can be no assurance, however, that the Company will be successful in raising sufficient additional capital on terms that it will consider acceptable or that the Company's operations will produce positive consolidated cash flow in sufficient amounts to service the Senior Notes and to pay cash dividends on the Preferred Shares. Failure to raise and generate sufficient funds may require the Company to delay or abandon some of its planned future expansion or expenditures, which could have a material adverse effect on the Company's growth and its ability to compete in the telecommunications services industry. In addition, the Company's operating flexibility with respect to certain business matters is, and will continue to be, limited by covenants associated with the Senior Notes and the Exchange Notes, if issued. Among other things, these covenants limit the ability of the Company and its subsidiaries to incur additional indebtedness, create liens upon assets, apply the proceeds from the disposal of assets, make dividend payments and other distributions on capital stock and redeem capital stock. In addition, the terms of the Old Preferred Shares contain certain covenants that may limit the Company's operating flexibility with respect to the incurrence of indebtedness and issuance of additional preferred shares. There can be no assurance that such covenants will not adversely affect the Company's ability to finance its future operations or capital needs or to engage in other business activities that may be in the interest of the Company. The Company was in compliance with all covenants associated with the Senior Notes as of December 31, 1996. 39 BUSINESS OVERVIEW NEXTLINK was founded in 1994 by Mr. Craig O. McCaw, its Chief Executive Officer and principal equity owner, to provide local facilities-based telecommunications services with a focus on delivering switched services to commercial customers. In July 1996, NEXTLINK became one of the first CLECs in the United States to provide facilities-based local dial tone services under the Telecom Act, which opened the entire local exchange market to competition. In each of the markets it serves, NEXTLINK's goal is to become the principal competitor to the ILEC for its targeted customer base of small and medium sized businesses by offering a single source for local, long distance and enhanced communications services. The Company currently offers a bundled package of switched local dial tone and long distance services in eight markets and anticipates launching these services in an additional 14 markets, 13 of which are anticipated to be launched by the end of June 1997. In addition, the Company offers dedicated transmission and competitive access services to long distance carriers and end users in 18 of its markets, including those markets where the Company has not yet launched switched local dial tone and long distance services. NEXTLINK also offers enhanced communications services, including a series of IVR products, a virtual communications center for mobile professionals and workgroups and an interactive communications tool for the World Wide Web and intranet applications called the Intermind Communicator. To date, NEXTLINK has acquired and constructed telecommunications networks in seven states, with operations currently active or under construction in 22 markets containing an aggregate of approximately four million addressable business lines. As of December 31, 1996, the Company's operations included approximately 1,080 route miles of installed and operational high capacity fiber optic cable with a combined total of approximately 66,000 fiber miles which connect to 403 buildings and an additional 400 route miles under construction. The Company seeks to encompass the significant business concentrations in each area it serves, focusing on direct connections to end-user locations and ILEC central offices. The Company constructs its networks utilizing high capacity fiber optic cable, with a backbone density generally ranging from 72 to 240 fibers, and self-healing SONET transmission equipment. In addition, the Company employs a uniform technology platform for each of its networks that is based on the Nortel DMS 500 digital local and long distance combination switching system and associated distribution technology. As of December 31, 1996, the Company had five operational Nortel DMS 500 switches serving eight markets, had installed three switches during the first quarter of 1997 and anticipates installing one switch in the second quarter 1997, allowing the Company to service in the aggregate 14 additional markets. The Company plans to install a tenth switch in its NEXTLAB facility, a fully functional model of one of the Company's networks, which will serve as the Company's network operations control center and a testing facility for switch software and the Company's products and services. NEXTLINK has interconnection agreements covering 15 markets and is currently negotiating two additional interconnection agreements that will cover its seven additional markets. These agreements provide the Company with the ability to exchange telecommunications traffic between its customers and the customers of the ILEC. The Company accelerated its offering of switched local dial tone services by establishing initial interconnection agreements while longer term agreements are negotiated. The operating experience gained by the Company under these agreements gives the Company critical knowledge for negotiating longer term arrangements, which the Company believes provides it with an advantage over other CLECs in modifying its ongoing relationships with the ILECs. 40 MARKET OPPORTUNITY Prior to 1984, AT&T dominated both the local exchange and long distance marketplace by owning the operating entities that provided both local exchange and long distance services to most of the U.S. population. While long distance competition began to emerge in the late 1970s, the critical event triggering the growth of long distance competition was the breakup of AT&T and the separation of its local and long distance businesses as mandated by the MFJ in 1984. To foster competition in the long distance market, the MFJ prohibited AT&T's divested local exchange businesses, the RBOCs, from acting as a single source provider of telecommunications services. The Company believes that a similarly critical event occurred in 1996 with the passage of the Telecom Act. In most locations throughout the United States, the ILEC has operated with a virtual monopoly over the provision of most local exchange services. However, just as competition slowly emerged in the long distance business prior to the MFJ, competitive opportunities also have slowly emerged over the last 10 years at the local level. Industry sources estimate that in 1995 the total revenues from local and long distance telecommunications services were approximately $175 billion, of which approximately $101 billion were derived from local exchange services and approximately $74 billion from long distance services. Although the MFJ relating to the breakup of AT&T established the preconditions for competition in the market for long distance services in 1984, the market for local exchange services has until recently been virtually closed to competition and has largely been dominated by regulated monopolies. Efforts to open the local exchange market began in the late 1980s on a state-by-state basis when CAPs began offering dedicated private line transmission and access services. These types of services together currently account for approximately 12% ($12 billion) of the total local exchange revenues. CAPs were restricted, often by state laws, from providing the other, more frequently used services such as basic dial tone and switched services, which today account for approximately 88% ($89 billion) of local exchange revenues. The Telecom Act and the FCC's issuance of rules for competition, particularly those requiring the interconnection of all networks and the interchange of traffic among the ILECs and the CLECs, as well as pro-competitive policies already developed by state regulatory commissions, have caused fundamental changes in the structure of the local exchange markets. Although the U.S. Court of Appeals for the Eighth Circuit has issued a partial stay of the FCC's rules implementing the local competition provisions of the Telecom Act, the stay is limited to issues relating to pricing of interconnection and a CLEC's ability to impose "most favored nation" requirements on ILECs. Both issues remain subject to scrutiny and oversight by state regulatory commissions. See "--Regulatory Overview." These developments create opportunities for new entrants offering local exchange services to capture a portion of the current monopolists' nearly 100% market share. The development of facilities-based switched local dial tone services competition, however, is in its early stages. Even though other CLECs have begun to offer on-network switched local services, the Company believes that to date less than 1% of the total business lines in the United States have changed from an ILEC to a CLEC for such switched services. As competition develops, the Company anticipates that the market will become increasingly segmented, with the ILECs and the CLECs focusing on particular customer and geographic segments. NEXTLINK believes that the provisions of the Telecom Act requiring the ILECs to cooperate on a technical level with competitors are as significant as the Telecom Act's provisions eliminating state laws barring competitors from entering the local exchange services market. Under the Telecom Act, the FCC and state regulators are required to ensure that ILECs implement: - Interconnection--provides competitors the right to connect to the ILECs' networks at any technically feasible point and to obtain access to its rights-of-way; 41 - Unbundling of the Local Network--allows competitors to purchase and utilize components of the ILECs' network selectively; - Reciprocal Compensation--establishes the framework for pricing between the CLEC and the ILEC; and - Number Portability--allows ILEC customers to retain their current telephone numbers when they switch to a CLEC. In addition, the Telecom Act provides that ILECs that are subsidiaries of RBOCs cannot combine in-region, long distance services across local access and transport areas ("LATAs") with the local services they offer until they have demonstrated that they have complied with certain regulatory requirements relating to local competition. See "--Regulatory Overview." The Company believes it will have an opportunity to gain market share in certain markets by combining local and long distance services in a single offering to its customers before that market's ILEC, if it is a subsidiary of a RBOC, is permitted to do so. BUSINESS STRATEGY The Company has built an end user-focused, locally oriented organization dedicated to providing a broad range of products and services at competitive prices primarily to small and medium sized businesses. The key components of the Company's strategy to maximize penetration of its targeted customer base are: FOCUS ON SMALL AND MEDIUM SIZED BUSINESSES. The Company primarily focuses marketing efforts for its switched local, long distance and enhanced communications services on small and medium sized businesses and professional groups with 10 to 50 business lines. The Company's market research indicates that these customers prefer a single source for all of their telecommunications requirements, including products, billing, installation, maintenance and customer service. The Company has chosen to focus on this segment, based on its expectations that higher gross margins will generally be available on services provided to these customers, as compared with larger businesses, and that ILECs may be less likely to apply significant resources towards retaining these customers. The Company expects to attract these customers through a direct sales effort by offering: (i) bundled facilities-based local dial tone and resold long distance services, as well as the Company's enhanced communications services; (ii) a 10% to 15% discount to comparable pricing by the ILEC, depending on the individual market; and (iii) responsive customer service and support provided on a local level. DEVELOP A DIRECT SALES FORCE AND A CUSTOMER CARE ORGANIZATION. NEXTLINK is building a highly motivated and experienced direct sales force and customer care organization that is designed to establish a direct and personal relationship with its customers. Salespeople are given incentives through a commission structure that targets 40% of a salesperson's compensation to be based on performance. To ensure customer satisfaction, each customer will have a single point of contact for customer care who is responsible for solving problems and responding to customer inquiries. Management believes that the quality of its sales force and the responsiveness of its customer care organization will help to attract and retain customers and provide a key competitive advantage in competing with the ILEC in the local exchange market. STANDARDIZE PROCESSES TO ACCELERATE REVENUE GROWTH. The Company believes that the immediate challenge for CLECs will be developing the ability to implement effective provisioning systems, which include the complex process of transitioning ILEC customers to the Company's switched local dial tone services. Accordingly, the Company has begun to identify and will focus, as a key competitive strategy, on implementing best provisioning practices in each of its markets that will provide for rapid and seamless transitions of customers from the ILEC to the Company. To support 42 the provisioning of its services, the Company has begun a long-term development program relating to a comprehensive information technology platform geared toward delivering information and automated ordering and provisioning capability directly to the end-user as well as to the Company's internal staff. The Company believes that these practices and its comprehensive information technology platform, as developed, will provide the Company with a long-term competitive advantage and allow it to implement more rapidly switched local dial tone services in its markets and to shorten the time between the sale of its services and the generation of revenues. DEVELOP HIGH CAPACITY NETWORKS WITH BROAD MARKET COVERAGE. NEXTLINK has and intends to continue to approach network design with a long-term view focusing on three key elements. First, the Company designs and builds its networks to provide extensive coverage of principal business concentrations, featuring direct physical connection of the Company's network to a high percentage of the commercial buildings and a majority of the ILEC central offices. This broad coverage is expected to result in a higher proportion of traffic that is both originated and terminated on the Company's networks, which should provide higher long-term operating margins. Second, the Company constructs high capacity networks that utilize large fiber bundles capable of carrying high volumes of voice, data, video and Internet traffic as well as other high bandwidth services. This strategy should reduce potential "overbuild" costs and provide added network capacity as the Company adds high bandwidth services in the future. Third, the Company employs a uniform technology platform based on Nortel DMS 500 switches, associated distribution technology and other common transmission technologies enabling the Company to (i) deploy features and functions quickly in all of its networks, (ii) expand switching capacity in a cost effective manner and (iii) lower maintenance costs through reduced training and spare parts requirements. The Company also utilizes unbundled loops from the ILEC to connect the Company's switch and network to end user buildings and is evaluating other alternatives for building connectivity, including wireless connections, for the "last mile" of transport. OFFER ENHANCED COMMUNICATIONS SERVICES. NEXTLINK offers customers value-added services that are not dependent on the Company's local facilities. As a result, the Company believes it can establish a customer base in a market in advance of constructing network facilities as well as offer additional services in markets where the Company has constructed facilities. These enhanced communications service offerings include: (i) IVR services, which provide an interface between NEXTLINK's clients and their customers for a variety of applications; (ii) Xpress, NEXTLINK's virtual communications center that allows mobile professionals and workgroups to access a suite of commonly used communications services from any telephone in the public switched network; and (iii) the Intermind Communicator, an interactive communications tool for the World Wide Web and intranet applications. The Company plans to focus the marketing of its enhanced communications services in all of its markets, as well as in areas of planned network expansion. This should increase the Company's visibility, develop customer relationships and assist the Company in attracting local exchange customers when it operates networks in these markets. CONTINUE MARKET EXPANSION. The Company currently operates or is constructing networks in 22 markets in seven states. These markets, in the aggregate, have approximately four million addressable business lines. The Company's goal is to add or expand markets and market clusters in order to increase its market potential to approximately 11 million addressable business lines by the end of 1998. NEXTLINK believes that its strategy of operating its networks in clusters (i) offers substantial advantages including economies of scale in management, marketing, sales and network operations, (ii) enables the Company to capture a greater percentage of regional traffic and to develop regional pricing plans, because the Company believes that a significant level of traffic terminates within 300 miles of its origination and (iii) provides opportunities in smaller markets and those markets that are too small to develop on a stand alone basis. The Company anticipates continuing to expand into new geographic areas as opportunities arise either through building new 43 networks, acquiring existing networks or acquiring capacity. Most recently the Company acquired an 80 mile fiber optic network located in Los Angeles and six adjacent markets and reached an agreement in principle to acquire an existing operational fiber optic network in downtown Philadelphia in order to extend its existing network in Pennsylvania. The Company believes that a critical factor in the successful implementation of the Company's strategy is the quality of its management team and their extensive experience in the telecommunications industry. The Company has built a management team that it believes is well suited to challenge the dominance of the ILECs in the local exchange market. Mr. Craig O. McCaw, the Company's Chief Executive Officer, and Mr. James F. Voelker, the Company's President, each has in excess of 17 years of experience in leading companies in competitive segments of the telecommunications industry. In addition, the Company has recruited experienced entrepreneurs and industry executives to head each of its operating subsidiaries, many of whom have previously built and led their own start-up telecommunications businesses. Many of the Company's mid-level and senior managers were associated with Mr. McCaw during the early years at McCaw Cellular Communications, Inc. (now known as AT&T Wireless Services, Inc.), where the organizational themes included an unyielding focus on the customer, developing a first-class, differentiated product offering, decentralized management decision-making and building a high capacity system. THE COMPANY'S TELECOMMUNICATIONS SERVICES LOCAL AND LONG DISTANCE SERVICES The Company commenced the offering of switched local dial tone and long distance services in seven markets on July 4, 1996, and in an eighth market on January 1, 1997. The Company expects to commence the offering of switched local dial tone and long distance services in its remaining 14 markets later in 1997. The Company focuses its product offering on basic telecommunications services, which it believes are the core of local exchange services. Pricing, which is determined and implemented by the Company's operating subsidiary in each local market, has been generally 10% to 15% lower than the pricing for comparable local services from the ILEC. The Company's current product offering includes: - Standard dial tone, including touch tone dialing, 911, and operator assisted calling; - Multi-trunk services, including direct inward dialing (DID) and direct outward dialing (DOD); - Long distance service, including 1+, 800/888 and operator services; - Voice messaging with personalized greetings, send, transfer, reply and remote retrieval capabilities; and - Directory listings and assistance. Currently, the Company offers CAP services in 18 of its markets, focusing on long distance carriers and the private line needs of high volume customers. In addition, data services that are currently offered by the Company include Ethernet, TOKEN rings, and Fiber Distributed Data Interface (FDDI). The Company's CAP services, which are used as both primary and back-up circuits, fall into three principal categories: (i) special access circuits that connect end-users to long distance carriers; (ii) special access circuits that connect long distance carriers' facilities to one another; and (iii) private line circuits that connect several facilities owned by the same end-user. 44 ENHANCED COMMUNICATIONS SERVICES NEXTLINK's IVR platform allows a consumer to dial into a computer-based system using a toll-free number and a touch tone phone, and, by following a customized menu, to access a variety of information and to leave simultaneously a profile of the caller behind for use by either NEXTLINK or its clients. Currently, NEXTLINK provides four types of IVR services: - LeaveWord--prompts the consumer to leave messages of any length or complexity, ranging from catalog requests and contest entries to specific product questions and surveys; - Dealer Locator--helps a consumer to locate the nearest dealer of the client's products by instantly identifying the consumer's area and responding with the names, addresses and phone numbers of the client's locations within any desired mileage radius; - Automated Order Entry--allows consumers to purchase products using the interactive phone service 24-hours a day, with real-time order and credit card confirmation as well as arranging for delivery of the new item to the consumer's desired address; and - Interactive Call Center--provides the consumer with a menu of selections that include Dealer Locator, Automated Order Entry and other functions, including receiving a catalog, registering the warranty of a product, contest entry and an option for callers to be forwarded to a live operator. NEXTLINK also provides a virtual communications center for mobile professionals and workgroups through its Xpress service, which offers a suite of personal communications services. These services are made available through a specialized personal telephone number. The key services provided by this center are the following: - Follow-Me--instructs the communications center to forward any calls to an Xpress number to a particular local telephone number; - Voice Messaging--allows subscribers to receive, send, keep, transfer, instantly reply to or request future delivery for voice messages; - Call-out---enables subscribers to make calls from the communications center without hanging up between calls or dialing another PIN number; - Paging--notifies subscribers via pager of new and urgent messages; - Caller ID--provides the ability to capture the telephone number of anyone who calls the subscriber, which is also displayed on the subscriber's pager; - Fax Messaging--stores an incoming fax and delivers it to the nearest fax machine designated by the subscriber when the subscriber calls in to retrieve it; and - Teleconferencing--handles all teleconferencing needs through a teleconferencing operator. The Intermind Communicator is a new category of interactive communications software for the World Wide Web and intranet applications. The Intermind Communicator provides functions similar to the Company's IVR services for use on the Internet. The Intermind Communicator utilizes hypercommunications, which is a special type of publish/subscribe application. The Company markets the Intermind Communicator to businesses that are seeking to deliver and receive (that is, "push and pull") information over the Internet. The Intermind Communicator allows these businesses to interact with end users by providing requested information and simultaneously receiving specific communications anonymously from that end user. The Company has developed its enhanced communications service offerings through acquisitions, marketing agreements and equity investment. In June 1995, the Company acquired certain enhanced communications services assets from City Signal, Inc. These assets are used by the Company to offer its 45 Xpress service. In September 1995, the Company acquired a fully operational interactive voice response business through which the Company offers its IVR services. In June 1996, the Company invested in the preferred stock of Intermind Corporation, an Internet communications tool software developer. Simultaneously, the Company executed an exclusive marketing agreement, which provides that the Company is the exclusive telecommunications company authorized to market the Intermind Communicator in each of the Company's current geographic service areas. The Company anticipates that it will continue to explore other enhanced communications services opportunities and may acquire, invest in or establish marketing relationships with, additional service providers in the future that support its overall business and marketing strategies. SALES AND CUSTOMER CARE OVERVIEW The Company utilizes a two-pronged sales strategy in each of its markets. The initial sales efforts in the Company's markets are for switched local dial tone and long distance services focusing on small and medium sized businesses and professional groups with 10 to 15 business lines. The Company's market research indicates that these customers prefer a single source for all of their telecommunications requirements, including products, billing, installation, maintenance and customer service. The Company utilizes a direct sales effort offering combined local and long distance services with prices that are generally at a 10% to 15% discount from the ILEC. Providing a combination of local and long distance services provides the Company's customers a level of convenience that has been generally unavailable since the break-up of AT&T. The Company is also marketing its enhanced communications services through a separate direct sales force in each market, which is expected to increase the number of customers for all of NEXTLINK's telecommunications services in that market at a faster rate. In addition, the Company is continuing its sales efforts for traditional CAP services to long distance carriers and large commercial users. SALES FORCE The Company is building a highly motivated and experienced direct sales force and customer care organization that is designed to establish a direct and personal relationship with its customers. The Company seeks to recruit salespeople with strong sales backgrounds, including salespeople from long distance companies, telecommunications equipment manufacturers and the ILECs. Salespeople are given incentives through a commission structure that targets 40% of a salesperson's compensation to be based on performance. With respect to traditional CAP services, the Company currently utilizes a national sales force to establish and expand long distance company access service sales. Sales efforts for long distance carriers are centralized in order to provide a single point of contact for these customers. The Company anticipates that its enhanced communications service offerings will continue to be sold across the country by its existing national sales force for these services. The Company has also augmented these efforts with a separate, targeted, locally based sales force in each of its markets. The Company believes that this two-pronged approach to each market will provide revenues that are incremental to its local exchange operations. CUSTOMER CARE The Company is augmenting its direct sales approach with superior customer care and support through locally based customer care representatives. The Company is structuring its customer care organization in such a manner that each customer will have a single point of contact for customer care who is responsible for solving problems and responding to customer inquiries. The Company seeks to provide a customer care group that has the ability and resources to respond to and resolve customer 46 problems as they arise. The Company believes that customer care representatives will be the most effective if they are based in the community in which the Company is offering services. NETWORK DEVELOPMENT GENERAL In developing its networks, the Company has executed a strategy of (i) acquiring fully or partially constructed fiber optic networks and (ii) designing and constructing high capacity fiber optic networks with broad coverage. The Company is constantly evaluating markets as locations for expansion of the Company's current networks and the development of additional networks. The decision to build, acquire or utilize capacity of an existing network is not based on any single factor, but on a combination of a number of factors including: - demographic, economic, competitive and telecommunications demand characteristics of the market and the surrounding markets; - availability of rights-of-way; - actual and potential competitors; and - potential for the Company to cluster additional networks in the region. If a particular market targeted for development is deemed to present an attractive market opportunity, the Company determines whether acquisition opportunities are available. In some cases a large network can be acquired, and in other cases a small existing network can serve as a starting point for market entry. If the Company decides to build a new network, or substantially expand a small acquired system, the Company designs a proposed new or expanded network that can connect a large number of businesses, long distance carriers points of presence and the ILEC's principal central offices in the area to be served, utilizing existing rights-of-way and/or rights-of-way that the Company will construct. Concurrently, the Company's market development personnel visit the location of the proposed network to begin discussions with city officials, right-of-way providers, potential end-users and long distance companies. Based on the data developed during these preliminary studies and visits, the Company develops detailed financial estimates of the costs of constructing a network, including the cost of fiber optic cable, transmission and other electronic equipment, as well as costs related to switching, engineering, building entrance requirements and right-of-way acquisition. If the financial estimates are satisfactory to the Company, the Company's market development personnel prepare a detailed business and financial plan for the proposed network, including competitive, regulatory and right-of-way analyses. Based upon its review of these analyses the Company determines whether to proceed. The Company anticipates continuing the expansion of its networks into new markets utilizing the market development analysis described above. The Company will seek to continue to expand its operations in states where it has established one or more networks, by continuing to construct or acquire networks in adjacent areas to leverage its existing networks, switches and telecommunications equipment, thereby establishing a cost effective and operationally efficient cluster of networks in various geographic regions. 47 THE COMPANY'S NETWORKS The Company currently operates or is constructing networks in 22 markets in seven states. The following table provides certain information on the Company's networks.
AS OF DECEMBER 31, 1996 ------------------------------------------- ROUTE FIBER BUILDINGS STATE/MARKET LAUNCH DATE(1) MILES(2) MILES(3) CONNECTED(4) - -------------------------------------------------------- ------------------- ----------- ----------- ----------------- Tennessee............................................... 384 32,342 260 MEMPHIS............................................... July 1996 NASHVILLE............................................. July 1996 Pennsylvania............................................ 357 20,219 37 ALLENTOWN............................................. July 1996 HARRISBURG............................................ July 1996 LANCASTER............................................. July 1996 READING............................................... July 1996 SCRANTON/WILKES BARRE................................. June 1997 PHILADELPHIA(5)....................................... June 1997 Washington.............................................. 1 152 16 SPOKANE............................................... July 1996 Ohio.................................................... 17 2,499 2 CLEVELAND............................................. April 1997 COLUMBUS.............................................. April 1997 AKRON................................................. December 1997 Utah.................................................... 10 1,440 10 SALT LAKE CITY........................................ January 1997 PROVO/OREM............................................ April 1997 Nevada.................................................. 311 9,394 78 LAS VEGAS............................................. April 1997 California(6)........................................... 80 5,609 8 LOS ANGELES........................................... June 1997 ANAHEIM............................................... June 1997 COSTA MESA............................................ June 1997 GARDEN GROVE.......................................... June 1997 IRVINE................................................ June 1997 ORANGE................................................ June 1997 SANTA ANA............................................. June 1997 ----- ----------- --- Total............................................... 1,160 71,655 411 ----- ----------- --- ----- ----------- ---
- ------------------------ (1) Actual/Anticipated launch date of local dial tone services. (2) Route miles refers to the number of miles of the telecommunications path in which the Company-owned or leased fiber optic cables are installed. (3) Fiber miles refers to the number of route miles installed along a telecommunications path, multiplied by the Company's estimate of the number of fibers along that path. (4) Represents on-net building connections. (5) Acquisition anticipated to be completed during the second quarter of 1997. (6) Acquisition completed in February 1997. 48 TENNESSEE. In January 1995, the Company acquired from City Signal, Inc. an extensive, fully operational network in Memphis, Tennessee and another network then under development in Nashville, Tennessee. Since the date of acquisition, the Memphis network has provided dedicated private line services, long distance carrier access services, high speed data transmission, and video conferencing and, beginning in July 1996, local dial tone and long distance services. The Company's Memphis network currently is the most mature and extensive of the Company's networks and provides a model for the route design of the networks the Company envisions for the other areas it serves. In Nashville, the initial backbone network was completed in December 1995, and the Company also began providing local dial tone and long distance services to customers in this area in July 1996. PENNSYLVANIA. In April 1995, the Company began construction of an extensive regional fiber optic network connecting Harrisburg, Reading, Lancaster, and Allentown, Pennsylvania. The backbone network connecting these four areas and covering 21 counties was completed in the first quarter of 1996. The Company believes that this network provides it with the foundation for significant regional service offerings. The Company commenced offering switched local dial tone services to customers utilizing its Pennsylvania networks in July 1996. The Company recently completed an extension of the network to the Scranton/Wilkes Barre market. The Company recently entered into an agreement in principle which will enable it to extend this network into downtown Philadelphia during 1997. WASHINGTON. In April 1995, the Company acquired a local exchange service reseller located in Spokane, Washington. Currently serving approximately 880 business customers with approximately 7,300 lines serving the central business district of Spokane, the Company completed the construction of a fiber optic ring in the downtown area to provide facilities-based local telecommunications services directly to these customers. The Company commenced offering switched local dial tone services to customers utilizing its Spokane network in July 1996. The Company is in the process of migrating its current resale customers to the fiber optic network as portions of that network are completed. OHIO. In January 1996, the Company acquired existing fiber optic networks and switching facilities in the downtown business centers of Cleveland, Columbus and Akron, Ohio. The Company's networks in Ohio currently are limited to the downtown cores, but the Company will be expanding the route and fiber miles of each of these networks during 1997. In addition, the Company is currently replacing the switches that were acquired in Ohio with two Nortel DMS 500 switches, the Company's standard switching platform. The Company anticipates that it will begin offering switched local and long distance services in Cleveland and Columbus during the second quarter of 1997 and in Akron during the fourth quarter of 1997. UTAH. In March 1996, the Company admitted a 10% member to the subsidiary conducting the Company's operations in Utah, which member provided access to its rights-of-way, franchises, and other valuable services in order for the Company to commence the construction of a fiber optic network in Salt Lake City and the Wasatch Valley, which the Company believes is among the fastest growing areas in the United States. Construction of the downtown fiber optic ring began in the second quarter of 1996. The switching facilities were installed during the fourth quarter of 1996 with switched local and long distance service starting January 1, 1997. The Company recently executed a right-of-way agreement which will enable the expansion of this network to Provo and Orem during the first quarter of 1997. NEVADA. In April 1996, the Company became a 40% member in, and manager of, a joint venture that will provide local telecommunications services in Las Vegas, which the Company believes is one of the fastest growing areas in the United States. The Company has provided a license to the joint venture to operate under the name NEXTLINK Nevada. The joint venture currently provides competitive access services over a fiber optic network covering approximately 300 route miles throughout Las Vegas. The Company will provide strategic planning and management of the business for a ten year period through one of its subsidiaries. The Company anticipates that it will begin offering switched local and long distance services in this market during the second quarter of 1997. 49 CALIFORNIA. On February 4, 1997, the Company acquired substantially all the assets of Linkatel, a Los Angeles-based competitive access telecommunications provider. At the time of the acquisition, Linkatel operated an 80 mile fiber optic telecommunications network covering several markets from the downtown Los Angeles area to the City of Irvine in Orange County. The Los Angeles/Orange County area represents one of the largest telecommunications markets in the United States, with over 2 million addressable business lines. The Company assumed management of this operation in November 1996. As part of the assets acquired, the Company obtained access to approximately 250 route miles of right- of-way, of which 80 miles have been completed, and the Company is currently constructing an additional 110 miles. The network is currently providing competitive access services with the launch of switched local and long distance services scheduled for June 1997. NETWORK ARCHITECTURE DESIGN The Company builds or acquires its own fiber optic networks because it believes that facilities-based full service telecommunications companies whose networks are directly connected to their customers will have the ability to respond more quickly to customer needs for capacity and services. Moreover, the Company believes that facilities-based carriers develop a more knowledgeable, cooperative relationship with their customers, improving their ability to provide new services and other telecommunications solutions, which should result in higher long-term operating margins. The Company believes that the future telecommunications market will be an interconnected network of networks. The Company believes that calls will flow between local networks, with customers selecting their service provider based on high quality and differentiated products, responsive customer service and price. In some circumstances, depending in part upon regulatory conditions, the Company will utilize its own network for one portion of a call and resell the services of another carrier for the remaining portion of a call. In other instances, both the origination and termination of calls will take place on the Company's networks. The Company's networks are designed to maximize connectivity directly with significant numbers of business end-users, and to easily interconnect and provide a least-cost routing flow of traffic between the Company's network and other networks in the marketplace. In general, the Company seeks to build wide, expansive networks, rather than a simple core ring in a downtown metropolitan area. This construction focus is one factor that distinguishes the Company from traditional CAPs, which primarily focus on connecting high volume long distance users with their selected long distance carrier. Because the Company's product focus is much broader than traditional CAPs, its construction efforts reflect the Company's goal of connecting to a greater number of customers, including those without particularly high long distance traffic volumes. The Company believes that this type of broad coverage of the markets in which it operates will result in the following advantages: - an increased number of buildings that can be directly connected to the Company's network, which should maximize the number of businesses to which the Company can offer its services; - a higher volume of telecommunications traffic both originating and terminating on the Company's network, which should result in improved operating margins; - the ability to leverage its investment in high capacity switching equipment and electronics; and - the opportunity for the Company's network to provide backhaul carriage for other telecommunications service providers such as long distance and wireless carriers. The Company seeks to build high capacity networks using a backbone density ranging between 72 and 240 strands. A single pair of glass fibers on the Company's networks can currently transmit 32,256 simultaneous voice conversations, whereas a typical pair of copper wires can currently carry a maximum of 24 digitized simultaneous voice conversations. Although the ILECs commonly use copper wire in their 50 networks, the ILECs are currently deploying fiber optic cable to upgrade portions of their copper-based networks. The Company believes that installing high count fiber strands will allow the Company to offer a higher volume of voice and broadband services without incurring significant additional construction costs. CONSTRUCTION The construction period of a new network varies depending upon the scope of the activities, such as the number of backbone route miles to be installed, whether the construction is underground or aerial, whether the conduit is in place or requires construction, the initial number of buildings targeted for connection to the network backbone and the general configuration for its deployment. After installing the network backbone, extensions to additional buildings and expansions to other areas of a market are evaluated, based on detailed assessments of market potential. The Company's network backbones are installed in conduits that are either owned by the Company or leased from third parties. The Company leases conduit or pole space from entities such as utilities, railroads, long distance carriers, state highway authorities, local governments and transit authorities. These arrangements are generally for multi-year terms with renewal options, and are nonexclusive. The availability of these arrangements is an important part of the Company's evaluation of a market. Cancellation of any of the Company's material right-of-way agreements could have an adverse effect on the Company's business in that area and could have a material adverse effect on the Company. Office buildings are connected primarily by network backbone extensions to one of a number of physical rings of fiber optic cable, which originate and terminate at the Company's central node. Alternatively, the Company may access an end-user's location through interconnection with the ILEC's central office. The Company is also evaluating other alternatives for building connectivity, including wireless connections, for the "last mile" of transport. Signals are generally sent through a network backbone to the central node simultaneously on both primary and alternate protection paths. Most buildings served have a discrete Company presence (referred to as a "remote hub") located in the building. Within each building, Company-owned internal wiring connects the remote hub to the customer premises. Customer equipment is connected to Company-provided electronic equipment generally located in the remote hub, where customer transmissions are digitized, combined and converted to an optical signal. The traffic is then transmitted through the network backbone to the Company's central node where originating traffic is reconfigured for routing to its ultimate destination. After completion of network construction, the Company employs maintenance and line crews that are responsible for responding to outages and routine maintenance of the network. UNIFORM TECHNOLOGY PLATFORM The Company is implementing a consistent technology platform based on the Nortel DMS 500 switch throughout its networks. Unlike a traditional long distance or local switch, the Nortel DMS 500 switch will enable the Company to provide local and long distance services from a single platform. The Company believes that having a standardized switch platform will enable it to (i) deploy features and functions quickly in all of its networks, (ii) expand switch capacity in a cost effective manner and (iii) lower maintenance costs through reduced training and spare parts requirements. In addition, the scalability and capacity of these switches will allow the Company to switch calls from more than one market, which enhances the Company's ability to use a clustered approach to the building of its networks. The Company also is establishing a uniform transmission technology utilizing SONET design and standardized digital access and cross connect systems ("DACCS") and other ancillary transmission equipment. DACCS provide the ability to aggregate and disaggregate capacity along the fiber optic network. Using the DACCS, the capacity of 24 DS-0s can be aggregated to form a DS-1 and, again through the DACCS, 28 DS-1s can be aggregated to form a DS-3. 51 The Company has begun construction of a test site that will house a fully functional Nortel DMS 500 switch in a configuration that simulates the working environment of the Company's operational switches, distribution and ancillary equipment. Located in Dallas, Texas, this site, which will be referred to as NEXTLAB, will operate separate and apart from the Company's operational switches as both the Company's network operations control center (NOCC) and as a testing facility. NEXTLAB will provide the Company with a means to test switch software and service configurations prior to their release on the Company's networks. The Company believes that this process should: (i) minimize network outages; (ii) save network operating and training costs; and (iii) improve levels of customer service. IMPLEMENTATION OF LOCAL TELECOMMUNICATIONS A company preparing to offer local exchange services not only requires an installed switch, but also must have numerous network and routing arrangements in place. NEXTLINK has established all of these arrangements for Pennsylvania, Tennessee, Washington, Utah, and Ohio. These key elements include: INTERCONNECTION. The Company has executed interconnection agreements for all of its current operating networks: in Nashville and Memphis, Tennessee, with BellSouth; in Harrisburg, Reading, Lancaster and Allentown, Pennsylvania, with Bell Atlantic; and in Spokane, Washington, and Salt Lake City and Provo/Orem, Utah with US West. In each of the Tennessee, Pennsylvania and Washington markets, the Company began providing switched local dial tone services on July 4, 1996, and the Company was the first CLEC to interconnect with the ILEC for local traffic. The Company began providing local switched dial tone services in Salt Lake City on January 1, 1997. The Company has executed interconnection agreements with Ameritech for Cleveland, Columbus and Akron, Ohio, with Sprint/Centel for Las Vegas, Nevada. The Company anticipates executing two interconnection agreements with the ILECs for Los Angeles and the surrounding cluster of markets in the second quarter of 1997. In addition, the Company believes that interconnection arrangements between the ILECs and other CLECs or the Company will be in place in other markets that the Company may enter. The Company likely will initially "piggy-back" on these other arrangements while pursuing more favorable long-term arrangements. The Company's approach to interconnection has been a two-step process. To accelerate its launch of switched local dial tone services, the Company has entered into initial interconnection arrangements that allow for the immediate exchange of local traffic with the ILEC. These arrangements allow the Company to commence service immediately and then work to optimize its arrangements with the ILEC. The Company's ILEC agreements are now being re-negotiated under Sections 251 and 252 of the Telecom Act. The actual operating experience gained through the Company's initial interconnection agreements gives the Company critical knowledge for negotiating longer term arrangements, and the Company believes this knowledge provides it with an advantage over other CLECs in modifying these relationships with the ILEC. In some cases, where agreement on a long-term arrangement cannot be reached, the Company will pursue binding arbitration before the state utility commissions as provided under the Telecom Act. Should it choose to do so, the Company has the right to initiate arbitration in its four initial operating markets in the first quarter of 1997. There can be no assurance, however, that the Company will be able to negotiate longer term relationships on terms and conditions satisfactory to the Company or that the arbitrations will result in rates, terms and conditions satisfactory to the Company. TELEPHONE NUMBERS. The Company has been offered interim number portability arrangements by the ILEC in each of its markets, and the Company also is engaged in industry negotiations to establish permanent number portability. Number portability arrangements will allow ILEC customers to retain their telephone numbers when changing local exchange service carriers. In addition, the Company has been allocated multiple blocks of 10,000 telephone numbers for each of its Tennessee, Washington, Pennsylvania, Ohio, Utah and Las Vegas networks for use in assigning new numbers to its customers. These numbers, known as NXX numbers, are the first three digits of a customer's seven digit local phone number. In each of these cases, the NXX is fully loaded into the Local Exchange Routing Guide or LERG, 52 which instructs ILECs and other carriers to send a call using a NEXTLINK NXX to the appropriate NEXTLINK switch, for delivery to the NEXTLINK customer. SS7 POINT CODES. For each of the Company's switches, the Company has been assigned Point Codes for use with the advanced signaling system known as SS7 which is a separate or "out of band" communications channel used between telecommunications carriers to set up and control traffic on and between networks. The Company has designed its network to fully utilize SS7 signaling, which improves call processing times and frees capacity for voice, data, and video transmissions. The Company has entered into an agreement with a national SS7 service provider that will allow the Company to utilize SS7 signaling in its current and new markets nationwide. REGULATORY OVERVIEW OVERVIEW The Company's services are subject to varying degrees of federal, state and local regulation. The FCC generally exercises jurisdiction over the facilities of, and services offered by, telecommunications common carriers that provide interstate or international communications. The state regulatory commissions retain jurisdiction over the same facilities and services to the extent they are used to provide intrastate communications. Local governments sometimes impose franchise or licensing requirements on CAPs and local exchange carriers and regulate street opening and construction activities. The Telecom Act imposes on ILECs certain interconnection obligations that, taken together, grant competitive entrants such as the Company what is commonly referred to as "co-carrier status." In addition, the Telecom Act generally preempts state or local legal requirements that prohibit or have the effect of prohibiting any entity from providing telecommunications service. The Telecom Act allows state regulatory authorities to continue to impose competitively neutral requirements designed to promote universal service, protect public safety and welfare, maintain quality of service and safeguard the rights of consumers. The Telecom Act also preserves the ability of state and local authorities to manage and require compensation for the use of public rights-of-way by telecommunications providers including CAPs and other competitors of the ILECs in the local market. It is anticipated that co-carrier status and the preemption of state and local prohibitions on entry could permit the Company to become a full service provider of switched telecommunications services anywhere in the United States. The following table summarizes the interconnection rights granted by the Telecom Act that are most important to the achievement of this goal and the Company's belief as to the anticipated effect of the new requirements, if properly implemented.
ISSUE DEFINITION ANTICIPATED EFFECT - --------------------- -------------------------------------------- -------------------------------------------- Interconnection Efficient network interconnection to Allows competitive telecommunications transfer calls back and forth between ILECs provider to service and terminate calls to and competitive networks (including 911, 0+, customers not directly connected to its directory assistance, etc.) networks Local Loop Allows competitors to selectively gain Reduces the capital and operating costs of a Unbundling access at cost-based rates to ILEC wires competitive telecommunications provider to from central offices to customer premises serve customers not directly connected to its networks Reciprocal Mandates reciprocal compensation for local Improves the competitive telecommunications Compensation traffic exchange between ILECs and provider's margins for local service competitors
53
ISSUE DEFINITION ANTICIPATED EFFECT - --------------------- -------------------------------------------- -------------------------------------------- Number Portability Allows customers to change local carriers Allows customers to switch to competitive without changing numbers; true portability telecommunications provider's local service allows incoming calls to be routed directly without changing phone numbers to a competitor. Interim portability allows incoming calls to be routed through the ILEC to a competitor at the economic equivalent of true portability Access to Phone Mandates assignment of new telephone numbers Allows competitive telecommunications Numbers to competitive telecommunications provider's providers to provide telephone numbers to customers new customers on the same basis as the ILEC
While the interconnection rights established in the Telecom Act are a necessary prerequisite to the introduction of full local competition, they must be properly implemented to be effective. Significant implementation issues remain to be resolved before the barriers to entry into the local telephone business are sufficiently lowered to permit widespread competitive entry. See "Federal Legislation" below for a more complete explanation of the potential effect of the Telecom Act on the Company's business. FEDERAL LEGISLATION The Telecom Act, enacted on February 8, 1996, substantially revised the Communications Act of 1934. The Telecom Act establishes a regulatory framework for the introduction of local competition throughout the United States. Among other things, the Telecom Act preempts any state or local government from prohibiting any entity from providing telecommunications service. This provision sweeps away prohibitions on entry found in almost half of the states in the country at the time the Telecom Act was passed. The Telecom Act also establishes a dual federal-state regulatory scheme for eliminating other barriers to competition faced by competitors to the ILECs and other new entrants into the local telephone market. Specifically, the Telecom Act imposes on ILECs certain interconnection obligations to be implemented by FCC regulations. The Telecom Act contemplates that states will apply the federal regulations as they oversee interconnection negotiations between ILECs and their new competitors. The FCC has significant responsibility in the manner in which the Telecom Act will be implemented. The details of the rules adopted by the FCC implementing the Telecom Act's requirements will have a significant effect in determining the extent to which barriers to competition in local services are removed, as well as the time frame within which such barriers are eliminated. The FCC may also grant ILECs increased pricing flexibility to enable them to respond to competition. To the extent such pricing flexibility is granted, the Company's ability to compete for certain services may be adversely affected. The state PUCs also have significant responsibility in implementing the Telecom Act. Specifically, the states have authority to establish interconnection pricing, including unbundled loop charges, reciprocal compensation and wholesale pricing. The states are also charged under the Telecom Act with overseeing the arbitration process for resolving interconnection negotiation disputes between CLECs and the ILECs. In addition, the Telecom Act provides that ILECs that are subsidiaries of RBOCs cannot combine in-region, long distance services across local access and transport areas ("LATAs") with the local services they offer until they have demonstrated that (i) they have entered into an approved interconnection 54 agreement with a facilities-based CLEC or that no such CLEC has requested interconnection as of a statutorily determined deadline, (ii) they have satisfied a 14-element checklist designed to ensure that the ILEC is offering access and interconnection to all local exchange carriers on competitive terms and (iii) the FCC has determined that in-region, inter-LATA approval is consistent with the public interest, convenience and necessity. FEDERAL REGULATION The FCC was granted authority to eliminate tariff and reporting requirements for non-dominant carriers such as the Company. Acting under that authority, the FCC has eliminated tariff filing requirements for such carriers providing interstate long distance services. On February 13, 1997, the United States Court of Appeals for the District of Columbia granted motions for stay of the FCC detariffing order pending judicial review of that order. The result of this stay is that carriers must continue to file tariffs for interstate long distance services. Regulatory compliance measures remain in place for international traffic and for access services. In addition, the Telecom Act now requires that ILECs provide CLECs with physical collocation on rates, terms and conditions that are just and reasonable, unless the ILEC can demonstrate to state regulators that physical collocation is not practical. The Company believes that either physical or virtual collocation of its facilities in a timely fashion for appropriate rates and terms will accommodate its purposes. The FCC has taken two actions related to the assignment of telephone numbers, first in July 1995 mandating that over the course of the next year responsibility for administering and assigning local telephone numbers be transferred from the RBOCs and a few other ILECs to a neutral entity, and second in July 1996 adopting a regulatory structure under which a wide range of number portability issues would be resolved. On August 8, 1996, the FCC issued an order containing rules providing guidance to the ILECs, CLECs, long distance companies and state PUCs regarding several provisions of the Telecom Act. The rules include, among other things, FCC guidance on: (1) discounts for end-to-end resale of ILEC local exchange services (which the FCC has suggested should be in the range of 17%-25%); (2) availability of unbundled local loops and other unbundled ILEC network elements; (3) the use of Total Element Long Run Incremental Costs ("TELRIC") in the pricing of these unbundled network elements; (4) average default proxy prices for unbundled local loops in each state; (5) mutual compensation proxy rates for termination of ILEC/CLEC local calls; (6) an access charge transition plan that: (a) leaves access charges in place with respect to situations involving resale of ILEC local exchange services; (b) leaves access charges in place with respect to situations involving use of ILEC unbundled switching to provide local exchange access services except for 25% of the transport interconnection charge ("TIC"); and (c) permits avoidance of access charges only when the ILEC switch is not utilized; and (7) the ability of CLECs and other interconnectors to opt into portions of interconnection agreements negotiated by the ILECs with other parties on a most favored nation (or a "pick and choose") basis. In a combined Report and Order and Notice of Proposed Rulemaking released on December 24, 1996, the FCC made changes and proposed further changes in the interstate access charge structure. In the Report and Order, the FCC removed restrictions on ILECs' ability to lower access prices and relaxed the regulation of new switched access services in those markets where there are other providers of access services. If this increased pricing flexibility is not effectively monitored by federal regulators, it could have a material adverse effect on the Company's ability to compete in providing interstate access services. In the Notice of Proposed Rulemaking, the FCC proposed rules to reform the interstate access charge rate structure. The FCC also proposed to bring interstate access rate levels more in line with costs either by granting ILECs levels of increased pricing flexibility upon demonstrations of increased competition (or potential competition) in relevant markets or by mandating lower rates regardless of the level of competition (or through some combination of the two approaches). 55 In its Recommended Decision, the Joint Board recommended that the FCC establish a federal telecommunications subsidy regime that would probably significantly expand the current subsidy program. For example, the Recommended Decision proposes a new subsidy regime for services provided to qualifying schools and libraries. The Joint Board recommended the adoption of a cap of $2.25 billion per year for the program. The Joint Board also recommended the expansion of federal subsidies to low-income consumers of telecommunications services. In addition, the Telecom Act requires the FCC to adopt a subsidy scheme for the provision of telecommunications services to rural health care providers. The Joint Board recommended that the FCC require all providers of interstate telecommunications services, including in all likelihood the Company, to pay for these and other subsidy programs based on their gross revenues from the sale of telecommunications services minus payments made to other telecommunications carriers. The FCC must establish final universal service rules by May 8, 1997. The Company cannot at this time predict the level of its mandatory contribution, but the Company believes that it will likely be a significant expenditure if the FCC adopts the Joint Board recommendations. The Company anticipates that the FCC will initiate a number of additional proceedings, of its own volition and as a result of requests from CLECs and others, as a result of the Telecom Act. Such proceedings will further define and construe the Telecom Act's terms. COURT OF APPEALS DECISION Various parties, including ILECs and state PUCs, filed appeals of the FCC's August 8, 1996 order in various U.S. Courts of Appeal, and several parties petitioned the FCC and the courts to stay the effectiveness of the FCC's rules included in the FCC's order, pending a ruling on the appeals. Many of the appeals were consolidated and transferred to the U.S. Court of Appeals for the Eight Circuit. On October 15, 1996, the Eighth Circuit issued a partial stay of the FCC's rules until the full appeal on the FCC's rules could be heard. The stay was limited to two areas of the FCC's rules: (1) the pricing rules other than those dealing with commercial mobile radio service providers; and (2) the CLECs' ability to utilize a most favored nation procedure to select favorable provisions from other interconnectors' agreements. The Company believes that the stay will not have a material adverse effect on it, because the Company already has interconnection agreements in place, or expects to have such agreements in place after state PUC arbitration proceedings, under the provisions of the FCC's order and the Telecom Act which have not been stayed by the Court. The stay does not delay the implementation of the Telecom Act by the parties and by the state PUCs, but rather suspends the guidance on pricing and most favored nation procedures that the FCC sought to provide to the parties and the state PUCs. STATE REGULATION The Company expects that as it offers local exchange and other intrastate services in an increasing number of states, it will be subject to direct state PUC regulation in most if not all such states. In all states where certification as a common carrier is currently required, the Company's operating subsidiaries are certificated. In most states, the Company is required to file tariffs or price lists setting forth the terms, conditions and prices for services which are classified as intrastate. In some states, the Company's tariff can list a range of prices for particular services, and in others, such prices can be set on an individual customer basis. The Company is not subject to price cap or to rate of return regulation in any state in which it currently provides services. As noted above, states retain a significant regulatory role under the Telecom Act. The Telecom Act allows state regulatory authorities to continue to impose competitively neutral requirements designed to promote universal service, protect public safety and welfare, maintain quality of service and safeguard the rights of consumers. The Company anticipates that state PUCs will play a major role in determining 56 the specific charges for local network interconnection. In some states, those charges are being determined by generic cost proceedings and in other states they are being established through arbitration proceedings. LOCAL GOVERNMENT AUTHORIZATIONS In certain locations, the Company is required to obtain local franchises, licenses or other operating rights and street opening and construction permits to install and expand its fiber-optic networks. In some of the areas where the Company provides network services, the Company's subsidiaries pay license or franchise fees based on a percentage of gross revenues or on a per linear foot basis. There is no assurance that certain cities that do not currently impose fees will not seek to impose such fees in the future, nor is there any assurance that, following the expiration of existing franchises, fees will remain at their current levels. Under the Telecom Act, state and local governments retain the right to manage the public rights-of-way and to require fair and reasonable compensation from telecommunications providers, on a competitively neutral and nondiscriminatory basis, for use of public rights-of-way. If any of the Company's existing franchise or license agreements were terminated prior to its expiration date and the Company were forced to remove its fiber from the streets or abandon its network in place, such termination would have a material adverse effect on the Company's subsidiary in that area and could have a material adverse effect on the Company. The Company believes that the provisions of the Telecom Act barring state and local requirements that prohibit or have the effect of prohibiting any entity from providing telecommunications service should be construed to preclude any such action. However, there can be no assurance that one or more local authorities will not attempt to take such action. Nor is it clear that the Company would prevail in any judicial or regulatory proceeding to resolve such a dispute. COMPETITION As noted above, the regulatory environment in which the Company operates is changing rapidly. The passage of the Telecom Act combined with other actions by the FCC and state regulatory authorities continues to promote competition in the provision of telecommunications services. ILECS In each market served by its networks, the Company faces, and expects to continue to face, significant competition from the ILECs, which currently dominate their local telecommunications markets. The Company competes with the ILECs in its markets for local exchange services on the basis of product offerings, reliability, state-of-the-art technology, price, route diversity, ease of ordering and customer service. However, the ILECs have long-standing relationships with their customers and provide those customers with various transmission and switching services that the Company, in many cases, does not currently offer. The Company has sought, and will continue to seek, to achieve parity with the ILECs in order to become able to provide a full range of local telecommunications services. See "Regulatory Overview" for additional information concerning the regulatory environment in which the Company operates. Existing competition for private line and special access services is based primarily on quality, capacity and reliability of network facilities, customer service, response to customer needs, service features and price, and is not based on any proprietary technology. As a result of the comparatively recent installation of the Company's fiber optic networks, its dual path architectures and the state-of-the-art technology used in its networks, the Company may have cost and service quality advantages over some currently available ILEC networks. 57 OTHER COMPETITORS The Company also faces, and expects to continue to face, competition from other potential competitors in certain of the markets in which the Company offers its services. In addition to the ILECs and CAPs, potential competitors capable of offering private line and special access services include long distance carriers, cable television companies, electric utilities, microwave carriers, wireless telephone system operators and private networks built by large end-users. The Company believes that the Telecom Act as well as a recent series of completed and proposed transactions between ILECs and long distance companies and cable companies increase the likelihood that barriers to local exchange competition will be removed. The Telecom Act states that entry barriers must be lowered in the areas served by ILECs that are subsidiaries of RBOCs before such ILECs are permitted to provide in-region, interLATA services. When ILECs that are RBOC subsidiaries are permitted to provide such services, they will be in a position to offer single source service. ILECs that are not RBOC subsidiaries may offer single source service presently. In some cases, cable television companies are upgrading their networks with fiber optics and installing facilities to provide fully interactive transmission of broadband voice, video and data communications. In addition, under the Telecom Act, electric utilities may install fiber optic telecommunications cable and may facilitate provision of telecommunications services by electric utilities over those networks if granted regulatory authority to do so. Cellular and PCS providers may also be a source of competitive local telephone service. However, the Company believes these operators will be large users of CAP access services to transport their calls among their radio transmitter/receiver sites through networks that avoid the ILECs with whom they compete. The Company also competes with equipment vendors and installers, and telecommunications management companies, with respect to certain portions of its business. A continuing trend toward business combinations and alliances in the telecommunications industry may create significant new competitors to the Company. In addition, many of the Company's existing and potential competitors have financial, personnel and other resources significantly greater than those of the Company. With respect to the Company's enhanced communications service offerings, each is subject to competition. For example, there are several competitors that offer IVR services, such as Call Interactive, which the Company believes focuses its sales efforts on large volume IVR service users. Another competitor, Telemedia, which is owned by Sprint, also offers significant call volume capacity. With respect to Xpress, the Company's virtual communications center, there are numerous competitors with product offerings that include some or all of the services offered by Xpress. Similarly, the Company's Intermind offering faces competition from the services and products offered by such companies and Netscape, Marimba, Backweb and others. PURCHASING AND DISTRIBUTION With respect to the Company's fiber optic networks, which constitute the Company's most significant capital investments, the Company has entered into general purchase agreements with key equipment suppliers for fiber and fiber optic transmission equipment, with Nortel for telecommunications switches, and with other suppliers for various other components of each system. These agreements provide the basic framework under which purchase orders for these system components will be made. The specific purchases made for each network depend upon the configuration and other factors related to the network, such as the prospective customer base and location and the services to be offered over the network. Once these decisions are made, purchase orders for the appropriate fiber and selected equipment types are placed under the general purchase agreements. 58 PROPERTIES Neither the Company nor any of its subsidiaries owns any real property. The Company leases space for, among other things, offices, equipment rooms, collocation sites and general storage space. EMPLOYEES As of December 31, 1996, the Company employed 568 people, including full-time and part-time employees. The Company considers its employee relations to be good. None of the employees of the Company is covered by a collective bargaining agreement. TRADEMARKS AND TRADE NAMES The Company uses the name "NEXTLINK" as its primary business name. In July 1995, the Company filed for federal trademark protection of this name. In addition, filings have been made to register the distinctive floating X and related marks as protected trademarks under federal law. These filings all are pending. The Company has no assurance that they will be granted. LEGAL PROCEEDINGS The Company is not currently the party to any legal proceedings, other than regulatory and other proceedings that are in the normal course of its business. 59 MANAGEMENT The following table sets forth the names, ages and positions of the executive officers and members of the Company's board of directors. Their respective backgrounds are described following the table.
NAME AGE POSITION - ----------------------------------------------------- --- ----------------------------------------------------- Craig O. McCaw....................................... 47 Chief Executive Officer and Director James F. Voelker(1).................................. 46 President and Director Jan Loichle.......................................... 48 Vice President, Chief of Local Exchange Operations Kathleen H. Iskra.................................... 40 Vice President, Chief Financial Officer and Treasurer R. Bruce Easter, Jr.................................. 39 Vice President, General Counsel and Secretary Charles P. Daniels................................... 40 Vice President, Chief Marketing Officer Gordon Sileo......................................... 46 Vice President, Chief Information Officer J. Scott Bonney...................................... 40 Vice President, Regulatory and External Affairs Dennis Weibling(2)................................... 45 Director Scot Jarvis(1)....................................... 35 Director C. James Judson(2)................................... 52 Director William A. Hoglund(1)................................ 42 Director
- -------------------------- (1) Member of the Compensation Committee (2) Member of the Audit Committee The following persons are the presidents of the Company's operating subsidiaries:
NAME AGE POSITION - ----------------------------------------------------- --- ----------------------------------------------------- Hugh C. Cathey....................................... 46 President of NEXTLINK Ohio, L.L.C. Greg Green........................................... 33 President of NEXTLINK Washington, L.L.C. Don Hillenmeyer...................................... 50 President of NEXTLINK Tennessee, L.L.C. Robert Kingery....................................... 42 President of NEXTLINK Interactive, L.L.C. Dwayne Nielson....................................... 41 President of NEXTLINK Utah, L.L.C. Gary Rawding......................................... 45 President of NEXTLINK Pennsylvania, L.P. Donald W. Sessamen................................... 64 President of NEXTLINK California, L.L.C.
All of the officers identified above serve at the discretion of the Board of Directors of the Company. There are no family relationships between any person identified above. The following are brief biographies of persons identified above. CRAIG O. MCCAW has been Chief Executive Officer of NEXTLINK since September 1994. Mr. McCaw is also Chairman and Chief Executive Officer of Eagle River, a company formed and owned by Mr. McCaw to make strategic investments in telecommunications ventures. Mr. McCaw was the founder, chairman and chief executive officer of McCaw Cellular Communications, Inc. ("McCaw Cellular"), the nation's leading provider of wireless communications services, until the company was sold to AT&T in August 1994. Prior to entering the cellular telephone business in 1973, Mr. McCaw took over daily operation of a small cable television operation in Centralia, Washington, that he and his three brothers owned. Under his leadership, this one-system operation serving 4,000 subscribers eventually grew to be the nation's 20th largest cable operator serving 450,000 subscribers. In 1974, he expanded the cable company's services by entering the paging and conventional mobile telephone industries and eventually became the fifth largest paging operator in the country, serving approximately 320,000 subscribers 60 in 13 states. In 1981, Mr. McCaw saw the revolutionary potential of wireless communications and committed the company to developing broad-based cellular telephone services. Later, McCaw Cellular became the nation's largest cellular telephone operator, with cellular system positions in more than 100 U.S. cities, representing more than 100 million potential customers. The company also had interests in wireless data transmissions, personal communications services, air-to-ground phone systems and satellite communications at the time of its sale to AT&T. Mr. McCaw is one of the two principal owners of Teledesic Corporation, which in March 1994 announced plans for a worldwide satellite-based telecommunications system. Mr. McCaw is indirectly a significant stockholder, a director and Chairman of the Operating Committee of Nextel Communications, Inc., a provider of wireless telecommunications services. JAMES F. VOELKER has been the President of NEXTLINK since April 1995 and is responsible for developing the company vision and guiding overall operations. He is recognized as one of the early entrepreneurs in the business of building and delivering competitive local exchange service. Mr. Voelker's career in telecommunications spans almost two decades and includes experience in very different segments of the industry in a variety of executive positions. From 1981 to 1984 he served as vice president of sales, marketing and customer service for Lexitel Corporation, the forerunner of Allnet Communications. Mr. Voelker co-founded Digital Signal Inc. and served as chief operating officer and chief executive officer from 1985 through the company's sale to SP Telecom in 1990. Digital Signal operated a nation wide fiber optic network supplying capacity, engineering, provisioning and operational support to over one hundred interexchange carriers. In the CAP arena, Mr. Voelker became vice chairman of City Signal Inc. in 1992, which constructed and operated networks in six markets. Subsequently, he served as its chief executive officer after the company merged with its sister company Teledial America to form U S Signal. Based in Grand Rapids, Michigan, U S Signal was one of the first fully certified CLECs in the country. Mr. Voelker has served as vice chairman of ALTS, the industry Association of Local Telephone Service providers and as a director of Phoenix Network Inc., a publicly held long distance company. Mr. Voelker is also a member of the Compensation Committee of the Board of Directors. JAN LOICHLE has been Vice President, Chief of Local Exchange Operations of NEXTLINK since October 1996. Prior to that, Ms. Loichle was the President of NEXTLINK Solutions (the virtual communications center) from July 1995. Prior to joining NEXTLINK, Ms. Loichle was Executive Vice President at U.S. Signal in Detroit and Grand Rapids, Michigan from April 1993 to July 1995. At U.S. Signal Ms. Loichle led the development of an enhanced service platform (Magic Number) from concept through production system and implementation. From 1990 to 1993, Ms. Loichle was Assistant Vice President of Finance for SP Telecom in San Francisco. Prior to that, Ms. Loichle was Vice President of Financial Operations for Lexitel/Allnet/ALC in Birmingham, Michigan from December 1980 to October 1989. KATHLEEN H. ISKRA has been Vice President, Chief Financial Officer and Treasurer of NEXTLINK since January 1996. Prior to that, she was President and Chief Executive Officer of Horizon Air, a wholly owned subsidiary of Alaska Air Group. Prior to her appointment at Horizon Air, Ms. Iskra served as staff vice president of finance and controller of Alaska Airlines and Alaska Air Group. Ms. Iskra's service with Alaska began in 1987, when she was appointed Controller. Prior to joining Alaska, she was an audit manager with Arthur Andersen. R. BRUCE EASTER, JR. has been Vice President, General Counsel and Secretary of NEXTLINK since January 1995. From 1986 to December 1994, Mr. Easter was an associate and then partner in the law firm of Davis Wright Tremaine in Seattle, Washington, where he focused on communications law and media matters. Prior to joining Davis Wright Tremaine, Mr. Easter was a legal assistant at Home Box Office, Inc. from 1980 through 1986. 61 CHARLES P. DANIELS has been Vice President, Chief Marketing Officer of NEXTLINK since November 1995. Mr. Daniels is responsible for Marketing, Market Development, Product Development, and Engineering. From 1992 to 1995, Mr. Daniels worked for MCI where he was the founder and Program Manager of the network MCI Developers Lab. Mr. Daniels was also a founding member of MCI's Advanced Technology Group. Prior to joining MCI, Mr. Daniels worked for Manufacturers Hanover Trust from 1989 to 1992 as Vice President/Strategic Technology & Research, where he was responsible for evaluating and implementing new technologies that either reduced costs or generated new revenue. GORDON SILEO has been Vice President, Chief Information Officer of NEXTLINK since August 1995. Mr. Sileo is responsible for designing and implementing the NEXTLINK information technology, corporate communications and infrastructure. Prior to joining NEXTLINK, Mr. Sileo was Vice President of Information Services for US Signal from June 1994 to July 1995. From September 1991 to July 1993, Mr. Sileo was Vice President of Management Information Services for SP Telecom. J. SCOTT BONNEY has been Vice President, Regulatory and External Affairs for NEXTLINK since November 1994. He is responsible for implementing NEXTLINK's regulatory and industry affairs initiatives. Prior to joining NEXTLINK, from November 1992 to November 1994, Mr. Bonney was Vice President of Regulatory and External Affairs for Ameritech in Illinois, where he was responsible for implementing Ameritech's competitive network unbundling plan. Prior to joining Ameritech, from 1988 through November 1992, Mr. Bonney served as Director of Regulatory Affairs for Teleport Communications Group, one of the original competitors for local phone service. DENNIS WEIBLING has been a director of the Company since January 1997 and had been Executive Vice President of NEXTLINK since September 1994. Mr. Weibling is also President of Eagle River, Inc., since October 1993. Mr. Weibling is a director and member of Nextel Communications, Inc.'s board, operations, audit and compensation committees. Nextel is a leading provider of integrated wireless communications services for teams of mobile workers. Mr. Weibling serves on the board and executive committee of Teledesic Corporation, a satellite telecommunications company backed by Mr. McCaw and Microsoft founder Mr. William Gates. Mr. Weibling is a director of Cable Plus, one of the leading providers of private cable television and telephony service to residential apartment complexes. A licensed certified public accountant in Washington, Mr. Weibling is a member of the American Society of Certified Public Accountants and the Washington Society of Certified Public Accountants. In addition, Mr. Weibling is a licensed attorney in Ohio and a member of the American Bar Association and Ohio State Bar Association. Mr. Weibling is also a member of the Audit Committee of the Board of Directors. SCOT JARVIS has been a director of the Company since January 1997 and had been Executive Vice President of NEXTLINK since September 1994, was a Vice President of Eagle River, Inc. from October 1994 through April 1996. Mr. Jarvis is the co-founder and since March 1997 has been a member of Cedar Grove Partners, LLC. Prior to that, Mr. Jarvis was the acting President of the Company from September 1994 to April 1995. Prior to joining Eagle River, Inc., Mr. Jarvis served as Vice President of McCaw Development Corporation from 1993 to 1994 and of McCaw Cellular from 1985 through 1994. During his tenure at McCaw Cellular, Mr. Jarvis served in the positions of General Manager from 1990 to 1993, Vice President of Acquisitions and Development from 1988 to 1990 and Assistant Vice President from 1985 to 1988. Mr. Jarvis also recently served on the Board of Directors or executive committees of: NEXTEL Communications, Inc., PriCellular Corporation, Horizon Cellular Group, Los Angeles Cellular Telephone Company, Cellular 2000 Partnership, Cybertel Cellular Telephone Company (St. Louis), Northwest Cellular Partnership, and Movitel del Noroeste (Mexico Region). Mr. Jarvis has also served as the President of the Iberia Cellular Telephone Company from 1991 to 1994. Mr. Jarvis is also a member of the Compensation Committee of the Board of Directors. C. JAMES JUDSON has been a director of the Company since January 1997 and had been Executive Vice President of NEXTLINK since February 1995. Mr. Judson is also Vice President and General Counsel of Eagle River, Inc. since January 1995. Prior to joining Eagle River, Inc., from January 1, 1975 62 through January 1995, Mr. Judson was a partner in the Seattle law firm of Davis Wright Tremaine where he focused his practice primarily in the areas of corporation law and taxation. Mr. Judson is also a member of the Audit Committee of the Board of Directors. WILLIAM A. HOGLUND has been a director of the Company since January 1997 and had been Executive Vice President of NEXTLINK since February 1996. Mr. Hoglund is also Vice President and Chief Financial Officer of Eagle River, Inc. since January 1996. Prior to joining Eagle River, Inc., Mr. Hoglund was a Managing Director of J.P. Morgan & Co. in its investment banking group. Mr. Hoglund was employed by J.P. Morgan & Co. from 1977 through 1995, focusing for the past nine years on clients in the telecommunications, cable and media industries. Mr. Hoglund is also a member of the Compensation Committee of the Board of Directors. The following individuals are the senior management of the Company's subsidiaries. HUGH C. CATHEY has been the President of NEXTLINK Ohio since August 1996. Prior to joining NEXTLINK, Mr. Cathey had nearly 20 years of experience in the telecommunications industry. From 1993 to 1996, Mr. Cathey was president and chief executive officer of Digital Network, Inc., a publicly traded, facilities-based long distance company based in Dallas, Texas. From 1989 to 1993, Mr. Cathey served as president and chief executive officer of United Telemanagement, Inc. Prior to that, Mr. Cathey held sales and product management positions of increasing responsibility with AT&T, culminating as the senior executive of a business unit of AT&T with annual revenues of approximately $100 million. During Mr. Cathey's tenure at United Telemanagement, Inc., that company filed a petition under the Federal bankruptcy laws. GREG GREEN has been the President of NEXTLINK Washington since March 1995. Prior to that, from 1985 through March 1995, Mr. Green was the founder and former President of Tel-West Communications, Inc. ("Tel-West") until the Company's acquisition of certain assets of that company. At Tel-West, Mr. Green provided overall management of business development, sales and customer service. Mr. Green successfully negotiated with the Washington State Utilities and Transportation Commission to become the second competitive local exchange carrier in Washington State's history and the first in the city of Spokane. DON HILLENMEYER has been the President of NEXTLINK Tennessee since March 1995. Prior to joining NEXTLINK in March of 1995, Mr. Hillenmeyer was president of MCMG, Inc., a Nashville-based wireless communications management consulting and operations firm specializing in running Rural Service Areas for independent cellular telephone owners. Before founding MCMG, Inc., Mr. Hillenmeyer held various senior management positions at McCaw Cellular and was responsible for 13 southern states from August 1986 to February 1990. ROBERT KINGERY has been the President of NEXTLINK Interactive (the interactive voice response provider) since joining the Company in August 1995. Prior to joining NEXTLINK, Mr. Kingery was the President and Chief Executive Officer of Sound Response Corporation, an interactive voice services business he co-founded in 1991. DWAYNE NIELSON has been President of NEXTLINK Utah since February 1996. Prior to joining NEXTLINK, Mr. Nielson was Assistant Vice President, Consumer and Small Business Market, at Sprint Corporation from October 1994 to February 1996. Prior to that, from August 1985 through October 1994, Mr. Nielson held a variety of sales and marketing positions at Sprint and United Telephone. GARY RAWDING has been President of NEXTLINK Pennsylvania since September 1994. Prior to founding Penns Light Communications, Inc., certain assets of which were acquired by the Company in September 1994, he served as Vice President of Sales & Marketing at Eastern TeleLogic Corporation from 1989 until 1993. Prior to joining Eastern TeleLogic, Mr. Rawding held various positions with Bell Atlantic Corporation. 63 DONALD W. SESSAMEN has been President of NEXTLINK California since November 1996. Prior to that, Mr. Sessamen acted as a consultant to NEXTLINK. Prior to acting as a consultant to the Company, Mr. Sessamen joined Brooks Fiber California in 1994 as president, after the company acquired Phoenix Fiberlink. At Brooks Fiber California, Mr. Sessamen completed the installation of the San Jose system and managed the entry into switched services in the Sacramento market. From 1991 to 1994, Mr. Sessamen was executive vice president of operations, engineering and MIS at SP Telecom, a fiber optic systems construction and wholesale transmission company using Southern Pacific Railroad rights-of-way east of the Mississippi River. At SP Telecom, Mr. Sessamen led SP Telecom's entry into switch-based products utilizing the Northern Telecom DMS 250 Super Node, introducing innovative switch-based products. SUMMARY COMPENSATION TABLE The following table sets forth, for the fiscal year ended December 31, 1996, individual compensation information for the Chief Executive Officer of the Company and each of the four other most highly compensated executive officers of the Company who were serving as executive officers at December 31, 1996 (the "Named Executive Officers").
ANNUAL COMPENSATION ------------------------------------------------------------------------------------------------ OTHER SECURITIES ALL OTHER NAME AND PRINCIPAL ANNUAL UNDERLYING COMPENSATION POSITION FISCAL YEAR SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS(#)(1) ($)(2) - ------------------------------ ------------- ----------- ----------- ------------------ -------------- ------------------- McCaw, Craig O................ 1995 -0- -0- -0- -0- -0- CEO 1996 -0- -0- -0- -0- -0- Voelker, James J.............. 1995 89,405 87,000 11,542(3) 1,000,000 -0- President 1996 160,609 -0- -0- 15,000 6,523 Kingery, Robert............... 1995 65,589 88,082 -0- 98,347(4) -0- President of NEXTLINK 1996 225,000 30,000 -0- 5,000 5,625 Interactive Iskra, Kathleen H............. 1995 -0- -0- -0- -0- -0- Vice President, Chief 1996 121,233 65,250 -0- 153,500 1,575 Financial Officer and Treasurer Daniels, Charles P............ 1995 14,423 25,000 -0- 100,000 -0- Vice President, Chief 1996 100,000 84,750 -0- 7,500 2,512 Marketing Officer
- -------------------------- (1) Represents Class B membership units granted in connection with the Company's equity option plan during 1995 and 1996, respectively. (2) Represents contributions made by the Company on behalf of the executive officer under the Company's 401(k) Plan. (3) Of this amount, $11,238 was allocated to temporary housing expenses. (4) This represents the number of options to acquire Class B units granted in connection with the Recapitalization of the Company and its subsidiaries. Prior to the Recapitalization, this executive held options to acquire membership interests in Nextlink Interactive. 64 OPTION GRANTS IN LAST FISCAL YEAR(1)
POTENTIAL REALIZABLE VALUE INDIVIDUAL GRANTS AT ASSUMED ANNUAL RATES ----------------------- OF SHARES PRICE NUMBER OF % OF TOTAL OPTIONS APPRECIATION FOR OPTION TERM(2) SECURITIES GRANTED TO EXERCISE OR ----------------------------------------- NAME AND PRINCIPAL UNDERLYING OPTIONS EMPLOYEES IN FISCAL BASE PRICE EXPIRATION 5% 10% POSITION GRANTED(#) YEAR(%) ($/SH) DATE(3) ($) ($) - ----------------------- ------------------- ----------------------- --------------- ------------------- --------- --------- McCaw, Craig O., -0- -0- -0- N/A Voelker, James F. 15,000 1.79 .44 August 19, 2011 600 46,200 Kingery, Robert 5,000 0.60 .44 August 19, 2011 200 15,400 Iskra, Kathleen H. 75,000 8.96 .01 January 2, 2011 -0- 122,250 75,000 8.96 .44 January 2, 2011 3,000 231,000 3,500 .42 .44 August 19, 2011 140 10,780 Daniels, Charles P. 7,500 .90 .44 August 19, 2011 300 23,100
- -------------------------- (1) Effective on January 31, 1997, NEXTLINK Communications, L.L.C. was merged with and into NEXTLINK Communications, Inc. The information presented in this table reflects the grant of options pursuant to the Amended and Restated Equity Option Plan of NEXTLINK Communications, L.L.C. (the "EOP"). The Company has adopted a Stock Option Plan and is currently preparing documentation to cause the options to be options to purchase the Company's Class A Common Stock. See Note 12 to the Consolidated Financial Statements. (2) The value of the Company's Class B Units is determined in accordance with the EOP. Although Class B Units, when exercised, would constitute an ownership interest in the Company, the interest is limited to the appreciation in value of the Company, that is the distributable profits interests, if any, of the Company. Pursuant to the EOP, the Administrative Committee, which is comprised of two representatives from Eagle River and the President of the Company, determines the appreciation interest value of the options. During 1995, the members of the Administrative Committee were Messrs. Weibling, Jarvis and Voelker. During the period in which theses options were granted, the EOP provided that the valuation would be based upon financial data dated as of the close of the most recent tax year. Because of the small amount of capital invested at December 31, 1994, and because there had been no appreciation in the value of Class A Units at December 31, 1994, there was no fair market value ascribed to the unit options in excess of the $0.01 exercise price at the time of their grants during 1994 and 1995. Further, and consistent with the EOP, no separate determination of value was made for the grants until the end of 1995. The appreciation value was determined by the Administrative Committee by applying a rate of return to the capital invested based on expected rates of return for similar investments in comparable telecommunications businesses and accounting for payment of the preferred return described above and the return of capital to the Class A unit holders, and dividing that amount by the total Class A Units issued at December 31, 1996 and 1995. Based upon this valuation process, the appreciation interest per unit at years ended 1996 and 1995 for Class B Units was determined to be $3.50 and $0.44, respectively, and for Class A Units was determined to be $4.36 and $1.45, respectively. A compensation expense was then booked accordingly for the Class B Units to reflect the difference between the appreciation interest value and the exercise price at year end for the vested portion of the options granted during 1995. Commencing July 1, 1995, the EOP was revised to provide that the Administrative Committee could revalue the Company based on such financial data as the Administrative Committee deemed appropriate. The dollar amounts under the 5% and 10% columns are the result of calculations required by the rules of the Securities and Exchange Commission ("SEC") and, therefore, are not intended to forecast possible future appreciation, if any, of the Company's Class B Units. The amounts shown reflect the difference between (a) the appreciation of each unit at the SEC's assumed annual rates of appreciation through the fifteenth anniversary of the date of the grant based on the per unit valuation at the time of the grant and (b) the sum of (i) payment of the exercise price, (ii) the return of capital to the Class A unit holders, and (iii) the payment of a preferred return to the Class A unit holders. Pursuant to the Company's limited liability company agreement, the Class A unit holders are entitled to a preferred return on their capital contributions equal to the prime rate plus 2%. The Company utilized a prime rate of 8.25% in calculating the above returns under the SEC's assumed rates of return. (3) Options granted during 1996 vest either 20% at employment and 20% at the end of each subsequent year or 25% at the end of each of the next four years after grant. 65 AGGREGATED FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS DECEMBER 31, 1996 AT DECEMBER 31, 1996 (1) ---------------------------- ----------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---------------------------------------------------- ------------ -------------- ------------- -------------- McCaw, Craig O...................................... -0- -0- -0- -0- Voelker, James F.................................... 400,000 615,000 $ 1,400,000 $ 2,152,500 Kingery, Robert..................................... 39,339 64,008 137,687 224,028 Iskra, Kathleen H................................... 60,000 93,500 210,000 327,250 Daniels, Charles P.................................. 40,000 67,500 140,000 236,250
- -------------------------- (1) Reflects the difference between the exercise price and a valuation of $3.50 per unit. Because there is no public market for the Company's membership units, pursuant to the Equity Option Plan, the Plan's Administrative Committee determines the value of the Class B options at least as often as the end of each fiscal year. The valuation set forth above reflects the Administrative Committee's determination of per unit valuation at December 31, 1996. EMPLOYMENT AGREEMENTS NEXTLINK Pennsylvania, L.P., an operating subsidiary of the Company, has entered into an employment agreement with Gary A. Rawding, its President, for a term expiring on September 15, 1997, subject to automatic month-to-month extensions unless either party gives 30 days notice not to renew. The agreement provides for a base salary of $110,000, with a total bonus of $50,000 for the five-quarter period ended December 31, 1995 based on the attainment of goals and milestones outlined in the agreement and $10,000 per quarter thereafter. If NEXTLINK Pennsylvania, L.P. fails to renew the agreement or if employment is terminated due to the cessation of its business, NEXTLINK Pennsylvania, L.P. must pay Mr. Rawding his then-current monthly salary until one year after termination. The agreement also contains non-compete, non-solicitation and confidentiality provisions. NEXTLINK Interactive, L.L.C. ("NEXTLINK Interactive"), an operating subsidiary of the Company, has entered into an employment agreement with Robert Kingery, its President, for a term expiring on August 31, 1998, subject to earlier termination. The agreement provides for a base salary of $225,000, with a bonus based on the attainment of goals and milestones to be agreed to by NEXTLINK Interactive and Mr. Kingery. If NEXTLINK Interactive terminates Mr. Kingery's employment on 30 days notice, Mr. Kingery is entitled to receive a bonus as if he had been employed for each year of the initial term of the agreement. The agreement also contains non-compete, non-solicitation and confidentiality provisions. NEXTLINK Washington, L.L.C. ("NEXTLINK Washington"), an operating subsidiary of the Company, has entered into an employment agreement with Gregory Green as its President for a term expiring March 28, 1998, subject to earlier termination. The agreement provides for a base salary of $100,000 with a bonus of $30,000 during the first year, $35,000 during the second year and $40,000 during the third year, in each case upon the achievement of objectives. The agreement also contains non-compete, non-solicitation and confidentiality provisions. NEXTLINK COMMUNICATIONS, L.L.C. EQUITY OPTION PLAN The Company adopted an Amended and Restated Equity Option Plan (the "EOP"). Pursuant to the EOP, the Company could grant any employee of the Company or its Affiliates (as defined in the EOP) the right to acquire Class B membership interests ("Equity Interests") in the Company (an "Option"). The 66 EOP has been superseded by the NEXTLINK Communications, Inc. Stock Option Plan, described below, which was adopted in connection with the incorporation of the Company on January 31, 1997. The Company anticipates granting replacement options under the NEXTLINK Communications, Inc. Stock Option Plan to the holders of options granted under the EOP. The Option Plan is administered by a committee comprised of three members (the "Administrative Committee"). Two of the members were appointed by Eagle River, the primary member of the Company, and the third was the President of the Company. The Administrative Committee had sole and unfettered discretionary authority to administer the EOP and to alter, modify, change or terminate the EOP at any time. An Option granted under the EOP must be evidenced by a written agreement between the Company and the employee. Such agreement set forth the quantity of Equity Interests with respect to which the Option is granted, the Option price, the date the Option was granted, and such other terms, conditions, and restrictions as the Company deemed advisable and which were not inconsistent with the terms of the EOP. The holder of an Option (an "Option Holder") did not acquire any voting or other rights in the Company or in management of the Company upon the grant of an Option. In addition, the holder of an Equity Interest obtained upon exercise of an Option would not have voting or other management rights in the Company. An Option could have been exercised, in whole or in part, at any time after December 31, 1996 and within a 15-year period following the date the Option was granted, subject to ratable vesting of the Option over four Years of Service (as defined in the EOP) and provisions in the EOP relating to early termination of the Option in the case of termination of employment. Any portion of an Option that was not exercised by the end of the 15-year term would terminate unless extended by the Company. Under the EOP, the Company had the right to purchase an Option from an Option Holder (or his or her trustee, personal representative, guardian, executor or administrator) (collectively the "Transferee") at a purchase price equal to the then Fair Market Value (as defined in the EOP) of the Option upon the occurrence of (a) the bankruptcy of the Transferee (b) an adjudication by a court that the Transferee is insane or incompetent; (c) any general assignment by the Transferee for the benefit of his creditors; (d) the death of the Transferee; (e) the termination, for any reason, of the Transferee's employment with the Company or an Affiliate (as defined in the EOP); or (f) any other event which would cause an interest in the Company to be sold, assigned, awarded, confirmed, or otherwise transferred, for consideration or otherwise, to any person, whether voluntarily, involuntarily or by operation of law. NEXTLINK COMMUNICATIONS, INC. STOCK OPTION PLAN The Company established the NEXTLINK Communications, Inc. Stock Option Plan (the "Plan") to replace the EOP and to provide a performance incentive for certain officers, employees, and individuals who provide services to the Company, and to enable these individuals to acquire or increase proprietary interest in the success of the Company. Pursuant to the terms of the Plan, the Company's Board of Directors (the "Board") has reserved the right to terminate, modify, or amend the Plan subject to the following restriction: The Board must obtain shareholder approval for any amendment that (1) increases the number of shares of Class A Common Stock available under the Plan, (2) changes the Plan's eligibility provisions, or (3) requires shareholder approval under applicable law. The Plan Administrator may modify or amend outstanding options granted under the Plan, provided modification or amendment of an outstanding option shall not, without the consent of the optionee, impair or diminish any of the optionee's rights or any of the obligations of the Company. Except as otherwise provided in the Plan, no outstanding option shall be terminated without the consent of the optionee. Unless the optionee agrees otherwise, any change or adjustment to an outstanding incentive stock option shall be made so as not to constitute a "modification," as defined in Section 424(h) of the 67 Internal Revenue Code of 1986, as amended (the "Code"), and so as not to cause the option to cease qualifying as an incentive stock option, as defined in Code Section 422(b). The "Plan Administrator" is the Compensation Committee of the Board, and its members are Messrs. Voelker, Jarvis and Hoglund. The Board may from time to time remove members from, or add members to, the Compensation Committee. Vacancies on the committee, however caused, may be filled by the Board. The Plan Administrator acts as the manager of the Plan, possessing discretionary authority to determine all matters relating to the options to be granted. The Plan Administrator has the sole authority to interpret the provisions of the Plan, any option issued under the Plan, and any rule or regulation applicable to the Plan. The Plan Administrator's interpretation is conclusive and binding on all interested parties, so long as the interpretation and construction with respect to incentive stock options corresponds to the requirements of Code Section 422, the regulations thereunder, and any amendments thereto. The stock available under the stock options granted under the Plan are shares of the Company's authorized but unissued Class A Common Stock, par value $.01 per share ("Class A Common Stock"). The total number of shares that may be issued pursuant to options under the Plan, including both incentive and non-statutory options, shall not exceed an aggregate of 10,000,000 shares. Incentive stock options may be granted only to officers and other employees of the Company (or a parent or subsidiary corporation of the Company), including Board members who are also employees of the Company (or employees of a parent or subsidiary corporation of the Company). Non-statutory options may be granted to both employees and non-employees of the Company (or a corporate or non-corporate parent or subsidiary), including non-employee Board members. Certain limitations apply to 10% shareholders. Within the parameters established by the Plan, the Plan Administrator has the sole discretion to determine the options to be granted under the Plan, including selection of the individuals receiving option grants, the number of shares available under each option, the exercise price, and all other terms and conditions of the options. Separate option grants under the Plan need not be identical in any respect, even when made simultaneously. The Plan Administrator shall issue each optionee an individual "option agreement," which describes the relevant terms of the option. The purchase price per share of Class A Common Stock under each incentive stock option shall be not less than the fair market value of the Class A Common Stock on the date the option is granted, except where the option is a substituted or assumed option from another plan, and the exercise price relates to the original exercise price, in accordance with applicable provisions of the Code. Certain additional limitations apply to 10% shareholders. The purchase price per share of Class A Common Stock under each non-statutory stock option shall be not less than 85% of the fair market value of the Class A Common Stock on the date the option is granted, except where the option is a substituted or assumed option from another plan, and the exercise price relates to the option's original exercise price. The aggregate shares of Class A Common Stock available to an optionee through incentive stock options, which are exercisable for the first time during a calendar year, shall not exceed $100,000 in value. For purposes of this limit, the Class A Common Stock shall be valued at its fair market value as of the option grant date. To the extent an incentive stock option exceeds this limitation, it shall be considered a non-statutory stock option. An optionee must exercise his or her option, if at all, before it expires. Each option shall expire on the date specified in the individual option agreement, which date shall not be later than the tenth anniversary of the date on which the option was granted with respect to incentive stock options, the 15th anniversary with respect to non-statutory options and the fifth anniversary in the case of a 10% stockholder. 68 Options granted under the Plan and the rights and privileges conferred thereby may not be transferred, assigned, pledged, or hypothecated in any manner (whether by operation of law or otherwise), other than by will or applicable laws of descent and distribution; provided that non- statutory stock options may be transferred to a revocable trust established by the optionee for his or her descendants, to an immediate family member, or to a partnership in which only immediate family members or such estate-planning trusts are partners. Options shall not be subject to execution, attachment, or similar process. Upon any attempt to transfer, assign, pledge, hypothecate, or otherwise dispose of any option under the Plan, or any rights or privilege conferred by the Plan, contrary to the provisions of the Plan, or upon the sale or levy or any attachment or similar process upon the rights and privileges conferred by the Plan, such option shall thereupon terminate and become void. No person may create a lien on any funds, securities, or other property held under the Plan. Options granted under the Plan shall generally expire on the earlier of the following two events: (i) the date of expiration expressed in the individual option agreement, or (ii) three months after termination of employment (unless the termination is for cause, in which case the option shall immediately expire). Special rules apply in the event of an optionee's death or disability. In addition, options shall terminate if the shareholders of the Company receive cash, stock, or other property in exchange for or in connection with their shares of Class A Common Stock as a result of a merger, consolidation, acquisition of property or stock, separation, reorganization, or liquidation of the Company (other than a mere reincorporation, creation of a holding company, or merger in which the Company's shareholders receive a corresponding number of shares of Class A Common Stock in the survivor corporation). Prior to such an event, the optionee shall have the right to exercise his or her option, in whole or in part, to the extent vested. 69 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS From the inception of NEXTLINK through the end of 1995, NEXTLINK's capital and operational funding was provided on an as needed basis, primarily by Eagle River. During this period, under NEXTLINK's limited liability company agreement, one equity unit was issued for each dollar in cash or assets contributed to NEXTLINK. The equity ownership units issued from time to time during the course of this period thus reflect this one dollar to one equity unit equivalency. As of December 31, 1996, Eagle River had contributed approximately $53.9 million to NEXTLINK and had received approximately 53.9 million Class A Units in NEXTLINK Communications, L.L.C., which were converted to approximately 72.3 million shares of Class B Common Stock of the Company on January 31, 1997, including certain issuances described below. On September 15, 1994, NEXTLINK lent $100,000 to Gary A. Rawding, President of NEXTLINK Pennsylvania, L.P. This loan is unsecured and is due September 15, 2004, or upon the sale of more than one-half of his interest in NEXTLINK Pennsylvania, L.P. This loan bears interest at the prime rate and requires annual interest payments on September 15. On August 18, 1995, NEXTLINK lent $93,141 to James F. Voelker, NEXTLINK's President, in connection with his relocation to Washington. This loan bears interest at the prime rate and principal and interest are due on the earlier of December 31, 1998 or the sale of Mr. Voelker's former residence. On September 1, 1995, NEXTLINK agreed to pay $3.0 million to BWP, Inc. in connection with the acquisition of certain assets of Sound Response Corporation. A payment of $1.5 million was made on September 1, 1996 and an additional payment of $1.5 million is due September 1, 1997. In addition, NEXTLINK issued approximately 4.4 million Class A Units in NEXTLINK Communications, L.L.C., which were converted to approximately 5.9 million shares of Class B Common Stock of the Company on January 31, 1997, to BWP, Inc. in connection with this asset acquisition. On January 31, 1995, Eagle River lent NEXTLINK $3.3 million in connection with the acquisition of certain assets from City Signal, Inc. The note was unsecured and bore interest at the prime rate plus 2%. The note plus accrued interest was repaid with a portion of the net proceeds of NEXTLINK's offering of Senior Notes. NEXTLINK's principal equity owner, Mr. Craig O. McCaw, through Eagle River made advances to NEXTLINK primarily to fund NEXTLINK's capital expenditures (excluding acquisitions) and operating losses between January 1996 and April 1996. These advances of approximately $32.2 million, including accrued interest, were repaid using a portion of the net proceeds of the offering of the Senior Notes. During 1995, Eagle River lent NEXTLINK $7.3 million in connection with asset acquisitions and operating expenses. The note bore interest at the prime rate plus 2% and, on December 1, 1995, was converted to equity and approximately 7.3 million Class A Units in NEXTLINK Communications, L.L.C., which, along with the other Units owned by Eagle River, were converted to shares of Class B Common Stock of the Company on January 31, 1997. During 1995, NEXTLINK incurred expenses for administrative services provided by U.S. Signal, a minority member of NEXTLINK, pursuant to temporary agreements related to the acquisitions of certain assets from City Signal, Inc. NEXTLINK recorded expenses in connection with fees to this affiliate of $1.5 million in 1995. Each share of the Company's Class B Common Stock is convertible at the option of the holder thereof, at any time, into one share of Class A Common Stock. The Company and the current holders of the Company's Class B Common Stock and the holders of options to purchase Class B Common Stock will enter into a Registration Rights Agreement (the "Company Registration Rights Agreement") as of the consummation of the Incorporation, which, among other things, will provide that at any time after a Qualifying IPO (as defined) and upon the request of holders of at least 4% of the outstanding Class B Common Stock that is subject to the Company Registration Rights Agreement, the Company will 70 register under the Securities Act any of the shares of Class A Common Stock currently held by, or to be acquired in the future by, such holders, for sale in accordance with such holders' intended method of disposition thereof (a "Demand Registration"). The holders of the Class B Common Stock will have the right to request two Demand Registrations. The holders of the Class B Common Stock also will have the right, at any time after the Qualifying IPO, to include the shares of Class A Common Stock held by them in certain other registrations of common equity securities of the Company initiated by the Company on its own behalf or on behalf of its shareholders. The holders' rights under the Company Registration Rights Agreement are not transferable. In addition, the holders of Class B Common Stock and options to purchase Class B Common Stock have agreed to pay their pro rata share of all costs and expenses incurred in connection with each registration of their respective shares of Class A Common Stock. For purposes of the Company Registration Rights Agreement, "Qualifying IPO" means a public offering of Class A Common Stock that results in net proceeds to the Company of not less than $75,000,000 or such lesser amount as the Board of Directors of the Company may, in their discretion, determine to be adequate to commence the rights of the holders under the Company Registration Rights Agreement. 71 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT THE COMPANY. The following table sets forth certain information as of January 31, 1997, with respect to the beneficial ownership of NEXTLINK's capital stock by (i) each person known by the Company to own beneficially 5% or more of the outstanding shares of capital stock, (ii) the Company's Board of Directors, (iii) the Company's Chief Executive Officer and each of the Named Executive Officers and (iv) all directors and executive officers as a group. CLASS A COMMON STOCK
AMOUNT AND NATURE OF PERCENTAGE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP (%) - ------------------------------------------------------------------ ---------------------- --------------------- James F. Voelker.................................................. 400,000(1) 21.66 155 108th Avenue, N.E., Suite 810 Bellevue, WA 98004 Don Hillenmeyer................................................... 136,943(1) 7.42 105 Molloy Street Suite 300 Nashville, TN 37201 Greg Breetz....................................................... 136,943(1) 7.42 105 Molloy Street Suite 300 Nashville, TN 37201 Russ Land......................................................... 136,943(1) 7.42 105 Molloy Street Suite 300 Nashville, TN 37201 Craig O. McCaw.................................................... 0 -- Dennis Weibling................................................... 0 -- Scot Jarvis....................................................... 0 -- C. James Judson................................................... 0 -- William A. Hoglund................................................ 0 -- Robert Kingery.................................................... 39,339(1) 2.13 Kathleen H. Iskra................................................. 60,000(1) 3.25 Charles P. Daniels................................................ 40,000(1) 2.17 All directors and executive officers as a group (19 persons)...... 1,020,050(1) 56.86
- ------------------------ (1) Represents shares that are anticipated to be eligible for acquisition upon exercise of stock options during the next 60 days from January 31, 1997, which the Company anticipates granting as replacement options for options granted under the NEXTLINK Communications, L.L.C. EOP. 72 CLASS B COMMON STOCK
AMOUNT AND NATURE OF PERCENTAGE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP (%) - -------------------------------------------------------------------- ---------------------- --------------------- Eagle River, LLC.................................................... 72,307,914 83.41 2300 Carillon Point Kirkland, WA 98033 BWP, Inc............................................................ 5,914,497(1) 6.82 707 S.W. Washington, 8th Floor Portland, OR 97205 Craig O. McCaw...................................................... 72,911,686(2) 84.10 2300 Carillon Point Kirkland, WA 98033 Dennis Weibling..................................................... 72,307,914(3) 83.41 2300 Carillon Point Kirkland, WA 98033 James F. Voelker.................................................... 3,571,364(4) 4.12 Scot Jarvis......................................................... 670,283(5) * C. James Judson..................................................... 0 -- William A. Hoglund.................................................. 0 -- Robert Kingery...................................................... 2,081,312(6) 2.50 Kathleen H. Iskra................................................... 0 -- Charles P. Daniels.................................................. 0 -- All directors and executive officers as a group (19 persons)........ 80,110,582(7) 92.41
- ------------------------ (1) Represents shares of Class B Common Stock held beneficially by Douglas Bean and Robert F. Kingery, who own 39.88% and 35.19%, respectively of the total shares held by BWP, Inc. (2) Represents shares of Class B Common Stock held beneficially by Mr. McCaw as a result of his ownership interests in Eagle River and NEXTLINK, Inc. (3) Mr. Weibling, who is President of Eagle River, Inc., an affiliate of Eagle River, disclaims beneficial ownership in all securities held by Eagle River, except to the extent of his pecuniary interest therein. (4) Represents shares of Class B Common Stock that are eligible for acquisition upon exercise of a stock option during the next 60 days from January 31, 1997. (5) Includes 134,057 shares of Class B Common Stock held by the Rowena Family Limited Liability Company, of which Mr. Jarvis is the sole managing member. (6) Represents shares of Class B Common Stock held beneficially by Mr. Kingery as a result of his ownership in BWP, Inc. (7) See notes (2), (3), (4) and (6) above. * Less than 1%. 73 EAGLE RIVER. The following table sets forth certain information as of January 31, 1997, with respect to the beneficial ownership of Eagle River's member interests by (i) each person known by Eagle River to own beneficially 5% or more of the outstanding member interests, (ii) the Company's Board of Directors, (iii) the Company's Chief Executive Officer and each of the Named Executive Officers and (iv) all directors and executive officers as a group.
AMOUNT AND NATURE OF PERCENTAGE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(1) (%) - -------------------------------------------------------------------- ---------------------- --------------------- Craig O. McCaw...................................................... 31,122(2) 97.07 2300 Carillon Point Kirkland, WA 98033 Dennis Weibling..................................................... 940 2.93 2300 Carillon Point Kirkland, WA 98033 James F. Voelker.................................................... 0 -- Scot Jarvis......................................................... 0 -- C. James Judson..................................................... 0 -- William A. Hoglund.................................................. 0 -- Robert Kingery...................................................... 0 -- Kathleen H. Iskra................................................... 0 -- Charles P. Daniels.................................................. 0 -- All directors and executive officers as a group % (19 persons)...................................................... 32,062 100
- ------------------------ (1) Represents Class A Units. (2) Represents Class A Units held beneficially by Mr. McCaw as a result of his ownership interests in Eagle River and Eagle River, Inc. 74 DESCRIPTION OF CERTAIN INDEBTEDNESS The Company and NEXTLINK Capital, Inc. ("Capital") have issued $350,000,000 aggregate principal amount of Senior Notes, pursuant to an Indenture, dated as of April 25, 1996, by and among the Company, Capital and The United States Trust Company of New York, as trustee (the "Senior Indenture"), all of which are still outstanding. The Senior Notes accrue interest at the rate of 12 1/2% per annum, payable semi-annually in arrears on October 15 and April 15 of each year, commencing on October 15, 1996. The Senior Notes are senior obligations of the Company, rank PARI PASSU in right of payment with all existing and future senior obligations of the Company and will rank senior in right of payment to any future subordinated obligations of the Company, including the Exchange Notes, if issued. Holders of secured obligations of the Company will, however, have claims that are prior to the claims of the holders of the Senior Notes with respect to the assets securing such obligations. The Senior Notes are effectively subordinated to all indebtedness and other liabilities and commitments (including trade payables) of the Company's subsidiaries. In connection with the issuance of the Senior Notes, the Company used $117.7 million of the net proceeds to purchase a portfolio of securities, initially consisting of U.S. government securities (including any securities substituted in respect thereof, the "Pledged Securities"), that was pledged as security for payment of interest on the Senior Notes through April 15, 1999 and, under certain circumstances, as security for repayment of the principal of the Senior Notes. Proceeds from the Pledged Securities may be used by the Company to make interest payments on the Senior Notes through April 15, 1999. The Senior Notes may be redeemed at the option of the Company, in whole or in part, at any time on or after April 15, 2001 at the redemption prices set forth in the Senior Indenture plus accrued and unpaid interest, if any, to the date of redemption. In the event that, on or before April 15, 1999, the Company receives net proceeds from a sale of its Common Equity (as defined in the Senior Indenture), up to a maximum of 33 1/3% of the aggregate principal amount of the Senior Notes originally issued may, at the option of the Company, be redeemed from the net cash proceeds of such sale at a redemption price equal to 112.50% of the stated principal amount thereof, plus accrued and unpaid interest, if any, to the date of redemption, provided, however, that Senior Notes in an aggregate principal amount equal to at least $175.0 million remain outstanding after such redemption. The Senior Indenture contains a change of control repurchase requirement which is substantially identical to that of the Exchange Indenture. See "Description of the Exchange Notes--Change of Control." The Senior Indenture also contains certain covenants that, among other things, limit the ability of the Company and its subsidiaries to incur additional indebtedness, issue stock in subsidiaries, pay dividends or make other distributions, repurchase equity interests or subordinated indebtedness, engage in sale and leaseback transactions, create certain liens, enter into certain transactions with affiliates, sell assets of the Company and its subsidiaries, and enter into certain mergers and consolidations. The Senior Indenture contains provisions that allow for the modification and amendment of the covenants contained in the Senior Indenture by a vote of holders owning a majority of the Outstanding Notes (as defined in the Senior Indenture), including the covenant relating to a change of control, except during the pendency of an Offer to Purchase (as defined in the Senior Indenture). In addition, the holders of a majority in aggregate principal amount of the Outstanding Notes, on behalf of all holders of Senior Notes, may waive compliance by the Company and Capital with certain restrictive provisions of the Senior Indenture. DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of: (i) 350,000,000 shares of common stock, $.01 par value per share, which is divided into two classes, consisting of 250,000,000 shares of Class A Common Stock and 100,000,000 shares of Class B Common Stock (together the "Common Stock"); and (ii) 25,000,000 shares of preferred stock, $.01 par value per share (the "Serial Preferred Stock"). 75 COMMON STOCK Except as outlined below, the Class A Common Stock and Class B Common Stock are identical in all respects. Each share of Class B Common Stock may be converted, at any time and at the option of the holder thereof, into one share of Class A Common Stock. The Class A Common Stock and the Class B Common Stock are entitled to vote on all matters which come before the shareholders, voting together as a single class. Each share of Class A Common Stock has one (1) vote and each share of Class B Common Stock has ten (10) votes on all matters on which holders of Common Stock are entitled to vote. Accordingly, holders of a majority of the shares of Class B Common Stock entitled to vote in any election of directors may elect all of the directors standing for election unless a Voting Rights Triggering Event has occurred. Holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefor, subject to any preferential dividend rights of outstanding Serial Preferred Stock. Upon the liquidation, dissolution or winding-up of the Company, the holders of Common Stock are entitled to receive ratably the net assets of the Company available after the payment of all debts and other liabilities and subject to the prior rights of any outstanding Serial Preferred Stock. Holders of Common Stock have no preemptive, subscription or redemption rights. All the outstanding shares of Common Stock are fully paid and nonassessable. The rights, preferences and privileges of holders of Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of Serial Preferred Stock (including the Preferred Shares) that the Company may designate and issue in the future. PREFERRED STOCK Upon consummation of the Offering, there will be 5,700,000 shares of Serial Preferred Stock outstanding consisting of the Preferred Shares issued in the Offering and up to 6,000,000 additional Preferred Shares designated and reserved for issuance as dividends on the Preferred Shares in accordance with the terms thereof. Under the terms of the Company's Articles of Incorporation (the "Articles"), the Board of Directors of the Company is authorized to issue the remaining shares of Serial Preferred Stock in one or more series without shareholder approval, subject to any limitations prescribed by law and those contained in the Certificate of Designations. Each such series of Serial Preferred Stock shall have such rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation privileges, as shall be determined by the Board of Directors. The purpose of authorizing the Board of Directors to issue Serial Preferred Stock and determine its rights and preferences is to eliminate delays associated with a shareholder vote on specific issuances. The issuance of Serial Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of the outstanding voting stock of the Company. OLD PREFERRED SHARES The Old Preferred Shares will, with respect to dividend rights and rights on liquidation, winding-up and dissolution, rank (i) senior to each other class of capital stock outstanding or established hereafter by the Company the terms of which do not expressly provide that it ranks senior to, or on a parity with, the Old Preferred Shares as to dividend rights and rights on liquidation, winding-up and dissolution of the Company (collectively referred to as "Junior Shares"); (ii) subject to certain conditions, on a parity with each other class of preferred stock established hereafter by the Company the terms of which expressly provide that such class or series will rank on a parity with the Old Preferred Shares as to dividend rights and rights on liquidation, winding-up and dissolution (collectively referred to as "Parity Shares"); and (iii) subject to certain conditions, junior to each class of preferred stock established after the date hereof by the Company the terms of which expressly provide that such class or series will rank 76 senior to the Old Preferred Shares as to dividend rights and rights upon liquidation, winding-up and dissolution of the Company (collectively referred to as the "Senior Shares"). The Company may not authorize any new class of Senior Shares without the approval of the holders of at least two-thirds of the Old Preferred Shares then outstanding, voting or consenting as a separate class. In addition, the Company may not authorize or issue any Parity Shares (other than additional Old Preferred Shares issued as dividends on the Old Preferred Shares and Exchange Shares (as defined)) without the approval of the holders of at least a majority of the Old Preferred Shares then outstanding, voting or consenting as a separate class, if after giving effect to the issuance of such Parity Shares the aggregate liquidation preference of outstanding Parity Shares (other than the Old Preferred Shares (including additional Old Preferred Shares issued as dividends on the Old Preferred Shares) and Exchange Shares) would exceed the sum of (x) $50 million and (y) the aggregate amount of gross proceeds received after the Issue Date and on or prior to the date of issuance of such Parity Shares from the issuance of Qualified Junior Shares. Holders of the outstanding Old Preferred Shares will be entitled to receive, when, as and if declared by the Board of Directors of the Company, out of funds legally available therefor, dividends on the Old Preferred Shares at a rate per annum equal to 14% of the liquidation preference per Preferred Share, payable quarterly. In the event that dividends on the Old Preferred Shares are in arrears and unpaid for six or more quarterly dividend periods (whether or not consecutive), holders of Old Preferred Shares will be entitled to certain voting rights. All dividends will be cumulative, whether or not earned or declared, on a daily basis from the Issue Date and will be payable quarterly in arrears on February 1, May 1, August 1 and November 1 of each year (each a "Dividend Payment Date"), commencing on May 1, 1997, to holders of record on the January 15, April 15, July 15 and October 15 immediately preceding the relevant Dividend Payment Date. Dividends may be paid at the Company's option on any Dividend Payment Date occurring on or before February 1, 2002 either in cash or by issuing additional fully paid and nonassessable Old Preferred Shares with an aggregate liquidation preference equal to the amount of such dividends. After February 1, 2002 dividends are payable only in cash. Dividends payable on the Old Preferred Shares for any period shorter than a quarterly dividend period will be computed on the basis of a 360-day year of twelve 30-day months and the actual number of days elapsed. The Senior Indenture relating to the Senior Notes limits the Company's ability to pay cash dividends on its Capital Stock, including the Old Preferred Shares. See "Description of Certain Indebtedness." No full dividends may be declared or paid or funds set apart for the payment of dividends on any Parity Shares for any period unless full cumulative dividends shall have been or contemporaneously are declared and paid (or are deemed declared and paid) in full or declared and, if payable in cash, a sum in cash sufficient for such payment set apart for such payment on the Old Preferred Shares. If full dividends are not so paid, the Old Preferred Shares will share dividends PRO RATA with the Parity Shares. No dividends may be paid or set apart for such payment on Junior Shares (except dividends on Junior Shares payable in additional Junior Shares) if full cumulative dividends have not been paid in full (or deemed paid) on the Old Preferred Shares. Dividends on account of arrears for any past Dividend Period and dividends in connection with any optional redemption may be declared and paid at any time, without reference to any regular Dividend Payment Date, to holders of record of Old Preferred Shares on such date, not more than forty-five (45) days prior to the payment thereof, as may be fixed by the Board of Directors of the Company. So long as any Old Preferred Shares are outstanding, the Company shall not make any payment on account of, or set apart for payment money for a sinking or other similar fund for, the purchase, redemption or other retirement of, any Parity Shares or Junior Shares, or any warrants, rights, calls or options to purchase any Parity Shares or Junior Shares, and shall not permit any corporation or other entity directly or indirectly controlled by the Company to purchase or redeem any Parity Shares or Junior Shares or any such warrants, rights, calls or options, unless full cumulative dividends determined in accordance herewith on the Old Preferred Shares have been paid (or are deemed paid) in full. 77 The Old Preferred Shares will be subject to mandatory redemption (subject to the legal availability of funds therefor) in whole on February 1, 2009, at a price equal to 100% of the liquidation preference thereof, plus, without duplication, all accumulated and unpaid dividends to the date of redemption. Future agreements of the Company may restrict or prohibit the Company from redeeming the Old Preferred Shares. Following a Covenant Amendment, the Company may, at its election and without the consent of any holder of Old Preferred Shares, amend the Certificate of Designations to add provisions making the Old Preferred Shares redeemable at the option of the Company (subject to contractual and other restrictions with respect thereto and the legal availability of funds therefor): (i)at any time on or after February 1, 2002, in whole or in part, at the option of the Company, at the redemption prices (expressed in percentages of the liquidation preference thereof) set forth below, plus, without duplication, an amount in cash equal to all accumulated and unpaid dividends to the redemption date (including an amount in cash equal to a prorated dividend for the period from the Dividend Payment Date immediately prior to the redemption date), if redeemed during the 12-month period beginning February 1 of each of the years set forth below:
YEAR PERCENTAGE - --------------------------------------------------------------------------------- ----------- 2002............................................................................. 107.00% 2003............................................................................. 105.25 2004............................................................................. 103.50 2005............................................................................. 101.75 2006 and thereafter.............................................................. 100.00
(ii) prior to February 1, 2000, in part, in an amount not to exceed 35% of the initial aggregate liquidation preference of the Old Preferred Shares originally issued out of the net cash proceeds of one or more Qualifying Events (other than any Qualifying Event that results in a Change of Control) at a redemption price of 114.0% of the liquidation preference thereof plus, without duplication, an amount in cash equal to all accumulated and unpaid dividends to the redemption date (including an amount in cash equal to a prorated dividend for the period from the Dividend Payment Date immediately prior to the redemption date); provided, however, that after any such redemption, the aggregate liquidation preference of the Old Preferred Shares outstanding must equal at least 65% of the initial aggregate liquidation preference of the Old Preferred Shares originally issued in the Offering. Any such redemption will be required to occur on or prior to 60 days after the receipt by the Company of the proceeds of such Qualifying Event. In the event of redemption of only a portion of the then outstanding Old Preferred Shares, the Company shall effect such redemption on a PRO RATA basis. The Company may, at its option, subject to certain conditions, on any scheduled Dividend Payment Date occurring on or after the Issue Date, exchange the Old Preferred Shares, in whole but not in part, for the Exchange Notes; provided that (i) on the date of such exchange there are no accumulated and unpaid dividends on the Old Preferred Shares (including the dividend payable on such date) or other contractual impediment to such exchange and (ii) immediately after giving effect to such exchange, no Default or Event of Default (each as defined in the Exchange Indenture) would exist under the Exchange Indenture and no default or event or default would exist under the Senior Indenture. The exchange of the Old Preferred Shares into Exchange Notes would be restricted by covenants contained in the Senior Indenture relating, among other things, to the incurrence of indebtedness. Upon any voluntary or involuntary liquidation, dissolution or winding-up of the Company, holders of Old Preferred Shares will be entitled to be paid, out of the assets of the Company available for distribution to the shareholders, the liquidation preference of $50 per Preferred Share, plus, without duplication, an amount in cash equal to all accumulated and unpaid dividends thereon to the date fixed for liquidation, dissolution or winding-up (including an amount equal to a prorated dividend for the period from the last Dividend Payment Date to the date fixed for liquidation, dissolution or winding-up), 78 before any distribution is made on any Junior Shares, including, without limitation, common stock of the Company. If, upon any voluntary or involuntary liquidation, dissolution or winding-up of the Company, the amounts payable with respect to the Old Preferred Shares and all other Parity Shares are not paid in full, the holders of the Old Preferred Shares and the Parity Shares will share equally and ratably in any distribution of assets of the Company in proportion to the full liquidation preference, including, without duplication, all accrued and unpaid dividends to which each is entitled. After payment of the full amount of the liquidation preference and accumulated and unpaid dividends to which they are entitled, the holders of Old Preferred Shares will not be entitled to any further participation in any distribution of assets of the Company. However, neither the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Company nor the consolidation or merger of the Company with one or more entities shall be deemed to be a liquidation, dissolution or winding-up of the affairs of the Company. The holders of Old Preferred Shares, except as otherwise required under applicable law or as set forth below, shall not be entitled or permitted to vote on any matter required or permitted to be voted upon by the shareholders of the Company. The Certificate of Designations provides that if (i) dividends on the Old Preferred Shares are in arrears and unpaid (and, if after February 1, 2002, such dividends are not paid in cash) for six or more quarterly dividend periods (whether or not consecutive); (ii) the Company fails to redeem the Old Preferred Shares on February 1, 2009 or fails otherwise to discharge any redemption obligation with respect to the Old Preferred Shares; (iii) the Company fails to make an Offer to Purchase if the provisions set forth under "--Change of Control" below require such Offer of Purchase to be made, or fails to purchase Old Preferred Shares from holders who elect to have such shares purchased pursuant to such an Offer to Purchase; (iv) a breach or violation of any of the provisions described under the caption "--Certain Covenants" occurs and the breach or violation continues for a period of 30 days or more after the Company receives notice thereof specifying the default from the holders of at least 25% of the Old Preferred Shares then outstanding; or (v) the Company fails to pay at the final stated maturity (giving effect to any extensions thereof) the principal amount of any Debt of the Company or any Subsidiary of the Company, or the final stated maturity of any such Debt is accelerated, if the aggregate principal amount of such Debt, together with the aggregate principal amount of any other such Debt in default for failure to pay principal at the final stated maturity (giving effect to any extensions thereof) or which has been accelerated, aggregates $15 million or more at any time, in each case, after a 10-day period during which such default shall not have been cured or such acceleration rescinded, then the number of directors constituting the Board of Directors of the Company will be adjusted to permit the holders of a majority of the then outstanding Old Preferred Shares, voting together with any outstanding Parity Shares separately as a single class, to elect the lesser of two directors and that number of directors constituting 25% of the members of such Board of Directors. Such voting rights will continue until such time as, in the case of a dividend default, all accumulated dividends in arrears on the Old Preferred Shares are paid in full (and, in the case of dividends payable after February 1, 2002, paid in cash) and, in all other cases, the failure, breach or default giving rise to such Voting Rights Triggering Event is remedied or waived by the holders of at least a majority of the Old Preferred Shares then outstanding, at which time the term of any directors elected pursuant to the provisions of this paragraph shall terminate. Each such event described in clauses (i) through (v) above is referred to herein as a "Voting Rights Triggering Event." The voting rights provided herein shall be the holders' exclusive remedy at law or in equity. In addition to the provisions described above the Certificate of Designations also provides that the Company will not, without the approval of the holders of two-thirds of the Old Preferred Shares then outstanding amend, alter or repeal any of the provisions of the Company's Certificate of Incorporation (including the Certificate of Designations) or the bylaws of the Company so as to affect adversely the powers, preferences or rights of the holders of the Old Preferred Shares or reduce the time for any notice to which the holders of the Old Preferred Shares may be entitled. Subject to the provisions described above under "Ranking", the Certificate of Designations provides that an amendment of the Company's 79 Certificate of Incorporation to authorize or create, or to increase the authorized amount, of Junior Shares, Parity Shares or Senior Shares shall not be deemed to affect adversely the powers, preferences or rights of the holders of the Old Preferred Shares. Notwithstanding the foregoing, modifications and amendments of the terms of Certificate of Designations described below under "--Change of Control" and "--Certain Covenants" may be made by the Company with the consent of the holders of a majority of the Old Preferred Shares; provided, however, that following the mailing of any Offer to Purchase and until the Expiration Date of that Offer to Purchase no such modification or amendment may, without the consent of the holder of each outstanding Preferred Share affected thereby, modify any Offer to Purchase for the Old Preferred Shares required under the "Change of Control" covenant contained in the Certificate of Designations in a manner materially adverse to the holders of outstanding Old Preferred Shares. In addition, the holders of a majority of the outstanding Old Preferred Shares, on behalf of all holders of Old Preferred Shares, may waive compliance by the Company with the covenants described below under "--Certain Covenants" and may waive any past default of the provisions of the Certificate of Designations described below under "--Change of Control" and "--Certain Covenants", except a default arising from failure to purchase any Old Preferred Shares tendered pursuant to an Offer to Purchase. The Certificate of Designations provides that within 30 days of the occurrence of a Change of Control, the Company will be required to make an Offer to Purchase all outstanding Old Preferred Shares at a purchase price equal to 101% of the liquidation preference thereof, plus, without duplication, all accumulated and unpaid dividends per share to the date of purchase (including an amount in cash equal to a prorated dividend for the period from the Dividend Payment Date immediately prior to the date of purchase (as defined below) to the date of purchase) provided, that the Company will not repurchase or redeem any Old Preferred Shares pursuant to the foregoing provision prior to the Company's repurchase of such Senior Notes as are required to be repurchased pursuant to the Change of Control covenant in the Senior Indenture. A "Change of Control" will be deemed to have occurred at such time as either (a) any Person or any Persons acting together that would constitute a "group" (a "Group") for purposes of Section 13(d) of the Securities Exchange Act of 1934, or any successor provision thereto (other than Eagle River, Mr. Craig O. McCaw and their respective Affiliates or an underwriter engaged in a firm commitment underwriting on behalf of the Company), shall beneficially own (within the meaning of Rule 13d-3 under the Exchange Act, or any successor provision thereto) more than 50% of the aggregate voting power of all classes of Voting Stock of the Company or (b) neither Mr. Craig O. McCaw nor any person designated by him to the Company as acting on his behalf shall be a director of the Company or (c) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any new directors whose election by the Board of Directors of the Company or whose nomination for election by the shareholders of the Company was proposed by a vote of a majority of the directors of the Company then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office. The Certificate of Designations provides that the Company may not, and may not permit any Restricted Subsidiary of the Company to, Incur any Debt unless either (a) the ratio of (i) the aggregate consolidated principal amount of Debt of the Company outstanding as of the most recent available quarterly or annual balance sheet, after giving pro forma effect to the Incurrence of such Debt and any other Debt Incurred since such balance sheet date and the receipt and application of the proceeds thereof to (ii) Consolidated Cash Flow Available for Fixed Charges for the four full fiscal quarters next preceding the Incurrence of such Debt for which consolidated financial statements are available, determined on a pro forma basis as if any such Debt had been Incurred and the proceeds thereof had been applied at the beginning of such four fiscal quarters, would be less than 5.5 to 1 for such four-quarter periods ending on or prior to December 31, 1999 and 5.0 to 1 for such periods ending thereafter, or (b) the Company's Consolidated Capital Ratio as of the most recent available quarterly or annual 80 balance sheet, after giving pro forma effect to the Incurrence of such Debt and any other Debt Incurred since such balance sheet date and the receipt and application of the proceeds thereof, is less than 2.0 to 1. Notwithstanding the foregoing limitation, the Company and any Restricted Subsidiary may Incur the following: (i) Debt under any one or more Bank Credit Agreements or Vendor Financing Facilities in an aggregate principal amount at any one time not to exceed $125 million, and any renewal, extension, refinancing or refunding thereof in an amount which, together with any principal amount remaining outstanding or available under all Bank Credit Agreements and Vendor Financing Facilities of the Company and its Restricted Subsidiaries, plus the amount of any premium required to be paid in connection with such refinancing pursuant to the terms of any Bank Credit Agreement so refinanced plus the amount of expenses incurred in connection with such refinancing, does not exceed the aggregate principal amount outstanding or available under all such Bank Credit Agreements and Vendor Financing Facilities of the Company and its Restricted Subsidiaries immediately prior to such renewal, extension, refinancing or refunding; (ii) Purchase Money Debt Incurred to finance the construction, acquisition or improvement of Telecommunications Assets, provided that the net proceeds of such Purchase Money Debt do not exceed 80% of the cost of construction, acquisition or improvement price of the applicable Telecommunications Assets; (iii)Debt owed by the Company to any Wholly-Owned Restricted Subsidiary of the Company or Debt owed by a Restricted Subsidiary of the Company to the Company or a Wholly-Owned Restricted Subsidiary of the Company; provided, however, that upon either (x) the transfer or other disposition by such Wholly-Owned Restricted Subsidiary or the Company of any Debt so permitted to a Person other than the Company or another Wholly-Owned Restricted Subsidiary of the Company or (y) the issuance (other than directors' qualifying shares), sale, lease, transfer or other disposition of shares of Capital Stock (including by consolidation or merger) of such Wholly-Owned Restricted Subsidiary to a Person other than the Company or another such Wholly- Owned Restricted Subsidiary, the provisions of this clause (iii) shall no longer be applicable to such Debt and such Debt shall be deemed to have been Incurred at the time of such transfer or other disposition; (iv) Debt Incurred to renew, extend, refinance or refund (each, a "refinancing") Debt (a) referred to in clause (vi) below or (b) Incurred pursuant to the preceding paragraph or clause (ii) of this paragraph in an aggregate principal amount not to exceed the aggregate principal amount of and accrued interest on the Debt so refinanced plus the amount of any premium required to be paid in connection with such refinancing pursuant to the terms of the Debt so refinanced or the amount of any premium reasonably determined by the Company as necessary to accomplish such refinancing by means of a tender offer or privately negotiated repurchase, plus the amount of expenses of the Company incurred in connection with such refinancing; provided, however, that, the refinancing Debt by its terms, or by the terms of any agreement or instrument pursuant to which such Debt is issued, (x) does not provide for payments of principal of such Debt at the stated maturity thereof or by way of a sinking fund applicable thereto or by way of any mandatory redemption, defeasance, retirement or repurchase thereof by the Company (including any redemption, retirement or repurchase which is contingent upon events or circumstances, but excluding any retirement required by virtue of acceleration of such Debt upon any event of default thereunder), in each case prior to the time the same are required by the terms of the Debt being refinanced and (y) does not permit redemption or other retirement (including pursuant to a required offer to purchase made by the Company) of such Debt at the option of the holder thereof prior to the final stated maturity of the Debt being refinanced, other than a redemption or other retirement at the option of the holder of such Debt (including pursuant to an Offer to Purchase made by the Company) which is conditioned upon a change substantially similar to those described under "--Change of Control" or which is pursuant to provisions substantially similar to those described under "Description of the Exchange Notes--Covenants--Limitation on Asset Dispositions"; (v) Debt consisting of Permitted Interest Rate and Currency Protection Agreements; (vi) Debt outstanding at the Issue Date; (vii)Subordinated Debt invested by (a) a group of employees of the Company, which includes the Chief Executive Officer of the Company, who own, directly or indirectly, through an employee stock ownership plan or arrangement, shares of the Company's Capital Stock or (b) any other Person that controls the Company (i) on 81 the Issue Date or (ii) after a Change of Control, provided that the Company is not in default with respect to its obligations described under "Change of Control" above; (viii) Debt consisting of performance and other similar bonds and reimbursement obligations Incurred in the ordinary course of business securing the performance of contractual, franchise or license obligations of the Company or a Restricted Subsidiary, or in respect of a letter of credit obtained to secure such performance; and (ix) Debt not otherwise permitted to be Incurred pursuant to clauses (i) through (viii) above, which, together with any other outstanding Debt Incurred pursuant to this clause (ix), has an aggregate principal amount or, in the case of Debt issued at a discount, an accreted amount (determined in accordance with generally accepted accounting principles) at the time of Incurrence not in excess of $10 million at any time outstanding. The Certificate of Designations provides that, without the affirmative vote of the holders of a majority of the issued and outstanding Old Preferred Shares, voting or consenting as a separate class, the Company will not, in a single transaction or a series of related transactions, consolidate with or merge with or into, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its assets to, another Person or adopt a plan of liquidation unless (i) either (1) the Company is the surviving or continuing Person or (2) the Person (if other than the Company) formed by such consolidation or into which the Company is merged or the Person that acquires by conveyance, transfer or lease the properties and assets of the Company substantially as an entirety or in the case of a plan of liquidation, the Person to which assets of the Company have been transferred, shall be a corporation, limited liability company, partnership or trust organized and existing under the laws of the United States or any State thereof or the District of Columbia; (ii) the Old Preferred Shares shall be converted into or exchanged for and shall become shares of Capital Stock of such successor, transferee or resulting Person, having in respect of such successor, transferee or resulting Person the same powers, preferences and relative participating, optional or other special rights and the qualifications, limitations or restrictions thereon, that the Old Preferred Shares had immediately prior to such transaction; (iii) immediately after giving pro forma effect to such transactions, no Voting Rights Triggering Event shall have occurred or be continuing; and (iv) the Company has delivered to the Transfer Agent for the Old Preferred Shares prior to the consummation of the proposed transaction an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger or transfer complies with the Certificate of Designations and that all conditions precedent in the Certificate of Designations relating to such transaction have been satisfied. For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise, in a single transaction or series of related transactions) of all or substantially all of the properties and assets of one or more Subsidiaries, the Capital Stock of which constitutes all or substantially all of the properties or assets of the Company, will be deemed to be the transfer of all or substantially all of the properties and assets of the Company. The Company has entered into the Preferred Registration Rights Agreement pursuant to which the Company agreed, for the benefit of the holders of the Old Preferred Shares, (i) to file with the Commission, within 45 days following the Issue Date, the Exchange Offer Registration Statement under the Securities Act relating to an Exchange Offer pursuant to which preferred stock substantially identical to the Old Preferred Shares (except that such preferred stock will not contain terms with respect to transfer restrictions) (the "Exchange Shares") would be offered in exchange for the then outstanding Old Preferred Shares tendered at the option of the holders thereof and (ii) to use their reasonable best efforts to cause the Exchange Offer Registration Statement to become effective as soon as practicable thereafter. The Company has further agreed to commence the Exchange Offer promptly after the Exchange Offer Registration Statement has become effective, hold the offer open for at least 30 days, and exchange Exchange Shares for all Old Preferred Shares tendered and not withdrawn before the expiration of the offer. For each Preferred Share surrendered pursuant to the Exchange Offer, the holder who surrendered such share will receive an Exchange Share having a liquidation preference equal to that of the surrendered Preferred Share. Dividends on the Exchange Shares will accumulate from the last Dividend Payment Date on which dividends were paid or added to the liquidation preference of the Old 82 Preferred Shares surrendered in exchange therefor or, if no dividends have been paid or added to the liquidation preference of such Old Preferred Shares, from the Issue Date. In the event that (i) the Company has not filed the registration statement relating to the Exchange Offer (or, if applicable, the Resale Registration) within 45 days following January 31, 1997, (ii) such registration statement (or, if applicable, the Resale Registration) has not become effective within 120 days following January 31, 1997, (iii) the Exchange Offer has not been consummated within 30 business days following the effective date of the Exchange Offer Registration Statement or (iv) any registration statement required by the Preferred Registration Rights Agreement is filed and declared effective but shall thereafter cease to be effective (except as specifically permitted therein) without being succeeded immediately by an additional registration statement filed and declared effective (any such event referred to in clauses (i) through (iv), a "Registration Default"), then additional dividends will accrue (in addition to the stated dividends on the Old Preferred Shares) at the rate of 0.25% per annum on the liquidation preference of the Old Preferred Shares for the period from the occurrence of the Registration Default until such time as no Registration Default is in effect. Such additional dividends (the "Special Dividends") will be payable quarterly in arrears on each regular Dividend Payment Date. For each 90-day period that the Registration Default continues, the per annum rate of such Special Dividends will increase by an additional 0.25%; provided that such rate shall in no event exceed 1.0% per annum in the aggregate. At such time as such Registration Default is no longer in effect, the dividend rate on the Old Preferred Shares shall be the rate stated on the cover page hereof and no further Special Dividends will accrue. DIRECTOR AND OFFICER INDEMNIFICATION The Washington Business Corporation Act provides that a Washington corporation may include provisions in its articles of incorporation relieving each of its directors of monetary liability arising out of his or her conduct as a director for breach of his or her fiduciary duty except liability for (i) acts or omissions of a director that involve intentional misconduct or a knowing violation of law, (ii) conduct in violation of Section 23B.08.310 of the Washington Business Corporation Act (which section relates to unlawful distributions) or (iii) any transaction from which a director personally received a benefit in money, property or services to which the director was not legally entitled. The Company's Articles include such provisions. The Company's Articles and Bylaws provide that the Company shall, to the fullest extent permitted by the Washington Business Corporation Act, as amended from time to time, indemnify and advance expenses to each of its currently acting and former directors and officers, and may so indemnify and advance expenses to each of its current and former employees and agents. The Company believes the foregoing provisions are necessary to attract and retain qualified persons as directors and officers. PROVISIONS AFFECTING ACQUISITIONS AND BUSINESS COMBINATIONS The Washington Business Corporation Act, Section 23B.19 of the Revised Code of Washington, prohibits a "target corporation," with certain exceptions, from engaging in certain "significant business transactions" (such as a merger or sale of assets) with an "acquiring person" who acquires more than 10% of the voting securities of the target corporation for a period of five years after such acquisition, unless the transaction is approved by a majority of the members of the target corporation's board of directors prior to the date of the significant business transaction or the purchase of the shares made by the acquiring person or unless the aggregate amount of the cash and the market value of non-cash consideration received by holders of outstanding shares of any class or series of stock of the target corporation is equal to certain minimum amounts. The Company's Articles provide that it will be subject to such prohibitions and shall remain subject to such prohibitions even if they are ever repealed. Such prohibitions do not apply to any shareholders who beneficially own ten percent or more of the Company's outstanding voting securities prior to the Offering. 83 DESCRIPTION OF NEW PREFERRED SHARES The summary contained herein of certain provisions of the New Preferred Shares to be issued by the Company does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all of the provisions of the Certificate of Designations of rights and preferences relating thereto ("Certificate of Designations"), copies of which may be obtained from the Company upon request. See "Definitions" below for the definitions of certain capitalized terms used herein. RANKING The New Preferred Shares will, with respect to dividend rights and rights on liquidation, winding-up and dissolution, rank (i) senior to each other class of capital stock outstanding or established hereafter by the Company the terms of which do not expressly provide that it ranks senior to, or on a parity with, the New Preferred Shares as to dividend rights and rights on liquidation, winding-up and dissolution of the Company (collectively referred to as "Junior Shares"); (ii) subject to certain conditions, on a parity with each other class of preferred stock established hereafter by the Company the terms of which expressly provide that such class or series will rank on a parity with the New Preferred Shares as to dividend rights and rights on liquidation, winding-up and dissolution (collectively referred to as "Parity Shares"); and (iii) subject to certain conditions, junior to each class of preferred stock established after the date hereof by the Company the terms of which expressly provide that such class or series will rank senior to the New Preferred Shares as to dividend rights and rights upon liquidation, winding-up and dissolution of the Company (collectively referred to as the "Senior Shares"). The Company may not authorize any new class of Senior Shares without the approval of the holders of at least two-thirds of the New Preferred Shares then outstanding, voting or consenting as a separate class. In addition, the Company may not authorize or issue any Parity Shares (other than additional New Preferred Shares issued as dividends on the New Preferred Shares and Exchange Shares (as defined)) without the approval of the holders of at least a majority of the New Preferred Shares then outstanding, voting or consenting as a separate class, if after giving effect to the issuance of such Parity Shares the aggregate liquidation preference of outstanding Parity Shares (other than the New Preferred Shares (including additional New Preferred Shares issued as dividends on the New Preferred Shares) and Exchange Shares) would exceed the sum of (x) $50 million and (y) the aggregate amount of gross proceeds received after the Issue Date and on or prior to the date of issuance of such Parity Shares from the issuance of Qualified Junior Shares. DIVIDENDS Holders of the outstanding New Preferred Shares will be entitled to receive, when, as and if declared by the Board of Directors of the Company, out of funds legally available therefor, dividends on the New Preferred Shares at a rate per annum equal to 14% of the liquidation preference per Preferred Share, payable quarterly. In the event that dividends on the New Preferred Shares are in arrears and unpaid for six or more quarterly dividend periods (whether or not consecutive), holders of New Preferred Shares will be entitled to certain voting rights. See "--Voting Rights" below. All dividends will be cumulative, whether or not earned or declared, on a daily basis from the Issue Date and will be payable quarterly in arrears on February 1, May 1, August 1 and November 1 of each year (each a "Dividend Payment Date"), commencing on May 1, 1997, to holders of record on the January 15, April 15, July 15 and October 15 immediately preceding the relevant Dividend Payment Date. Dividends may be paid at the Company's option on any Dividend Payment Date occurring on or before February 1, 2002 either in cash or by issuing additional fully paid and nonassessable New Preferred Shares with an aggregate liquidation preference equal to the amount of such dividends. After February 1, 2002 dividends are payable only in cash. Dividends payable on the New Preferred Shares for any period shorter than a quarterly dividend period will be computed on the basis of a 360-day year of twelve 30-day months and the actual number of days elapsed. The Senior Indenture relating to the Senior Notes limits the Company's ability to pay 84 cash dividends on its Capital Stock, including the New Preferred Shares. See "Description of Certain Indebtedness." No full dividends may be declared or paid or funds set apart for the payment of dividends on any Parity Shares for any period unless full cumulative dividends shall have been or contemporaneously are declared and paid (or are deemed declared and paid) in full or declared and, if payable in cash, a sum in cash sufficient for such payment set apart for such payment on the New Preferred Shares. If full dividends are not so paid, the New Preferred Shares will share dividends pro rata with the Parity Shares. No dividends may be paid or set apart for such payment on Junior Shares (except dividends on Junior Shares payable in additional Junior Shares) if full cumulative dividends have not been paid in full (or deemed paid) on the New Preferred Shares. Dividends on account of arrears for any past Dividend Period and dividends in connection with any optional redemption may be declared and paid at any time, without reference to any regular Dividend Payment Date, to holders of record of New Preferred Shares on such date, not more than forty-five (45) days prior to the payment thereof, as may be fixed by the Board of Directors of the Company. So long as any New Preferred Shares are outstanding, the Company shall not make any payment on account of, or set apart for payment money for a sinking or other similar fund for, the purchase, redemption or other retirement of, any Parity Shares or Junior Shares, or any warrants, rights, calls or options to purchase any Parity Shares or Junior Shares, and shall not permit any corporation or other entity directly or indirectly controlled by the Company to purchase or redeem any Parity Shares or Junior Shares or any such warrants, rights, calls or options, unless full cumulative dividends determined in accordance herewith on the New Preferred Shares have been paid (or are deemed paid) in full. MANDATORY REDEMPTION The New Preferred Shares will be subject to mandatory redemption (subject to the legal availability of funds therefor) in whole on February 1, 2009, at a price equal to 100% of the liquidation preference thereof, plus, without duplication, all accumulated and unpaid dividends to the date of redemption. Future agreements of the Company may restrict or prohibit the Company from redeeming the New Preferred Shares. PERMITTED AMENDMENTS RELATING TO OPTIONAL REDEMPTION Following a Covenant Amendment, the Company may, at its election and without the consent of any holder of New Preferred Shares, amend the Certificate of Designations to add provisions making the New Preferred Shares redeemable at the option of the Company (subject to contractual and other restrictions with respect thereto and the legal availability of funds therefor): (i)at any time on or after February 1, 2002, in whole or in part, at the option of the Company, at the redemption prices (expressed in percentages of the liquidation preference thereof) set forth below, plus, without duplication, an amount in cash equal to all accumulated and unpaid dividends to the redemption date (including an amount in cash equal to a prorated dividend for the period from the Dividend Payment Date immediately prior to the redemption date), if redeemed during the 12-month period beginning February 1 of each of the years set forth below:
YEAR PERCENTAGE - --------------------------------------------------------------------------------- ----------- 2002............................................................................. 107.00% 2003............................................................................. 105.25 2004............................................................................. 103.50 2005............................................................................. 101.75 2006 and thereafter.............................................................. 100.00
(ii) prior to February 1, 2000, in part, in an amount not to exceed 35% of the initial aggregate liquidation preference of the New Preferred Shares originally issued out of the net cash proceeds of one or more 85 Qualifying Events (other than any Qualifying Event that results in a Change of Control) at a redemption price of 114.0% of the liquidation preference thereof plus, without duplication, an amount in cash equal to all accumulated and unpaid dividends to the redemption date (including an amount in cash equal to a prorated dividend for the period from the Dividend Payment Date immediately prior to the redemption date); provided, however, that after any such redemption, the aggregate liquidation preference of the New Preferred Shares outstanding must equal at least 65% of the initial aggregate liquidation preference of the New Preferred Shares originally issued in the Offering. Any such redemption will be required to occur on or prior to 60 days after the receipt by the Company of the proceeds of such Qualifying Event. In the event of redemption of only a portion of the then outstanding New Preferred Shares, the Company shall effect such redemption on a pro rata basis. PROCEDURE FOR REDEMPTION On and after the redemption date, unless the Company defaults in the payment of the applicable redemption price, dividends will cease to accumulate on New Preferred Shares called for redemption and all rights of holders of such shares will terminate except for the right to receive the redemption price, without interest; provided, however, that if a notice of redemption shall have been given as provided in the succeeding sentence and the funds necessary for redemption (including an amount in respect of all dividends that will accrue to the redemption date) shall have been segregated and irrevocably set apart by the Company, in trust for the equal and ratable benefit of the holders of the shares called for redemption, then dividends shall cease to accumulate on the redemption date on the shares to be redeemed then, at the close of business of the day on which such funds are segregated and set apart, the holders of the shares to be redeemed shall cease to be shareholders of the Company and shall be entitled only to receive the redemption price for such shares, without interest. The Company will send a written notice of redemption by first class mail to each holder of record of New Preferred Shares, not fewer than 30 days nor more than 60 days prior to the date fixed for such redemption at its registered address. New Preferred Shares issued and reacquired will have the status of authorized but unissued preferred stock of the Company undesignated as to series and may, with any and all other authorized but unissued preferred stock of the Company, be designated or redesignated and issued or reissued, as the case may be, as part of any series of preferred stock of the Company, except that any issuance or reissuance of New Preferred Shares must be in compliance with the Certificate of Designations. EXCHANGE The Company may, at its option, subject to certain conditions, on any scheduled Dividend Payment Date occurring on or after the Issue Date, exchange the New Preferred Shares, in whole but not in part, for the Exchange Notes; provided that (i) on the date of such exchange there are no accumulated and unpaid dividends on the New Preferred Shares (including the dividend payable on such date) or other contractual impediment to such exchange and (ii) immediately after giving effect to such exchange, no Default or Event of Default (each as defined in the Exchange Indenture) would exist under the Exchange Indenture and no default or event or default would exist under the Senior Indenture. The exchange of the New Preferred Shares into Exchange Notes would be restricted by covenants contained in the Senior Indenture relating, among other things, to the incurrence of indebtedness. Upon any exchange pursuant to the preceding paragraph, holders of outstanding New Preferred Shares will be entitled to receive, subject to the second succeeding sentence, $1.00 principal amount of Exchange Notes for each $1.00 of the aggregate liquidation preference of New Preferred Shares held by them. The Exchange Notes will be issued in registered form, without coupons. Exchange Notes issued in exchange for New Preferred Shares will be issued in principal amounts of $1,000 and integral multiples thereof so that each holder of New Preferred Shares will receive certificates representing the entire amount of Exchange Notes to which such holder's New Preferred Shares entitle such holder; provided that the Company may pay cash in lieu of issuing an Exchange Note in a principal amount less than 86 $1,000. The Company will send a written notice of exchange by mail to each holder of record of New Preferred Shares not fewer than 30 days nor more than 60 days before the date fixed for such exchange. On and after the date of exchange, dividends will cease to accrue on the outstanding New Preferred Shares and all rights of the holders of New Preferred Shares (except the right to receive the Exchange Notes, an amount in cash, to the extent applicable, equal to the accumulated and unpaid dividends to the exchange date and, if the Company so elects, cash in lieu of any Exchange Note that is in a principal amount less than $1,000) will terminate. The person entitled to receive the Exchange Notes issuable upon such exchange will be treated for all purposes as the registered holder of such Exchange Notes. See "Description of Exchange Notes." LIQUIDATION PREFERENCE Upon any voluntary or involuntary liquidation, dissolution or winding-up of the Company, holders of New Preferred Shares will be entitled to be paid, out of the assets of the Company available for distribution to the shareholders, the liquidation preference of $50 per New Preferred Share, plus, without duplication, an amount in cash equal to all accumulated and unpaid dividends thereon to the date fixed for liquidation, dissolution or winding-up (including an amount equal to a prorated dividend for the period from the last Dividend Payment Date to the date fixed for liquidation, dissolution or winding-up), before any distribution is made on any Junior Shares, including, without limitation, common stock of the Company. If, upon any voluntary or involuntary liquidation, dissolution or winding-up of the Company, the amounts payable with respect to the New Preferred Shares and all other Parity Shares are not paid in full, the holders of the New Preferred Shares and the Parity Shares will share equally and ratably in any distribution of assets of the Company in proportion to the full liquidation preference, including, without duplication, all accrued and unpaid dividends to which each is entitled. After payment of the full amount of the liquidation preference and accumulated and unpaid dividends to which they are entitled, the holders of New Preferred Shares will not be entitled to any further participation in any distribution of assets of the Company. However, neither the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Company nor the consolidation or merger of the Company with one or more entities shall be deemed to be a liquidation, dissolution or winding-up of the affairs of the Company. The Certificate of Designations does not contain any provision requiring funds to be set aside to protect the liquidation preference of the New Preferred Shares. VOTING RIGHTS The holders of New Preferred Shares, except as otherwise required under applicable law or as set forth below, shall not be entitled or permitted to vote on any matter required or permitted to be voted upon by the shareholders of the Company. The Certificate of Designations provides that if (i) dividends on the New Preferred Shares are in arrears and unpaid (and, if after February 1, 2002, such dividends are not paid in cash) for six or more quarterly dividend periods (whether or not consecutive); (ii) the Company fails to redeem the New Preferred Shares on February 1, 2009 or fails otherwise to discharge any redemption obligation with respect to the New Preferred Shares; (iii) the Company fails to make an Offer to Purchase if the provisions set forth under "--Change of Control" below require such Offer of Purchase to be made, or fails to purchase New Preferred Shares from holders who elect to have such shares purchased pursuant to such an Offer to Purchase; (iv) a breach or violation of any of the provisions described under the caption "--Certain Covenants" occurs and the breach or violation continues for a period of 30 days or more after the Company receives notice thereof specifying the default from the holders of at least 25% of the New Preferred Shares then outstanding; or (v) the Company fails to pay at the final stated maturity (giving effect to any extensions thereof) the principal amount of any Debt of the Company or any Subsidiary of the Company, or the final stated maturity of any such Debt is accelerated, if the aggregate 87 principal amount of such Debt, together with the aggregate principal amount of any other such Debt in default for failure to pay principal at the final stated maturity (giving effect to any extensions thereof) or which has been accelerated, aggregates $15 million or more at any time, in each case, after a 10-day period during which such default shall not have been cured or such acceleration rescinded, then the number of directors constituting the Board of Directors of the Company will be adjusted to permit the holders of a majority of the then outstanding New Preferred Shares, voting together with any outstanding Parity Shares separately as a single class, to elect the lesser of two directors and that number of directors constituting 25% of the members of such Board of Directors. Such voting rights will continue until such time as, in the case of a dividend default, all accumulated dividends in arrears on the New Preferred Shares are paid in full (and, in the case of dividends payable after February 1, 2002, paid in cash) and, in all other cases, the failure, breach or default giving rise to such Voting Rights Triggering Event is remedied or waived by the holders of at least a majority of the New Preferred Shares then outstanding, at which time the term of any directors elected pursuant to the provisions of this paragraph shall terminate. Each such event described in clauses (i) through (v) above is referred to herein as a "Voting Rights Triggering Event." The voting rights provided herein shall be the holders' exclusive remedy at law or in equity. In addition to the provisions described above under "Ranking," the Certificate of Designations will also provide that the Company will not, without the approval of the holders of two-thirds of the New Preferred Shares then outstanding amend, alter or repeal any of the provisions of the Company's Certificate of Incorporation (including the Certificate of Designations) or the bylaws of the Company so as to affect adversely the powers, preferences or rights of the holders of the New Preferred Shares or reduce the time for any notice to which the holders of the New Preferred Shares may be entitled. Subject to the provisions described above under "Ranking", the Certificate of Designations provides that an amendment of the Company's Certificate of Incorporation to authorize or create, or to increase the authorized amount, of Junior Shares, Parity Shares or Senior Shares shall not be deemed to affect adversely the powers, preferences or rights of the holders of the New Preferred Shares. Notwithstanding the foregoing, modifications and amendments of the terms of Certificate of Designations described below under "--Change of Control" and "--Certain Covenants" may be made by the Company with the consent of the holders of a majority of the New Preferred Shares; provided, however, that following the mailing of any Offer to Purchase and until the Expiration Date of that Offer to Purchase no such modification or amendment may, without the consent of the holder of each outstanding Preferred Share affected thereby, modify any Offer to Purchase for the New Preferred Shares required under the "Change of Control" covenant contained in the Certificate of Designations in a manner materially adverse to the holders of outstanding New Preferred Shares. In addition, the holders of a majority of the outstanding New Preferred Shares, on behalf of all holders of New Preferred Shares, may waive compliance by the Company with the covenants described below under "--Certain Covenants" and may waive any past default of the provisions of the Certificate of Designations described below under "--Change of Control" and "--Certain Covenants", except a default arising from failure to purchase any New Preferred Shares tendered pursuant to an Offer to Purchase. CHANGE OF CONTROL The Certificate of Designations will provide that within 30 days of the occurrence of a Change of Control, the Company will be required to make an Offer to Purchase all outstanding New Preferred Shares at a purchase price equal to 101% of the liquidation preference thereof, plus, without duplication, all accumulated and unpaid dividends per share to the date of purchase (including an amount in cash equal to a prorated dividend for the period from the Dividend Payment Date immediately prior to the date of purchase (as defined below) to the date of purchase) provided, that the Company will not repurchase or redeem any New Preferred Shares pursuant to the foregoing provision prior to the Company's repurchase of such Senior Notes as are required to be repurchased pursuant to the Change of Control 88 covenant in the Senior Indenture. A "Change of Control" will be deemed to have occurred at such time as either (a) any Person or any Persons acting together that would constitute a "group" (a "Group") for purposes of Section 13(d) of the Securities Exchange Act of 1934, or any successor provision thereto (other than Eagle River, Mr. Craig O. McCaw and their respective Affiliates or an underwriter engaged in a firm commitment underwriting on behalf of the Company), shall beneficially own (within the meaning of Rule 13d-3 under the Exchange Act, or any successor provision thereto) more than 50% of the aggregate voting power of all classes of Voting Stock of the Company or (b) neither Mr. Craig O. McCaw nor any person designated by him to the Company as acting on his behalf shall be a director of the Company or (c) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any new directors whose election by the Board of Directors of the Company or whose nomination for election by the shareholders of the Company was proposed by a vote of a majority of the directors of the Company then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office. Within 30 days following the date on which the Company becomes aware that a Change of Control has occurred, the Company must send the Offer to Purchase by first class mail postage prepaid to each holder of New Preferred Shares. Such Offer to Purchase shall state, among other things, its expiration date, which must be no earlier than 30 days nor later than 60 days from the date such Offer to Purchase is mailed, other than as may be required by law (the "Expiration Date"). Holders electing to have any New Preferred Shares purchased pursuant to an Offer to Purchase will be required to surrender such New Preferred Shares, properly endorsed for transfer, together with such other customary documents as the Company and the transfer agent may reasonably request, to the transfer agent and registrar for the New Preferred Shares at the address specified in the Offer to Purchase prior to the close of business on the Expiration Date. The Company will comply with the requirements of Rule 14e-1 under the Exchange Act to the extent applicable in connection with the purchase of New Preferred Shares pursuant to an Offer to Purchase. This "Change of Control" covenant is not intended to afford holders of New Preferred Shares protection in the event of certain highly leveraged transactions, reorganizations, restructurings, mergers and other similar transactions that might adversely affect the holders of New Preferred Shares but would not constitute a Change of Control. The Company could, in the future, enter into certain transactions, including certain recapitalizations of the Company, that would not constitute a Change of Control, but would increase the amount of indebtedness outstanding at such time. The Company does not currently have adequate financial resources to effect a repurchase of the New Preferred Shares upon a Change of Control and there can be no assurance that the Company will have such resources in the future. In addition, there may be restrictions contained in the Senior Indenture or other instruments evidencing Indebtedness incurred by the Company or its Restricted Subsidiaries which restrict or prohibit the ability of the Company to effect any repurchase of New Preferred Shares required in connection with a Change of Control. None of the provisions in the Certificate of Designations relating to a purchase of New Preferred Shares upon a Change of Control are waivable by the Board of Directors of the Company. Without the consent of each holder of New Preferred Shares affected thereby, after the mailing of the notice of an Offer to Purchase, no amendment to the Certificate of Designations may, directly or indirectly, affect the Company's obligation to purchase the outstanding New Preferred Shares or amend, modify or change the obligation of the Company to consummate an Offer to Purchase or waive any default in the performance thereof or modify any of the provisions of the definitions with respect to any such offer. 89 CERTAIN COVENANTS LIMITATION ON CONSOLIDATED DEBT. The Certificate of Designations will provide that the Company may not, and may not permit any Restricted Subsidiary of the Company to, Incur any Debt unless either (a) the ratio of (i) the aggregate consolidated principal amount of Debt of the Company outstanding as of the most recent available quarterly or annual balance sheet, after giving pro forma effect to the Incurrence of such Debt and any other Debt Incurred since such balance sheet date and the receipt and application of the proceeds thereof to (ii) Consolidated Cash Flow Available for Fixed Charges for the four full fiscal quarters next preceding the Incurrence of such Debt for which consolidated financial statements are available, determined on a pro forma basis as if any such Debt had been Incurred and the proceeds thereof had been applied at the beginning of such four fiscal quarters, would be less than 5.5 to 1 for such four-quarter periods ending on or prior to December 31, 1999 and 5.0 to 1 for such periods ending thereafter, or (b) the Company's Consolidated Capital Ratio as of the most recent available quarterly or annual balance sheet, after giving pro forma effect to the Incurrence of such Debt and any other Debt Incurred since such balance sheet date and the receipt and application of the proceeds thereof, is less than 2.0 to 1. Notwithstanding the foregoing limitation, the Company and any Restricted Subsidiary may Incur the following: (i)Debt under any one or more Bank Credit Agreements or Vendor Financing Facilities in an aggregate principal amount at any one time not to exceed $125 million, and any renewal, extension, refinancing or refunding thereof in an amount which, together with any principal amount remaining outstanding or available under all Bank Credit Agreements and Vendor Financing Facilities of the Company and its Restricted Subsidiaries, plus the amount of any premium required to be paid in connection with such refinancing pursuant to the terms of any Bank Credit Agreement so refinanced plus the amount of expenses incurred in connection with such refinancing, does not exceed the aggregate principal amount outstanding or available under all such Bank Credit Agreements and Vendor Financing Facilities of the Company and its Restricted Subsidiaries immediately prior to such renewal, extension, refinancing or refunding; (ii)Purchase Money Debt Incurred to finance the construction, acquisition or improvement of Telecommunications Assets, provided that the net proceeds of such Purchase Money Debt do not exceed 80% of the cost of construction, acquisition or improvement price of the applicable Telecommunications Assets; (iii)Debt owed by the Company to any Wholly-Owned Restricted Subsidiary of the Company or Debt owed by a Restricted Subsidiary of the Company to the Company or a Wholly-Owned Restricted Subsidiary of the Company; provided, however, that upon either (x) the transfer or other disposition by such Wholly-Owned Restricted Subsidiary or the Company of any Debt so permitted to a Person other than the Company or another Wholly-Owned Restricted Subsidiary of the Company or (y) the issuance (other than directors' qualifying shares), sale, lease, transfer or other disposition of shares of Capital Stock (including by consolidation or merger) of such Wholly-Owned Restricted Subsidiary to a Person other than the Company or another such Wholly- Owned Restricted Subsidiary, the provisions of this clause (iii) shall no longer be applicable to such Debt and such Debt shall be deemed to have been Incurred at the time of such transfer or other disposition; (iv)Debt Incurred to renew, extend, refinance or refund (each, a "refinancing") Debt (a) referred to in clause (vi) below or (b) Incurred pursuant to the preceding paragraph or clause (ii) of this paragraph in an aggregate principal amount not to exceed the aggregate principal amount of and accrued interest on the Debt so refinanced plus the amount of any premium required to be paid in connection with such refinancing pursuant to the terms of the Debt so refinanced or the amount of any premium reasonably determined by the Company as necessary to accomplish such refinancing by means of a tender offer or privately negotiated repurchase, plus the amount of expenses of the Company incurred in connection with such refinancing; provided, however, that, the refinancing Debt by its terms, or by the terms of any agreement or instrument pursuant to which such Debt is issued, (x) does not provide for payments of principal of such Debt at the stated maturity thereof or by way of a sinking fund applicable thereto or by way of any mandatory redemption, defeasance, retirement or repurchase thereof by the Company (including any redemption, retirement or repurchase which is contingent upon events or circumstances, 90 but excluding any retirement required by virtue of acceleration of such Debt upon any event of default thereunder), in each case prior to the time the same are required by the terms of the Debt being refinanced and (y) does not permit redemption or other retirement (including pursuant to a required offer to purchase made by the Company) of such Debt at the option of the holder thereof prior to the final stated maturity of the Debt being refinanced, other than a redemption or other retirement at the option of the holder of such Debt (including pursuant to an Offer to Purchase made by the Company) which is conditioned upon a change substantially similar to those described under "--Change of Control" or which is pursuant to provisions substantially similar to those described under "Description of the Exchange Notes--Covenants--Limitation on Asset Dispositions"; (v) Debt consisting of Permitted Interest Rate and Currency Protection Agreements; (vi) Debt outstanding at the Issue Date; (vii) Subordinated Debt invested by (a) a group of employees of the Company, which includes the Chief Executive Officer of the Company, who own, directly or indirectly, through an employee stock ownership plan or arrangement, shares of the Company's Capital Stock or (b) any other Person that controls the Company (i) on the Issue Date or (ii) after a Change of Control, provided that the Company is not in default with respect to its obligations described under "Change of Control" above; (viii) Debt consisting of performance and other similar bonds and reimbursement obligations Incurred in the ordinary course of business securing the performance of contractual, franchise or license obligations of the Company or a Restricted Subsidiary, or in respect of a letter of credit obtained to secure such performance; and (ix) Debt not otherwise permitted to be Incurred pursuant to clauses (i) through (viii) above, which, together with any other outstanding Debt Incurred pursuant to this clause (ix), has an aggregate principal amount or, in the case of Debt issued at a discount, an accreted amount (determined in accordance with generally accepted accounting principles) at the time of Incurrence not in excess of $10 million at any time outstanding. For purposes of determining compliance with this "Limitation on Consolidated Debt" covenant, in the event that an item of Debt meets the criteria of more than one of the types of Debt the Company is permitted to incur pursuant to the foregoing clauses (i) through (ix), the Company shall have the right, in its sole discretion, to classify such item of Debt and shall only be required to include the amount and type of such Debt under the clause permitting the Debt as so classified. For purposes of determining any particular amount of Debt under such covenant, Guarantees or Liens with respect to letters of credit supporting Debt otherwise included in the determination of a particular amount shall not be included. MERGER, CONSOLIDATION AND SALE OF ASSETS. The Certificate of Designations will provide that, without the affirmative vote of the holders of a majority of the issued and outstanding New Preferred Shares, voting or consenting as a separate class, the Company will not, in a single transaction or a series of related transactions, consolidate with or merge with or into, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its assets to, another Person or adopt a plan of liquidation unless (i) either (1) the Company is the surviving or continuing Person or (2) the Person (if other than the Company) formed by such consolidation or into which the Company is merged or the Person that acquires by conveyance, transfer or lease the properties and assets of the Company substantially as an entirety or in the case of a plan of liquidation, the Person to which assets of the Company have been transferred, shall be a corporation, limited liability company, partnership or trust organized and existing under the laws of the United States or any State thereof or the District of Columbia; (ii) the New Preferred Shares shall be converted into or exchanged for and shall become shares of Capital Stock of such successor, transferee or resulting Person, having in respect of such successor, transferee or resulting Person the same powers, preferences and relative participating, optional or other special rights and the qualifications, limitations or restrictions thereon, that the New Preferred Shares had immediately prior to such transaction; (iii) immediately after giving pro forma effect to such transactions, no Voting Rights Triggering Event shall have occurred or be continuing; and (iv) the Company has delivered to the transfer agent for the New Preferred Shares prior to the consummation of the proposed transaction an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger or transfer complies with the Certificate of Designations and that all conditions precedent in the Certificate of 91 Designations relating to such transaction have been satisfied. For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise, in a single transaction or series of related transactions) of all or substantially all of the properties and assets of one or more Subsidiaries, the Capital Stock of which constitutes all or substantially all of the properties or assets of the Company, will be deemed to be the transfer of all or substantially all of the properties and assets of the Company. REPORTS. The Certificate of Designations will provide that the Company will provide to the holders of New Preferred Shares, within 15 days after it files them with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may by rules and regulations prescribe) which the Company files with the Commission pursuant to Section 13 or 15(d) of the Exchange Act. In the event that the Company is no longer required to furnish such reports to its securityholders pursuant to the Exchange Act, the Company will cause its consolidated financial statements, comparable to those that would have been required to appear in annual or quarterly reports, to be delivered to the holders of New Preferred Shares. TRANSFER AGENT AND REGISTRAR Continental Stock Transfer & Trust Company will be the transfer agent and registrar for the New Preferred Shares (the "Transfer Agent"). 92 DESCRIPTION OF THE EXCHANGE NOTES The Exchange Notes are to be issued under an Indenture (the "Exchange Indenture"), between the Company and United States Trust Company of New York, as trustee (the "Trustee"), which will be executed on or prior to the date of original issuance of the Exchange Notes. The statements under this caption relating to the Exchange Notes and the Exchange Indenture are summaries and do not purport to be complete, and are subject to, and are qualified in their entirety by reference to, all the provisions of the Exchange Indenture, including the definitions of certain terms therein. The Exchange Indenture is by its terms subject to and governed by the Trust Indenture Act of 1939, as amended. Unless otherwise indicated, references under this caption to sections, "Section" or articles are references to the Exchange Indenture. Where reference is made to particular provisions of the Exchange Indenture or to defined terms not otherwise defined herein, such provisions or defined terms are incorporated herein by reference. Copies of the Exchange Indenture are available at the corporate trust office of the Trustee and may also be obtained from the Company (see "Additional Information" below). For purposes of the description of the Exchange Notes, the term "Company" refers to NEXTLINK Communications, Inc. and does not include its subsidiaries except for purposes of financial data determined on a consolidated basis. GENERAL The Exchange Notes will be unsecured obligations of the Company and will mature on February 1, 2009. The Exchange Notes will bear interest at the rate of 14% per annum, payable semi-annually in cash (or, on or prior to February 1, 2002, in additional Exchange Notes, at the option of the Company) on February 1 and August 1 of each year to the Person in whose name the Note (or any predecessor Note) is registered at the close of business on the preceding January 15 or July 15, as the case may be. Interest on the Exchange Notes will be computed on the basis of a 360-day year of twelve 30-day months. (SectionSection 301, 307 and 310) Principal of and premium, if any, and interest on the Exchange Notes will be payable, and the Exchange Notes may be presented for registration of transfer and exchange, at the office or agency of the Company maintained for that purpose in the Borough of Manhattan, The City of New York provided that at the option of the Company, payment of interest on the Exchange Notes may be made by check mailed to the address of the Person entitled thereto as it appears in the Note Register. Until otherwise designated by the Company, such office or agency will be the corporate trust office of the Trustee, as Paying Agent and Registrar. (SectionSection 301, 305 and 1002) The Exchange Notes will be issued in fully registered form, without coupons, in denominations of $1,000 and any integral multiple thereof (other than with respect to additional Exchange Notes issued in lieu of cash interest in accordance with the terms of the Exchange Indenture). (Section 302). No service charge will be made for any registration of transfer or exchange of Exchange Notes, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. SUBORDINATION The payment of the principal of and premium, if any, and interest on the Exchange Notes, and any other obligations of the Company in respect of the Exchange Notes (including any obligation to repurchase Exchange Notes) will, to the extent set forth in the Exchange Indenture, be subordinated in right of payment to the prior payment in full of all Senior Debt. Upon any payment or distribution of assets to creditors upon any liquidation, dissolution, winding-up, reorganization, assignment for the benefit of creditors, marshalling of assets or any bankruptcy, insolvency or similar proceedings of the Company, the holders of all Senior Debt will first be entitled to receive payment in full in cash of all amounts due or to become due thereon before the holders of the Exchange Notes will be entitled to receive any payment in 93 respect of the principal of or premium, if any, or interest on the Exchange Notes. No payments on account of principal, premium, if any, or interest, or any other obligations (including any obligation to repurchase), in respect of the Exchange Notes may be made if there shall have occurred and be continuing a Senior Payment Default. Upon the occurrence of a Senior Nonmonetary Default and receipt of written notice by the Company and the Trustee of the occurrence of such Senior Nonmonetary Default from a holder of the Designated Senior Debt (or a trustee, agent or other representative for such a holder) which is the subject of such Senior Nonmonetary Default, no payments on account of principal, premium, if any, or interest, or any other obligations (including any obligation to repurchase), in respect of the Exchange Notes may be made for a period (the "Payment Blockage Period") commencing on the date of the receipt of such notice and ending the earlier of (i) the date on which such Senior Nonmonetary Default shall have been cured or waived or ceased to exist or all Designated Senior Debt the subject of such Senior Nonmonetary Default has been discharged and (ii) the 179th day after the date of the receipt of such notice; provided, however, that no more than one Payment Blockage Period may be commenced during any 360-day period and there shall be a period of at least 181 days during any such 360-day period when no Payment Blockage Period is in effect; provided further, that no Senior Nonmonetary Default which existed or was continuing on the date of the commencement of a Payment Blockage Period may be made the basis of the commencement of a subsequent Payment Blockage Period whether or not within a period of 360 consecutive days, unless such Senior Nonmonetary Default shall have been cured for a period of not less than 90 consecutive days. "Senior Payment Default" is defined in the Exchange Indenture as any default in the payment of any principal of or premium, if any, or interest on Senior Debt when due, whether at the stated maturity of any such payment or by declaration of acceleration, call for redemption or otherwise. "Senior Nonmonetary Default" is defined in the Exchange Indenture as a default with respect to any Designated Senior Debt, other than a Senior Payment Default, which with the giving of notice or the passage of time, or both, shall give the holders of such Designated Senior Debt (or a trustee or agent on behalf of the holders thereof) the right to declare such Designated Senior Debt due and payable prior to the date on which it would otherwise become due and payable. Although the Exchange Indenture places limitations on the Company's ability to incur additional Debt, see "Covenants--Limitation on Consolidated Debt," such limitations do not prohibit Debt Incurred under Bank Credit Agreements or Vendor Financing Facilities, or certain Purchase Money Debt, or refinancings thereof, and any Debt incurred in accordance with such limitations may constitute Senior Debt. "Senior Debt" means the principal of (and premium, if any) and interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company whether or not such claim for post-petition interest is allowed in such proceeding) on, or other amount of, (i) Debt for money borrowed of the Company created pursuant to Bank Credit Agreements or Vendor Financing Facilities, (ii) Debt for money borrowed of the Company, whether Incurred on or prior to the date of the Exchange Indenture or thereafter Incurred, other than the Exchange Notes, (iii) Debt evidenced by bonds, debentures, notes or other similar instruments, including Debt Incurred in connection with the acquisition of property, assets or businesses, (iv) matured and unmatured reimbursement or other obligations of the Company with respect to letters of credit, bankers' acceptances or similar facilities issued for the account of the Company, (v) obligations of the Company under interest rate swaps, caps, collars and similar arrangements, (vi) Capital Lease Obligations of the Company, (vii) guarantees by the Company of (x) Debt for money borrowed and (y) Debt of a Restricted Subsidiary consisting of performance and other similar bonds and reimbursement obligations Incurred in the ordinary course of business securing the performance of contractual, franchise or license obligations of such Restricted Subsidiary, or in respect of a letter of credit obtained to secure such performance; and (viii) amendments, renewals, extensions, modifications, refinancings and refundings of any such Debt; provided, however, the following shall not constitute Senior Debt: (A) any Debt owed to a Person when such Person is a Subsidiary of the Company, (B) any Debt which by the terms of the instrument creating or evidencing the same is not 94 superior in right of payment to the Exchange Notes, (C) any Debt Incurred in violation of the Indenture or (D) any Debt which is subordinated in right of payment in any respect to any other Debt of the Company. "Designated Senior Debt" means (i) Debt under the Senior Notes and (ii) any Senior Debt of the Company (a) which at the time of determination exceeds $15 million in aggregate principal amount outstanding or available under a committed facility, (b) which is specifically designated in the instrument evidencing such Senior Debt as "Designated Senior Debt" by the Company and (c) as to which the Trustee has received an Officers' Certificate of the Company specifying such Senior Debt as "Designated Senior Debt." The Company's principal operations are conducted through its Subsidiaries, and the Company is therefore dependent upon the cash flow of its Subsidiaries to meet its obligations. The Company's Subsidiaries will have no obligation to guarantee or otherwise pay amounts due under the Exchange Notes. Therefore, the Exchange Notes will be effectively subordinated to all indebtedness and other liabilities and commitments (including trade payables) of the Company's Subsidiaries. Any right of the Company to receive assets of any of its Subsidiaries upon any liquidation or reorganization of such Subsidiary (and the consequent right of holders of the Exchange Notes to participate in those assets) will be effectively subordinated to the claims of the Subsidiary's creditors, except to the extent that the Company itself is recognized as a creditor of the Subsidiary. Any recognized claims of the Company as a creditor of the Subsidiary would be subordinate to any prior security interest held by any other creditor of the Subsidiary and obligations of the Subsidiary that are senior to those owing to the Company. As of December 31, 1996, there was approximately $374.9 million of Senior Debt outstanding and $29.2 million of obligations of the Company's subsidiaries. PERMITTED AMENDMENTS RELATING TO OPTIONAL REDEMPTION Following a Covenant Amendment, the Company may, at its election and without the consent of any holder of Exchange Notes, amend the Exchange Indenture to add provisions making the Exchange Notes redeemable at the option of the Company: (i)at any time on or after February 1, 2002 and prior to maturity, in whole or in part, upon not less than 30 nor more than 60 days' notice mailed to each Holder of Exchange Notes to be redeemed at such Holder's address appearing in the Note Register, in amounts of $1,000 or an integral multiple of $1,000, at the following Redemption Prices (expressed as percentages of the principal amount) plus accrued interest to but excluding the Redemption Date (subject to the right of Holders of record on the relevant Regular Record Date to receive interest due on an Interest Payment Date that is on or prior to the Redemption Date), if redeemed during the 12-month period beginning February 1 of the years indicated:
REDEMPTION YEAR PRICE - -------------------------------------------------------------------------------- ------------ 2002............................................................................ 107.00% 2003............................................................................ 105.25 2004............................................................................ 103.50 2005............................................................................ 101.75 2006 and thereafter............................................................. 100.00
(SectionSection 203, 1101, 1105 and 1107) (ii)prior to February 1, 2000, in part, in an aggregate principal amount not to exceed $99.75 million out of the net cash proceeds of one or more Qualifying Events (other than a Qualifying Event that results in a Change of Control), provided, however, that Exchange Notes in an aggregate principal amount equal to at least $185.25 million remain outstanding after such redemption. Such redemption must occur on a Redemption Date within 60 days after the receipt by the Company of the proceeds of such Qualifying Event and upon not less than 30 nor more than 60 days' notice mailed to each holder of Exchange Notes to be redeemed at such holder's address appearing in the Note Register, in amounts of $1,000 or an integral multiple of $1,000 at a redemption price of 114.0% of their 95 principal amount plus accrued and unpaid interest to but excluding the Redemption Date (subject to the right of holders of record on the relevant Regular Record Date to receive interest due on an Interest Payment Date that is on or prior to the Redemption Date). If less than all the Exchange Notes are to be redeemed, the Trustee shall select, on a pro rata basis, by lot or by such other method as the Trustee shall deem fair and appropriate, the particular Exchange Notes to be redeemed or any portion thereof that is an integral multiple of $1,000. (Section 1104) MANDATORY REDEMPTION; SINKING FUND Except as set forth under "Covenants--Limitation on Asset Sales" and "Covenants--Change of Control" below, the Company is not required to purchase or make mandatory redemption payments or sinking fund payments with respect to the Exchange Notes. COVENANTS The Exchange Indenture will contain, among others, the following covenants, which will only have effect beginning on the date (if any) of issuance of the Exchange Notes: LIMITATION ON CONSOLIDATED DEBT The Company may not, and may not permit any Restricted Subsidiary of the Company to, Incur any Debt unless either (a) the ratio of (i) the aggregate consolidated principal amount of Debt of the Company outstanding as of the most recent available quarterly or annual balance sheet, after giving pro forma effect to the Incurrence of such Debt and any other Debt Incurred since such balance sheet date and the receipt and application of the proceeds thereof to (ii) Consolidated Cash Flow Available for Fixed Charges for the four full fiscal quarters next preceding the Incurrence of such Debt for which consolidated financial statements are available, determined on a pro forma basis as if any such Debt had been Incurred and the proceeds thereof had been applied at the beginning of such four fiscal quarters, would be less than 5.5 to 1 for such four-quarter periods ending on or prior to December 31, 1999 and 5.0 to 1 for such periods ending thereafter, or (b) the Company's Consolidated Capital Ratio as of the most recent available quarterly or annual balance sheet, after giving pro forma effect to the Incurrence of such Debt and any other Debt Incurred since such balance sheet date and the receipt and application of the proceeds thereof, is less than 2.0 to 1. Notwithstanding the foregoing limitation, the Company and any Restricted Subsidiary may Incur the following: (i)Debt under any one or more Bank Credit Agreements or Vendor Financing Facilities in an aggregate principal amount at any one time not to exceed $125 million, and any renewal, extension, refinancing or refunding thereof in an amount which, together with any principal amount remaining outstanding or available under all Bank Credit Agreements and Vendor Financing Facilities of the Company and its Restricted Subsidiaries, plus the amount of any premium required to be paid in connection with such refinancing pursuant to the terms of any Bank Credit Agreement so refinanced plus the amount of expenses incurred in connection with such refinancing, does not exceed the aggregate principal amount outstanding or available under all such Bank Credit Agreements and Vendor Financing Facilities of the Company and its Restricted Subsidiaries immediately prior to such renewal, extension, refinancing or refunding; (ii)Purchase Money Debt Incurred to finance the construction, acquisition or improvement of Telecommunications Assets, provided that the net proceeds of such Purchase Money Debt do not exceed 80% of the cost of construction, acquisition or improvement price of the applicable Telecommunications Assets; (iii)Debt owed by the Company to any Wholly-Owned Restricted Subsidiary of the Company or Debt owed by a Restricted Subsidiary of the Company to the Company or a Wholly-Owned Restricted Subsidiary of the Company; provided, however, that upon either (x) the transfer or other disposition by such Wholly-Owned Restricted Subsidiary or the Company of any Debt so permitted to a Person other than the Company or another Wholly-Owned Restricted 96 Subsidiary of the Company or (y) the issuance (other than directors' qualifying shares), sale, lease, transfer or other disposition of shares of Capital Stock (including by consolidation or merger) of such Wholly-Owned Restricted Subsidiary to a Person other than the Company or another such Wholly-Owned Restricted Subsidiary, the provisions of this clause (iii) shall no longer be applicable to such Debt and such Debt shall be deemed to have been Incurred at the time of such transfer or other disposition; (iv)Debt Incurred to renew, extend, refinance or refund (each, a "refinancing") (a) Debt referred to in clause (vi) of this paragraph, (b) Debt Incurred pursuant to the preceding paragraph or clause (ii) of this paragraph or (c) the Exchange Notes in an aggregate principal amount not to exceed the aggregate principal amount of and accrued interest on the Debt so refinanced plus the amount of any premium required to be paid in connection with such refinancing pursuant to the terms of the Debt so refinanced or the amount of any premium reasonably determined by the Company as necessary to accomplish such refinancing by means of a tender offer or privately negotiated repurchase, plus the amount of expenses of the Company incurred in connection with such refinancing; provided, however, that Debt the proceeds of which are used to refinance the Exchange Notes or Debt which is pari passu to the Exchange Notes or Debt which is subordinate in right of payment to the Exchange Notes shall only be permitted if (1) in the case of any refinancing of the Exchange Notes or Debt which is pari passu to the Exchange Notes, the refinancing Debt is made pari passu to the Exchange Notes or subordinated to the Exchange Notes, and, in the case of any refinancing of Debt which is subordinated to the Exchange Notes, the refinancing Debt constitutes Subordinated Debt and (2) in either case, the refinancing Debt by its terms, or by the terms of any agreement or instrument pursuant to which such Debt is issued, (x) does not provide for payments of principal of such Debt at the stated maturity thereof or by way of a sinking fund applicable thereto or by way of any mandatory redemption, defeasance, retirement or repurchase thereof by the Company (including any redemption, retirement or repurchase which is contingent upon events or circumstances, but excluding any retirement required by virtue of acceleration of such Debt upon any event of default thereunder), in each case prior to the time the same are required by the terms of the Debt being refinanced and (y) does not permit redemption or other retirement (including pursuant to a required offer to purchase made by the Company) of such Debt at the option of the holder thereof prior to the final stated maturity of the Debt being refinanced, other than a redemption or other retirement at the option of the holder of such Debt (including pursuant to an Offer to Purchase made by the Company) which is conditioned upon a change substantially similar to those described under "--Change of Control" or which is pursuant to provisions substantially similar to those described under "--Limitation on Asset Dispositions"; (v)Debt consisting of Permitted Interest Rate and Currency Protection Agreements; (vi)Debt outstanding at the date of issuance of the Exchange Notes; (vii)Debt outstanding under the Exchange Notes; (viii)Subordinated Debt invested by (a) a group of employees of the Company, which includes the Chief Executive Officer of the Company, who own, directly or indirectly, through an employee stock ownership plan or arrangement, shares of the Company's Capital Stock or (b) any other Person that controls the Company (i) on the date of original issuance of the Exchange Notes or (ii) after a Change of Control, provided that the Company is not in default with respect to its obligations described under "Change of Control" below; (ix)Debt consisting of performance and other similar bonds and reimbursement obligations Incurred in the ordinary course of business securing the performance of contractual, franchise or license obligations of the Company or a Restricted Subsidiary, or in respect of a letter of credit obtained to secure such performance; and (x)Debt not otherwise permitted to be Incurred pursuant to clauses (i) through (ix) above, which, together with any other outstanding Debt Incurred pursuant to this clause (x), has an aggregate principal amount or, in the case of Debt issued at a discount, an accreted amount (determined in accordance with generally accepted accounting principles) at the time of Incurrence not in excess of $10 million at any time outstanding. For purposes of determining compliance with this "Limitation on Consolidated Debt" covenant, in the event that an item of Debt meets the criteria of more than one of the types of Debt the Company is permitted to incur pursuant to the foregoing clauses (i) through (x), the Company shall have the right, in 97 its sole discretion, to classify such item of Debt and shall only be required to include the amount and type of such Debt under the clause permitting the Debt as so classified. For purposes of determining any particular amount of Debt under such covenant, Guarantees or Liens with respect to letters of credit supporting Debt otherwise included in the determination of a particular amount shall not be included. (Section1007) LIMITATION ON SENIOR SUBORDINATED DEBT The Company shall not Incur any Debt which by its terms is both (i) subordinated in right of payment to any Senior Debt and (ii) senior in right of payment to the Exchange Notes. (Section1008) LIMITATION ON ISSUANCE OF GUARANTEES OF SUBORDINATED DEBT The Company shall not permit any Restricted Subsidiary, directly or indirectly, to assume, guarantee or in any other manner become liable with respect to any Debt of the Company that is expressly by its terms subordinate or junior in right of payment to any other Debt of the Company unless such Restricted Subsidiary shall make effective provision for guaranteeing the Exchange Notes (x) with respect to Debt that ranks pari passu with the Exchange Notes, to the same extent as such Debt is to be guaranteed by such Restricted Subsidiary or (y) with respect to Debt that is subordinate in right of payment to the Exchange Notes, to a greater extent than such other Debt is to be guaranteed by such Restricted Subsidiary. (Section1009) LIMITATION ON LIENS SECURING SUBORDINATED DEBT The Company shall not, and shall not permit any Restricted Subsidiary to, Incur any Lien on or with respect to any property or assets of the Company or any such Restricted Subsidiary now owned or hereafter acquired to secure Debt which is pari passu with or subordinated in right of payment to the Exchange Notes without making, or causing such Restricted Subsidiary to make, effective provision for securing the Exchange Notes (and, if the Company shall so determine, any other Debt of the Company which is not subordinate to the Exchange Notes or of such Restricted Subsidiary) (x) equally and ratably with such Debt as to such property or assets for so long as such Debt shall be so secured or (y) in the event such Debt is Debt of the Company which is subordinate in right of payment to the Exchange Notes, prior to such Debt as to such property for so long as such Debt will be so secured. The foregoing restrictions shall not apply to: (i) Liens in respect of Debt existing at the date of original issuance of the Exchange Notes; (ii) Liens securing only the Exchange Notes; (iii) Liens in favor of the Company or a Wholly-Owned Restricted Subsidiary; or (iv) Liens to secure Debt incurred to extend, renew, refinance or refund (or successive extensions, renewals, refinancings or refundings), in whole or in part, any Debt secured by Liens referred to in the foregoing clauses (i) or (ii) so long as such Lien does not extend to any other property and the principal amount of Debt so secured is not increased except as otherwise permitted under Clause (iv) of the second paragraph of "Limitation on Consolidated Debt." (Section1010) LIMITATION ON RESTRICTED PAYMENTS The Company (i) may not, directly or indirectly, declare or pay any dividend, or make any distribution, in respect of its Capital Stock or to the holders thereof (in their capacity as such), excluding any dividends or distributions payable solely in shares of its Capital Stock (other than Disqualified Stock) or in options, warrants or other rights to acquire its Capital Stock (other than Disqualified Stock); (ii) may not, and may not permit any Restricted Subsidiary to, purchase, redeem, or otherwise retire or acquire for value (a) any Capital Stock of the Company or any Related Person of the Company; or (b) any options, warrants or rights to purchase or acquire shares of Capital Stock of the Company or any Related Person of the Company or any securities convertible or exchangeable into shares of Capital Stock of the Company or any Related Person of the Company; (iii) may not make, or permit any Restricted Subsidiary to make, any Investment in, or payment on a Guarantee of any obligation of, any Person, other than the 98 Company or a Restricted Subsidiary of the Company, except for Permitted Investments; and (iv) may not, and may not permit any Restricted Subsidiary to, redeem, defease, repurchase, retire or otherwise acquire or retire for value, prior to any scheduled maturity, repayment or sinking fund payment, Debt of the Company which is subordinate in right of payment to the Exchange Notes (each of clauses (i) through (iv) being a "Restricted Payment") if: (1) a Default or an Event of Default shall have occurred and is continuing; or (2) upon giving effect to such Restricted Payment, the Company could not Incur at least $1.00 of additional Debt pursuant to the terms of the Exchange Indenture described in the first paragraph of "--Limitation on Consolidated Debt" above; or (3) upon giving effect to such Restricted Payment, the aggregate of all Restricted Payments from the Issue Date exceeds the sum of: (a) 50% of cumulative Consolidated Net Income (or, in the case Consolidated Net Income shall be negative, less 100% of such deficit) since the end of the last full fiscal quarter prior to the Issue Date through the last day of the last full fiscal quarter ending immediately preceding the date of such Restricted Payment; plus (b) $5 million; plus (c) 100% of the net reduction in any Investment that when made was a Restricted Payment resulting from payments of interest on Debt, dividends, repayments of loans or advances, or other transfers of assets, in each case to the Company or any Restricted Subsidiary of the Company (except to the extent that any such payment is included in the calculation of Consolidated Net Income) or from redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries; provided that the amount included in this clause (c) shall not exceed the amount of any such Investment previously made by the Company and its Restricted Subsidiaries; provided, further, that the Company or a Restricted Subsidiary of the Company may make any Restricted Payment with the aggregate net proceeds received after the Issue Date, including the fair value of property other than cash (determined in good faith by the Board of Directors of the Company, as conclusively evidenced by a board resolution filed with the Trustee), as capital contributions to the Company or from the issuance (other than to a Restricted Subsidiary) of Capital Stock (other than Disqualified Stock) of the Company and warrants, rights or options on Capital Stock (other than Disqualified Stock) of the Company and the principal amount of Debt of the Company that has been converted into Capital Stock (other than Disqualified Stock and other than by a Restricted Subsidiary) of the Company after the date of the Exchange Indenture. Notwithstanding the foregoing, the Company may (i) pay any dividend on Capital Stock of any class within 60 days after the declaration thereof if, on the date when the dividend was declared, the Company could have paid such dividend in accordance with the foregoing provisions; (ii) repurchase any shares of its Common Equity or options to acquire its Common Equity from Persons who were formerly officers or employees of the Company, provided that the aggregate amount of all such repurchases made pursuant to this clause (ii) shall not exceed $2 million, plus the aggregate cash proceeds received by the Company since the Issue Date from issuances of its Common Equity or options to acquire its Common Equity to members, officers, managers and employees of the Company or any of its Subsidiaries; (iii) refinance, and permit its Restricted Subsidiaries to refinance, any Debt otherwise permitted by clause (iv) of the second paragraph under "--Limitation on Consolidated Debt" above; and (iv) retire or repurchase, and permit its Restricted Subsidiaries to retire or repurchase, any Capital Stock of the Company or of any Restricted Subsidiary of the Company in exchange for, or out of the proceeds of the substantially concurrent sale (other than to a Restricted Subsidiary of the Company) of, Capital Stock (other than Disqualified Stock) of the Company. If the Company makes a Restricted Payment which, at the time of the making of such Restricted Payment, would in the good faith determination of the Company be permitted under the Exchange Indenture, such Restricted Payment shall be deemed to have been made in compliance with the Exchange Indenture notwithstanding any subsequent adjustments made in good faith to the Company financial statements affecting Consolidated Net Income for any period. (Section1011) LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES The Company may not, and may not permit any Restricted Subsidiary to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or 99 restriction on the ability of any Restricted Subsidiary of the Company (i) to pay dividends (in cash or otherwise) or make any other distributions in respect of its Capital Stock owned by the Company or any other Restricted Subsidiary of the Company or pay any Debt or other obligation owed to the Company or any other Restricted Subsidiary; (ii) to make loans or advances to the Company or any other Restricted Subsidiary; or (iii) to transfer any of its property or assets to the Company or any other Restricted Subsidiary. Notwithstanding the foregoing, the Company may, and may permit any Restricted Subsidiary to, suffer to exist any such encumbrance or restriction (a) pursuant to any agreement in effect on the date of original issuance of the Exchange Notes; (b) pursuant to an agreement relating to any Acquired Debt, which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person so acquired and its Subsidiaries; (c) pursuant to any one or more Bank Credit Agreements or Vendor Financing Facilities (and renewals, extensions, refinancings or refundings thereof) which is permitted to be outstanding under clause (i) of the second paragraph of "Limitation on Consolidated Debt", provided that such restriction is consistent with, and not materially more restrictive (as conclusively determined in good faith by the Chief Financial Officer of the Company), taken as a whole, than, comparable provisions included in similar agreements or facilities extended to comparable credits engaged in the Telecommunications Business; (d) pursuant to an agreement effecting a renewal, refunding or extension of Debt Incurred pursuant to an agreement referred to in clause (a) or (b) above or (e) below, provided, however, that the provisions contained in such renewal, refunding or extension agreement relating to such encumbrance or restriction are not materially more restrictive (as conclusively determined in good faith by the Chief Financial Officer of the Company), taken as a whole, than the provisions contained in the agreement the subject thereof; (e) in the case of clause (iii) above, restrictions contained in any security agreement (including a Capital Lease Obligation) securing Debt of the Company or a Restricted Subsidiary otherwise permitted under the Exchange Indenture, but only to the extent such restrictions restrict the transfer of the property subject to such security agreement; (f) in the case of clause (iii) above, customary nonassignment provisions entered into in the ordinary course of business in leases and other agreements; (g) with respect to a Restricted Subsidiary of the Company imposed pursuant to an agreement which has been entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Restricted Subsidiary, provided that consummation of such transaction would not result in a Default or an Event of Default, that such restriction terminates if such transaction is not consummated and that such consummation or abandonment of such transaction occurs within one year of the date such agreement was entered into; (h) pursuant to applicable law or regulations; (i) pursuant to the Exchange Indenture and the Exchange Notes; or (j) any restriction on the sale or other disposition of assets or property securing Debt as a result of a Permitted Lien on such assets or property. (Section 101) LIMITATION ON ASSET DISPOSITIONS The Company may not, and may not permit any Restricted Subsidiary to, make any Asset Disposition in one or more related transactions occurring within any 12-month period unless: (i) the Company or the Restricted Subsidiary, as the case may be, receives consideration for such disposition at least equal to the fair market value for the assets sold or disposed of as determined by the Board of Directors of the Company in good faith and evidenced by a board resolution filed with the Trustee, which determination shall be conclusive; (ii) at least 75% of the consideration for such disposition consists of (1) cash or readily marketable cash equivalents or the assumption of Debt of the Company (other than Debt that is subordinated to the Exchange Notes) or of the Restricted Subsidiary and release from all liability on the Debt assumed; (2) Telecommunications Assets; or (3) shares of publicly traded Voting Stock of any Person engaged in the Telecommunications Business in the United States; and (iii) all Net Available Proceeds, less any amounts invested within 360 days of such disposition in new Telecommunications Assets, are applied within 360 days of such disposition (1) first, to the permanent repayment or reduction of Debt then outstanding under any Bank Credit Agreement or Vendor Financing Facility, to the extent such agreements would require such application or prohibit payments pursuant to clause (2) following, 100 (2) second, to the extent of remaining Net Available Proceeds, to make an Offer to Purchase outstanding Exchange Notes at 100% of their principal amount plus accrued interest to the date of purchase and, to the extent required by the terms thereof, any other Debt of the Company that is pari passu with the Exchange Notes at a price no greater than 100% of the principal amount thereof plus accrued interest to the date of purchase and (3) third, to the extent of any remaining Net Available Proceeds following the completion of the Offer to Purchase, to the repayment of other Debt of the Company or Debt of a Restricted Subsidiary of the Company, to the extent permitted under the terms thereof. To the extent any Net Available Proceeds remain after such uses, the Company and its Restricted Subsidiaries may use such amounts for any purposes not prohibited by the Exchange Indenture. (Section 1013) Notwithstanding the foregoing, these provisions shall not apply to any Asset Disposition which constitutes a transfer, conveyance, sale, lease or other disposition of all or substantially all of the Company's properties or assets as described under "--Mergers, Consolidations and Certain Sales of Assets". LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES The Company may not, and may not permit any Restricted Subsidiary of the Company to, issue, transfer, convey, sell or otherwise dispose of any shares of Capital Stock of a Restricted Subsidiary of the Company or securities convertible or exchangeable into, or options, warrants, rights or any other interest with respect to, Capital Stock of a Restricted Subsidiary of the Company to any person other than the Company or a Wholly-Owned Restricted Subsidiary of the Company except (i) in a transaction consisting of a sale of Capital Stock of such Restricted Subsidiary owned by the Company or any Restricted Subsidiary of the Company and that complies with the provisions described under "--Limitation on Asset Dispositions" above to the extent such provisions apply; (ii) if required, the issuance, transfer, conveyance, sale or other disposition of directors' qualifying shares; (iii) in a transaction in which, or in connection with which, the Company or a Restricted Subsidiary acquires at the same time sufficient Capital Stock of such Restricted Subsidiary to at least maintain the same percentage ownership interest it had prior to such transaction; and (iv) Disqualified Stock issued in exchange for, or upon conversion of, or the proceeds of the issuance of which are used to redeem, refinance, replace or refund shares of Disqualified Stock of such Restricted Subsidiary, provided that the amounts of the redemption obligations of such Disqualified Stock shall not exceed the amounts of the redemption obligations of, and such Disqualified Stock shall have redemption obligations no earlier than those required by, the Disqualified Stock being exchanged, converted, redeemed, refinanced, replaced or refunded. (Section 1014) TRANSACTIONS WITH AFFILIATES AND RELATED PERSONS The Company may not, and may not permit any Restricted Subsidiary of the Company to, enter into any transaction (or series of related transactions) with an Affiliate or Related Person of the Company (other than the Company or a Wholly-Owned Restricted Subsidiary of the Company), including any Investment, but excluding transactions pursuant to employee compensation arrangements approved by the Board of Directors of the Company, either directly or indirectly, unless such transaction is on terms no less favorable to the Company or such Restricted Subsidiary than those that could be obtained in a comparable arm's-length transaction with an entity that is not an Affiliate or Related Person and is in the best interests of such Company or such Restricted Subsidiary. For any transaction that involves in excess of $1 million but less than or equal to $5 million, the Chief Executive Officer of the Company shall determine that the transaction satisfies the above criteria and shall evidence such a determination by a certificate filed with the Trustee. For any transaction that involves in excess of $5 million, the Company shall also obtain an opinion from a nationally recognized expert with experience in appraising the terms and conditions, taken as a whole, of the type of transaction (or series of related transactions) for which the opinion is required stating that such transaction (or series of related transactions) is on terms and conditions, taken as a whole, no less favorable to the Company or such Restricted Subsidiary than those that could be obtained in a comparable arm's-length transaction with an entity that is not an Affiliate or Related Person of the Company, which opinion shall be filed with the Trustee. This covenant shall not apply to Investments by an Affiliate or a Related Person of the Company in the Capital Stock (other than Disqualified Stock) of the Company or any Restricted Subsidiary of the Company. (Section 1015) 101 CHANGE OF CONTROL Within 30 days of the occurrence of a Change of Control, the Company will be required to make an Offer to Purchase all Outstanding Exchange Notes at a purchase price equal to 101% of their principal amount plus accrued and unpaid interest to the date of purchase. A "Change of Control" will be deemed to have occurred at such time as either (a) any Person or any Persons acting together that would constitute a "group" (a "Group") for purposes of Section 13(d) of the Securities Exchange Act of 1934, or any successor provision thereto (other than Eagle River, Mr. Craig O. McCaw and their respective Affiliates or an underwriter engaged in a firm commitment underwriting on behalf of the Company), shall beneficially own (within the meaning of Rule 13d-3 under the Exchange Act, or any successor provision thereto) more than 50% of the aggregate voting power of all classes of Voting Stock of the Company or (b) neither Mr. Craig O. McCaw nor any person designated by him to the Company as acting on his behalf shall be a director of the Company or (c) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any new directors whose election by the Board of Directors of the Company or whose nomination for election by the shareholders of the Company was proposed by a vote of a majority of the directors of the Company then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office. (Section1016) Except as described above with respect to a Change of Control, the Exchange Indenture will not contain provisions that permit the Holders of the Exchange Notes to require that the Company repurchase or redeem the Exchange Notes in the event of a takeover, recapitalization or similar restructuring. Restrictions in the Exchange Indenture described herein on the ability of the Company and its Restricted Subsidiaries to incur additional Indebtedness, to grant Liens on its or their property, to make Restricted Payments and to make Asset Sales may also make more difficult or discourage a takeover of the Company, whether favored or opposed by the management of the Company. Consummation of any such transaction in certain circumstances may require redemption or repurchase of the Exchange Notes, and there can be no assurance that the Company or the acquiring party will have sufficient financial resources to effect such redemption or repurchase. Such restrictions and the restrictions on transactions with Affiliates may, in certain circumstances, make more difficult or discourage any leveraged buyout of the Company or any of its Subsidiaries by the management of the Company or other Persons. While such restrictions cover a variety of arrangements which have traditionally been used to effect highly leveraged transactions, the Exchange Indenture may not afford the Holders of Exchange Notes protection in all circumstances from the adverse aspects of a highly leveraged transaction, reorganization, restructuring, merger or similar transaction. The Company does not currently have adequate financial resources to effect a repurchase of the Exchange Notes upon a Change of Control and there can be no assurance that the Company will have such resources in the future. The inability of the Company to repurchase the Exchange Notes upon a Change of Control would constitute an Event of Default. In addition, there may be restrictions contained in instruments evidencing Debt incurred by the Company or its Restricted Subsidiaries permitted under the Senior Indenture and the Exchange Indenture which restrict or prohibit the ability of the Company to effect any repurchase required under the Exchange Indenture in connection with a Change of Control. In the event that the Company makes an Offer to Purchase the Exchange Notes, the Company intends to comply with any applicable securities laws and regulations, including any applicable requirements of Section 14(e) of, and Rule 14e-1 under, the Exchange Act. 102 PROVISION OF FINANCIAL INFORMATION The Company has agreed that, for so long as any Exchange Notes remain outstanding, it will furnish to the holders of the Exchange Notes and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. In addition, the Company will file with the Trustee within 15 days after it files them with the Commission copies of the annual and quarterly reports and the information, documents, and other reports that the Company is required to file with the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act ("SEC Reports"). In the event the Company shall cease to be required to file SEC Reports pursuant to the Exchange Act, the Company will nevertheless continue to file such reports with the Commission (unless the Commission will not accept such a filing) and the Trustee. The Company will furnish copies of the SEC Reports to the holders of Exchange Notes at the time the Company is required to file the same with the Trustee and will make such information available to investors who request it in writing. (Section 1017) MERGERS, CONSOLIDATIONS AND CERTAIN SALES OF ASSETS The Company may not, in a single transaction or a series of related transactions, (i) consolidate with or merge into any other Person or permit any other Person to consolidate with or merge into the Company (other than the consolidation or merger of a Wholly-Owned Restricted Subsidiary organized under the laws of a State of the United States into the Company), or (ii) directly or indirectly, transfer, sell, lease or otherwise dispose of all or substantially all of its assets (determined on a consolidated basis for the Company and its Restricted Subsidiaries taken as a whole and provided that the creation of a Lien on or in any of its assets shall not in and of itself constitute the transfer, sale, lease or disposition of the assets subject to the Lien), unless: (1) in a transaction in which the Company does not survive or in which the Company sells, leases, or otherwise disposes of all or substantially all of its assets to any other Person, the successor entity to the Company is organized under the laws of the United States of America or any State thereof or the District of Columbia and shall expressly assume, by a supplemental indenture executed and delivered to the Trustee in form satisfactory to the Trustee, all of the Company's obligation under the Exchange Indenture; (2) immediately after giving pro forma effect to such transaction as if such transaction had occurred at the beginning of the last full fiscal quarter immediately prior to the consummation of such transaction with the appropriate adjustments with respect to the transaction being included in such pro forma calculation and treating any Debt which becomes an obligation of the Company or a Subsidiary as a result of such transaction as having been incurred by the Company or such Subsidiary at the time of the transaction, no Default or Event of Default shall have occurred and be continuing; (3) immediately after giving effect to such transaction, the Consolidated Net Worth of the Company (or other successor entity to the Company) is equal to or greater than that of the Company immediately prior to the transaction; (4) the Company has delivered to the Trustee an Opinion of Counsel to the effect that the holders of the Exchange Notes will not recognize gain or loss for Federal income tax purposes as a result of such transaction; and (5) certain other conditions are met. (Section 801) In the event of any transaction (other than a lease) described in and complying with the immediately preceding paragraph in which the Company is not the surviving Person and the surviving Person assumes all the obligations of the Company under the Exchange Notes and the Exchange Indenture pursuant to a supplemental indenture, such surviving Person shall succeed to, and be substituted for, and may exercise every right and power of, the Company, and the Company will be discharged from its obligations under the Exchange Indenture and the Exchange Notes; provided that solely for the purpose of calculating amounts described in clause (3) under "Covenants--Limitation on Restricted Payments", any such surviving Person shall only be deemed to have succeeded to and be substituted for the Company with respect to the period subsequent to the effective time of such transaction, and the Company (before giving effect to such transaction) shall be deemed to be the "Company" for such purposes for all prior periods. (Section 801) 103 The meaning of the phrase "all or substantially all" as used above varies according to the facts and circumstances of the subject transaction, has no clearly established meaning under relevant law and is subject to judicial interpretation. Accordingly, in certain circumstances, there may be a degree of uncertainty in ascertaining whether a particular transaction would involve a disposition of "all or substantially all" of the assets of the Company, and therefore it may be unclear whether the foregoing provisions are applicable. EVENTS OF DEFAULT The following will be Events of Default under the Exchange Indenture: (a) failure to pay principal of (or premium, if any, on) any Exchange Note when due (whether such payment is prohibited by the subordination provisions of the Exchange Indenture); (b) failure to pay any interest on any Exchange Note when due (whether such payment is prohibited by the subordination provisions of the Exchange Indenture), and any such failure continued for 30 days as to any interest payment date thereafter; (c) default in the payment of principal and interest on Exchange Notes required to be purchased pursuant to an Offer to Purchase as described under "Covenants--Change of Control" when due and payable; (d) failure to perform or comply with the provisions described under "Mergers, Consolidations and Certain Sales of Assets"; (e) failure to perform any other covenant or agreement of the Company under the Exchange Indenture or the Exchange Notes continued for 60 days after written notice to the Company by the Trustee or holders of at least 25% in aggregate principal amount of Outstanding Exchange Notes; (f) default under the terms of any instrument evidencing or securing Debt of the Company or any Significant Subsidiary having an outstanding principal amount of $10 million individually or in the aggregate which default results in the acceleration of the payment of such Debt or constitutes the failure to pay such Debt when due; (g) the rendering of a final judgment or judgments (not subject to appeal) for the payment of money against the Company or any Significant Subsidiary in an aggregate amount in excess of $15 million which remains undischarged or unstayed for a period of 45 days after the date on which the right to appeal all such judgments has expired; and (h) certain events of bankruptcy, insolvency or reorganization affecting the Company or any Significant Subsidiary. (Section 501) Subject to the provisions of the Exchange Indenture relating to the duties of the Trustee in case an Event of Default (as defined) shall occur and be continuing, the Trustee will be under no obligation to exercise any of its rights or powers under the Exchange Indenture at the request or direction of any of the holders, unless such holders shall have offered to the Trustee reasonable indemnity. (Section 603) Subject to such provisions for the indemnification of the Trustee, the Holders of a majority in aggregate principal amount of the Outstanding Exchange Notes will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee. The Trustee may refuse, however, to follow any direction that the Trustee, in its sole discretion, determines may be unduly prejudicial to the rights of another holder or that may subject the Trustee to any liability or expense if the Trustee determines, in its sole discretion, that it lacks indemnification against such loss or expense. (Section 512) If an Event of Default (other than an Event of Default described in Clause (h) above with respect to the Company) shall occur and be continuing, either the Trustee or the holders of at least 25% in aggregate principal amount of the Outstanding Exchange Notes may accelerate the maturity of all Exchange Notes; provided, however, that after such acceleration, but before a judgment or decree based on acceleration, the Holders of a majority in aggregate principal amount of Outstanding Exchange Notes may, under certain circumstances, rescind and annul such acceleration if all Events of Default, other than the non-payment of accelerated principal, have been cured or waived as provided in the Exchange Indenture. If an Event of Default specified in Clause (h) above occurs with respect to the Company, the Outstanding Exchange Notes will ipso facto become immediately due and payable without any declaration or other act on the part of the Trustee or any holder. (Section 502) For information as to waiver of defaults, see "Modification and Waiver". 104 No holder of any Exchange Note will have any right to institute any proceeding with respect to the Exchange Indenture or for any remedy thereunder, unless such holder shall have previously given to the Trustee written notice of a continuing Event of Default (as defined) and unless also the holders of at least 25% in aggregate principal amount of the Outstanding Exchange Notes shall have made written request, and offered reasonable indemnity, to the Trustee to institute such proceeding as trustee, and the Trustee shall not have received from the holders of a majority in aggregate principal amount of the Outstanding Exchange Notes a direction inconsistent with such request and shall have failed to institute such proceeding within 60 days. (Section 507) However, such limitations do not apply to a suit instituted by a holder of an Exchange Note for enforcement of payment of the principal of and premium, if any, or interest on such Exchange Note on or after the respective due dates expressed in such Exchange Note. (Section 508) The Exchange Indenture provides that if a Default occurs and is continuing, generally the Trustee must within 90 days after the occurrence of such Default, give to the holders notice of such Default. The Trustee may withhold from holders of the Exchange Notes notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal of, premium, if any or interest) if it determines that withholding notice is in their interest; provided however, that in the case of any default of a character specified in Clause (e) above, no such notice to holders shall be given until at least 30 days after the occurrence thereof. (Section 602) The Company will be required to furnish to the Trustee quarterly a statement as to the performance by the Company of certain of its obligations under the Exchange Indenture and the Company is required upon becoming aware of any Default or Event of Default to deliver to the Trustee a statement specifying such Default or Event of Default. (Section 1019) SATISFACTION AND DISCHARGE OF THE INDENTURE The Exchange Indenture will cease to be of further effect as to all outstanding Exchange Notes (except as to (i) rights of registration of transfer and exchange and any right of the Company to effect an optional redemption, (ii) substitution of apparently mutilated, defaced, destroyed, lost or stolen Exchange Notes, (iii) rights of holders to receive payment of principal of and premium, if any, and interest on the Exchange Notes, (iv) rights, obligations and immunities of the Trustee under the Exchange Indenture and (v) rights of the Holders of the Exchange Notes as beneficiaries of the Exchange Indenture with respect to any property deposited with the Trustee payable to all or any of them), if (x) the Company will have paid or caused to be paid the principal of and premium, if any, and interest on the Exchange Notes as and when the same will have become due and payable or (y) all outstanding Exchange Notes (except lost, stolen or destroyed Exchange Notes which have been replaced or paid) have been delivered to the Trustee for cancellation. (Section 401) DEFEASANCE The Exchange Indenture will provide that, at the option of the Company, (a) if applicable, the Company will be discharged from any and all obligations in respect of the Outstanding Exchange Notes or (b) if applicable, the Company may omit to comply with certain restrictive covenants, that such omission shall not be deemed to be an Event of Default under the Exchange Indenture and the Exchange Notes and that the subordination provisions of the Exchange Indenture will cease to apply, in either case (a) or (b) upon irrevocable deposit with the Trustee, in trust, of money and/or U.S. government obligations which will provide money in an amount sufficient in the opinion of a nationally recognized firm of independent certified public accountants to pay the principal of and premium, if any, and each installment of interest, if any, on the Outstanding Exchange Notes on the Stated Maturity. With respect to clause (b), the obligations under the Exchange Indenture other than with respect to such covenants and the Events of Default other than the Events of Default relating to such covenants above shall remain in full force and effect. Such trust may only be established if, among other things (i) with respect to clause (a), the Issuers have received from, or there has been published by, the Internal 105 Revenue Service a ruling or there has been a change in law after the Issue Date, which in the Opinion of Counsel provides that holders of the Exchange Notes will not recognize gain or loss for Federal income tax purposes as a result of such deposit, defeasance and discharge and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such deposit, defeasance and discharge had not occurred; or, with respect to clause (b), the Company has delivered to the Trustee an Opinion of Counsel to the effect that the holders of the Exchange Notes will not recognize gain or loss for Federal income tax purposes as a result of such deposit and defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred; (ii) no Default or Event of Default shall have occurred or be continuing; (iii) at the time of such deposit, no default in the payment of all or a portion of principal of (or premium, if any) or interest on or other obligations in respect of any Senior Debt shall have occurred and be continuing and no other event of default with respect to any Senior Debt shall have occurred and be continuing permitting after notice or the lapse of time, or both, the acceleration thereof; (iv) the Company has delivered to the Trustee an Opinion of Counsel to the effect that such deposit shall not cause the Trustee or the trust so created to be subject to the Investment Company Act of 1940, as amended; and (v) certain other customary conditions precedent are satisfied. (Section 1201) MODIFICATION AND WAIVER Modifications and amendments of the Exchange Indenture may be made by the Company and the Trustee with the consent of the holders of a majority in aggregate principal amount of the Outstanding Exchange Notes; provided, however, that no such modification or amendment may, without the consent of the holder of each Outstanding Exchange Note affected thereby, (a) change the due date of the principal of, or any installment of interest on, any Exchange Note, (b) reduce the principal amount of, or the premium or interest on, any Exchange Note, (c) change the place or currency of payment of principal of, or premium or interest on, any Exchange Note, (d) impair the right to institute suit for the enforcement of any payment on or with respect to any Exchange Note, (e) reduce the above-stated percentage of Outstanding Exchange Notes necessary to modify or amend the Exchange Indenture, (f) reduce the percentage of aggregate principal amount of Outstanding Exchange Notes necessary for waiver of compliance with certain provisions of the Exchange Indenture or for waiver of certain defaults, (g) modify any provisions of the Exchange Indenture relating to the modification and amendment of the Exchange Indenture or the waiver of past defaults or covenants, except as otherwise specified, (h) following the mailing of any Offer to Purchase and until the Expiration Date of that Offer to Purchase, modify any Offer to Purchase for the Exchange Notes required under the "Limitation on Asset Dispositions" and the "Change of Control" covenants contained in the Exchange Indenture in a manner materially adverse to the holders thereof or (i) modify any of the subordination provisions of the Exchange Indenture in a manner adverse to the holders of the Exchange Notes. (Section 902) Notwithstanding the foregoing, without the consent of any holder of Exchange Notes, the Company and the Trustee may amend or supplement the Exchange Indenture or the Exchange Notes to cure any ambiguity, defect or inconsistency, to provide for uncertificated Exchange Notes in addition to or in place of certificated Exchange Notes, to provide for the assumption of the Company's obligations to holders of Exchange Notes in the case of a merger or consolidation, to make any change that would provide any additional rights or benefits to holders of Exchange Notes or that does not adversely affect the legal rights under the Exchange Indenture of any such holder, or to comply with requirements of the Commission in order to effect or maintain the qualification of the Exchange Indenture under the Trust Indenture Act. (Section 901) The holders of a majority in aggregate principal amount of the Outstanding Exchange Notes, on behalf of all holders of Exchange Notes, may waive compliance by the Company with certain restrictive provisions of the Exchange Indenture. (Section 1019) Subject to certain rights of the Trustee, as provided in the 106 Exchange Indenture, the holders of a majority in aggregate principal amount of the Outstanding Exchange Notes, on behalf of all holders of Exchange Notes, may waive any past default under the Exchange Indenture, except a default in the payment of principal, premium or interest or a default arising from failure to purchase any Exchange Note tendered pursuant to an Offer to Purchase. (Section 513) NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS No director, officer, employee, incorporator or stockholder of the Company, as such, shall have any liability for any obligations of the Company under the Exchange Notes or the Exchange Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each holder of Exchange Notes by accepting an Exchange Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Exchange Notes. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the Commission that such waiver is against public policy. GOVERNING LAW The Exchange Indenture and the Exchange Notes will be governed by the laws of the State of New York. THE TRUSTEE The Exchange Indenture provides that, except during the continuance of an Event of Default, the Trustee will perform only such duties as are specifically set forth in the Exchange Indenture. During the existence of an Event of Default, the Trustee will exercise such rights and powers vested in it under the Exchange Indenture and use the same degree of care and skill in its exercise as a prudent person would exercise under the circumstances in the conduct of such person's own affairs. (Section 601) The Exchange Indenture and provisions of the Trust Indenture Act incorporated by reference therein contain limitations on the rights of the Trustee, should it become a creditor of the Company, to obtain payment of claims in certain cases or to realize on certain property received by it in respect of any such claim as security or otherwise. The Trustee is permitted to engage in other transactions with the Company or any Affiliate, provided, however, that if it acquires any conflicting interest (as defined in the Exchange Indenture or in the Trust Indenture Act), it must eliminate such conflict or resign. (SectionSection 608 and 613) 107 DEFINITIONS Set forth below is a summary of certain of the defined terms used in the Certificate of Designations provisions and in the Exchange Indenture. Reference is made to the Certificate of Designations and the Exchange Indenture for the full definition of all such terms, as well as any other terms used herein for which no definition is provided. "Acquired Debt" means, with respect to any specified Person, (i) Debt of any other Person existing at the time such Person merges with or into or consolidates with or becomes a Restricted Subsidiary of such specified Person and (ii) Debt secured by a Lien encumbering any asset acquired by such specified Person, which Debt was not Incurred in anticipation of, and was outstanding prior to, such merger, consolidation or acquisition. "Affiliate" of any Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such Person. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Asset Disposition" by any Person means any transfer, conveyance, sale, lease or other disposition by such Person or any of its Restricted Subsidiaries (including a consolidation or merger or other sale of any such Restricted Subsidiary with, into or to another Person in a transaction in which such Restricted Subsidiary ceases to be a Restricted Subsidiary of the specified Person, but excluding a disposition by a Restricted Subsidiary of such Person to such Person or a Wholly-Owned Restricted Subsidiary of such Person or by such Person to a Wholly-Owned Restricted Subsidiary of such Person) of (i) shares of Capital Stock or other ownership interests of a Restricted Subsidiary of such Person, other than pursuant to a transaction in compliance with the covenant described under "Description of Exchange Notes-- Mergers, Consolidations and Certain Sales of Assets", (ii) substantially all of the assets of such Person or any of its Restricted Subsidiaries representing a division or line of business (other than as part of a Permitted Investment) or (iii) other assets or rights of such Person or any of its Restricted Subsidiaries other than (A) in the ordinary course of business or (B) that constitutes a Restricted Payment which is permitted under the covenant "Description of Exchange Notes--Limitation on Restricted Payments" above; provided that a transaction described in clauses (i), (ii) and (iii) shall constitute an Asset Disposition only if the aggregate consideration for such transfer, conveyance, sale, lease or other disposition is equal to $5 million or more in any 12-month period. "Bank Credit Agreement" means any one or more credit agreements (which may include or consist of revolving credits) between the Company or any Restricted Subsidiary of the Company and one or more banks or other financial institutions providing financing for the business of the Company and its Restricted Subsidiaries. "Capital Lease Obligation" of any Person means the obligation to pay rent or other payment amounts under a lease of (or other Debt arrangements conveying the right to use) real or personal property of such Person which is required to be classified and accounted for as a capital lease or a liability on the face of a balance sheet of such Person in accordance with generally accepted accounting principles (a "Capital Lease"). The stated maturity of such obligation shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. The principal amount of such obligation shall be the capitalized amount thereof that would appear on the face of a balance sheet of such Person in accordance with generally accepted accounting principles. "Capital Stock" of any Person means any and all shares, interests, participations or other equivalents (however designated) of corporate stock or other equity participations, including partnership interests, whether general or limited, of such Person. 108 "Common Equity" of any Person means Capital Stock of such Person that is not Disqualified Stock, and a "Sale of Common Equity" includes any sale effected by private sale or public offering. "Consolidated Capital Ratio" of any Person as of any date means the ratio of (i) the aggregate consolidated principal amount of Debt of such Person then outstanding to (ii) the aggregate consolidated Capital Stock (other than Disqualified Stock) and paid-in capital (other than in respect of Disqualified Stock) of such Person as of such date. "Consolidated Cash Flow Available for Fixed Charges" for any period means the Consolidated Net Income of the Company and its Restricted Subsidiaries for such period increased by the sum of (i) Consolidated Interest Expense of the Company and its Restricted Subsidiaries for such period, plus (ii) Consolidated Income Tax Expense of the Company and its Restricted Subsidiaries for such period, plus (iii) the consolidated depreciation and amortization expense included in the income statement of the Company and its Restricted Subsidiaries for such period plus (iv) any non-cash expense related to the issuance to employees of the Company or any Restricted Subsidiary of the Company of options to purchase Capital Stock of the Company or such Restricted Subsidiary, plus (v) any charge related to any premium or penalty paid in connection with redeeming or retiring any Debt prior to its stated maturity; provided, however, that there shall be excluded therefrom the Consolidated Cash Flow Available for Fixed Charges (if positive) of any Restricted Subsidiary of the Company (calculated separately for such Restricted Subsidiary in the same manner as provided above for the Company) that is subject to a restriction which prevents the payment of dividends or the making of distributions to the Company or another Restricted Subsidiary of the Company to the extent of such restriction. "Consolidated Income Tax Expense" for any period means the consolidated provision for income taxes of the Company and its Restricted Subsidiaries for such period calculated on a consolidated basis in accordance with generally accepted accounting principles. "Consolidated Interest Expense" means for any period the consolidated interest expense included in a consolidated income statement (excluding interest income) of the Company and its Restricted Subsidiaries for such period calculated on a consolidated basis in accordance with generally accepted accounting principles, including without limitation or duplication (or, to the extent not so included, with the addition of), (i) the amortization of Debt discounts; (ii) any payments or fees with respect to letters of credit, bankers' acceptances or similar facilities; (iii) fees with respect to interest rate swap or similar agreements or foreign currency hedge, exchange or similar agreements; (iv) Preferred Stock dividends of the Company and its Restricted Subsidiaries (other than dividends paid in shares of Preferred Stock that is not Disqualified Stock) declared and paid or payable; (v) accrued Disqualified Stock dividends of the Company and its Restricted Subsidiaries, whether or not declared or paid; (vi) interest on Debt guaranteed by the Company and its Restricted Subsidiaries; and (vii) the portion of any Capital Lease Obligation paid during such period that is allocable to interest expense. "Consolidated Net Income" for any period means the consolidated net income (or loss) of the Company and its Restricted Subsidiaries for such period determined on a consolidated basis in accordance with generally accepted accounting principles; provided that there shall be excluded therefrom (a) the net income (or loss) of any Person acquired by the Company or a Restricted Subsidiary of the Company in a pooling-of-interests transaction for any period prior to the date of such transaction, (b) the net income (or loss) of any Person that is not a Restricted Subsidiary of the Company except to the extent of the amount of dividends or other distributions actually paid to the Company or a Restricted Subsidiary of the Company by such Person during such period, (c) gains or losses on Asset Dispositions by the Company or its Restricted Subsidiaries, (d) all extraordinary gains and extraordinary losses, (e) the cumulative effect of changes in accounting principles, (f) non-cash gains or losses resulting from fluctuations in currency exchange rates, (g) any non-cash gain or loss realized on the termination of any employee pension benefit plan and (h) the tax effect of any of the items described in clauses (a) through (g) above; provided, further, that for purposes of any determination pursuant to the provisions described 109 under "Description of the Exchange Notes--Covenants--Limitation on Restricted Payments," there shall further be excluded therefrom the net income (but not net loss) of any Restricted Subsidiary of the Company that is subject to a restriction which prevents the payment of dividends or the making of distributions to the Company or another Restricted Subsidiary of the Company to the extent of such restriction. "Consolidated Net Worth" of any Person means the consolidated stockholders' equity of such Person, determined on a consolidated basis in accordance with generally accepted accounting principles, less amounts attributable to Disqualified Stock of such Person; provided that, with respect to the Company, adjustments following the date of the Exchange Indenture to the accounting books and records of the Company in accordance with Accounting Principles Board Opinions Nos. 16 and 17 (or successor opinions thereto) or otherwise resulting from the acquisition of control of the Company by another Person shall not be given effect to. "Consolidated Tangible Assets" of any Person means the total amount of assets (less applicable reserves and other properly deductible items) which under generally accepted accounting principles would be included on a consolidated balance sheet of such Person and its Restricted Subsidiaries after deducting therefrom all goodwill, trade names, trademarks, patents, unamortized debt discount and expense and other like intangibles, which in each case under generally accepted accounting principles would be included on such consolidated balance sheet; provided that, with respect to the Company, adjustments following the date of the Exchange Indenture to the accounting books and records of the Company in accordance with Accounting Principles Board Opinions Nos. 16 and 17 (or successor opinions thereto) or otherwise resulting from the acquisition of control of the Company by another Person shall not be given effect to. "Current Market Price" per Junior Share or any other security at any date means (i) if the security is not registered under the Exchange Act, (a) the value of the security, determined in good faith by the Board of Directors of the Company, based on the most recently completed arm's-length transaction between Company and a person other than an Affiliate of the Company and the closing of which occurs on such date or shall have occurred within the six-month period preceding such date, or (b) if no such transaction shall have occurred on such date or within such six-month period, the value of the security as determined by an independent financial expert (provided that, in the case of the calculation of Current Market Price for determining the cash value of fractional shares, any such determination within six months that is, in the good faith judgment of the Board of Directors of the Company, a reasonable determination, may be utilized) or (ii) (a) if the security is registered under the Exchange Act, the average of the daily market prices of the security for the 20 consecutive trading days immediately preceding such date, or (b) if the security has been registered under the Exchange Act for less than 20 consecutive trading days before such date, then the average of the closing sales prices for all of the trading days before such date for which closing sales prices are available, in the case of each of (ii) (a) and (ii) (b), as certified to the Warrant Agent by the President, any Vice President or the Chief Financial Officer of the Company. The market price for each such trading day shall be: (A) in the case of a security listed or admitted to trading on any national securities exchange or quotation system, the closing sales price, regular way, on such day, or if no sale takes place on such day, the average of the closing bid and asked prices on such day, (B) in the case of a security not then listed or admitted to trading on any national securities exchange or quotation system, the last reported sale price on such day, or if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reputable quotation source designated by the Company, (C) in the case of a security not then listed or admitted to trading on any national securities exchange or quotation system and as to which no such reported sale price or bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported by a reputable quotation service, or a newspaper of general circulation in the Borough of Manhattan, City and State of New York, customarily published on each Business Day, designated by the Company, or, if there shall be no bid and asked prices on such day, the 110 average of the high bid and low asked prices, as so reported, on the most recent day (not more than 30 days prior to the date in question) for which prices have been so reported and (D) if there are no bid and asked prices reported during the 30 days prior to the date in question, the Current Market Price shall be determined as if the securities were not registered under the Exchange Act. "Debt" means (without duplication), with respect to any Person, whether recourse is to all or a portion of the assets of such Person and whether or not contingent, (i) every obligation of such Person for money borrowed, (ii) every obligation of such Person evidenced by bonds, debentures, notes or other similar instruments, including any such obligations Incurred in connection with the acquisition of property, assets or businesses, (iii) every reimbursement obligation of such Person with respect to letters of credit, bankers' acceptances or similar facilities issued for the account of such Person, (iv) every obligation of such Person issued or assumed as the deferred purchase price of property or services (including securities repurchase agreements but excluding trade accounts payable or accrued liabilities arising in the ordinary course of business which are not overdue or which are being contested in good faith), (v) every Capital Lease Obligation of such Person, (vi) all Receivables Sales of such Person, together with any obligation of such Person to pay any discount, interest, fees, indemnities, penalties, recourse, expenses or other amounts in connection therewith, (vii) all obligations to redeem Disqualified Stock issued by such Person, (viii) every obligation under Interest Rate and Currency Protection Agreements of such Person and (ix) every obligation of the type referred to in clauses (i) through (viii) of another Person and all dividends of another Person the payment of which, in either case, such Person has Guaranteed. The "amount" or "principal amount" of Debt at any time of determination as used herein represented by (a) any Debt issued at a price that is less than the principal amount at maturity thereof, shall be the amount of the liability in respect thereof determined in accordance with generally accepted accounting principles, (b) any Receivables Sale, shall be the amount of the unrecovered capital or principal investment of the purchaser (other than the Company or a Wholly-Owned Restricted Subsidiary of the Company) thereof, excluding amounts representative of yield or interest earned on such investment, (c) any Disqualified Stock, shall be the maximum fixed redemption or repurchase price in respect thereof, (d) any Capital Lease Obligation, shall be determined in accordance with the definition thereof, or (e) any Permitted Interest Rate or Currency Protection Agreement, shall be zero. In no event shall Debt include any liability for taxes. "Default" means an event that with the passing of time or the giving of notice or both shall constitute an Event of Default. "Disqualified Stock" of any Person means any Capital Stock of such Person which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the option of the holder thereof, in whole or in part, on or prior to the final Stated Maturity of the Exchange Notes or the mandatory redemption date of the Preferred Shares, as applicable; provided, however, that any Preferred Stock which would not constitute Disqualified Stock but for provisions thereof giving holders thereof the right to require the Company to repurchase or redeem such Preferred Stock upon the occurrence of a Change of Control occurring prior to the final Stated Maturity of the Exchange Notes or the mandatory redemption date of the Preferred Shares, as applicable, shall not constitute Disqualified Stock if the change of control provisions applicable to such Preferred Stock are no more favorable to the holders of such Preferred Stock than the provisions applicable, in the case of Exchange Notes, to the Exchange Notes contained in the covenant described under "Description of the Exchange Notes--Covenants--Change of Control" or to the Preferred Shares, in the case of Preferred Shares, contained in the covenant described under "Description of Preferred Shares--Change of Control" and such Preferred Stock specifically provides that the Company will not repurchase or redeem any such stock pursuant to such provisions prior to the Company's repurchase of such Exchange Notes or Preferred Shares, as applicable, as are required to be repurchased pursuant to such covenant. 111 "Eligible Institution" means a commercial banking institution that has combined capital and surplus of not less than $500 million or its equivalent in foreign currency, whose debt is rated "A-3" or higher, "A-" or higher or "A-" or higher according to Moody's Investors Service, Inc., Standard & Poor's Ratings Group or Duff & Phelps Credit Rating Co. (or such similar equivalent rating by at least one "nationally recognized statistical rating organization" (as defined in Rule 436 under the Securities Act)) respectively, at the time as of which any investment or rollover therein is made. "Event of Default" has the meaning set forth under "Description of the Exchange Notes--Events of Default". "Exchange Act" means the Securities Exchange Act of 1934, as amended (or any successor act) and the rules and regulations thereunder. "Government Securities" means direct obligations of, or obligations guaranteed by, the United States of America for the payment of which obligations or guarantee the full faith and credit of the United States is pledged and which have a remaining weighted average life to maturity of not more than 18 months from the date of Investment therein. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person guaranteeing, or having the economic effect of guaranteeing, any Debt of any other Person (the "primary obligor") in any manner, whether directly or indirectly, and including, without limitation, any obligation of such Person, (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such Debt, (ii) to purchase property, securities or services for the purpose of assuring the holder of such Debt of the payment of such Debt, or (iii) to maintain working capital, equity capital or other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Debt (and "Guaranteed", "Guaranteeing" and "Guarantor" shall have meanings correlative to the foregoing); provided, however, that the Guarantee by any Person shall not include endorsements by such Person for collection or deposit, in either case, in the ordinary course of business; and provided further, that the incurrence by a Restricted Subsidiary of the Company of a lien on real or personal property of such Restricted Subsidiary acquired, constructed or constituting improvements made after the Issue Date to secure Purchase Money Debt which is Incurred for the construction, acquisition and improvement of Telecommunications Assets and is otherwise permitted under the Exchange Indenture, shall not be deemed to constitute a Guarantee by such Restricted Subsidiary of any Purchase Money Debt of the Company secured thereby; provided, however, that (a) the net proceeds of any Debt secured by such a Lien does not exceed 100% of such purchase price or cost of construction or improvement of the property subject to such Lien; (b) such Lien attaches to such property prior to, at the time of or within 180 days after the acquisition, completion of construction or commencement of operation of such property; and (c) such Lien does not extend to or cover any property other than the property (or identifiable portions thereof) acquired, constructed or constituting improvements made with the proceeds of such Purchase Money Debt (it being understood and agreed that all Debt owed to any single lender or group or lenders or outstanding under any single credit facility shall be considered a single Purchase Money Debt, whether drawn at one time or from time to time). "Incur" means, with respect to any Debt or other obligation of any Person, to create, issue, incur (by conversion, exchange or otherwise), assume, Guarantee or otherwise become liable in respect of such Debt or other obligation including by acquisition of Subsidiaries or the recording, as required pursuant to generally accepted accounting principles or otherwise, of any such Debt or other obligation on the balance sheet of such Person (and "Incurrence", "Incurred", "Incurrable" and "Incurring" shall have meanings correlative to the foregoing); provided, however, that a change in generally accepted accounting principles that results in an obligation of such Person that exists at such time becoming Debt shall not be deemed an Incurrence of such Debt and that neither the accrual of interest nor the accretion of original issue discount shall be deemed an Incurrence of Debt; provided, further, however, that the 112 Company may elect to treat all or any portion of revolving credit debt of the Company or a Subsidiary as being Incurred from and after any date beginning the date the revolving credit commitment is extended to the Company or a Subsidiary, by furnishing notice thereof to the Trustee or the Transfer Agent, as applicable, and any borrowings or reborrowings by the Company or a Subsidiary under such commitment up to the amount of such commitment designated by the Company as Incurred shall not be deemed to be new Incurrences of Debt by the Company or such Subsidiary. "Interest Rate or Currency Protection Agreement" of any Person means any forward contract, futures contract, swap, option or other financial agreement or arrangement (including, without limitation, caps, floors, collars and similar agreements) relating to, or the value of which is dependent upon, interest rates or currency exchange rates or indices. "Investment" by any Person means any direct or indirect loan, advance or other extension of credit or capital contribution (by means of transfers of cash or other property to others or payments for property or services for the account or use of others, or otherwise) to, or purchase or acquisition of Capital Stock, bonds, notes, debentures or other securities or evidence of Debt issued by, any other Person, including any payment on a Guarantee of any obligation of such other Person, but excluding any loan, advance or extension of credit to an employee of the Company or any of its Restricted Subsidiaries in the ordinary course of business, accounts receivables and other commercially reasonable extensions of trade credit. "Issue Date" means the date on which the Old Preferred Shares are first issued and delivered. "Joint Venture" means a corporation, partnership or other entity engaged in one or more Telecommunications Businesses as to which the Company (directly or through one or more Restricted Subsidiaries) exercises managerial control and in which the Company owns (i) a 50% or greater interest, or (ii) a 40% or greater interest, together with options or other contractual rights, exercisable not more than seven years after the Company's initial Investment in such Joint Venture, to increase its interest to not less than 50%. "Junior Shares" means Capital Stock of the Company that does not rank, as to the payment of dividends or other comparable distributions or as to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, prior to or on a parity with the Preferred Shares. "Lien" means, with respect to any property or assets, any mortgage or deed of trust, pledge, hypothecation, assignment, Receivables Sale, deposit arrangement, security interest, lien, charge, easement (other than any easement not materially impairing usefulness or marketability), encumbrance, preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever on or with respect to such property or assets (including, without limitation, any conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing). "Marketable Securities" means: (i) Government Securities; (ii) any time deposit account, money market deposit and certificate of deposit maturing not more than 270 days after the date of acquisition issued by, or time deposit of, an Eligible Institution; (iii) commercial paper maturing not more than 270 days after the date of acquisition issued by a corporation (other than an Affiliate of the Company) with a rating, at the time as of which any investment therein is made, of "P-1" or higher according to Moody's Investors Service, Inc., "A-1" or higher according to Standard & Poor's Ratings Group or "A-1" or higher according to Duff & Phelps Credit Rating Co. (or such similar equivalent rating by at least one "nationally recognized statistical rating organization" (as defined in Rule 436 under the Securities Act)); (iv) any banker's acceptances or money market deposit accounts issued or offered by an Eligible Institution; (v) repurchase obligations with a term of not more than 7 days for Government Securities entered into with 113 an Eligible Institution; and (vi) any fund investing exclusively in investments of the types described in clauses (i) through (v) above. "Net Available Proceeds" from any Asset Disposition by any Person means cash or readily marketable cash equivalents received (including by way of sale or discounting of a note, installment receivable or other receivable, but excluding any other consideration received in the form of assumption by the acquiror of Debt or other obligations relating to such properties or assets) therefrom by such Person, net of (i) all legal, title and recording tax expenses, commissions and other fees and expenses Incurred and all federal, state, provincial, foreign and local taxes (including taxes payable upon payment or other distribution of funds from a foreign subsidiary to the Company or another subsidiary of the Company) required to be accrued as a liability as a consequence of such Asset Disposition, (ii) all payments made by such Person or its Restricted Subsidiaries on any Debt which is secured by such assets in accordance with the terms of any Lien upon or with respect to such assets or which must by the terms of such Lien, or in order to obtain a necessary consent to such Asset Disposition or by applicable law, be repaid out of the proceeds from such Asset Disposition, (iii) all distributions and other payments made to minority interest holders in Restricted Subsidiaries of such Person or joint ventures as a result of such Asset Disposition, (iv) appropriate amounts to be provided by such Person or any Restricted Subsidiary thereof, as the case may be, as a reserve in accordance with generally accepted accounting principles against any liabilities associated with such assets and retained by such Person or any Restricted Subsidiary thereof, as the case may be, after such Asset Disposition, including, without limitation, liabilities under any indemnification obligations and severance and other employee termination costs associated with such Asset Disposition, in each case as determined by the Board of Directors of the Company, in reasonable good faith judgment and evidenced by a board resolution filed with the Trustee; provided, however, that any reduction in such reserve within twelve months following the consummation of such Asset Disposition will be treated for all purposes of the Indenture and the Exchange Notes as a new Asset Disposition at the time of such reduction with Net Available Proceeds equal to the amount of such reduction, and (v) any consideration for an Asset Disposition (which would otherwise constitute Net Available Proceeds) that is required to be held in escrow pending determination of whether a purchase price adjustment will be made, but amounts under this clause (v) shall become Net Available Proceeds at such time and to the extent such amounts are released to such Person. "Offer to Purchase" means a written offer (the "Offer") sent by the Company by first class mail, postage prepaid, to each holder at his address appearing in the records of the Company with respect to the Preferred Shares and the Note Register with respect to the Exchange Notes, on the date of the Offer offering to purchase up to the liquidation preference of Preferred Shares or the principal amount of Exchange Notes, as applicable, specified in such Offer at the purchase price specified in such Offer (as determined pursuant to the Certificate of Designations or the Exchange Indenture, as the case may be). Unless otherwise required by applicable law, the Offer shall specify an expiration date (the "Expiration Date") of the Offer to Purchase which shall be, subject to any contrary requirements of applicable law, not less than 30 days or more than 60 days after the date of such Offer and a settlement date (the "Purchase Date") for purchase of such security within five Business Days after the Expiration Date. The Company shall notify the Transfer Agent or the Trustee, as the case may be at least 15 business days (or such shorter period as is acceptable to the Transfer Agent or the Trustee, as the case may be, prior to the mailing of the Offer of the Company's obligation to make an Offer to Purchase, and the Offer shall be mailed by the Company or, at the Company's request, by the Transfer Agent or the Trustee, as the case may be, in the name and at the expense of the Company. The Offer shall contain information concerning the business of the Company and its Subsidiaries which the Company in good faith believes will enable such holders to make an informed decision with respect to the Offer to Purchase (which at a minimum will include (i) the most recent annual and quarterly financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the documents required to be filed with the Transfer Agent or the Trustee, as the case may be, pursuant to the Certificate of Designations or the Exchange Indenture (which requirements may be satisfied by delivery of such 114 documents together with the Offer), (ii) a description of material developments in the Company's business subsequent to the date of the latest of such financial statements referred to in clause (i) (including a description of the events that require the making of the Offer to Purchase), (iii) if applicable, appropriate pro forma financial information concerning the Offer to Purchase and the events that require the making of the Offer to Purchase and (iv) any other information required by applicable law to be included therein). The Offer shall contain all instructions and materials necessary to enable such holders to tender Preferred Shares or Exchange Notes pursuant to the Offer to Purchase. The Offer shall also state: a. the Section of the Certificate of Designations or the Exchange Indenture, if applicable, pursuant to which the Offer to Purchase is being made; b. the Expiration Date and the Purchase Date; c. the aggregate liquidation preference of the Outstanding Preferred Shares or principal amount of the Outstanding Exchange Notes, as applicable, offered to be purchased by the Company pursuant to the Offer to Purchase (including, if less than 100%, the manner by which such has been determined pursuant to the provision requiring the Offer to Purchase) (the "Purchase Amount"); d. the purchase price to be paid by the Company for Preferred Shares or Exchange Notes, as applicable, accepted for payment (as specified pursuant to the Certificate of Designations or the Exchange Indenture) (the "Purchase Price"); e. that the holder may tender all or any portion of the Preferred Shares or Exchange Notes registered in the name of such holder, and that any portion of an Exchange Note tendered must be tendered in an integral multiple of $1,000 principal amount; f. the place or places where Preferred Shares or Exchange Notes, as applicable, are to be surrendered for tender pursuant to the Offer to Purchase; g. that dividends on any Preferred Share or interest on any Exchange Note, as applicable, not tendered or tendered but not purchased by the Company pursuant to the Offer to Purchase will continue to accrue; h. that on the Purchase Date the Purchase Price will become due and payable upon each Preferred Share or Exchange Note being accepted for payment pursuant to the Offer to Purchase and that dividends or interest thereon, as applicable, shall cease to accrue on and after the Purchase Date; i. that each holder electing to tender a Preferred Share or Exchange Note pursuant to the Offer to Purchase will be required to surrender such Preferred Share or Exchange Note at the place or places specified in the Offer prior to the close of business on the Expiration Date (such Preferred Share or Exchange Note being, if the Company or the Transfer Agent or the Trustee, as applicable, so requires, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Transfer Agent or Trustee, as applicable, duly executed by, the holder thereof or his attorney duly authorized in writing); j. that holders will be entitled to withdraw all or any portion of Preferred Shares or Exchange Notes, as applicable, tendered if the Company (or its Paying Agent) receives, not later than the close of business on the Expiration Date, a telegram, telex, facsimile transmission or letter setting forth the name of the holder, the number of Preferred Shares or the principal amount of the Exchange Note the holder tendered, the certificate number of the Preferred Share or Exchange Note the holder tendered and a statement that such holder is withdrawing all or a portion of his tender; 115 k. that (a) if Preferred Shares or Exchange Notes in an aggregate amount less than or equal to the Purchase Amount are duly tendered and not withdrawn pursuant to the Offer to Purchase, the Company shall purchase all such Preferred Shares or Exchange Notes and (b) in the case of Exchange Notes, if Exchange Notes in an aggregate principal amount in excess of the Purchase Amount are tendered and not withdrawn pursuant to the Offer to Purchase, the Company shall purchase Exchange Notes having an aggregate principal amount equal to the Purchase Amount on a PRO RATA basis (with such adjustments as may be deemed appropriate so that only Exchange Notes in denominations of $1,000 or integral multiples thereof shall be purchased); and l. that in the case of any holder whose Preferred Shares or Exchange Notes are purchased only in part, the Company shall issue and the Transfer Agent shall countersign and execute, and the Trustee shall authenticate and deliver to the holder of such Preferred Shares or Exchange Notes without service charge, a new Preferred Share or Preferred Shares or Exchange Note or Exchange Notes, as applicable, of any authorized denomination, in the case of Exchange Notes, as requested by such holder, in an aggregate principal amount equal to and in exchange for the unpurchased portion of the Exchange Note so tendered. Any Offer to Purchase shall be governed by and effected in accordance with the Offer for such Offer to Purchase. "Permitted Interest Rate or Currency Protection Agreement" of any Person means any Interest Rate or Currency Protection Agreement entered into with one or more financial institutions in the ordinary course of business that is designed to protect such Person against fluctuations in interest rates or currency exchange rates with respect to Debt Incurred and which shall have a notional amount no greater than the payments due with respect to the Debt being hedged thereby and not for purposes of speculation. "Permitted Investment" means (i) any Investment in a Joint Venture (including the purchase or acquisition of any Capital Stock of a Joint Venture), provided the aggregate amount of all outstanding Investments pursuant to this clause (i) in Joint Ventures in which the Company owns, directly or indirectly, a less than 50% interest shall not exceed $25 million, (ii) any Investment in any Person as a result of which such Person becomes a Restricted Subsidiary or, subject to the proviso to clause (i) of this definition, becomes a Joint Venture of the Company, (iii) any Investment in Marketable Securities, (iv) Investments in Permitted Interest Rate or Currency Protection Agreements, and (v) Investments made as a result of the receipt of noncash consideration from an Asset Disposition that was made pursuant to and in compliance with the covenant described under "Description of the Exchange Notes-- Covenants--Limitation on Asset Dispositions". "Person" means any individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, trust, unincorporated organization, government or agency or political subdivision thereof or any other entity. "Preferred Dividends" for any Person means for any period the quotient determined by dividing the amount of dividends and distributions paid or accrued (whether or not declared) on Preferred Stock of such Person during such period calculated in accordance with generally accepted accounting principles, by 1 minus the maximum statutory income tax rate then applicable to the Company (expressed as a decimal). "Preferred Stock" of any Person means Capital Stock of such Person of any class or classes (however designated) that ranks prior, as to the payment of dividends or as to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of such Person, to shares of Capital Stock of any other class of such Person. 116 "Public Equity Offering" means an underwritten public offering of common stock, par value $.01 per share, of the Company pursuant to an effective registration statement filed with the Commission in accordance with the Securities Act. "Purchase Money Debt" means (i) Acquired Debt Incurred in connection with the acquisition of Telecommunications Assets and (ii) Debt of the Company or of any Restricted Subsidiary of the Company (including, without limitation, Debt represented by Capital Lease Obligations, Vendor Financing Facilities, mortgage financings and purchase money obligations) Incurred for the purpose of financing all or any part of the cost of construction, acquisition or improvement by the Company or any Restricted Subsidiary of the Company or any Joint Venture of any Telecommunications Assets of the Company, any Restricted Subsidiary of the Company or any Joint Venture, and including any related notes, Guarantees, collateral documents, instruments and agreements executed in connection therewith, as the same may be amended, supplemented, modified or restated from time to time. "Qualifying Event" means a Public Equity Offering or one or more Strategic Equity Investments which in either case results in aggregate net proceeds to the Company of not less than $75 million. "Qualified Junior Shares" means Junior Shares that do not constitute Disqualified Stock. "Receivables" means receivables, chattel paper, instruments, documents or intangibles evidencing or relating to the right to payment of money in respect of the sale of goods or services. "Receivables Sale" of any Person means any sale of Receivables of such Person (pursuant to a purchase facility or otherwise), other than in connection with a disposition of the business operations of such Person relating thereto or a disposition of defaulted Receivables for purpose of collection and not as a financing arrangement. "Related Person" of any Person means any other Person directly or indirectly owning (a) 10% or more of the Outstanding Common Equity of such Person (or, in the case of a Person that is not a corporation, 10% or more of the equity interest in such Person) or (b) 10% or more of the combined voting power of the Voting Stock of such Person. "Restricted Subsidiary" of the Company means any Subsidiary, whether existing on or after the date of original issuance of the Exchange Notes, unless such Subsidiary is an Unrestricted Subsidiary. "Significant Subsidiary" means a Restricted Subsidiary that is a "significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X under the Securities Act and the Exchange Act. "Strategic Equity Investment" means an investment in Qualified Junior Shares made by a Strategic Investor in an aggregate amount of not less than $25 million. "Strategic Investor" means a Person engaged in one or more Telecommunications Businesses (which need not be such Person's primary business) that has, or 80% or more of the Voting Stock of which is owned, directly or indirectly, by a Person that has, an equity market capitalization or net worth, at the time of its initial Investment in the Company, in excess of $2.0 billion. "Subordinated Debt" means Debt of the Company as to which the payment of principal of (and premium, if any) and interest and other payment obligations in respect of such Debt shall be subordinate to the prior payment in full of the Exchange Notes, or the Senior Notes if the Exchange Notes have not yet been issued, to at least the following extent: (i) no payments of principal of (or premium, if any) or interest on or otherwise due in respect of such Debt may be permitted for so long as any default in the payment of principal (or premium, if any) or interest on the Exchange Notes or Senior Notes, as applicable, exists; (ii) in the event that any other default that with the passing of time or the giving of notice, or both, would constitute an Event of Default exists with respect to the Exchange Notes or Senior Notes, as applicable, upon notice by 25% or more in principal amount of the Exchange Notes or Senior Notes, as applicable, to the Trustee, the Trustee shall have the right to give notice to the Company and 117 the holders of such Debt (or trustees or agents therefor) of a payment blockage, and thereafter no payments of principal of (or premium, if any) or interest on or otherwise due in respect of such Debt may be made for a period of 179 days from the date of such notice or for the period until such default has been cured or waived or ceased to exist and any acceleration of the Exchange Notes or Senior Notes, as applicable, has been rescinded or annulled, whichever period is shorter (which Debt may provide that (A) no new period of payment blockage may be commenced by a payment blockage notice unless and until 360 days have elapsed since the effectiveness of the immediately prior notice, (B) no nonpayment default that existed or was continuing on the date of delivery of any payment blockage notice to such holders (or such agents or trustees) shall be, or be made, the basis for a subsequent payment blockage notice and (C) failure of the Company to make payment on such Debt when due or within any applicable grace period, whether or not on account of such payment blockage provisions, shall constitute an event of default thereunder); and (iii) such Debt may not (x) provide for payments of principal of such Debt at the stated maturity thereof or by way of a sinking fund applicable thereto or by way of any mandatory redemption, defeasance, retirement or repurchase thereof by the Company (including any redemption, retirement or repurchase which is contingent upon events or circumstances, but excluding any retirement required by virtue of acceleration of such Debt upon an event of default thereunder), in each case prior to the final Stated Maturity of the Exchange Notes or Senior Notes, as applicable, or (y) permit redemption or other retirement (including pursuant to an offer to purchase made by the Company) of such other Debt at the option of the holder thereof prior to the final Stated Maturity of the Exchange Notes or the Senior Notes, as applicable, other than a redemption or other retirement at the option of the holder of such Debt (including pursuant to an offer to purchase made by the Company) which is conditioned upon a change of control of the Company pursuant to provisions substantially similar to those described under "Description of the Exchange Notes--Covenants--Change of Control" (and which shall provide that such Debt will not be repurchased pursuant to such provisions prior to the Company's repurchase of the Exchange Notes or Senior Notes, as applicable, required to be repurchased by the Company). "Subsidiary" of any Person means (i) a corporation more than 50% of the combined voting power of the outstanding Voting Stock of which is owned, directly or indirectly, by such Person or by one or more other Subsidiaries of such Person or by such Person and one or more Subsidiaries thereof or (ii) any other Person (other than a corporation) in which such Person, or one or more other Subsidiaries of such Person or such Person and one or more other Subsidiaries thereof, directly or indirectly, has at least a majority ownership and power to direct the policies, management and affairs thereof. "Telecommunications Assets" means all assets, rights (contractual or otherwise) and properties, whether tangible or intangible, used or intended for use in connection with a Telecommunications Business. "Telecommunications Business" means the business of (i) transmitting, or providing services relating to the transmission of, voice, video or data through owned or leased transmission facilities, (ii) creating, developing or marketing communications related network equipment, software and other devices for use in a Telecommunication Business or (iii) evaluating, participating or pursuing any other activity or opportunity that is primarily related to those identified in (i) or (ii) above and shall, in any event, include all businesses in which the Company or any of its Subsidiaries are engaged on the Issue Date; provided that the determination of what constitutes a Telecommunications Business shall be made in good faith by the Board of Directors of the Company, which determination shall be conclusive. "Unrestricted Subsidiary" means (1) any Subsidiary of the Company designated as such by the Board of Directors of the Company as set forth below where (a) neither the Company nor any of its other Subsidiaries (other than another Unrestricted Subsidiary) (i) provides credit support for, or Guarantee of, any Debt of such Subsidiary or any Subsidiary of such Subsidiary (including any undertaking, agreement or instrument evidencing such Debt) or (ii) is directly or indirectly liable for any Debt of such Subsidiary or any Subsidiary of such Subsidiary, and (b) no default with respect to any Debt of such Subsidiary or any Subsidiary of such Subsidiary (including any right which the holders thereof may have 118 to take enforcement action against such Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Debt of the Company and its Restricted Subsidiaries to declare a default on such other Debt or cause the payment thereof to be accelerated or payable prior to its final scheduled maturity and (2) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors of the Company may designate any Subsidiary to be an Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property of, any other Subsidiary of the Company which is not a Subsidiary of the Subsidiary to be so designated or otherwise an Unrestricted Subsidiary, provided that either (x) the Subsidiary to be so designated has total assets of $1,000 or less or (y) immediately after giving effect to such designation, the Company could incur at least $1.00 of additional Debt pursuant to the first paragraph under "Description of the Exchange Notes--Covenants--Limitation on Consolidated Debt" or under "Description of the Preferred Shares--Covenants--Limitation on Consolidated Debt" above, as applicable, and provided, further and solely for purposes of the Exchange Notes and the Exchange Indenture, that the Company could make a Restricted Payment in an amount equal to the greater of the fair market value and the book value of such Subsidiary pursuant to the covenant described under "Description of the Exchange Notes--Covenants--Limitation on Restricted Payments" and such amount is thereafter treated as a Restricted Payment for the purpose of calculating the aggregate amount available for Restricted Payments thereunder. The Board of Directors of the Company may designate any Unrestricted Subsidiary to be a Restricted Subsidiary, provided that, immediately after giving effect to such designation, the Company could incur at least $1.00 of additional Debt pursuant to the first paragraph under "Description of the Exchange Notes--Covenants--Limitation on Consolidated Debt or under "Description of the Preferred Shares--Covenants--Limitation on Consolidated Debt" above, as applicable. "Vendor Financing Facility" means any agreements between the Company or a Restricted Subsidiary of the Company and one or more vendors or lessors of equipment to the Company or any of its Restricted Subsidiaries (or any affiliate of any such vendor or lessor) providing financing for the acquisition by the Company or any such Restricted Subsidiary of equipment from any such vendor or lessor. "Voting Stock" of any Person means Capital Stock of such Person which ordinarily has voting power for the election of directors (or persons performing similar functions) of such Person, whether at all times or only so long as no senior class of securities has such voting power by reason of any contingency. "Wholly-Owned Restricted Subsidiary" of any Person means a Restricted Subsidiary of such Person 99% or more of the outstanding Capital Stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person or by one or more Wholly-Owned Restricted Subsidiaries of such Person or by such Person and one or more Wholly-Owned Restricted Subsidiaries of such Person. 119 PLAN OF DISTRIBUTION Based on no-action letters issued by the staff of the Commission (the "Staff") to third parties, the Company believes the New Preferred Shares issued pursuant to the Exchange Offer may be offered for resale, resold and otherwise transferred by holders thereof (other than a "Restricted Holder," being (i) a broker-dealer who acquires such New Preferred Shares directly from the Company to resell pursuant to Rule 144A or any other available exemption under the Securities Act, (ii) a person that is an Affiliate of the Company or (ii) a broker-dealer who acquired Old Preferred Shares as a result of market-making or other trading activities), without compliance with the registration and prospectus delivery provisions of the Securities Act provided that such New Preferred Shares are acquired in the ordinary course of such holders' business and such holders have no arrangements with any person to participate in the distribution of such New Preferred Shares. To date, the Staff has taken the position that participating broker-dealers may fulfill their prospectus delivery requirements with respect to transactions involving an exchange of securities such as the exchange pursuant to the Exchange Offer (other than a resale of an unsold allotment from the sale of the Old Preferred Shares to the Initial Purchasers) with the prospectus contained in the Exchange Offer Registration Statement of which this Prospectus is a part. Pursuant to the Preferred Registration Rights Agreement, the Company has agreed to permit participating broker-dealers and other persons, if any, subject to similar prospectus delivery requirements to use this Prospectus in connection with the resale of such New Preferred Shares. The Company has agreed that it will make this Prospectus, and any amendment or supplement to this Prospectus, available to any broker-dealer that requests such documents in the Letter of Transmittal. Each holder of the Old Preferred Shares who wishes to exchange its Old Preferred Shares for New Preferred Shares in the Exchange Offer will be required to make certain representations to the Company as set forth in "The Exchange Offer--Terms and Conditions of the Letter of Transmittal". In addition, each holder who is a broker-dealer and who receives New Preferred Shares pursuant to the Exchange Offer in exchange for Old Preferred Shares for its own account as a result of market-making activities or other trading activities, will be required to acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale by it of such New Preferred Shares. The Company will not receive any proceeds from any sale of New Preferred Shares by broker-dealers. New Preferred Shares received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the New Preferred Shares or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or at negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such New Preferred Shares. Any broker-dealer that resells New Preferred Shares that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such New Preferred Shares may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of New Preferred Shares and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker- dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The Company has agreed to pay all expenses incidental to the Exchange Offer other than commissions and concessions of any brokers or dealers and will indemnify holders of the Preferred Shares (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act, as set forth in the Preferred Registration Rights Agreement. 120 LEGAL MATTERS The validity of the New Preferred Shares will be passed upon for the Company by Willkie Farr & Gallagher, New York, New York. As to matters of Washington law, Willkie Farr & Gallagher will rely upon the opinion of Davis Wright Tremaine LLP, Seattle, Washington. EXPERTS The audited consolidated financial statements of the Company, Sound Response Corporation, Tel-West Central Services, Inc. and City Signal, Inc.,Tennessee Operations, included in this Prospectus have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said reports. The financial statements of Linkatel Pacific, L.P. as of December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and 1994 and the cumulative period from July 21, 1993 (date of inception) to December 31, 1996 included in this Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. 121 NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES(1) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION Pro Forma Consolidated Statement of Operations for the Year Ended December 31, 1996............................................................................... F-3 Pro Forma Consolidated Statement of Operations for the Year Ended December 31, 1995............................................................................... F-4 Pro Forma Consolidated Balance Sheet at December 31, 1996............................ F-5 AUDITED ANNUAL CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants............................................. F-6 Consolidated Balance Sheets at December 31, 1996 and 1995............................ F-7 Consolidated Statements of Operations for the Years Ended December 31, 1996 and 1995 and From Inception (September 16, 1994) to December 31, 1994....................... F-8 Consolidated Statements of Changes in Members' Equity (Deficit) for the Years Ended December 31, 1996 and 1995 and From Inception (September 16, 1994) to December 31, 1994............................................................................... F-9 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996 and 1995 and From Inception (September 16, 1994) to December 31, 1994....................... F-10 Notes to Consolidated Financial Statements........................................... F-12 LINKATEL PACIFIC, L.P. Independent Auditors' Report......................................................... F-24 Balance Sheets at December 31, 1996 and 1995......................................... F-25 Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994 and the Cumulative Period From July 21, 1993 (Date of Inception) to December 31, 1996...... F-26 Statements of Partners' Capital for the Years Ended December 31, 1996, 1995 and 1994 and the Cumulative Period From July 21, 1993 (Date of Inception) to December 31, 1996............................................................................... F-27 Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 and the Cumulative Period From July 21, 1993 (Date of Inception) to December 31, 1996...... F-28 Notes to Financial Statements........................................................ F-29 SOUND RESPONSE CORPORATION Report of Independent Public Accountants............................................. F-33 Balance Sheets at August 31, 1995, December 31, 1994 and December 31, 1993........... F-34 Statements of Operations For the Eight Months Ended August 31, 1995 and For the Years Ended December 31, 1994 and 1993................................................... F-35 Statements of Changes in Shareholders' Equity For the Eight Months Ended August 31, 1995 and For the Years Ended December 31, 1994 and 1993............................ F-36 Statements of Cash Flows For the Eight Months Ended August 31, 1995 and For the Years Ended December 31, 1994 and 1993................................................... F-37 Notes to Financial Statements........................................................ F-38 TEL-WEST CENTRAL SERVICES, INC. Report of Independent Public Accountants............................................. F-42 Balance Sheets at March 31, 1995 and September 30, 1994 and 1993..................... F-43 Statements of Operations For the Six Months Ended March 31, 1995 and For the Years Ended September 30, 1994 and 1993.................................................. F-44 Statements of Changes in Shareholders' Equity For the Six Months Ended March 31, 1995 and For the Years Ended September 30, 1994 and 1993................................ F-45 Statements of Cash Flows For the Six Months Ended March 31, 1995 and For the Years Ended September 30, 1994 and 1993.................................................. F-46 Notes to Financial Statements........................................................ F-47 CITY SIGNAL, INC., TENNESSEE OPERATIONS Report of Independent Public Accountants............................................. F-51 Summary of Revenue and Direct Operating Expenses For the Years Ended December 31, 1994 and 1993...................................................................... F-52 Notes to the Summary of Revenue and Direct Operating Expenses........................ F-53
- ------------------------ (1) See Notes 1 and 12 to the Audited Annual Consolidated Financial Statements. F-1 NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES PRO FORMA CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED) The following unaudited pro forma statement of operations for the year ended December 31, 1996 gives effect to the the acquisitions of the ITC Companies ("ITC"), a long distance reseller based in Salt Lake City, Utah, and Linkatel Pacific, L.P. ("Linkatel"), a competitive access service provider based in Los Angeles, California (collectively referred to as the "1996 Acquisitions") as if those transactions had occurred on January 1, 1996. The ITC acquisition closed in December 1996 and the Linkatel acquisition closed in February 1997. Both acquisitions will be accounted for using the purchase method of accounting. The unaudited pro forma statement of operations for the year ended December 31, 1995 gives effect to (i) the 1996 Acquisitions, (ii) the acquisition of Tel-West Central Services, Inc., now known as NEXTLINK Washington, L.L.C. ("NEXTLINK Washington"), which conducts NEXTLINK Communications, L.L.C.'s (the "Company") operations in Spokane, Washington and Sound Response Corporation, now known as NEXTLINK Interactive, L.L.C. ("NEXTLINK Interactive"), which conducts the Company's interactive voice response platform operations (collectively referred to as the "1995 Acquisitions") and (iii) a recapitalization of the Company and four of the Company's operating subsidiaries, as a result of which each of these subsidiaries was owned 99% by the Company and 1% by a corporation that is wholly owned by Mr. Craig O. McCaw (the "Recapitalization") as if those transactions had occurred on January 1, 1995. The unaudited pro forma balance sheet gives effect to the Linkatel acquisition and the conversion of the Company to a corporation as though such transactions had occurred on December 31, 1996. The pro forma financial statements have been prepared based on the historical financial statements of the Company as well as the historical financial statements of Linkatel, ITC, Tel-West Central Services, Inc. and Sound Response Corporation and certain estimates and assumptions set forth in the notes to the pro forma financial statements. This pro forma financial information is neither necessarily indicative of results that would have actually occurred had the transactions been consummated on the indicated dates nor is it necessarily indicative of future operating results or financial position. F-2 NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (DOLLARS IN THOUSANDS) (UNAUDITED)
PRO FORMA PRO FORMA HISTORICAL LINKATEL ITC ADJUSTMENTS RESULTS ------------ --------- --------- ------------ ----------- Revenue.......................................... $ 25,686 $ 172 $ 11,372 $ (953)(1) $ 36,277 Costs and Expenses: Operating...................................... 25,094 695 7,181 (570)(1) 32,400 Selling, general and administrative............ 31,353 1,031 3,094 (240)(1) 35,238 Deferred compensation.......................... 9,914 -- -- -- 9,914 Depreciation and amortization.................. 10,340 1,010 705 (155)(1) 14,966 3,066(2) ------------ --------- --------- ------------ ----------- Total costs and expenses................... 76,701 2,736 10,980 2,101 92,518 ------------ --------- --------- ------------ ----------- Income/(loss) from operations.................... (51,015) (2,564) 392 (3,054) (56,241) Interest income.................................. 10,446 -- -- (2,267)(3) 8,179 Interest expense................................. (30,876) (481) (182) 28(1) (31,030) 481(4) ------------ --------- --------- ------------ ----------- Income (loss) before minority interests.......... (71,445) (3,045) 210 (4,812) (79,092) Minority interests in loss of consolidated subsidiaries.................................... 344 -- -- -- 344 ------------ --------- --------- ------------ ----------- Net income (loss)................................ $ (71,101) $ (3,045) $ 210 $ (4,812) $ (78,748) ------------ --------- --------- ------------ ----------- ------------ --------- --------- ------------ -----------
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (1) Reflects elimination of revenues and expenses of ITC after acquisition that are also included in the historical column. (2) Reflects additional amortization of intangible assets resulting from allocation of a portion of the purchase prices of ITC and Linkatel to goodwill, customer base and other intangible assets. (3) To reflect a reduction in interest income earned on investment of excess cash due to assumed payment of cash portion of purchase prices as of January 1, 1996. (4) To reflect a reduction in Linkatel's interest expense due to assumed repayment of Linkatel's debt as of January 1, 1996. F-3 NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (DOLLARS IN THOUSANDS) (UNAUDITED)
1996 1995 PRO FORMA PRO FORMA HISTORICAL ACQUISITIONS ACQUISITIONS ADJUSTMENTS RESULTS (1) ------------ ------------ ------------ ------------ ----------- Revenue.................................... $ 7,552 $ 9,492 $ 12,773 $ (4,197)(2) $ 25,620 Costs and expenses: Operating................................ 6,618 6,089 6,429 (2,629)(2) 16,507 Selling, general and administrative...... 9,563 3,471 4,592 (2,259)(2) 15,367 Deferred compensation.................... 375 -- -- -- 375 Depreciation and amortization............ 3,458 1,286 436 (495)(2) 8,663 912(3) 3,066(4) ------------ ------------ ------------ ------------ ----------- Total costs and expenses................... 20,014 10,846 11,457 (1,405) 40,912 ------------ ------------ ------------ ------------ ----------- Income/(loss) from operations.............. (12,462) (1,354) 1,316 (2,792) (15,292) Interest income............................ -- -- -- -- -- Interest expense........................... (499) (287) (45) 17(3) (814) ------------ ------------ ------------ ------------ ----------- Income (loss) before minority interests.... (12,961) (1,641) 1,271 (2,775) (16,106) Minority interests in loss of consolidated subsidiaries.............................. 230 - (13) (103)(5) 114 ------------ ------------ ------------ ------------ ----------- Net income (loss).......................... $ (12,731) $ (1,641) $ 1,258 $ (2,878) $ (15,992) ------------ ------------ ------------ ------------ ----------- ------------ ------------ ------------ ------------ -----------
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (1) The pro forma consolidated statement of operations data do not give effect to the Company's acquisition of certain fixed assets that are now being used by the Company in Ohio. (2) Represents elimination of revenues and expenses of NEXTLINK Washington and NEXTLINK Interactive after acquisition that are also included in the historical column. (3) Represents amortization of NEXTLINK Washington and NEXTLINK Interactive intangible assets, primarily goodwill. (4) Reflects additional amortization of intangible assets resulting from allocation of a portion of the purchase prices of ITC and Linkatel to goodwill, customer base and other intangible assets. (5) Represents the effect of the Recapitalization as if this transaction had occurred on January 1, 1995. F-4 NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES PRO FORMA CONSOLIDATED BALANCE SHEET DECEMBER 31, 1996 (DOLLARS IN THOUSANDS) (UNAUDITED)
PRO FORMA PRO FORMA HISTORICAL LINKATEL ADJUSTMENTS BALANCE ----------- --------- ------------ ----------- ASSETS Current assets: Cash and cash equivalents.................................. $ 76,807 $ 689 $ (30,130)(1) 41,811 (5,555)(2) Marketable securities...................................... 47,713 -- -- 47,713 Accounts receivable, net................................... 7,008 22 -- 7,030 Other...................................................... 607 222 -- 829 Pledged securities......................................... 39,770 -- -- 39,770 ----------- --------- ------------ ----------- Total current assets..................................... 171,905 933 (35,685) 137,153 Pledged securities........................................... 61,668 -- -- 61,668 Property and equipment, net.................................. 97,784 14,166 -- 111,950 Goodwill, net................................................ 24,110 -- 29,619(3) 53,729 Other intangible assets, net................................. 11,243 235 -- 11,478 Other long-term assets, net.................................. 23,973 292 (6,000)(1) 16,775 (1,490)(4) ----------- --------- ------------ ----------- Total assets............................................. $ 390,683 $ 15,626 $ (13,556) $ 392,753 ----------- --------- ------------ ----------- ----------- --------- ------------ ----------- LIABILITIES AND MEMBERS' EQUITY (DEFICIT) Current liabilities: Bank overdraft............................................. $ -- $ -- $ -- $ -- Accounts payable........................................... 18,622 621 -- 19,243 Accrued expenses........................................... 4,112 1,312 -- 5,424 Accrued interest payable................................... 9,250 -- -- 9,250 Notes payable.............................................. -- 5,555 (5,555)(2) -- Current portion of capital lease obligations............... 1,194 -- -- 1,194 Payable to affiliate....................................... 1,500 1,490 (1,490)(4) 1,500 ----------- --------- ------------ ----------- Total current liabilities................................ 34,678 8,978 (7,045) 36,611 Long-term liabilities: Long-term debt............................................. 350,000 -- -- 350,000 Capital lease obligations.................................. 6,262 -- -- 6,262 Other...................................................... 13,139 137 -- 13,276 ----------- --------- ------------ ----------- Total current liabilities................................ 404,079 9,115 (7,045) 406,149 Minority interests........................................... 308 -- -- 308 Equity units subject to redemption........................... 4,950 -- -- 4,950 Members' equity (deficit).................................... (18,654) 6,511 (6,511)(5) (18,654) ----------- --------- ------------ ----------- Total liabilities and members' equity (deficit).......... $ 390,683 $ 15,626 $ (18,654) $ 392,753 ----------- --------- ------------ ----------- ----------- --------- ------------ -----------
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET (1) Represents payment of the cash portion of the purchase price in the Linkatel transaction, including $6,000 that had been deposited in escrow pending closing of the transaction. (2) Represents repayment of Linkatel debt. (3) Represents allocation to goodwill of the excess of the purchase price over the net assets acquired in the Linkatel transaction. The goodwill will have a 20 year life. (4) Represents elimination of advances to Linkatel prior to the closing of the transaction. (5) Represents elimination of net assets acquired in Linkatel transaction. F-5 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Members of NEXTLINK Communications, L.L.C.: We have audited the accompanying consolidated balance sheets of NEXTLINK Communications, L.L.C. (a Washington limited liability company) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in members' equity (deficit) and cash flows for the years then ended and the period from inception (September 16, 1994) to December 31, 1994. 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 financial statements referred to above present fairly, in all material respects, the financial position of NEXTLINK Communications, L.L.C. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for the years then ended and the period from inception (September 16, 1994) to December 31, 1994 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Seattle, Washington February 10, 1997 F-6 NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (DOLLARS IN THOUSANDS)
1996 1995 ----------- --------- ASSETS Current assets: Cash and cash equivalents.............................................................. $ 76,807 $ 1,350 Marketable securities.................................................................. 47,713 -- Accounts receivable, net............................................................... 7,008 3,563 Other.................................................................................. 607 746 Pledged securities..................................................................... 39,770 -- ----------- --------- Total current assets............................................................... 171,905 5,659 Pledged securities....................................................................... 61,668 -- Property and equipment, net.............................................................. 97,784 29,664 Goodwill, net............................................................................ 24,110 12,137 Other intangible assets, net............................................................. 11,243 5,751 Other long-term assets, net.............................................................. 23,973 250 ----------- --------- Total assets....................................................................... $ 390,683 $ 53,461 ----------- --------- ----------- --------- LIABILITIES AND MEMBERS' EQUITY (DEFICIT) Current liabilities: Bank overdraft......................................................................... $ -- $ 1,373 Accounts payable....................................................................... 18,622 4,315 Accrued expenses....................................................................... 4,112 1,266 Accrued interest payable............................................................... 9,250 -- Current portion of capital lease obligations........................................... 1,194 -- Payable to affiliates.................................................................. 1,500 4,937 ----------- --------- Total current liabilities.......................................................... 34,678 11,891 Long-term liabilities: Long-term debt......................................................................... 350,000 -- Capital lease obligations.............................................................. 6,262 -- Other.................................................................................. 13,139 1,965 ----------- --------- Total liabilities.................................................................. 404,079 13,856 Commitments and contingencies Minority interests....................................................................... 308 2,886 Equity units subject to redemption (900,000 units outstanding as of December 31, 1996)... 4,950 -- Members' equity (deficit) (63,793,820 and 49,798,659 units outstanding as of December 31, 1996 and 1995, respectively)........................................................... (18,654) 36,719 ----------- --------- Total liabilities and members' equity (deficit).................................... $ 390,683 $ 53,461 ----------- --------- ----------- ---------
The accompanying notes are an integral part of these consolidated statements. F-7 NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND FROM INCEPTION (SEPTEMBER 16, 1994) TO DECEMBER 31, 1994 (DOLLARS IN THOUSANDS)
1996 1995 1994 ---------- ---------- --------- Revenue......................................................................... $ 25,686 $ 7,552 $ -- Costs and expenses: Operating..................................................................... 25,094 6,618 106 Selling, general and administrative........................................... 31,353 9,563 232 Deferred compensation......................................................... 9,914 375 -- Depreciation.................................................................. 6,640 1,125 7 Amortization of intangible assets............................................. 3,700 2,333 7 ---------- ---------- --------- Total costs and expenses.................................................. 76,701 20,014 352 ---------- ---------- --------- Loss from operations............................................................ (51,015) (12,462) (352) Interest income................................................................. 10,446 -- -- Interest expense................................................................ (30,876) (499) -- ---------- ---------- --------- Loss before minority interests.................................................. (71,445) (12,961) (352) Minority interests in loss of consolidated subsidiaries......................... 344 230 3 ---------- ---------- --------- Net loss........................................................................ $ (71,101) $ (12,731) $ (349) ---------- ---------- --------- ---------- ---------- ---------
The accompanying notes are an integral part of these consolidated statements. F-8 NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND FROM INCEPTION (SEPTEMBER 16, 1994) TO DECEMBER 31, 1994 (DOLLARS IN THOUSANDS)
UNITS AMOUNT ------------- ---------- BALANCE, INCEPTION (SEPTEMBER 16, 1994)............................................... -- $ -- Contributed capital................................................................. 1,021,305 1,021 Net loss............................................................................ -- (349) ------------- ---------- BALANCE, DECEMBER 31, 1994............................................................ 1,021,305 672 Contributed capital................................................................. 44,365,413 44,366 Issuance of units for NEXTLINK Interactive acquisition.............................. 4,411,941 4,412 Net loss............................................................................ -- (12,731) ------------- ---------- BALANCE, DECEMBER 31, 1995............................................................ 49,798,659 36,719 Contributed capital................................................................. 9,502,021 9,502 Issuance of units for NEXTLINK Ohio acquisition..................................... 651,933 652 Impact of recapitalization and merger of affiliates................................. 3,841,207 5,574 Net loss............................................................................ -- (71,101) ------------- ---------- BALANCE, DECEMBER 31, 1996............................................................ 63,793,820 $ (18,654) ------------- ---------- ------------- ----------
The accompanying notes are an integral part of these consolidated statements. F-9 NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND FROM INCEPTION (SEPTEMBER 16, 1994) TO DECEMBER 31, 1994 (DOLLARS IN THOUSANDS)
1996 1995 1994 ---------- ---------- --------- OPERATING ACTIVITIES: Net loss........................................................................ $ (71,101) $ (12,731) $ (349) Adjustments to reconcile net loss to net cash used in operating activities: Deferred compensation expense............................................... 9,914 375 -- Equity in loss of affiliates................................................ 1,100 -- -- Depreciation and amortization............................................... 10,340 3,458 14 Minority interest in loss of consolidated subsidiaries...................... (344) (230) (3) Changes in assets and liabilities, net of effects from acquisitions: Accounts receivable......................................................... (1,659) (2,529) -- Other current assets........................................................ (42) (638) -- Other long-term assets...................................................... (1,430) (500) (79) Accounts payable............................................................ 993 2,163 -- Accrued expenses............................................................ 2,416 1,452 21 Accrued interest payable.................................................... 9,250 -- -- ---------- ---------- --------- Total adjustments....................................................... 30,538 3,551 (47) ---------- ---------- --------- Net cash used in operating activities........................................... (40,563) (9,180) (396) INVESTING ACTIVITIES: Purchase of property and equipment.......................................... (51,920) (17,778) (140) Net assets acquired in business and asset acquisitions...................... (15,169) (17,639) (460) Cash placed into escrow for business acquisition............................ (6,000) -- -- Investments in unconsolidated affiliates.................................... (4,953) -- -- Purchase of pledged securities.............................................. (117,688) -- -- Maturity of pledged securities.............................................. 16,431 -- -- Purchase of marketable securities,net....................................... (47,713) -- -- ---------- ---------- --------- Net cash used in investing activities........................................... (227,012) (35,417) (600) FINANCING ACTIVITIES: Proceeds from issuance of senior notes...................................... 350,000 -- -- Capital contributions....................................................... 9,935 37,091 1,021 Proceeds from payable to affiliates......................................... 28,766 7,458 -- Repayment of payables to affiliates......................................... (33,703) -- -- Bank overdraft.............................................................. (1,373) 1,373 -- Costs incurred in connection with financing................................. (9,822) -- -- Repayment of capital lease obligations...................................... (771) -- -- ---------- ---------- --------- Net cash provided by financing activities....................................... 343,032 45,922 1,021 ---------- ---------- --------- Net increase in cash and cash equivalents....................................... 75,457 1,325 25 Cash and cash equivalents, beginning of period.................................. 1,350 25 -- ---------- ---------- --------- Cash and cash equivalents, end of period........................................ $ 76,807 $ 1,350 $ 25 ---------- ---------- --------- ---------- ---------- --------- SUPPLEMENTAL CASH FLOW DISCLOSURES: Cash paid for interest, net of amount capitalized........................... $ 20,912 $ 16 $ -- ---------- ---------- --------- ---------- ---------- ---------
F-10 NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND FROM INCEPTION (SEPTEMBER 16, 1994) TO DECEMBER 31, 1994 (DOLLARS IN THOUSANDS) SUPPLEMENTAL CASH FLOW DISCLOSURES: (DOLLARS IN THOUSANDS) Noncash investing and financing activities: During 1996 and 1995, the Company completed various acquisitions of businesses and assets (see Note 3). In connection with these acquisitions, the Company issued equity units and assumed liabilities as follows:
1996 1995 --------- --------- Fair value of tangible assets acquired..................................................... $ 12,579 $ 11,500 Liabilities assumed........................................................................ (8,228) (3,554) Fair value of intangible assets acquired................................................... 16,420 19,335 --------- --------- $ 20,771 $ 27,281 --------- --------- --------- --------- Cash paid for assets....................................................................... $ 15,169 $ 17,022 Deferred purchase consideration............................................................ -- 3,000 Equity units issued: Company units issued (1)................................................................. 5,602 4,412 Subsidiary units and options issued...................................................... -- 2,847 --------- --------- $ 20,771 $ 27,281 --------- --------- --------- ---------
- ------------------------ (1) Company units issued in 1996 includes 900,000 Class A Units valued at $4,950 which are subject to redemption (see Note 3). During 1996, the Company acquired $1,377 in property and equipment under capital lease obligations, exclusive of property and equipment under capital lease obligations which were acquired in acquisitions. In January 1996, the Company recognized additional members' equity and goodwill of $5,574 and $2,907, respectively, and a reduction in minority interests of $2,667 relating to a recapitalization and merger of companies holding minority equity interests in certain subsidiaries of the Company, which exchanged these interests for Class A units of the Company. In December 1995, the Company issued 7,273,918 Class A Units to an affiliate in satisfaction of a payable of $7,274. The accompanying notes are an integral part of these consolidated statements. F-11 NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 1. ORGANIZATION: The consolidated financial statements include the accounts of NEXTLINK Communications, L.L.C., a Washington limited liability company, and its majority-owned subsidiaries (the Company). The Company, through predecessor entities, was formed on September 16, 1994 and, through its subsidiaries, provides competitive local telecommunications services in selected markets in the United States. The Company is a majority-owned subsidiary of Eagle River Investments, L.L.C. (Eagle River). Prior to January 31, 1997, the Company was organized and operated under a limited liability company agreement. The agreement provided, among other things, for specific allocation of net profits and losses to each member, allocations and distributions to members, and a preferred return to members on their respective contributions invested in the Company, as well as a return of their respective investments in the Company. On January 31, 1997, NEXTLINK Communications, L.L.C. merged with and into NEXTLINK Communications, Inc., a Washington corporation (the Incorporation). See Note 12 for further discussion. Unless otherwise indicated all information presented herein is presented for periods prior to the Incorporation, and therefore relate to the time that the Company was a limited liability company. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION The Company's consolidated financial statements include 100% of the assets, liabilities and results of operations of subsidiaries in which the Company has a controlling interest of greater than 50%. The ownership interests of the other members or partners are reflected as minority interests. The Company's investments in entities in which it has voting interests of at least 20% but not more than 50% are accounted for using the equity method and investments in entities in which it has voting interests of not more than 20% are accounted for using the cost method. All significant intercompany accounts and transactions have been eliminated. REVENUE RECOGNITION The Company recognizes revenue on telecommunications and enhanced communications services in the period that service is provided. CASH AND CASH EQUIVALENTS Cash equivalents consist of highly liquid investments with original maturities of three months or less at the time of purchase. MARKETABLE SECURITIES Marketable securities consist of U.S. government securities and commercial paper with original maturities beyond three months, but less than 12 months. Marketable securities are stated at cost, adjusted for discount accretion and premium amortization. The securities in the Company's portfolio are classified as "held to maturity," as management has the intent and ability to hold those securities to maturity. The fair value of the Company's marketable securities approximates the carrying value. F-12 NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) PLEDGED SECURITIES In connection with the sale of Senior Notes (see Note 6), a portion of the net proceeds were utilized to purchase a portfolio consisting of U.S. government securities, which mature at dates sufficient to provide for payment in full of interest on the Senior Notes through April 15, 1999. The pledged securities are stated at cost, adjusted for premium amortization and accrued interest. The fair value of the pledged securities approximates the carrying value. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Direct costs of construction are capitalized, including $853,000 of interest costs related to construction during 1996. There were no interest costs capitalized prior to 1996. Depreciation is computed using the straight-line method over estimated useful lives beginning in the month an asset is put into service. Estimated useful lives of property and equipment are as follows: Telecommunications switching and other equipment... 5-10 years Fiber optic network................................ 15-20 years Office equipment, furniture and other.............. 3-5 years Leasehold improvements............................. the lesser of the estimated useful lives or the terms of the leases
INTANGIBLE ASSETS Intangible assets primarily represent costs allocated in acquisitions to customer bases and contracts, software and related intellectual property and goodwill. Intangible assets are amortized using the straight-line method over the estimated useful lives of the assets as follows: Customer contracts.................................... term of the contracts Customer bases........................................ 5 years Software and related intellectual property............ 5 years Goodwill.............................................. 15-20 years
LONG-LIVED ASSETS The Company periodically reviews the carrying value of its long-lived assets, including property, equipment and intangible assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. To the extent the estimated future cash inflows attributable to the asset, less estimated future cash outflows, is less than the carrying amount, an impairment loss is recognized. F-13 NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) INCOME TAXES The Company has been organized and operated under a limited liability company agreement structured in a manner that is intended to result in the classification of the Company as a partnership for federal income tax purposes. Accordingly, no provision for income taxes has been made. See Note 12 for discussion regarding the effect of the Incorporation. CONCENTRATION OF CREDIT RISK The Company is exposed to concentration of credit risk principally from accounts receivable. The Company had one customer whose revenue represented approximately 23% of the Company's 1996 revenue and three customers whose revenue each represented approximately 12-14% of the Company's 1995 revenue. ESTIMATES USED IN FINANCIAL STATEMENT PRESENTATION The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. RECLASSIFICATIONS Certain reclassifications have been made to prior period amounts in order to conform to the current presentation. 3. ACQUISITIONS: In December 1996, the Company acquired ITC, a switched-based long-distance reseller based in Salt Lake City, Utah. ITC has approximately 9,000 long-distance customers in Utah, Colorado, Arizona, New Mexico and Idaho. Consideration for the acquisition of ITC consisted of a cash payment of $4.0 million, of which $2.6 million was placed into escrow to be paid during 1998, plus the issuance of 900,000 Class A Units of the Company. The Company has granted the seller an option requiring the Company to repurchase the units at $11.50 per unit beginning three years from the date of the closing of the acquisition in the event that the Company has not completed a public offering of its equity securities prior to that time. The Company has valued the units, including the put option, at $4,950,000, or $5.50 per unit. In January 1996, the Company acquired certain assets of FoneNet, Inc. and U.S. Network, Inc. through NEXTLINK Ohio, L.L.C. NEXTLINK Ohio, L.L.C. is currently constructing fiber optic telecommunications systems for the Ohio region. Consideration for the purchase consisted of a cash payment of $9.6 million, the issuance of 651,933 Class A Units of the Company, valued at $651,933, plus the assumption of capital lease obligations of $6.1 million. F-14 NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 3. ACQUISITIONS: (CONTINUED) In September 1995, the Company acquired certain assets of Sound Response Corporation and immediately contributed the assets to NEXTLINK Interactive, L.L.C. NEXTLINK Interactive, L.L.C. provides interactive voice response and debit card services. The total cost of the acquisition was approximately $12.2 million. Included in the cost of the acquisition are 4,411,941 Class A Units of the Company valued at $4,411,941 and $3.0 million of deferred purchase consideration payable to BWP, Inc. (formerly known as Sound Response Corporation) of which $1.5 million was paid during 1996 and $1.5 is payable during 1997. In May 1995, the Company acquired certain assets of City Signal, Inc. and Teledial America, Inc. relating to the Magic Number service, through NEXTLINK Solutions, L.L.C. These assets are used by NEXTLINK Solutions, L.L.C. to offer a virtual communications center for mobile professionals and workgroups. The total cost of the acquisition was approximately $617,000. In April 1995, the Company acquired the telecommunications business of Tel-West Central Services, Inc., a local exchange service reseller in Spokane, Washington, through acquisition of the ownership units of NEXTLINK Washington, L.L.C. The total cost of the acquisition was approximately $1.2 million. In January 1995, the Company acquired certain assets of City Signal, Inc. (which is also known as U.S. Signal) through NEXTLINK Tennessee, L.L.C, primarily consisting of an existing fiber optic telecommunications network in Memphis and another network then under development in Nashville. NEXTLINK Tennessee, L.L.C. is expanding the networks and is currently providing switched local and long-distance telecommunications services in these markets. The total cost of the acquisition was approximately $17.5 million. Included in the cost of the acquisition were 2,847,444 Class A Units and related options of NEXTLINK Tennessee, L.L.C. valued at $2,847,444. In September 1994, the Company acquired certain assets of Penns Light Communications, Inc. through NEXTLINK Pennsylvania, L.P. The total cost of the acquisition was approximately $460,000. The above described acquisitions have been accounted for as purchases and, accordingly, the acquired assets and liabilities have been recorded at their estimated fair values at the date of the acquisition, and the results of operations have been included in the accompanying consolidated financial statements since the dates of acquisition. The total purchase price in excess of the fair market value of the net assets acquired was recorded as goodwill. See Note 10 for a discussion of valuation of Class A Units. The following unaudited pro forma information presents the results of the Company as if the above described acquisitions plus the Linkatel acquisition (see Note 12) had occurred as of the beginning of 1995. These results include certain adjustments consistent with the Company's accounting policies. These results are not necessarily indicative of the results that actually would have been attained if the acquisitions had been in effect at the beginning of 1995 or which may be attained in the future.
DECEMBER 31, ---------------------- 1996 1995 ---------- ---------- (UNAUDITED, IN THOUSANDS) Revenue.............................................................. $ 36,105 $ 25,620 Net loss............................................................. $ (67,616) $ (15,992)
F-15 NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 4. PROPERTY AND EQUIPMENT:
DECEMBER 31, -------------------- 1996 1995 --------- --------- (IN THOUSANDS) Telecommunications networks................................................................ $ 66,762 $ 15,358 Office equipment, leasehold improvements, furniture and other.............................. 18,097 3,710 --------- --------- 84,859 19,068 Less accumulated depreciation.............................................................. (8,369) (1,125) --------- --------- 76,490 17,943 Network construction in progress........................................................... 21,294 11,721 --------- --------- $ 97,784 $ 29,664 --------- --------- --------- ---------
5. OTHER LONG-TERM ASSETS:
DECEMBER 31, -------------------- 1996 1995 --------- --------- (IN THOUSANDS) Financing costs............................................................................... $ 9,822 $ -- Cash held in escrow for acquisitions.......................................................... 8,682 -- Equity investments............................................................................ 3,853 -- Advances to business to be acquired........................................................... 1,490 -- Other noncurrent assets....................................................................... 854 250 --------- --------- 24,701 250 Less accumulated amortization................................................................. (728) -- --------- --------- $ 23,973 $ 250 --------- --------- --------- ---------
The Company's equity investments include (i) a 40% investment in Telecommunications of Nevada, L.L.C., which operates a fiber optic telecommunications network serving the Las Vegas market and (ii) a $3.2 million investment in convertible preferred stock of Intermind Corporation, representing a 13.6% voting interest. Intermind markets an interactive communications tool for the World Wide Web and intranet applications. 6. LONG-TERM DEBT: On April 25, 1996, the Company completed the issuance and sale of $350.0 million in principal amount of 12.5% Senior Notes due April 15, 2006. The Company used $117.7 million of the gross proceeds to purchase U.S. government securities, representing funds sufficient to provide for payment in full of interest on the Senior Notes through April 15, 1999 and used an additional $32.2 million to repay the advances and accrued interest from Eagle River. In addition, the Company incurred costs of $9.8 million in connection with the financing (including underwriter discounts and commissions). Interest payments on the Senior Notes are due semi-annually. As of December 31, 1996, the fair value of long-term debt approximated carrying value. F-16 NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 6. LONG-TERM DEBT: (CONTINUED) The Senior Notes will be redeemable at the option of the Company, in whole or in part, at any time on or after April 15, 2001 at the following prices (expressed in percentages of the principal amount thereof at stated maturity) if redeemed during the 12-month period beginning April 15 of the years indicated below, in each case together with interest accrued to the redemption date:
YEAR PERCENTAGE - ------------------------------------------------------------------------------------- ----------- 2001................................................................................. 106.250% 2002................................................................................. 104.167% 2003................................................................................. 102.083% 2004 and thereafter.................................................................. 100.000%
The indenture pursuant to which the Senior Notes are issued contains certain covenants that, among other things, limits the ability of the Company and its subsidiaries to incur additional indebtedness, issue stock in subsidiaries, pay dividends or make other distributions, repurchase equity interests or subordinated indebtedness, engage in sale and leaseback transactions, create certain liens, enter into certain transactions with affiliates, sell assets of the Company and its subsidiaries, and enter into certain mergers and consolidations. In the event of a change in control of the Company as defined in the indenture, holders of the Senior Notes will have the right to require the Company to purchase their Senior Notes, in whole or in part, at a price equal to 101% of the stated principal amount thereof, plus accrued and unpaid interest, if any, thereon to the date of purchase. The Senior Notes are senior unsecured obligations of the Company, and are subordinated to all current and future indebtedness of the Company's subsidiaries, including trade payables. 7. RELATED PARTY TRANSACTIONS: During 1995, Eagle River loaned the Company $7.3 million at an interest rate of prime plus 2%. On December 1, 1995, the note payable and accrued interest were converted to equity. Included in payable to affiliates is $1.5 million payable to a Company member in conjunction with the Sound Response Corporation acquisition. The amount is due September 1, 1997. The Company incurred expenses provided by an affiliate and minority member for administrative services as a result of a temporary agreement related to certain acquisitions. The Company recorded expenses in connection with fees to this affiliate of approximately $1.5 million in 1995. 8. COMMITMENTS AND CONTINGENCIES: Capitalized leases consist of leases of telecommunications equipment and fiber optic networks. The Company is also leasing premises under various operating leases which, in addition to rental payments, require payments for insurance, maintenance, property taxes and other executory costs related to the leases. The lease agreements have various expiration dates and renewal options through 2015. F-17 NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 8. COMMITMENTS AND CONTINGENCIES: (CONTINUED) Future minimum payments required under the capital leases and operating leases and agreements that have an initial or remaining noncancelable lease term in excess of one year at December 31, 1996 are summarized below:
CAPITAL OPERATING YEARS ENDING DECEMBER 31, LEASES LEASES - ---------------------------------------------------------------------- --------- ----------- (IN THOUSANDS) 1997 $ 2,322 $ 2,562 1998 2,310 2,568 1999 2,213 2,537 2000 1,921 2,338 2001 285 1,971 Thereafter............................................................ 1,376 8,051 --------- Total minimum lease payments.......................................... 10,427 Amounts representing interest......................................... (2,971) --------- Present value of future minimum lease payments........................ 7,456 Less amounts due in one year.......................................... (1,194) --------- $ 6,262 --------- ---------
Total rent expense amounted to $2,248,000, $579,000 and $18,000 in 1996, 1995 and 1994, respectively. The Company is obligated under a supply agreement with a telecommunications equipment vendor to purchase a certain dollar volume of equipment over the next four years in order to obtain special pricing. If the Company is unable to meet the required purchase commitment, the Company will be obligated to pay additional amounts for previous purchases. 9. EMPLOYEE BENEFIT PLAN: The Company offers a 401(k) Plan to eligible employees as part of a 401(k) Plan administered by an affiliate and Company member. All employees who have worked at least 1,000 hours and have attained the age of 21 are eligible to participate in the plan. Company contributions to the plan totaled $357,000 and $50,000 in 1996 and 1995, respectively. 10. MEMBERS' EQUITY: MEMBERSHIP UNITS The Company's limited liability company agreement provides for both Class A and Class B membership interests in the Company. Class A Unit holders are entitled to a preferred return on their investment in the Company plus a return of their capital upon the dissolution of the Company. Class B Units are granted in connection with the Company's Amended and Restated Equity Option Plan (EOP). Although Class B Units, when exercised, will constitute an ownership interest in the Company, the interest is limited to the appreciation in the value of the Company, that is the distributable profits interest, F-18 NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 10. MEMBERS' EQUITY: (CONTINUED) if any, of the Company. On January 31, 1997, the Company merged with and into NEXTLINK Communications, Inc. (see Note 12). The valuation of membership units is determined by the EOP Administrative Committee. The value of Class A Units as of December 31, 1995 and 1996 was determined to be approximately $1.45 and $4.36, respectively, and the appreciation interest per unit for Class B Units was approximately $0.44 and $3.50 as of the same dates. RECAPITALIZATION Effective January 1, 1996, the Company merged four of its five operating subsidiaries with newly formed entities owned by the Company (the Recapitalization). As a result of these mergers, the entities and individuals holding minority interests in the subsidiaries exchanged these interests for 3,841,207 Class A Units of the Company (representing an approximate 5.9% ownership interest in the Company) which were valued at approximately $5.6 million. NEXTLINK Washington, L.L.C. did not participate in the merger. The transaction has been accounted for as a purchase of minority interests. Accordingly, the $2.9 million excess of the purchase price over the book value of the interests acquired was recorded as goodwill. In addition to the exchange of equity interests, the Company exchanged options to acquire equity interests in the subsidiaries for options to acquire Class B Units in the Company. In connection with this transaction, the Company issued 1,953,656 options with exercise prices of $0.01 and four-year vesting schedules. These options had substantially the same economic values and vesting schedules as the subsidiary options which were exchanged. These options are included in the summary of information regarding the EOP that follows. EQUITY OPTION PLANS The Company and certain of its subsidiaries provided for grants of equity option interests (EO Interests) during 1994 and 1995. The various option grants, including those granted pursuant to the Recapitalization, are considered compensatory and are accounted for similar to stock appreciation rights. The Company recognizes compensation expense over the vesting period based on the excess of the fair value of the Class B Units, as determined by the Administrative Committee, over the exercise price of the option and such expense is periodically adjusted for changes in the fair value of the Class B units. Effective January 1, 1996, the various option plans mentioned above were replaced by the EOP. The EOP provides for the grant of EO Interests in the Company. Options generally expire 15 years from the date of grant and vest 25% at the end of each of the next four years. Previously granted options continue to vest under their previous schedule which, in most cases, vested 20% at employment and 20% at the end of each subsequent year. F-19 NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 10. MEMBERS' EQUITY: (CONTINUED) Information regarding the Company's EOP is summarized below:
WEIGHTED AVERAGE NUMBER EXERCISE OF UNITS PRICES ----------- -------------- Balance, inception (September 16, 1994)......................... Granted....................................................... 898,996 $ 0.01 ----------- Balance, December 31, 1994...................................... 898,996 $ 0.01 Granted....................................................... 1,135,176 $ 0.01 Granted pursuant to the Recapitalization...................... 1,953,656 $ 0.01 Canceled...................................................... (375,000) $ 0.01 ----------- Balance, December 31, 1995...................................... 3,612,828 $ 0.01 Granted....................................................... 1,031,002 $ 0.85 Canceled...................................................... (101,608) $ 0.01 ----------- Balance, December 31, 1996...................................... 4,542,222 $ 0.20 ----------- -------------- ----------- --------------
Of the options outstanding at December 31, 1996, there were 4,383,722 with exercise prices ranging from $0.01 to $0.44 and 158,500 with an exercise price of $3.50. As of December 31, 1996, 1995 and 1994, there were 1,551,782, 805,864 and 59,149 options vested, respectively. For the same periods, the weighted average exercise for these vested options were $0.02, $0.01 and $0.01, respectively. The Company recorded $9,914,000 and $375,000 of deferred compensation expense related to the EOP during 1996 and 1995, respectively. Such deferred compensation is included in other long-term liabilities. On January 31, 1997, in conjunction with the Incorporation, the Company established a new stock option plan. All options previously outstanding will be regranted under the new plan with terms and conditions substantially the same as under the previous plan except that option holders will no longer have the option to require the Company to repurchase units for cash upon exercise of such units, nor will the Company have the option to repurchase exercised units for cash. 11. QUARTERLY SUMMARY OF OPERATIONS (UNAUDITED): The financial information presented below reflects all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary to a fair presentation of the results for the interim periods. F-20 NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 11. QUARTERLY SUMMARY OF OPERATIONS (UNAUDITED): (CONTINUED) Summarized quarterly financial data for 1996 and 1995 is as follows (unaudited, in thousands):
1996 --------------------------------------------- 1ST 2ND 3RD 4TH --------- ---------- ---------- ---------- Revenue...................................... $ 5,370 $ 6,671 $ 6,919 $ 6,726 Cost and expenses............................ 12,041 15,415 23,050 26,195 --------- ---------- ---------- ---------- Loss from operations......................... (6,671) (8,744) (16,131) (19,469) Other income (expense), net.................. (445) (4,973) (7,371) (7,297) --------- ---------- ---------- ---------- Net loss..................................... $ (7,116) $ (13,717) $ (23,502) $ (26,766) --------- ---------- ---------- ---------- --------- ---------- ---------- ---------- 1995 --------------------------------------------- 1ST 2ND 3RD 4TH --------- ---------- ---------- ---------- Revenue...................................... $ 399 $ 1,000 $ 2,825 $ 3,328 Cost and expenses............................ 2,003 3,289 5,271 9,451 --------- ---------- ---------- ---------- Loss from operations......................... (1,604) (2,289) (2,446) (6,123) Other income, net............................ 43 36 (95) (253) --------- ---------- ---------- ---------- Net loss..................................... $ (1,561) $ (2,253) $ (2,541) $ (6,376) --------- ---------- ---------- ---------- --------- ---------- ---------- ----------
12. SUBSEQUENT EVENTS: INCORPORATION On January 31, 1997, the Company was merged into NEXTLINK Communications, Inc. (Communications), a Washington corporation in a tax-free transaction. In the merger, the Company's Class A membership interests were converted into shares of Class B common stock of Communications, and options to purchase Class B membership interests were converted into options to purchase shares of Class A common stock of Communications. Communications Class A common stock and Class B common stock will be identical in dividend and liquidation rights, and will vote together as a single class on all matters, except as otherwise required by applicable law, with the Class A shareholders entitled to cast one vote per share, and the Class B shareholders entitled to cast 10 votes per share. In calculating the number of shares of Communications common stock that each of the Company's Class A members received in the merger, the Company applied a formula that reflected each members' revalued capital account balance as of January 31, 1997. Class B membership options were converted on a one to one basis. After the incorporation, Communications had 100,000,000 and 83,123,084 shares of Class B common stock authorized and outstanding, respectively and 250,000,000 and 0 shares of Class A common stock authorized and outstanding, respectively with options to purchase 4,668,912 shares of Class A common stock outstanding. Communications also has 25,000,000 shares of Preferred Shares authorized, 5,700,000 are outstanding. See below under "Financing." The amount of Class B common stock outstanding excludes 3,571,364 shares of Class B common stock issuable upon exercise of an option granted to Mr. James F. Voelker, the Company's President. F-21 NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 12. SUBSEQUENT EVENTS: (CONTINUED) The conversion of the Company to a taxable corporation will result in the Company recording fully reserved net deferred tax assets. Major items giving rise to deferred tax assets include deferred compensation and certain operating expenses capitalized for tax purposes. Management believes that, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding the realization of the net deferred tax assets. Accordingly, a valuation allowance will be provided for the net deferred tax assets of the Company. FINANCING On January 31, 1997, the Company completed the sale of 5.7 million units consisting of (i) 14% senior exchangeable redeemable preferred shares (Preferred Shares), liquidation preference $50 per share, and (ii) contingent warrants to acquire in the aggregate 5% of each class of outstanding junior shares (as defined) of the Company on a fully diluted basis as of February 1, 1998, which resulted in gross proceeds to the Company of $285 million and proceeds net of underwriting discounts, advisory fees and expenses of $274 million. Dividends on the Preferred Shares will accrue from January 31, 1997 and will be payable quarterly commencing on May 1, 1997 at an annual rate of 14% of the liquidation preference thereof. Dividends may be paid, at the Company's option, on any dividend payment date occurring on or prior to February 1, 2002 either in cash or by issuing additional Preferred Shares with an aggregate liquidation preference equal to the amount of such dividends. The Company is required to redeem all of the Preferred Shares outstanding on February 1, 2009 at a redemption price equal to 100% of the liquidation preference thereof, plus accumulated and unpaid dividends to the date of redemption. Subject to certain conditions, the Preferred Shares are exchangeable in whole, but not in part, at the option of the Company, on any dividend payment date, for the 14% senior subordinated notes (Senior Subordinated Notes) due February 1, 2009 of the Company. All terms and conditions of the Senior Subordinated Notes would be substantially the same as those of the Preferred Shares. The contingent warrants are only exercisable on any business day after February 1, 1998 if a Qualifying Event has not occurred on or prior to February 1, 1998. A Qualifying Event means a public equity offering (as defined) or one or more strategic equity investments (as defined) which in either case results in aggregate net proceeds to the Company of not less than $75 million. In the event of a change in control of the Company, the Company will be required to offer to purchase all of the then outstanding Preferred Shares at a price equal to 101% of the liquidation preference thereof, plus accumulated and unpaid dividends to the date of redemption. ACQUISITION On February 4, 1997, the Company completed the acquisition of substantially all of the assets of Linkatel Pacific, L.P. (Linkatel), a Los Angeles-based competitive access telecommunications provider. At the time of acquisition, Linkatel operated an 80 mile fiber optic telecommunications network covering several markets in the Orange and Los Angeles county areas. The acquired assets consist primarily of fiber optic network equipment and rights-of-way. The Company plans to expand the network and add switching facilities in order to provide local dial tone services during 1997. The total purchase price of $42.5 million consisted of a cash payment of $36.1 million, the repayment of debt of $5.6 million and the assumption of net liabilities of $0.8 million. F-22 NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 12. SUBSEQUENT EVENTS: (CONTINUED) The assets acquired and consideration given were as follows (in thousands): Fair value of tangible assets and liabilities acquired............ $ 12,003 Fair value of intangible assets acquired.......................... 29,682 --------- $ 41,685 --------- --------- Cash paid for assets, including repayment of debt................. $ 41,685 --------- ---------
F-23 [LETTERHEAD] INDEPENDENT AUDITORS' REPORT To the Partners of Linkatel Pacific, L.P.: We have audited the accompanying balance sheets of Linkatel Pacific, L.P. (the Partnership), a California limited partnership and a development stage entity, as of December 31, 1996 and 1995, and the related statements of operations, partners' capital and cash flows for the years ended December 31, 1996, 1995 and 1994 and the cumulative period from July 21, 1993 (date of inception) to December 31, 1996. These financial statements are the responsibility of the Partnership. 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, such financial statements present fairly, in all material respects, the financial position of the Partnership as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the years ended December 31, 1996, 1995 and 1994 and the cumulative period from July 21, 1993 (date of inception) to December 31, 1996 in conformity with generally accepted accounting principles. On February 4, 1997, substantially all of the Partnership's assets were acquired by and liabilities assumed by an unrelated third party (Note 7), including obligations under the long-term loan agreement. [LOGO] January 24, 1997, except for Note 7, as to which the date is February 4, 1997 [LOGO] F-24 LINKATEL PACIFIC, L.P. (A CALIFORNIA LIMITED PARTNERSHIP) (A DEVELOPMENT STAGE ENTITY) BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1995
1996 1995 --------- --------- (IN THOUSANDS) ASSETS CURRENT ASSETS: Cash and cash equivalents, including restricted cash of $500 (1996 and 1995) (Note 4)...... $ 689 $ 3,771 Accounts receivable........................................................................ 22 14 Other current assets....................................................................... 222 99 --------- --------- Total current assets................................................................... 933 3,884 NETWORK PLANT AND EQUIPMENT (Notes 4 and 5): Plant...................................................................................... 9,104 6,908 Telecommunications equipment............................................................... 2,339 2,061 Other equipment............................................................................ 318 299 Network-in-progress........................................................................ 3,964 2,867 --------- --------- Total network plant and equipment...................................................... 15,725 12,135 Less accumulated depreciation and amortization............................................. (1,559) (732) --------- --------- Network plant and equipment, net....................................................... 14,166 11,403 OTHER ASSETS: Organization costs, net (Note 5)........................................................... 179 293 Unamortized debt issue costs, net.......................................................... 211 266 Licenses, net.............................................................................. 56 85 Other...................................................................................... 81 89 --------- --------- Total other assets..................................................................... 527 733 --------- --------- $ 15,626 $ 16,020 --------- --------- --------- --------- LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES: Accounts payable and accrued liabilities (Note 5).......................................... $ 1,933 $ 1,322 Note payable to NTFC (Note 4).............................................................. 5,555 5,260 --------- --------- Total current liabilities.............................................................. 7,488 6,582 DEFERRED CREDITS AND OTHER LIABILITIES..................................................... 137 141 ADVANCE FROM NEXTLINK (Note 4)............................................................. 1,490 COMMITMENTS AND CONTINGENCIES (Note 6)..................................................... PARTNERS' CAPITAL (Note 5)................................................................. 6,511 9,297 --------- --------- $ 15,626 $ 16,020 --------- --------- --------- ---------
See independent auditors' report and notes to financial statements. F-25 LINKATEL PACIFIC, L.P. (A CALIFORNIA LIMITED PARTNERSHIP) (A DEVELOPMENT STAGE ENTITY) STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND THE CUMULATIVE PERIOD FROM JULY 21, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1996
CUMULATIVE PERIOD FROM JULY 21, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1996 1995 1994 1996 --------- --------- --------- -------------- (IN THOUSANDS) REVENUES--Telecommunications services........................... $ 165 $ 62 $ 3 $ 230 COSTS AND EXPENSES (Notes 5 and 6): Engineering..................................................... 688 409 43 1,176 Sales and marketing............................................. 175 211 215 601 General and administrative...................................... 856 672 813 2,637 Depreciation and amortization................................... 1,010 781 287 2,078 --------- --------- --------- ------- Total costs and expenses.................................... 2,729 2,073 1,358 6,492 --------- --------- --------- ------- OPERATING LOSS.................................................. (2,564) (2,011) (1,355) (6,262) INTEREST (EXPENSE) INCOME, net.................................. (481) (99) 93 (481) --------- --------- --------- ------- NET LOSS........................................................ $ (3,045) $ (2,110) $ (1,262) $ (6,743) --------- --------- --------- ------- --------- --------- --------- -------
See independent auditors' report and notes to financial statements. F-26 LINKATEL PACIFIC, L.P. (A CALIFORNIA LIMITED PARTNERSHIP) (A DEVELOPMENT STAGE ENTITY) STATEMENTS OF PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND THE CUMULATIVE PERIOD FROM JULY 21, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1996
LINKATEL COLONY/LINKATEL FIBRCOM COMMUNICATIONS, INC. NETWORKS, INC. INCORPORATED (GENERAL AND LIMITED (GENERAL AND LIMITED (GENERAL AND LIMITED PARTNER) PARTNER) PARTNER) TOTAL -------------------------- ------------------------ ------------------------ ----------- PARTNERSHIP PARTNERSHIP PARTNERSHIP PARTNERSHIP UNITS AMOUNT UNITS AMOUNT UNITS AMOUNT UNITS ------------- ----------- ------------- --------- ------------- --------- ----------- (IN THOUSANDS) BALANCE, July 21, 1993 (date of inception)........................ -- $ -- -- $ -- -- $ -- -- PARTNERS' CAPITAL CONTRIBUTIONS: Cash (Note 1)....................... 5 5 1 1 1 1 7 Property, organization costs, research and development, and expense reimbursement (Note 1).... 1,500 238 500 435 500 435 2,500 NOTE RECEIVABLE (Note 5)............ (159) NET LOSS............................ (196) (65) (65) ------ ----------- ------ --------- ------ --------- ----------- BALANCE, December 31, 1993.......... 1,505 (112) 501 371 501 371 2,507 PARTNERS' CAPITAL CONTRIBUTIONS: Cash (Note 1)....................... 3,505 3,505 3,505 3,505 7,010 Notes payable converted to capital (Note 1).......................... 500 500 500 500 1,000 INTEREST ON NOTE RECEIVABLE (Note 5)................................ (11) NET LOSS............................ (202) (530) (530) ------ ----------- ------ --------- ------ --------- ----------- BALANCE, December 31, 1994.......... 1,505 (325) 4,506 3,846 4,506 3,846 10,517 PARTNERS' CAPITAL CONTRIBUTIONS-- Cash................................ -- -- 2,025 2,025 2,025 2,025 4,050 INTEREST ON NOTE RECEIVABLE (Note 5)................................ (10) NET LOSS............................ (240) (935) (935) ------ ----------- ------ --------- ------ --------- ----------- BALANCE, December 31, 1995.......... 1,505 (575) 6,531 4,936 6,531 4,936 14,567 PARTNERS' CAPITAL CONTRIBUTIONS-- Cash................................ 135 135 135 135 270 INTEREST ON NOTE RECEIVABLE (Note 5)................................ (11) NET LOSS............................ (313) (1,366) (1,366) ------ ----------- ------ --------- ------ --------- ----------- BALANCE, December 31, 1996.......... 1,505 $ (899) 6,666 $ 3,705 6,666 $ 3,705 14,837 ------ ----------- ------ --------- ------ --------- ----------- ------ ----------- ------ --------- ------ --------- ----------- AMOUNT --------- BALANCE, July 21, 1993 (date of inception)........................ $ -- PARTNERS' CAPITAL CONTRIBUTIONS: Cash (Note 1)....................... 7 Property, organization costs, research and development, and expense reimbursement (Note 1).... 1,108 NOTE RECEIVABLE (Note 5)............ (159) NET LOSS............................ (326) --------- BALANCE, December 31, 1993.......... 630 PARTNERS' CAPITAL CONTRIBUTIONS: Cash (Note 1)....................... 7,010 Notes payable converted to capital (Note 1).......................... 1,000 INTEREST ON NOTE RECEIVABLE (Note 5)................................ (11) NET LOSS............................ (1,262) --------- BALANCE, December 31, 1994.......... 7,367 PARTNERS' CAPITAL CONTRIBUTIONS-- Cash................................ 4,050 INTEREST ON NOTE RECEIVABLE (Note 5)................................ (10) NET LOSS............................ (2,110) --------- BALANCE, December 31, 1995.......... 9,297 PARTNERS' CAPITAL CONTRIBUTIONS-- Cash................................ 270 INTEREST ON NOTE RECEIVABLE (Note 5)................................ (11) NET LOSS............................ (3,045) --------- BALANCE, December 31, 1996.......... $ 6,511 --------- ---------
See independent auditors' report and notes to financial statements. F-27 LINKATEL PACIFIC, L.P. (A CALIFORNIA LIMITED PARTNERSHIP) (A DEVELOPMENT STAGE ENTITY) STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND THE CUMULATIVE PERIOD FROM JULY 21, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1996
CUMULATIVE PERIOD FROM JULY 21, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1996 1995 1994 1996 --------- --------- --------- -------------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss....................................................................... $ (3,045) $ (2,110) $ (1,262) $ (6,743) Depreciation and amortization.................................................. 1,010 781 287 2,078 Write-off of organization costs................................................ 20 20 Loss on disposal of fixed assets............................................... 5 5 Interest accrued on note receivable due from partner........................... (11) (10) (11) (32) Interest accrued on note payable to NTFC....................................... 295 260 555 Changes in operating assets and liabilities: Accounts receivable.......................................................... (8) (10) 7 (22) Other assets................................................................. (113) 23 (156) (248) Accounts payable and accrued liabilities and other liabilities............... 607 (693) 1,681 2,059 --------- --------- --------- -------------- Net cash (used in) provided by operating activities........................ (1,240) (1,759) 546 (2,328) CASH FLOWS FROM INVESTING ACTIVITIES: Network plant and equipment expenditures....................................... (3,602) (5,351) (6,121) (15,194) Licenses....................................................................... (24) Organization costs............................................................. (165) --------- --------- --------- -------------- Net cash used in investing activities...................................... (3,602) (5,351) (6,121) (15,383) CASH FLOWS FROM FINANCING ACTIVITIES: Partners' capital contributions................................................ 270 4,050 7,010 11,337 Proceeds from advance from NextLink............................................ 1,490 1,490 Proceeds from notes payable to NTFC............................................ 5,000 5,000 Proceeds from notes payable to partners........................................ 1,000 Debt issue costs............................................................... (352) (427) --------- --------- --------- -------------- Net cash provided by financing activities.................................. 1,760 9,050 6,658 18,400 --------- --------- --------- -------------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........................... $ (3,082) $ 1,940 $ 1,083 $ 689 CASH AND CASH EQUIVALENTS-- Beginning of period.......................................................... 3,771 1,831 748 0 --------- --------- --------- -------------- CASH AND CASH EQUIVALENTS-- End of period................................................................ $ 689 $ 3,771 $ 1,831 $ 689 --------- --------- --------- -------------- --------- --------- --------- -------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION--Interest paid................ $ 226 $ 66 $ 53 $ 345 --------- --------- --------- -------------- --------- --------- --------- -------------- SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES: During the years ended December 31, 1996 and 1995, accrued interest of $295 and $260, respectively, was added to the principal balance of the note payable to NTFC. Partners' noncash capital contributions: Network-in-progress.......................................................... $ 543 Organization costs........................................................... 323 Note receivable.............................................................. 159 Licenses..................................................................... 50 Debt issue costs............................................................. 33 Notes payable converted to partners' capital................................. $ 1,000 1,000
See independent auditors' report and notes to financial statements. F-28 LINKATEL PACIFIC, L.P. (A CALIFORNIA LIMITED PARTNERSHIP) (A DEVELOPMENT STAGE ENTITY) NOTES TO FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND 1995 AND FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND THE CUMULATIVE PERIOD FROM JULY 21, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1996 1. ORGANIZATION Linkatel Pacific, L.P. (Linkatel) is a California limited partnership. Linkatel was formed on July 21, 1993 with LINKATEL Communications, Inc. (LCI), a California corporation, as both a general partner and a limited partner, and Colony/Linkatel Networks, Inc. (CLN), a California corporation, and FIBRCOM Incorporated (FIBRCOM), a Delaware corporation, as limited partners. On March 3, 1994, a California Public Utility Commission order was issued which authorized CLN and FIBRCOM to become general partners. Therefore, on April 11, 1994, an amendment to Certificate of Limited Partnership was executed and filed with the State of California adding CLN and FIBRCOM, both limited partners, as general partners. During 1994, each of the partners contributed $5,000 for its general partner interest. The partnership agreement requires CLN and FIBRCOM to make cash capital contributions collectively totaling $16,000,000. Simultaneous with the closing of the loan agreement described in Note 4, CLN and FIBRCOM each funded capital contributions consisting of $3,500,000 cash and conversion of notes payable of $500,000 to partners' capital in satisfaction of a portion of the partners' capital requirement. The remaining $8,000,000 capital commitment is to be contributed based on Linkatel's financial needs and in accordance with certain terms of the loan agreement. Effective with the sale of the Partnership's assets (Note 7), such capital commitment is no longer required. Partnership units were issued to the partners in accordance with the partnership agreement in exchange for cash, as well as for the agreed-upon value of property, organization costs, licenses, research and development, and expense reimbursement. Property, organization and license costs contributed were recorded by Linkatel at transferors' cost. Linkatel did not record any amounts for research and development costs incurred by LCI or for LCI expense reimbursement by CLN and FIBRCOM. Accumulated losses for the period from July 21, 1993 to December 31, 1996 were allocated based on the PRO RATA share of outstanding partnership units during the period. 2. BASIS OF PRESENTATION Linkatel was formed to build, own and operate a fiber-optic telecommunications alternative access network in the Los Angeles basin. Linkatel, which is a development stage entity, has devoted substantially all of its present efforts to establishing this business including obtaining adequate financing, obtaining regulatory approval, building the alternative access network, assessing market demand and obtaining customers. Linkatel will remain in the development stage until the network is built and sufficient customer demand is established. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH EQUIVALENTS--Linkatel considers all highly-liquid investments purchased with an original maturity of three months or less to be cash equivalents. NETWORK PLANT AND EQUIPMENT--Additions are recorded at cost which generally includes materials, applicable labor, overhead and interest. Depreciation is computed generally using the straight-line F-29 LINKATEL PACIFIC, L.P. (A CALIFORNIA LIMITED PARTNERSHIP) (A DEVELOPMENT STAGE ENTITY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 1996 AND 1995 AND FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND THE CUMULATIVE PERIOD FROM JULY 21, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1996 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) method over estimated useful lives ranging up to 20 years. Expenditures for maintenance and repairs are expensed as incurred. LICENSES--Licenses are recorded at cost and are amortized over five years. ORGANIZATION COSTS--Organization costs are recorded at cost and are amortized over five years. DEBT ISSUE COSTS--Debt issue costs are capitalized and are amortized over the term of the loan agreement, which is seven years. REVENUES--Telecommunications fees are recorded as revenue in the period the service is provided. INCOME TAXES--Linkatel is not a taxable entity for federal and state income tax purposes. Accordingly, no provision is made for income taxes in the accompanying financial statements since Linkatel's operations are reportable by its partners on their income tax returns. USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. 4. LOAN AGREEMENT Linkatel entered into a loan agreement, dated February 17, 1994, with a third-party finance company. The agreement provides that Linkatel may borrow principal not to exceed an aggregate of $25,000,000, plus up to $1,700,000 in capitalized interest. Loan proceeds are to be used solely for the purchase of equipment and services for Linkatel's fiber-optic transmission and communication system. Interest is to be accrued and added to principal during the first 12 months following the first borrowing date of each note (the Capitalized Interest Period) at the 90-day commercial paper rate plus 4.75% (10.21% at December 31, 1996). Monthly interest-only payments commence the month following the Capitalized Interest Period and will continue for 12 months, after which principal will be repaid in accordance with a 60-month amortization schedule. Standby fees are payable as consideration for the loan commitment. The fees are payable quarterly based on 0.35% per annum of the average portion which remains unborrowed during each calendar quarter. The loan agreement requires Linkatel to maintain a compensating balance of cash, cash equivalents or marketable securities of at least $500,000. Borrowings under the loan agreement are collateralized by the assets and revenues of Linkatel. A post-closing, post-initial funding condition included a requirement to obtain a second carrier agreement with a carrier from a specific listing of interexchange carriers. That second carrier agreement was executed on January 23, 1995. At December 31, 1994, there were certain events and conditions which constituted events of default under the loan agreement which if not cured by Linkatel or waived by F-30 LINKATEL PACIFIC, L.P. (A CALIFORNIA LIMITED PARTNERSHIP) (A DEVELOPMENT STAGE ENTITY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 1996 AND 1995 AND FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND THE CUMULATIVE PERIOD FROM JULY 21, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1996 4. LOAN AGREEMENT (CONTINUED) the lender could have prevented initial funding and terminated the loan agreement. In 1995 Linkatel obtained waivers by the lender of certain of the requirements of these provisions for the year ended December 31, 1994. Based on these events, initial funding under the loan agreement in the amount of $5,000,000 occurred in July 1995. During 1995, the lender agreed to waive payment of a portion of the standby fees until such time as the lender makes the remaining loan commitment available to Linkatel. At December 31, 1996, Linkatel is in default of various covenants under the loan agreement. Such events of default have not been cured by Linkatel or waived by the lender, including certain events of default existing at December 31, 1995 and 1994. All borrowings outstanding ($5,604,000, including accrued interest, at December 31, 1996) are considered current liabilities since the lender has the right to demand full and immediate payment. On September 30, 1996, Linkatel entered into an asset purchase agreement with an unrelated third-party (Nextlink Communications, LLC) (Nextlink) for the sale of Linkatel's assets (Note 7). In consideration of Linkatel granting limited operational and management authority to Nextlink during the interim period between the signing of the asset purchase agreement until the closing date (the Interim Period), Nextlink agreed to advance funds to Linkatel up to a maximum aggregate amount of $2,440,000 for the purpose of providing the necessary cash flow to cover the operating expenses and capital expenditures of Linkatel during the Interim Period. Advances of $1,490,000 at December 31, 1996 are unsecured and shall be liabilities of Linkatel assumed by Nextlink at the closing date (Note 7). 5. RELATED PARTY TRANSACTIONS During 1995 and 1994, KBLCOM Incorporated (KBLCOM), the parent company of FIBRCOM; The Providence Journal, the parent company of CLN; and LCI received fees for services provided to Linkatel. The statements of operations include $128,000 and $253,000 for financial and human resources services provided by KBLCOM in 1995 and 1994, respectively, and $6,000 and $78,000 for management services provided by LCI in 1995 and 1994, respectively. During 1995, Linkatel incurred $7,000 of expenses related to management services provided by The Providence Journal. At December 31, 1996 and 1995, network plant and equipment includes $96,000 and $96,000, respectively, of technical services provided by The Providence Journal and $217,000 and $217,000, respectively, of consulting services provided by LCI. At December 31, 1996 and 1995, network plant and equipment and organization costs include $113,000 and $113,000, respectively, of consulting services provided by TACAN Corporation, an affiliate of LCI. Linkatel holds a promissory note from LCI dated December 29, 1992 in the amount of $150,000 plus accrued interest. The interest rate on the note is 6% per annum, and unpaid interest is to be added to the principal on an annual basis. The outstanding loan amount and accrued interest have been deducted from LCI's partner's capital account. Distributions of earnings payable to LCI as well as distributions from certain other projects of which LCI is a partner are to be payable to Linkatel as payments on the note until the note is paid in full. Payments are to be allocated first to unpaid interest and then to principal. If the F-31 LINKATEL PACIFIC, L.P. (A CALIFORNIA LIMITED PARTNERSHIP) (A DEVELOPMENT STAGE ENTITY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 1996 AND 1995 AND FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND THE CUMULATIVE PERIOD FROM JULY 21, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1996 5. RELATED PARTY TRANSACTIONS (CONTINUED) distributions to LCI from Linkatel or the ventures specified in the agreement are insufficient to fully repay the promissory note by December 31, 2017, the remaining unpaid balance of principal and unpaid accrued interest are to be waived. Accounts payable and accrued liabilities at December 31, 1996 and 1995 include $52,000 and $52,000, respectively, due to KBLCOM. 6. COMMITMENTS Linkatel has entered into renewable commitments for the rental of poles and conduit which are based on the actual number of poles and conduit used by the operation. Such commitments resulted in $333,000, $124,000 and $14,000 of rent expense in 1996, 1995 and 1994, respectively. Linkatel has noncancelable operating leases involving certain real property. Future minimum lease payments under those noncancelable operating leases are as follows: (In thousands)
(IN THOUSANDS) 1997.......................................................................... $ 253 1998.......................................................................... 254 1999.......................................................................... 153 2000.......................................................................... 5 ----- Total payments required....................................................... $ 665 ----- -----
Rent expense under these leases in 1996, 1995 and 1994 was approximately $229,000, $213,000 and $92,000, respectively. As of February 17, 1994, effective date of the loan agreement (described in Note 4), Linkatel committed to purchase certain transmission and cable products and associated services totaling $18,777,000. The commitment may be modified with appropriate written requests and approvals. The remaining commitment as of December 31, 1996 is $13,005,000 (Note 7). 7. SUBSEQUENT EVENT On February 4, 1997, substantially all of the Partnership's assets were acquired by and liabilities assumed by Nextlink for a total purchase price of $42,500,000 less the amount of certain assets and liabilities (as defined). Effective with the sale of the Partnership's assets and assumption of liabilities by Nextlink, the Partnership's purchase commitment under the loan agreement had been canceled. F-32 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Sound Response Corporation: We have audited the accompanying balance sheets of Sound Response Corporation (an Oregon corporation) as of August 31, 1995, and December 31, 1994 and 1993, and the related statements of operations, changes in shareholders' equity and cash flows for the eight months ended August 31, 1995, and for the years ended December 31, 1994 and 1993. 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 financial statements referred to above present fairly, in all material respects, the financial position of Sound Response Corporation as of August 31, 1995, and December 31, 1994 and 1993, and the results of its operations and its cash flows for the eight months ended August 31, 1995, and for the years ended December 31, 1994 and 1993 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Seattle, Washington, March 22, 1996 F-33 SOUND RESPONSE CORPORATION BALANCE SHEETS
DECEMBER 31, AUGUST 31, -------------------------- 1995 1994 1993 ------------- ------------- ----------- ASSETS CURRENT ASSETS: Cash................................................................. $ 688,963 $ 113,842 $ 34,221 Accounts receivable, net of allowance for uncollectible accounts of $40,000, $0 and $0, respectively................................... 2,377,956 651,378 379,155 Receivable from shareholder.......................................... -- 30,615 -- Other current assets................................................. 12,935 7,334 2,612 ------------- ------------- ----------- Total current assets............................................. 3,079,854 803,169 415,988 PROPERTY AND EQUIPMENT, net (Note 2)................................... 1,368,361 421,578 256,533 OTHER ASSETS, net...................................................... -- 900 1,500 ------------- ------------- ----------- Total assets..................................................... $ 4,448,215 $ 1,225,647 $ 674,021 ------------- ------------- ----------- ------------- ------------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Bank overdraft....................................................... $ -- $ -- $ 36,074 Accounts payable..................................................... 1,891,300 330,646 170,003 Payroll accruals..................................................... -- 106,188 -- Telecom accruals..................................................... -- 42,561 -- Current portion of long-term liabilities............................. 29,123 10,632 26,193 Deferred revenue..................................................... -- -- 175,000 ------------- ------------- ----------- Total current liabilities........................................ 1,920,423 490,027 407,270 LONG-TERM LIABILITIES: Notes payable........................................................ 53,385 44,963 56,158 Loans from shareholders.............................................. -- 156,295 154,419 ------------- ------------- ----------- Total long-term liabilities...................................... 53,385 201,258 210,577 ------------- ------------- ----------- Total liabilities................................................ 1,973,808 691,285 617,847 ------------- ------------- ----------- COMMITMENTS AND CONTINGENCIES (Note 4) SHAREHOLDERS' EQUITY: Common stock, no par value; 21,000,000 shares authorized: Class A Common Stock, 4,000,000 issued and outstanding at August 31, 1995 and 2,000,000 issued and outstanding at December 31, 1994 and 1993.................................................... -- -- -- Class B Common Stock, 262,500, 185,000 and 110,000 issued and outstanding at August 31, 1995, December 31, 1994 and 1993, respectively..................................................... -- -- -- Paid-in capital...................................................... 240,500 240,500 98,000 Retained earnings (deficit).......................................... 2,233,907 293,862 (41,826) ------------- ------------- ----------- Total shareholders' equity....................................... 2,474,407 534,362 56,174 ------------- ------------- ----------- Total liabilities and shareholders' equity....................... $ 4,448,215 $ 1,225,647 $ 674,021 ------------- ------------- ----------- ------------- ------------- -----------
The accompanying notes are an integral part of these balance sheets. F-34 SOUND RESPONSE CORPORATION STATEMENTS OF OPERATIONS
EIGHT MONTHS YEARS ENDED ENDED DECEMBER 31, AUGUST 31, ---------------------------- 1995 1994 1993 ------------- ------------- ------------- REVENUE............................................................. $ 8,285,795 $ 3,232,907 $ 1,888,805 ------------- ------------- ------------- COST AND EXPENSES: Operating....................................................... 2,565,889 885,781 606,690 Selling, general and administrative............................. 3,330,860 1,889,106 1,094,155 Depreciation and amortization................................... 151,328 102,012 70,410 ------------- ------------- ------------- 6,048,077 2,876,899 1,771,255 ------------- ------------- ------------- INCOME FROM OPERATIONS.............................................. 2,237,718 356,008 117,550 INTEREST EXPENSE.................................................... 16,848 20,320 17,563 ------------- ------------- ------------- NET INCOME.......................................................... $ 2,220,870 $ 335,688 $ 99,987 ------------- ------------- ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these financial statements. F-35 SOUND RESPONSE CORPORATION STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
SHARES OUTSTANDING ----------------------------------- RETAINED TOTAL CLASS A VOTING CLASS B NONVOTING PAID-IN EARNINGS SHAREHOLDERS' COMMON STOCK COMMON STOCK CAPITAL (DEFICIT) EQUITY --------------- ------------------ ---------- ------------ -------------- BALANCE, JANUARY 1, 1993.................................. 20,000 -- $ 10,000 $ (101,813) $ (91,813) Common stock split on 100:1 basis... 2,000,000 -- -- -- -- Cancellation of original Class A stock............................. (20,000) -- -- -- -- Dividends declared at $0.02 per share............................. -- -- -- (40,000) (40,000) Issuance of nonvoting stock......... -- 110,000 88,000 -- 88,000 Net income.......................... -- -- -- 99,987 99,987 --------------- ---------- ---------- ------------ -------------- BALANCE, DECEMBER 31, 1993.................................. 2,000,000 110,000 98,000 (41,826) 56,174 Issuance of nonvoting stock......... -- 75,000 142,500 -- 142,500 Net income.......................... -- -- -- 335,688 335,688 --------------- ---------- ---------- ------------ -------------- BALANCE, DECEMBER 31, 1994.................................. 2,000,000 185,000 240,500 293,862 534,362 Dividends declared at $0.07 per share............................. -- -- -- (152,950) (152,950) Common stock split on 2:1 basis..... 2,000,000 185,000 -- -- -- Cancellation of nonvoting stock..... -- (107,500) -- -- -- Dividends declared at $0.03 per share............................. -- -- -- (127,875) (127,875) Net income.......................... -- -- -- 2,220,870 2,220,870 --------------- ---------- ---------- ------------ -------------- BALANCE, AUGUST 31, 1995.................................. 4,000,000 262,500 $ 240,500 $ 2,233,907 $ 2,474,407 --------------- ---------- ---------- ------------ -------------- --------------- ---------- ---------- ------------ --------------
The accompanying notes are an integral part of these financial statements. F-36 SOUND RESPONSE CORPORATION STATEMENTS OF CASH FLOWS
EIGHT MONTHS YEARS ENDED ENDED DECEMBER 31, AUGUST 31, -------------------------- 1995 1994 1993 ------------- ------------ ------------ OPERATING ACTIVITIES: Net income......................................................... $ 2,220,870 $ 335,688 $ 99,987 ------------- ------------ ------------ Adjustments to reconcile net income to net cash provided by operating activities-- Noncash compensation............................................. 30,615 142,500 106,000 Depreciation and amortization.................................... 151,328 102,012 70,410 Changes in assets and liabilities: Accounts receivable............................................ (1,726,578) (272,223) (310,666) Other current assets........................................... (5,601) (35,337) (2,612) Bank overdraft................................................. -- (36,074) 36,074 Accounts payable............................................... 1,560,655 160,642 124,852 Accrued expenses............................................... (148,749) 130,750 (62,264) Deferred revenue............................................... -- (175,000) 175,000 ------------- ------------ ------------ (138,330) 17,270 136,794 ------------- ------------ ------------ Net cash provided by operations.............................. 2,082,540 352,958 236,781 ------------- ------------ ------------ INVESTING ACTIVITIES: Purchase of property and equipment................................. (1,042,019) (266,457) (125,231) ------------- ------------ ------------ FINANCING ACTIVITIES: Dividends paid..................................................... (280,825) -- (40,000) Proceeds from lines of credit...................................... 1,360,000 -- -- Payments on notes payable.......................................... (28,280) (6,880) (3,306) Payments on loans from shareholders................................ (156,295) -- (43,086) Payments on lines of credit........................................ (1,360,000) -- -- ------------- ------------ ------------ Net cash used in financing activities........................ (465,400) (6,880) (86,392) ------------- ------------ ------------ NET INCREASE IN CASH................................................... 575,121 79,621 25,158 CASH, beginning of year................................................ 113,842 34,221 9,063 ------------- ------------ ------------ CASH, end of year...................................................... $ 688,963 $ 113,842 $ 34,221 ------------- ------------ ------------ ------------- ------------ ------------ SUPPLEMENTAL CASH FLOW DISCLOSURES: Cash paid for interest:............................................ $ 16,848 $ 18,444 $ 17,563 ------------- ------------ ------------ ------------- ------------ ------------
The accompanying notes are an integral part of these financial statements. F-37 SOUND RESPONSE CORPORATION NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION AND PRINCIPLES OF CONSOLIDATION The financial statements include the accounts of Sound Response Corporation, an Oregon S corporation. The Company was formed August 12, 1991, and is principally engaged in the ownership and operation of enhanced or intelligent communications services. REVENUE RECOGNITION The Company recognizes revenue in the period that service is provided. Bad debt expense of $40,000, $28,739 and $2,952 are included in selling, general and administrative expenses for the periods ended August 31, 1995, December 31, 1994 and 1993, respectively. The Company determined that no allowance for uncollectible accounts was required at December 31, 1994 and 1993. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Provisions for depreciation are computed using the straight-line method over estimated useful lives, which range from five to seven years, beginning in the month an asset is put into service. Leasehold improvements are amortized using the straight-line method over the term of the lease. INCOME TAXES The Company has been organized and operated under a subchapter S tax status structured in a manner that is intended to result in the classification of the Company as a partnership for federal income tax purposes. Accordingly, no provision for income taxes has been made. CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the Company to concentration of credit risk consist principally of accounts receivable. Concentrations of credit risk with respect to accounts receivable are limited due to the dispersion of the Company's customer base among different industries and remedies provided by terms of contracts and statutes. Certain of the Company's customers provide a significant portion of the Company's revenues. Customers providing more than 10% of the Company's revenues during the periods ending August 31, 1995, December 31, 1994 and 1993 are as follows:
EIGHT MONTHS YEAR ENDED ENDED DECEMBER 31, AUGUST 31, ------------------------ 1995 1994 1993 --------------- ----- ----- Number of customers......................................... 2 2 3 Percentage of revenues...................................... 97% 42% 71%
F-38 SOUND RESPONSE CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) AUGUST 31, 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. PROPERTY AND EQUIPMENT:
DECEMBER 31, ------------------------ AUGUST 31, 1995 1994 1993 ------------- ----------- ----------- Network equipment.............................................. $ 1,519,199 $ 605,415 $ 348,272 Furniture...................................................... 124,450 35,934 26,620 Software....................................................... 59,363 -- -- Leasehold improvements......................................... 35,548 -- 16,664 ------------- ----------- ----------- 1,738,560 641,349 391,556 Less--accumulated depreciation................................. 370,199 219,771 135,023 ------------- ----------- ----------- $ 1,368,361 $ 421,578 $ 256,533 ------------- ----------- ----------- ------------- ----------- -----------
3. LONG TERM DEBT: A summary of the Company's outstanding long-term debt is as follows:
DECEMBER 31, ------------------------ AUGUST 31, 1995 1994 1993 ----------- ----------- ----------- Notes payable to shareholders; interest at 9%; interest payments due monthly; principal due 180 days following demand........... $ -- $ 156,295 $ 154,419 Note payable to shareholder; interest at 8%; principal and interest due March 30, 1994.................................... -- -- 18,000 Note payable for equipment; interest at 26.36%; graduated principal plus interest payments due monthly until maturity on August 1, 1998................................................. 33,748 55,595 64,351 Note payable for equipment; interest at 15.8%; graduated principal plus interest payments due monthly until maturity on April 1, 1998.................................................. 48,760 -- -- ----------- ----------- ----------- 82,508 211,890 236,770 Less--current maturities......................................... (29,123) (10,632) (26,193) ----------- ----------- ----------- $ 53,385 $ 201,258 $ 210,577 ----------- ----------- ----------- ----------- ----------- -----------
F-39 SOUND RESPONSE CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) AUGUST 31, 1995 3. LONG TERM DEBT: (CONTINUED) During 1995, the Company entered into several operating line-of-credit agreements with interest rates ranging from 9.5% to 10.5%. All agreements were cancelled as of August 31, 1995. The Company's future minimum payments under its long-term debt agreements are as follows:
YEAR ENDING DECEMBER 31, - ------------------------------------------------------------------------------------------------------- Remainder of 1995...................................................................................... $ 7,569 1996................................................................................................... 31,158 1997................................................................................................... 36,397 1998................................................................................................... 7,384 --------- $ 82,508 --------- ---------
4. COMMITMENTS AND CONTINGENCIES: The Company is leasing premises under various operating leases which, in addition to rental payments, require payments for insurance, maintenance, property taxes and other executory costs related to the leases. The lease agreements have various expiration dates and renewal options through 2001. Future minimum payments required under operating leases and agreements that have an initial or remaining noncancellable lease term in excess of one year at August 31, 1995 are summarized below:
YEAR ENDING DECEMBER 31, - --------------------------------------------------------------------------------------------------- Remainder of 1995.................................................................................. $ 66,403 1996............................................................................................... 285,744 1997............................................................................................... 285,744 1998............................................................................................... 285,744 1999............................................................................................... 282,576 Thereafter......................................................................................... 394,216 ------------- $ 1,600,427 ------------- -------------
Total rent expense amounted to approximately $115,000 for the eight months ended August 31, 1995 and $78,000 and $51,000 for the years ended December 31, 1994 and 1993, respectively. 5. EMPLOYEE STOCK AWARD PLAN: During 1993, the Company established the Key Employee Stock Award Plan (the Plan). During the eight months ended August 31, 1995 and the years ended December 31, 1994 and 1993, 2,500, 75,000 and 110,000 shares were awarded, respectively. Compensation expense was recorded upon award of the shares. Compensation expense of $0, $142,500 and $88,000 was recognized in the eight months ended August 31, 1995 and the years ended December 31, 1994 and 1993, respectively. The Plan was terminated as of August 31, 1995. F-40 SOUND RESPONSE CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) AUGUST 31, 1995 6. SUBSEQUENT EVENT: In September 1995, NEXTLINK Communications, L.L.C. (NEXTLINK) acquired certain assets of the Company and immediately contributed the assets to NEXTLINK Interactive, L.L.C. NEXTLINK Interactive, L.L.C. provides interactive nationwide voice response and debit card services. The total cost of the acquisition was approximately $12,193,000. Included in the cost of the acquisition are 4,411,941 units of NEXTLINK valued at $4,411,941 and $3,000,000 of deferred purchase consideration payable to BWP, Inc. (formerly known as Sound Response Corporation). In addition, NEXTLINK made a distribution of $905,000 to BWP, Inc., in 1996 to satisfy certain liabilities in connection with the acquisition. F-41 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Tel-West Central Services, Inc.: We have audited the accompanying balance sheets of Tel-West Central Services, Inc. (a Washington corporation) as of March 31, 1995, and September 30, 1994 and 1993, and the related statements of operations, changes in shareholders' equity and cash flows for the six months ended March 31, 1995, and for the years ended September 30, 1994 and 1993. 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 financial statements referred to above present fairly, in all material respects, the financial position of Tel-West Central Services, Inc. as of March 31, 1995, and September 30, 1994 and 1993, and the results of its operations and its cash flows for the six months ended March 31, 1995, and for the years ended September 30, 1994 and 1993 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Seattle, Washington, May 9, 1996 F-42 TEL-WEST CENTRAL SERVICES, INC. BALANCE SHEETS
SEPTEMBER 30, MARCH 31, ------------------------ 1995 1994 1993 ----------- ----------- ----------- ASSETS CURRENT ASSETS: Cash..................................................................... $ 2,624 $ 3,826 $ 3,294 Accounts receivable, net of allowance for doubtful accounts of $0, $5,000 and $0, respectively................................................... 163,743 53,005 32,865 Receivables from related parties......................................... 58,604 59,734 62,278 ----------- ----------- ----------- 224,971 116,565 98,437 PROPERTY AND EQUIPMENT, net................................................ 306,042 250,038 67,588 ----------- ----------- ----------- Total assets......................................................... $ 531,013 $ 366,603 $ 166,025 ----------- ----------- ----------- ----------- ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable......................................................... $ 170,492 $ 83,723 $ 15,765 Payroll accruals......................................................... 7,627 17,612 93 Accrued taxes payable.................................................... 13,739 2,653 4,462 Line of credit........................................................... 9,177 9,177 -- Current portion of notes payable--affiliates............................. 112,183 25,041 -- Current portion of notes payable--others................................. 14,524 14,109 18,663 ----------- ----------- ----------- 327,742 152,315 38,983 LONG-TERM LIABILITIES: Notes payable--affiliates................................................ 205,414 219,497 -- Notes payable--others.................................................... 14,917 21,736 51,443 ----------- ----------- ----------- 220,331 241,233 51,443 ----------- ----------- ----------- Total liabilities.................................................... 548,073 393,548 90,426 ----------- ----------- ----------- SHAREHOLDERS' EQUITY: Common stock, no par value, and paid-in capital; 50,000 shares authorized, issued and outstanding..................................... 63,298 63,298 63,298 Retained earnings (deficit).............................................. (80,358) (90,243) 12,301 ----------- ----------- ----------- Total shareholders' equity........................................... (17,060) (26,945) 75,599 ----------- ----------- ----------- Total liabilities and shareholders' equity........................... $ 531,013 $ 366,603 $ 166,025 ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these balance sheets. F-43 TEL-WEST CENTRAL SERVICES, INC. STATEMENTS OF OPERATIONS
SIX MONTHS YEAR ENDED ENDED SEPTEMBER 30, MARCH 31, ------------------------- 1995 1994 1993 ----------- ------------ ----------- REVENUE................................................................... $ 472,083 $ 523,625 $ 216,183 ----------- ------------ ----------- COST AND EXPENSES: Operating............................................................. 361,479 421,391 147,001 Selling, general and administrative................................... 61,143 168,187 24,921 Depreciation.......................................................... 20,991 22,393 25,627 ----------- ------------ ----------- 443,613 611,971 197,549 ----------- ------------ ----------- INCOME (LOSS) FROM OPERATIONS............................................. 28,470 (88,346) 18,634 INTEREST EXPENSE.......................................................... 18,585 14,198 4,083 ----------- ------------ ----------- INCOME (LOSS) BEFORE TAXES................................................ 9,885 (102,544) 14,551 PROVISION FOR INCOME TAXES................................................ -- -- 2,250 ----------- ------------ ----------- NET INCOME (LOSS)......................................................... $ 9,885 $ (102,544) $ 12,301 ----------- ------------ ----------- ----------- ------------ -----------
The accompanying notes are an integral part of these financial statements. F-44 TEL-WEST CENTRAL SERVICES, INC. STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
COMMON STOCK -------------------------- RETAINED TOTAL SHARES PAID-IN EARNINGS SHAREHOLDERS' OUTSTANDING AMOUNT CAPITAL (DEFICIT) EQUITY ------------- ----------- --------- ------------ -------------- BALANCE, October 1, 1992....................... 50,000 $ -- $ 63,298 $ -- $ 63,298 Net income................................. -- -- -- 12,301 12,301 ------------- ----- --------- ------------ -------------- BALANCE, September 30, 1993.................... 50,000 -- 63,298 12,301 75,599 Net income................................. -- -- -- (102,544) (102,544) ------------- ----- --------- ------------ -------------- BALANCE, September 30, 1994.................... 50,000 -- 63,298 (90,243) (26,945) Net income................................. -- -- -- 9,885 9,885 ------------- ----- --------- ------------ -------------- BALANCE, March 31, 1995........................ 50,000 $ -- $ 63,298 $ (80,358) $ (17,060) ------------- ----- --------- ------------ -------------- ------------- ----- --------- ------------ --------------
The accompanying notes are an integral part of these financial statements. F-45 TEL-WEST CENTRAL SERVICES, INC. STATEMENTS OF CASH FLOWS
SIX MONTHS YEAR ENDED ENDED SEPTEMBER 30, MARCH 31, ------------------------ 1995 1994 1993 ------------ ------------ ---------- OPERATING ACTIVITIES: Net income (loss)...................................................... $ 9,885 $ (102,544) $ 12,301 ------------ ------------ ---------- Adjustments to reconcile net income to net cash provided by (used in) operating activities-- Depreciation and amortization........................................ 20,991 22,393 25,627 Gain on asset sale................................................... -- (965) -- Changes in assets and liabilities: Accounts receivable................................................ (110,738) (20,140) (16,233) Accounts payable................................................... 86,768 67,959 413 Accrued expenses................................................... 1,101 15,709 4,555 ------------ ------------ ---------- (1,878) 84,956 14,362 ------------ ------------ ---------- Net cash provided by (used in) operating activities.............. 8,007 (17,588) 26,663 ------------ ------------ ---------- INVESTING ACTIVITIES: Purchase of property and equipment..................................... (76,994) (228,878) (6,588) ------------ ------------ ---------- FINANCING ACTIVITIES: Proceeds from notes payable-affiliates................................. 84,800 252,790 -- Proceeds from notes payable-other...................................... -- -- 55,425 Payments on notes payable-affiliates................................... (11,741) (8,252) -- Payments on notes payable-other........................................ (6,404) (13,223) (26,907) Proceeds from line of credit........................................... -- 9,177 -- Decrease (increase) in receivables from related parties................ 1,130 6,506 (46,255) ------------ ------------ ---------- Net cash provided by (used in) financing activities.............. 67,785 246,998 (17,737) ------------ ------------ ---------- Net (decrease) increase in cash.......................................... (1,202) 532 2,338 CASH, beginning of year.................................................. 3,826 3,294 956 ------------ ------------ ---------- CASH, end of year........................................................ $ 2,624 $ 3,826 $ 3,294 ------------ ------------ ---------- ------------ ------------ ---------- SUPPLEMENTAL CASH FLOW DISCLOSURES: Cash paid for interest................................................. $ 18,585 $ 14,198 $ 4,083 Cash paid for taxes.................................................... -- 2,250 --
The accompanying notes are an integral part of these financial statements. F-46 TEL-WEST CENTRAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION AND PRINCIPLES OF CONSOLIDATION The financial statements include the accounts of Tel-West Central Services, Inc., (the Company) a Washington corporation. The Company was formed September 8, 1992, and is principally engaged in the ownership and operation of fiber-optic telecommunications services. REVENUE RECOGNITION The Company recognizes revenues in the period that service is provided. Provisions for bad debts of $0, $5,000 and $0 are included in selling, general and administrative expenses for the periods ended March 31, 1995, September 30, 1994 and September 30, 1993, respectively. The Company determined an allowance for doubtful accounts was not required at March 31, 1995 and September 30, 1994 and 1993. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Provisions for depreciation are computed using the straight-line method over estimated useful lives (from five to seven years) beginning in the month an asset is put into service. INCOME TAXES The Company accounts for deferred taxes using the asset and liability method. CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the Company to concentration of credit risk consist principally of accounts receivable. Concentrations of credit risk with respect to accounts receivable are limited due to the dispersion of the Company's customer base among different industries and remedies provided by terms of contracts and statutes. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-47 TEL-WEST CENTRAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1995 2. PROPERTY AND EQUIPMENT:
SEPTEMBER 30, MARCH 31, ------------------------ 1995 1994 1993 ----------- ----------- ----------- Switch equipment........................................................... $ 351,124 $ 190,088 $ 97,034 Furniture and fixtures..................................................... 16,844 16,392 2,448 Vehicles................................................................... -- -- 28,995 ----------- ----------- ----------- 367,968 206,480 128,477 Less--accumulated depreciation............................................. (99,313) (78,322) (60,889) ----------- ----------- ----------- 268,655 128,158 67,588 Work in process............................................................ 37,387 121,880 -- ----------- ----------- ----------- $ 306,042 $ 250,038 $ 67,588 ----------- ----------- ----------- ----------- ----------- -----------
3. LONG TERM DEBT: A summary of the Company's outstanding long-term debt is as follows:
SEPTEMBER 30, MARCH 31, ------------------------ 1995 1994 1993 ----------- ----------- ----------- Notes payable to affiliates: Note payable to affiliate; interest at 11.5%; graduated principal plus interest payments due monthly until maturity on February 20, 2001...... $ 131,013 $ 138,538 $ -- Note payable to affiliate; interest at 11.5%; graduated principal plus interest payments due monthly until maturity on October 20, 2001....... 101,784 106,000 -- Note payable to affiliate; interest at 12%; interest-only payments due bi-weekly until maturity on December 21, 1994.......................... 55,000 -- -- Notes payable to officers; non-interest bearing; due upon sale of assets of the Company (April 1, 1995)......................................... 29,800 -- -- ----------- ----------- ----------- 317,597 244,538 -- Less current maturities.................................................. 112,183 25,041 -- ----------- ----------- ----------- $ 205,414 $ 219,497 $ -- ----------- ----------- ----------- ----------- ----------- ----------- Notes payable to others: Note payable to commercial bank; interest at prime plus 2.5%; graduated principal plus interest payments due monthly until maturity on February 10, 1997............................................................... $ 29,441 $ 35,845 $ 48,075 Note payable to credit union; interest at 6.5%; graduated principal plus interest payments due monthly until maturity on January 27, 1997....... -- -- 22,031 ----------- ----------- ----------- 29,441 35,845 70,106 Less current maturities.................................................. 14,524 14,109 18,663 ----------- ----------- ----------- $ 14,917 $ 21,736 $ 51,443 ----------- ----------- ----------- ----------- ----------- -----------
F-48 TEL-WEST CENTRAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1995 3. LONG TERM DEBT: (CONTINUED) The Company's future minimum payments under its long-term debt agreements are as follows:
YEAR ENDING MARCH 31, - --------------------------------------------------------------------------------- 1996......................................................................... $ 126,707 1997......................................................................... 45,621 1998......................................................................... 34,426 1999......................................................................... 38,602 2000......................................................................... 43,282 Thereafter................................................................... 58,400 ----------- $ 347,038 ----------- -----------
4. LINE OF CREDIT: The Company had an operating line of credit with a commercial bank. As of March 31, 1995, the credit line was $10,000 and the unused borrowing capacity was $823. The line of credit bore interest at the bank's prime plus 2.5%. The interest rate was 11.0% and 9.75% as of March 31, 1995 and September 30, 1994, respectively. There were no borrowings under the credit line as of September 30, 1993. The line of credit was collateralized by the assets of the Company and matured on May 1, 1995. 5. RELATED PARTY TRANSACTIONS: The Company purchased certain telecommunications equipment from and sold equipment to a company which is affiliated with the Company's president and principal shareholder. Purchases in the amount of $372, $14,315 and $7,785 were made from this affiliated company during the six months ended March 31, 1995 and the years ended September 30, 1994 and 1993, respectively. Sales to this affiliated company were $3,437, $39,486 and $10,622 during the six months ended March 31, 1995 and the years ended September 30, 1994 and 1993, respectively. 6. COMMITMENTS AND CONTINGENCIES: The Company leased premises under an operating lease which, in addition to rental payments, required payments for insurance, maintenance, property taxes and other executory costs related to the lease. The lease agreement expires on December 31, 1998. Future minimum payments required under the operating lease are summarized below:
YEAR ENDING MARCH 31, - ----------------------------------------------------------------------------------- 1996........................................................................... $ 9,060 1997........................................................................... 9,060 1998........................................................................... 9,060 1999........................................................................... 6,795 --------- $ 33,975 --------- ---------
Total rent expense amounted to approximately $4,900, $5,800 and $0 for the six months ended March 31, 1995, and for the years ended September 30, 1994 and 1993, respectively. F-49 TEL-WEST CENTRAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1995 7. INCOME TAXES: Significant components of deferred income tax assets are as follows:
SEPTEMBER 30, MARCH 31, -------------------- 1995 1994 1993 ----------- --------- --------- Deferred tax assets: Net operating loss carryforwards.............................................. $ 13,900 $ 15,400 $ -- Valuation allowance........................................................... (13,900) (15,400) -- ----------- --------- --- $ -- $ -- $ -- ----------- --------- --- ----------- --------- ---
For tax purposes, the Company had available at March 31, 1995, net operating loss carryforwards for regular tax purposes of approximately $93,000 which will expire in 2009. The change in valuation allowance was a decrease of $1,500 in the six months ended March 31, 1995 and an increase of $15,400 in the year ended September 30, 1994. Management believes that, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding the realization of the net deferred tax asset. Such factors include recurring operating losses resulting primarily from the development of the Company's network and expected increased competition. Accordingly, a valuation allowance has been provided for the deferred tax assets of the Company. The difference between the statutory tax rate for small businesses of approximately 15% and the tax provision recorded by the Company is due to the Company's full valuation allowance against its deferred tax assets. 8. SUBSEQUENT EVENT: In April 1995, NEXTLINK Washington, L.L.C. acquired certain assets and liabilities of the Company. NEXTLINK Washington, L.L.C. operates a local exchange service business in Spokane, Washington, and is constructing fiber-optic telecommunications networks in this region. The total cost of the acquisition was approximately $1,151,000. F-50 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To NEXTLINK Communications, L.L.C.: We have audited the accompanying summary of revenue and direct operating expenses of City Signal, Inc., Tennessee Operations (the Division) for the years ended December 31, 1994 and 1993. This summary is the responsibility of the Division's management. Our responsibility is to express an opinion on this summary 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 summary is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the summary. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall summary presentation. We believe that our audits provide a reasonable basis for our opinion. The summary was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission (for inclusion in the registration statement on Form S-4 of NEXTLINK Communications, L.L.C.) as described in Note 1 and is not intended to be a complete presentation of the Division's results of operations. In our opinion, the summary referred to above presents fairly, in all material respects, the revenue and direct operating expenses of the Division for the years ended December 31, 1994 and 1993, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Seattle, Washington, June 28, 1996 F-51 CITY SIGNAL, INC., TENNESSEE OPERATIONS SUMMARY OF REVENUE AND DIRECT OPERATING EXPENSES FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
1994 1993 ------------- -------------- Revenue............................................................................ $ 1,676,408 $ 148,163 Direct operating expenses: Costs of revenue................................................................. 676,551 101,807 Selling, general and administrative expenses..................................... 890,473 824,664 Depreciation..................................................................... 667,288 377,723 ------------- -------------- Total direct operating expenses................................................ 2,234,312 1,304,194 ------------- -------------- Excess of direct operating expenses over revenue................................... $ (557,904) $ (1,156,031) ------------- -------------- ------------- --------------
The accompanying notes are an integral part of this summary. F-52 CITY SIGNAL, INC., TENNESSEE OPERATIONS NOTES TO THE SUMMARY OF REVENUE AND DIRECT OPERATING EXPENSES DECEMBER 31, 1994 AND 1993 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION The accompanying summary of revenue and direct operating expenses for City Signal, Inc., Tennessee Operations (the Division) was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission and is not intended to be a complete presentation of the Division's results of operation. In January 1995, NEXTLINK Communications, L.L.C. acquired certain assets (herein referred to as the Tennessee Operations) of City Signal, Inc. (which is also known as U.S. Signal) through NEXTLINK Tennessee, L.L.C. NEXTLINK Tennessee, L.L.C. provides fiberoptic telecommunications networks and is currently providing services as well as constructing fiberoptic telecommunications systems for the Memphis and Nashville, Tennessee, metropolitan markets. NEXTLINK Communications, L.L.C., a Washington limited liability company (the Company), through predecessor entities, was formed on September 16, 1994 and is principally engaged in the ownership and operation of telecommunications services and enhanced or intelligent communications services. The Company is a majority-owned subsidiary of Eagle River Investments, L.L.C. City Signal, Inc. began operating in Tennessee in the fourth quarter of 1993. Their operations consisted of providing telecommunication access services in competition with the incumbent local exchange carrier. REVENUE RECOGNITION The Division's revenue consists principally of telecommunications access charges billed to customers and sales of telecommunications equipment and related installation services. The Division recognized revenue on telecommunications access charges in the period that service was provided. Sales of telecommunications equipment and related installation services are recorded when the goods and services are delivered. PROPERTY AND EQUIPMENT Provisions for depreciation are computed using the straight-line method over estimated useful lives (from five to 15 years) beginning in the year an asset is placed into service. Leasehold improvements are amortized using the straight-line method over the terms of the leases. INCOME TAXES As discussed above, the accompanying summary shows only the revenue and direct operating expenses of the Division. Accordingly, no provision for income taxes is reflected therein. ESTIMATES USED IN THIS PRESENTATION The preparation of this summary in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-53 CITY SIGNAL, INC., TENNESSEE OPERATIONS NOTES TO THE SUMMARY OF REVENUE AND DIRECT OPERATING EXPENSES (CONTINUED) DECEMBER 31, 1994 AND 1993 2. BASIS OF PRESENTATION: The summary of revenue includes the Division's revenues from services provided to customers beginning with the commencement of service in the fourth quarter of 1993. Costs of revenue consist primarily of network transmission charges and the costs of telecommunications equipment sold, related installation costs and ongoing node site location and right of way rental expenses. Selling, general and administrative expenses consist of those costs directly attributable to and incurred by the Division. City Signal, Inc., during 1994 and 1993, provided certain support activities of a general and administrative nature for its various operations, including the Division. No allocation of expenses incurred by City Signal, Inc., has been reflected in this summary. 3. COMMITMENTS AND CONTINGENCIES: The Division leased certain node site locations and office premises under various operating leases which, in addition to rental payments, require payments for insurance, maintenance, property taxes and other executory costs related to the leases. These agreements had various expiration dates and renewal options through 2015. The node site location and right of way rental expenses are recorded as costs of revenue and amounted to approximately $382,000 in 1994 and were immaterial in 1993. The office premises rent expenses are recorded as selling, general and administrative expenses and amounted to approximately $90,000 and $26,600 in 1994 and 1993, respectively. F-54 ANNEX A TO THE PROSPECTUS GLOSSARY CAP (COMPETITIVE ACCESS PROVIDER)--A company that provides its customers with an alternative to the ILEC for local private line and special access telecommunications services. CENTRAL OFFICES--The switching centers or central switching facilities of the LECs. CO-CARRIER STATUS--A regulatory scheme under which the ILEC is required to integrate new, competing providers of local exchange service, such as the Company, into the systems of traffic exchange, inter-carrier compensation, and other inter-carrier relationships that already exist among ILECs in most jurisdictions. COLLOCATION--The ability of a CLEC such as the Company to connect its network to the ILECs central offices. Physical collocation occurs when a CLEC places its network connection equipment inside the ILEC's central offices. Virtual collocation is an alternative to physical collocation pursuant to which the ILEC permits a CLEC to connect its network to the ILEC's central offices on comparable terms, even though the CLEC's network connection equipment is not physically located inside the central offices. DEDICATED--Telecommunications lines dedicated or reserved for use by particular customers and charged on a flat, usually monthly basis. DIGITAL--A method of storing, processing and transmitting information through the use of distinct electronic or optical pulses that represent the binary digits 0 and 1. Digital transmission and switching technologies employ a sequence of these pulses to represent information as opposed to the continuously variable analog signal. The precise digital numbers minimize distortion (such as graininess or snow in the case of video transmission, or static or other background distortion in the case of audio transmission). DS-0, DS-1, DS-3--The standard circuit capacity classifications. Each of these transmission services can be provided using the same type of fiber optic cable, but offer different bandwidth (that is, capacity), depending upon the individual needs of the end-user. A DS-0 is a dedicated circuit that is considered to meet the requirements of usual business communications, with transmission capacity of up to 64 kilobits of bandwidth per second (that is, a voice grade equivalent circuit). This service offers a basic low capacity dedicated digital line for connecting telephones, fax machines, personal computers and other telecommunications equipment. A DS-1 is a high speed digital circuit typically linking high volume customer locations to long distance carriers or other customer locations. Typically utilized for voice transmissions as well as the interconnection of LANs, DS-1 service accommodates transmission speeds of up to 1.544 megabits per second, which is the equivalent of 24 voice grade equivalent circuits. DS-3 service provides a very high capacity digital circuit with transmission capacity of 45 megabits per second, which is equivalent to 28 DS-1 circuits or 672 voice grade equivalent circuits. This is a digital service used by long distance carriers for central office connections and by some large commercial users to link multiple sites. ETHERNET--A local area network technology used for connecting computers, printers, workstations, terminals, etc., within the same building. Ethernet operates over twisted wire or coaxial cable at speeds up to 100 megabits per second. Ethernet is the most popular LAN technology. FCC--The United States Federal Communications Commission. FDDI (FIBER DISTRIBUTED DATA INTERFACE)--Based on fiber optics, FDDI is a 100 megabit per second local area network technology used to connect computers, printers, and workstations at very high speeds. FDDI is also used as backbone technology to interconnect other LANs. A-1 FIBER MILE--The number of route miles installed (excluding pending installations) along a telecommunications path multiplied by the number of fibers along that path. See the definition of "route mile" below. INTERCONNECTION DECISIONS--Rulings by the FCC announced in September 1992 and August 1993, which require the RBOCs and most other large ILECs to provide interconnection in ILEC central offices to any CAP, long distance carrier or end-user seeking such interconnection for the provision of interstate special access and switched access transport services. KILOBIT--One thousand bits of information. The information-carrying capacity (i.e., bandwidth) of a circuit may be measured in "kilobits per second." One kilobit is approximately sufficient to encode a standard telegram. LANS (LOCAL AREA NETWORKS)--The interconnection of computers for the purpose of sharing files, programs and various devices such as printers and high-speed modems. LANs may include dedicated computers or file servers that provide a centralized source of shared files and programs. LOCAL EXCHANGE--A geographic area determined by the appropriate state regulatory authority in which calls generally are transmitted without toll charges to the calling or called party. LEC (LOCAL EXCHANGE CARRIER)--A company providing local telephone services. LINE--an electrical path between a LEC central office and a subscriber. LONG DISTANCE CARRIERS (INTEREXCHANGE CARRIERS)--Long distance carriers provide services between local exchanges on an interstate or intrastate basis. A long distance carrier may offer services over its own or another carrier's facilities. MEGABIT--One million bits of information. The information-carrying capacity (i.e., bandwidth) of a circuit may be measured in "megabits per second." One megabit is approximately sufficient to encode a 3 inch by 5 inch photograph. NUMBER PORTABILITY--The ability of an end-user to change local exchange carriers while retaining the same telephone number. POPS (POINTS OF PRESENCE)--Locations where a long distance carrier has installed transmission equipment in a service area that serves as, or relays calls to, a network switching center of that long distance carrier. PUC (PUBLIC UTILITY COMMISSION)--A state regulatory body, established in most states, which regulates utilities, including telephone companies providing intrastate services. PRIVATE LINE--A dedicated telecommunications connection between end-user locations. PUBLIC SWITCHED NETWORK--That portion of a ILEC's network available to all users generally on a shared basis (i.e., not dedicated to a particular user). Traffic along the public switched network is generally switched at the ILEC's central offices. RECIPROCAL COMPENSATION--The compensation paid to and from a new competitive local exchange carrier and the ILEC for termination of a local call on each other's networks. ROUTE MILE--The number of miles of the telecommunications path in which the Company-owned or leased fiber optic cables are installed. SPECIAL ACCESS SERVICES--The lease of private, dedicated telecommunications lines or "circuits" along the network of a ILEC or a CAP, which lines or circuits run to or from the long distance carrier POPs. Examples of special access services are telecommunications lines running between POPs of a single long distance carrier, from one long distance carrier POP to the POP of another long distance carrier or from an end-user to a long distance carrier POP. A-2 SWITCH--A device that opens or closes circuits or selects the paths or circuits to be used for transmission of information. Switching is a process of interconnecting circuits to form a transmission path between users. SWITCHED ACCESS SERVICES--Transmission of switched calls through the local switched network for the purpose of originating or terminating toll calls. Long distance companies pay switched access charges to the ILECs for each switched call originated or terminated on the ILEC's network. SWITCHED ACCESS TRANSPORT SERVICES--Transportation of switched traffic along dedicated lines between the ILEC central offices and long distance carrier POPs. SWITCHED TRAFFIC--Telecommunications traffic along the public switched network that is charged on a per-minute or other range sensitive basis. This traffic is generally switched at the ILEC's central offices. TOKEN RING--A local area network technology used to interconnect personal computers, file servers, printers, and other devices. Token Ring LANs typically operate at either 4 megabits per second or 16 megabits per second. A-3 NEXTLINK COMMUNICATIONS, INC. All tendered Old Preferred Shares, executed Letters of Transmittal, and other related documents should be directed to the Exchange Agent. Requests for assistance and for additional copies of the Prospectus, the Letter of Transmittal and other related documents should be directed to the Exchange Agent. The Exchange Agent for the Exchange Offer is CONTINENTAL STOCK TRANSFER & TRUST COMPANY 2 Broadway New York, New York 10004 Attention: Reorganization Department Phone: (212)509-4000 x535 Fax: (212)509-5150 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 23B.08.510 of the Revised Code of Washington authorizes Washington corporations to indemnify their officers and directors under certain circumstances against expenses and liabilities incurred in legal proceedings involving such persons because of their being or having been an officer or director. The Company's Articles of Incorporation and By-laws require indemnification of the Company's officers and directors to the fullest extent permitted by Washington law. The Company also maintains directors' and officers' liability insurance. The Company's By-laws and Articles of Incorporation provide that the Company shall, to the full extent permitted by the Washington Business Corporation Act (the "Washington Business Act") of the State of Washington, as amended from time to time, indemnify all directors and officers of the Company. In addition, the Company's Articles of Incorporation contains a provision eliminating the personal liability of directors to the Company or its shareholders for monetary damages arising out of a breach of fiduciary duty. Under Washington law, this provision eliminates the liability of a director for breach of fiduciary duty but does not eliminate the personal liability of any director for (i) acts of omissions of a director that involve intentional misconduct or a knowing violation of law, (ii) conduct in violation of Section 23B.08.310 of the Revised Code of Washington (which section relates to unlawful distributions) or (iii) any transaction from which a director personally received a benefit in money, property or services to which the director was not legally entitled. The Company intends to enter into separate indemnification agreements with each of its directors and executive officers. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits: 1 --Purchase Agreement, dated as of January 21, 1997, by and among the Company and the Initial Purchasers. 3.1 --Articles of Incorporation of the Company. 3.2 --By-laws of the Company 4.1 --Form of Exchange Note Indenture, by and among the Company and United States Trust Company of New York, as trustee, relating to the Exchange Notes, including form of Exchange Notes. 4.3 --Certificate of Designations of the Powers, Preferences and Relative, Participating, Optional and Other Special Rights of 14% Senior Exchangeable Redeemable Preferred Shares and Qualifications, Limitations and Restrictions thereof. 4.4 --Form of stock certificate of 14% Senior Exchangeable Redeemable Preferred Shares. *5.1 --Opinion of Willkie Farr & Gallagher. *5.2 --Opinion of Davis Wright Tremaine, LLP. 10.1 --Stock Option Plan of the Company. 10.2 --Management Agreement, dated as of April 30, 1996, by and between NEXTLINK Management Services, L.L.C. and Telecommunications of Nevada, L.L.C. (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-4 of NEXTLINK Communications, L.L.C. (the predecessor of the Company) file no. 333-4603)
II-1 10.3 --Warrant Agreement, dated as of January 31, 1997, by and between the Company and Continental Stock Trust & Transfer Company, as warrant agent. 10.4 --Registration Rights Agreement dated as of January 15, 1997, between the Company and the signatories listed therein. 10.5 --Preferred Exchange and Registration Rights Agreement, dated as of January 31, 1997, by and among the Company and the Initial Purchasers. 12 --Statement Regarding Computation of Ratio of Earnings to Fixed Charges. 21 --Subsidiaries of the Registrant. 23.1 --Consent of Arthur Andersen LLP. 23.2 --Consent of Deloitte & Touche LLP. *23.3 --Consent of Willkie Farr & Gallagher (included in their opinion filed as Exhibit 5.1). *23.4 --Consent of Davis Wright Tremaine, LLP (included in their opinion filed as Exhibit 5.2). 24 --Powers of Attorney (included on signature pages). *25 --Statement on Form T-1 of Eligibility of Trustee. 99.1 --Form of Letter of Transmittal. 99.2 --Form of Notice of Guaranteed Delivery. 99.3 --Form of Letter to Clients. 99.4 --Form of Letter to Nominees.
- ------------------------ * To be filed by amendment. (b) Financial Statement Schedules: All schedules have been omitted because they are not applicable or not required or the required information is included in the financial statements or notes thereto. ITEM 22. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions, described under Item 20 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the option of their counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of this Registration Statement through the date of responding to the request. The undersigned Registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in this Registration Statement when it became effective. II-2 SIGNATURES Pursuant to the requirements of the Securities Act the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Bellevue, State of Washington, on March 13, 1997. NEXTLINK COMMUNICATIONS, INC. By: /s/ CRAIG O. MCCAW ----------------------------------------- Craig O. McCaw Title: CHIEF EXECUTIVE OFFICER POWER OF ATTORNEY We, the undersigned directors and officers of NEXTLINK Communications, Inc., do hereby severally constitute and appoint James F. Voelker and R. Bruce Easter, Jr., and each of them, our true and lawful attorneys and agents, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorneys and agents, or any of them, may deem necessary or advisable to enable said Corporation to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement on Form S-4, including specifically, but without limitation, power and authority to sign for us or any of us, in our names in the capacities indicated below, any and all amendments (including post-effective amendments) hereto; and we do each hereby ratify and confirm all that said attorneys and agents, or any one of them, shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated: SIGNATURE TITLE DATE - ------------------------------ --------------------------- ------------------- /s/ CRAIG O. MCCAW Chief Executive Officer and - ------------------------------ Director March 13, 1997 Craig O. McCaw Vice President, Chief /s/ KATHLEEN H. ISKRA Financial Officer - ------------------------------ (Principal Financial March 13, 1997 Kathleen H. Iskra Officer and Principal Accounting Officer) /s/ JAMES F. VOELKER President (Principal - ------------------------------ Executive Officer) and March 13, 1997 James F. Voelker Director /s/ DENNIS WEIBLING Director - ------------------------------ March 13, 1997 Dennis Weibling /s/ SCOT JARVIS Director - ------------------------------ March 13, 1997 Scot Jarvis /s/ C. JAMES JUDSON Director - ------------------------------ March 13, 1997 C. James Judson /s/ WILLIAM A. HOGLUND Director - ------------------------------ March 13, 1997 William A. Hoglund II-3 EX-1 2 PURCHASE AGREEMENT 01/21/97 Exhibit 1 NEXTLINK COMMUNICATIONS MERGER, INC. (a Washington corporation) Units consisting of Senior Exchangeable Redeemable Preferred Stock and Contingent Warrants PURCHASE AGREEMENT January 21, 1997 MERRILL LYNCH & CO., Merrill Lynch, Pierce, Fenner & Smith Incorporated TORONTO DOMINION SECURITIES (USA) INC. as Representatives of the several Initial Purchasers c/o Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated North Tower World Financial Center New York, New York 10281-1209 Ladies and Gentlemen: NEXTLINK Communications, L.L.C., a limited liability company formed under the laws of the State of Washington (the "Company"), and NEXTLINK Communications Merger, Inc., a corporation organized under the laws of the State of Washington (the "Issuer"), confirm their agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Toronto Dominion Securities (USA) Inc. (collectively, the "Initial Purchasers", which term shall also include any initial purchaser substituted as hereinafter provided in Section 11 hereof), for whom Merrill Lynch and Toronto Dominion Securities (USA) Inc. are acting as representatives (in such capacity, the "Representatives") with respect to the issue and sale by the Issuer and the purchase by the Initial Purchasers, acting severally and not jointly, of the respective number of units set forth in Schedule A. Each Unit consists of (i) one share of the Company's 14% Senior Exchangeable Redeemable Preferred Stock (the "Preferred Securities"), (ii) a Contingent Warrant (the "Warrants"), which represent in the aggregate the right to acquire 5% of each outstanding class of capital stock of the Company that ranks junior to the Preferred Securities (the "Junior Shares") on a fully diluted basis as of the time the Warrants become exercisable. The Preferred Securities are exchangeable at the option of the Issuer into 14% Senior Subordinated Notes due 2009 (the "Notes") to be issued by the Issuer. The Company and the Issuer have executed an Agreement and Plan of Merger pursuant to which the Company will be merged with and into the Issuer, with the Issuer as the surviving corporation (the "Merger"). Unless the context otherwise requires, with respect to periods after consummation of the Merger references herein to either the Company or the Issuer shall be deemed to refer to the Issuer after the Merger. The Company and the Issuer understand that the Initial Purchasers propose to make an offering of the Securities on the terms and in the manner set forth herein and agrees that the Initial Purchasers may resell, subject to the conditions set forth herein, all or a portion of the Securities to purchasers ("Subsequent Purchasers") at any time after the date of this Agreement. The Securities are to be offered and sold through the Initial Purchasers without being registered under the Securities Act of 1933, as amended (the "1933 Act"), in reliance upon exemptions therefrom. Pursuant to the terms of the Securities, investors that acquire Securities may only resell or otherwise offer such Securities if such Securities are hereafter registered under the 1933 Act or if an exemption from the registration requirements of the 1933 Act is available (including the exemption afforded by Rule 144A ("Rule 144A") of the rules and regulations promulgated under the 1933 Act by the Securities and Exchange Commission (the "Commission")). The Company and the Issuer have prepared and delivered to each Initial Purchaser copies of a preliminary offering memorandum dated January 9, 1997 (the "Preliminary Offering Memorandum") and has prepared and will deliver to each Initial Purchaser, on the date hereof or the next succeeding day, copies of a final offering memorandum dated January 21, 1997 (the "Final Offering Memorandum"), each for use by such Initial Purchaser in connection with its solicitation of purchases of, or offering of, the Securities. "Offering Memorandum" means, with respect to any date or time referred to in this Agreement, the most recent offering memorandum (whether the Preliminary Offering Memorandum or the Final Offering Memorandum, or any amendment or supplement to either such document), including any annexes or exhibits thereto, which has been prepared and delivered by the Company and the Issuer to the Initial Purchasers in connection with their solicitation of purchases of, or offering of, the Securities. All references in this Agreement to financial statements and schedules and other information which is "contained," "included" or "stated" in the Offering Memorandum (or other references of like import) shall be deemed to mean and include all such financial statements and schedules and other information which are incorporated by reference in the Offering Memorandum. SECTION 1. Representations and Warranties. (a) Representations and Warranties by the Company and the Issuer. Each of the Company and the Issuer, jointly and severally, represents and warrants to each Initial Purchaser as of the date hereof and as of the Closing Time referred to in Section 2(b) hereof, and agrees with each Initial Purchaser as follows: (i) Similar Offerings. It has not, directly or indirectly, solicited any offer to buy or offered to sell, and will not, directly or indirectly, solicit any offer to buy or offer to sell, in the United States or to any United States citizen or resident, any security which is or would be integrated with the sale of the Securities in a manner that would require the Securities to be registered under the 1933 Act. (ii) Offering Memorandum. The Offering Memorandum does not, and at the Closing Time will not, include an untrue statement of a material fact or omit to state a material fact in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that this representation, warranty and agreement shall not apply to statements in or omissions from the Offering Memorandum made in reliance upon and -2- in conformity with information furnished to the Company and the Issuer in writing by any Initial Purchaser through the Representatives expressly for use in the Offering Memorandum. (iii) Independent Accountants. The accountants who certified the financial statements and supporting schedules included in the Offering Memorandum are independent certified public accountants with respect to the Company and its subsidiaries within the meaning of Regulation S-X under the 1933 Act. (iv) Financial Statements. The financial statements, together with the related schedules and notes, included in the Offering Memorandum present fairly the financial position of the Company and its consolidated subsidiaries at the dates indicated and the statement of operations, stockholders' equity and cash flows of the Company and its consolidated subsidiaries for the periods specified; said financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods involved. The supporting schedules, if any, included in the Offering Memorandum present fairly in accordance with GAAP the information required to be stated therein. The selected financial data and the summary financial information included in the Offering Memorandum present fairly the information shown therein and have been compiled on a basis consistent with that of the audited financial statements included in the Offering Memorandum. The pro forma financial statements of the Company and its subsidiaries and the related notes thereto included in the Offering Memorandum present fairly the information shown therein, have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements and have been properly compiled on the bases described therein, and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein. (v) No Material Adverse Change in Business. (A) Since the respective dates as of which information is given in the Offering Memorandum, except as otherwise stated therein, (1) there has been no material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise or the Issuer, as the case may be (a "Material Adverse Effect"), whether or not arising in the ordinary course of business, (2) there have been no transactions entered into by the Company or any of its subsidiaries, other than those in the ordinary course of business, which are material with respect to the Company and its subsidiaries considered as one enterprise and (3) there has been no dividend or distribution of any kind declared, paid or made by the Company or the Issuer on any class of its capital stock; and (B) since the date of its incorporation, the Issuer has not entered into any transactions, and is not party to any agreement, except those related to the consummation of the Merger. (vi) Good Standing of the Company. The Company has been duly organized and is validly existing as a limited liability company under the laws of the State of Washington and has power and authority to own, lease and operate its properties and to conduct its business as described in the Offering Memorandum and to enter into and perform its obligations under this Agreement; and the Company is duly qualified as a foreign limited liability company to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except -3- where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. (vii) Good Standing of the Issuer. The Issuer has been duly organized and is validly existing as a corporation under the laws of the State of Washington and has power and authority to own, lease and operate its properties and to conduct its business as described in the Offering Memorandum and to enter into and perform its obligations under this Agreement; and the Issuer is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. (viii) Good Standing of Designated Subsidiaries. Each "significant subsidiary" of the Company (as such term is defined in Rule 1-02 of Regulation S-X) (each a "Designated Subsidiary" and, collectively, the "Designated Subsidiaries") has been duly organized and is validly existing as a limited liability company or limited partnership, as the case may be, in good standing under the laws of the jurisdiction of its formation, has power and authority to own, lease and operate its properties and to conduct its business as described in the Offering Memorandum and is duly qualified as a foreign limited liability company or limited partnership, as the case may be, to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect; except as otherwise disclosed in the Offering Memorandum, all of the issued and outstanding capital stock of each Designated Subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and 99% thereof is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; none of the outstanding shares of capital stock of the Designated Subsidiaries was issued in violation of any preemptive or similar rights arising by operation of law, or under the constituting or operative document or agreement of any Designated Subsidiary or under any agreement to which the Company or any Designated Subsidiary is a party. The subsidiaries of the Company other than Designated Subsidiaries, considered in the aggregate as a single subsidiary, do not constitute a "significant subsidiary" as defined in Rule 1-02 of Regulation S-X. (ix) Capitalization. The authorized, issued and outstanding capital stock of each of the Company and the Issuer is as set forth in the Offering Memorandum. The shares of issued and outstanding capital stock of each of the Company and the Issuer have been duly authorized and validly issued and are fully paid and non-assessable; none of the outstanding shares of capital stock of the Company or the Issuer was issued in violation of the preemptive or other similar rights of any securityholder of the Company, as applicable. (x) Authorization of Agreement. This Agreement has been duly authorized, executed and delivered by each of the Company and the Issuer. (xi) Authorization and Description of Preferred Securities. The Preferred Securities have been duly authorized for issuance and sale to the Initial Purchasers pursuant to this Agreement and, when issued and delivered by the Issuer pursuant to this Agreement against payment of the consideration set forth herein, will be validly issued and fully paid and non- -4- assessable; the Preferred Securities conform to the statements relating thereto contained in the Offering Memorandum and such description conforms to the rights set forth in the instruments defining the same; no holder of the Preferred Securities will be subject to personal liability by reason of being such a holder; and the issuance of the Preferred Securities is not subject to the preemptive or other similar rights of any securityholder of the Issuer. (xii) Authorization of the Warrant Agreement. The Warrant Agreement, to be dated as of January 31, 1997 (the "Warrant Agreement"), between the Issuer and __________, as Warrant Agent (the "Warrant Agent"), has been duly authorized by the Issuer and, at the Closing Time, will have been duly executed and delivered by the Issuer and will constitute a valid and binding agreement of the Issuer, enforceable against the Issuer in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws relating to or affecting enforcement of creditors' rights generally, or by general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). (xiii) Authorization of the Warrants. The Warrants have been duly authorized for issuance and sale to the Initial Purchasers pursuant to this Agreement and, at the Closing Time, will have been duly executed by the Issuer and, when issued and delivered against payment of the consideration specified herein and duly authorized by the Warrant Agent as provided in the Warrant Agreement, will constitute valid and binding obligations of the Issuer, enforceable against the Issuer in accordance with their terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws relating to or affecting enforcement of creditors' rights generally, or by general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law), and will be in the form contemplated by, and entitled to the benefits of, the Warrant Agreement. (xiv) Authorization and Reservation of Junior Shares. The Junior Shares initially issuable upon exercise of the Warrants have been duly and validly authorized and reserved for issuance and, when issued and delivered in accordance with the provisions of the Warrant Agreement, will be duly and validly issued, fully paid and non-assessable. The Junior Shares conform to all statements relating thereto contained in the Offering Memorandum and such description conforms to the rights set forth in the instruments defining the same. (xv) Authorization of the Indenture. The Indenture (as hereinafter defined in Section 1(a)(xvi) hereof) has been duly authorized by the Issuer and, when executed at a time contemporaneous with the issuance of the Notes, will have been duly executed and delivered by the Issuer and will constitute a valid and binding agreement of the Issuer, enforceable against it in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws relating to or affecting enforcement of creditors' rights generally, or by general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). (xvi) Authorization of the Notes. The Notes have been duly authorized by the Issuer and, when issued and delivered upon exchange for the Preferred Securities in accordance -5- with the terms of the Preferred Securities, will have been duly executed, authenticated, issued and delivered and will constitute valid and legally binding obligations of the Issuer entitled to the benefits provided by the Indenture (the "Indenture") between the Issuer and United States Trust Company of New York as Trustee (the "Trustee"), under which they are to be issued, enforceable against the Issuer in accordance with their terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws relating to or affecting enforcement of creditors' rights generally, or by general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). (xvii) Description of the Warrants and the Warrant Agreement. The Warrants and the Warrant Agreement will conform in all material respects to the respective statements relating thereto contained in the Offering Memorandum and will be in substantially the respective forms previously delivered to the Initial Purchasers. (xviii) Description of the Notes and the Indenture. The Notes and the Indenture will conform in all material respects to the respective statements relating thereto contained in the Offering Memorandum and will be in substantially the respective forms previously delivered to the Initial Purchasers. (xix) Absence of Defaults and Conflicts. None of the Company, any of its subsidiaries or the Issuer is in violation of its constituting or operative document or agreement or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or the Issuer, as the case may be, or by which or any of them may be bound, or to which any of the property or assets of the Company or any of its subsidiaries or the Issuer, as the case may be, is subject (collectively, "Agreements and Instruments") except for such defaults that would not result in a Material Adverse Effect; the issue and sale of the Securities, the execution, delivery and performance of this Agreement, the Warrant Agreement, the Indenture, the Preferred Registration Rights Agreement (as hereinafter defined in Section 1(a)(xx) hereof), the Warrant Registration Rights Agreement (as hereinafter defined in Section 1(a)(xxi) hereof), the Preferred Securities, the Warrants and any other agreement or instrument entered into or issued or to be entered into or issued by the Company or the Issuer, as applicable, in connection with the transactions contemplated hereby or thereby or in the Offering Memorandum and the exchange of the Preferred Securities for the Notes and the consummation of the transactions contemplated herein, therein and in the Offering Memorandum (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Offering Memorandum under the caption "Use of Proceeds" and the exchange of the Preferred Securities for the Notes), the consummation of the Merger and compliance by the Company and, the Issuer with its obligations hereunder and thereunder have been duly authorized by all necessary action and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or a Repayment Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries or the Issuer, as the case may be, pursuant to, the Agreements and Instruments except for such conflicts, breaches or defaults or liens, charges or encumbrances that, singly or in the aggregate, would not result in -6- a Material Adverse Effect, nor will such action result in any violation of the provisions of the constituting or operative document or agreement of the Company or any of its subsidiaries or the Issuer, as the case may be, or any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any of its subsidiaries or the Issuer, as the case may be, or any of their assets or properties. As used herein, a "Repayment Event" means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder's behalf) the right to require to repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or any of its subsidiaries or the Issuer, as the case may be. (xx) Authorization of the Preferred Registration Rights Agreement. The Preferred Securities Exchange and Registration Rights Agreement between the Issuer and the Initial Purchasers to be dated as of January 31, 1997 (the "Preferred Registration Rights Agreement") has been duly authorized by the Issuer and, when executed and delivered by the Issuer, will constitute a valid and legally binding agreement of the Issuer enforceable against it in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws relating to or affecting enforcement of creditors' rights generally, or by general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law); and the Preferred Registration Rights Agreement will conform in all material respects to the description thereof in the Offering Memorandum; (xxi) Authorization of the Warrant Registration Rights Agreement. The Warrant Registration Rights Agreement between the Issuer and the Initial Purchasers to be dated as of January 31, 1997 (the "Warrant Registration Rights Agreement") has been duly authorized and, when executed and delivered by the Issuer, will constitute a valid and legally binding agreement of the Issuer enforceable against the Issuer in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws relating to or affecting enforcement of creditors' rights generally, or by general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law); and the Warrant Registration Rights Agreement will conform in all material respects to the description thereof in the Offering Memorandum. (xxii) Absence of Labor Dispute. No labor dispute with the employees of the Company or any of its subsidiaries or the Issuer exists or, to the knowledge of the Company and the Issuer, is imminent, and neither the Company nor the Issuer is aware of any existing or imminent labor disturbance by the employees of any of its or any of its subsidiaries' principal suppliers, manufacturers, customers or contractors, which, in either case, may reasonably be expected to result in a Material Adverse Effect. (xxiii) Absence of Proceedings. Except as disclosed in the Offering Memorandum, there is no action, suit, proceeding, inquiry or investigation before or by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company and the Issuer, threatened, against or affecting the Company, or any subsidiary thereof or the Issuer, as the case may be, which might reasonably be expected to result in a Material -7- Adverse Effect, or which might reasonably be expected to materially and adversely affect the properties or assets of the Company or any of its subsidiaries or the Issuer, as the case may be, or the consummation of this Agreement or the performance by the Company or the Issuer of its obligations hereunder. The aggregate of all pending legal or governmental proceedings to which the Company or any subsidiary thereof or the Issuer, as the case may be, is a party or of which any of their respective property or assets is the subject which are not described in the Offering Memorandum, including ordinary routine litigation incidental to the business, could not reasonably be expected to result in a Material Adverse Effect. (xxiv) Possession of Intellectual Property. The Company and its subsidiaries own or possess, or can acquire on reasonable terms, adequate patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names or other intellectual property (collectively, "Intellectual Property") necessary to carry on the business now operated by them, and neither the Company nor any of its subsidiaries has received any notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interest of the Company or any of its subsidiaries therein, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, singly or in the aggregate, would result in a Material Adverse Effect. (xxv) Absence of Further Requirements. No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency is necessary or required for the performance by the Company or, the Issuer of its obligations hereunder, in connection with the offering, issuance or sale of the Securities hereunder or the consummation of the actions contemplated by this Agreement, the Warrant Agreement, the Indenture, the Preferred Registration Rights Agreement or the Warrant Registration Rights Agreement except for the filing of certain registration statements with the Commission pursuant to the 1933 Act and the qualification of the Indenture under the Trust Indenture Act of 1939, as amended (the "1939 Act"), as contemplated by the Preferred Registration Rights Agreement and the Warrant Registration Rights Agreement. (xxvi) Possession of Licenses and Permits. Except as set forth in or contemplated by the Offering Memorandum with respect to systems under development and the offering of dial tone service, each of the Company and its subsidiaries has all material certificates, consents, exemptions, orders, permits, licenses, authorizations, franchises or other material approvals (each, an "Authorization") of and from, and has made all material declarations and filings with, all Federal, state, local and other governmental authorities, all self-regulatory organizations and all courts and other tribunals, necessary or appropriate for the Company and its subsidiaries to own, lease, license, use and construct its properties and assets and to conduct its business in the manner described in the Offering Memorandum, except to the extent that the failure to obtain any such Authorizations or make any such declaration or filing would not, singly or in the aggregate, result in a Material Adverse Effect. Except as set forth in or contemplated by the Offering Memorandum, all such Authorizations are in full force and effect with respect to the Company and its subsidiaries; to the best knowledge of the Company, no event has occurred that permits, or after notice or lapse of time could permit, the revocation, termination or modification of any -8- such Authorization; the Company and its subsidiaries are in compliance in all material respects with the terms and conditions of all such Authorizations and with the rules and regulations of the regulatory authorities and governing bodies having jurisdiction with respect thereto; and, except as set forth in the Offering Memorandum, the Company has no knowledge that any person is contesting or intends to contest the granting of any material Authorization; and neither the execution and delivery of this Agreement, the Warrant Agreement, the Indenture, the Preferred Registration Rights Agreement, the Warrant Registration Rights Agreement, the Preferred Securities or the Warrants, nor the consummation of the transactions contemplated hereby or thereby or of the Merger nor compliance with the terms, conditions and provisions thereof by the Company or Capital will cause any suspension, revocation, impairment, forfeiture, nonrenewal or termination of any Authorization. (xxvii) Title to Property. The Company and its subsidiaries have good and marketable title to all real property owned by the Company and its subsidiaries and good title to all other properties owned by them, in each case, free and clear of all mortgages, pledges, liens, security interests, claims, restrictions or encumbrances of any kind except such as (a) are described in the Offering Memorandum or (b) do not, singly or in the aggregate, materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or any of its subsidiaries; and all of the leases and subleases material to the business of the Company and its subsidiaries, considered as one enterprise, and under which the Company or any of its subsidiaries holds properties described in the Offering Memorandum, are in full force and effect, and neither the Company nor any of its subsidiaries has any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company or any of its subsidiaries under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company or any subsidiary thereof to the continued possession of the leased or subleased premises under any such lease or sublease. (xxviii) Tax Returns. The Company and its subsidiaries have filed all federal, state, foreign and, to the extent material, local tax returns that are required to be filed or have duly requested extensions thereof and have paid all taxes required to be paid by any of them and any related assessments, fines or penalties, except for any such tax, assessment, fine or penalty that is being contested in good faith and by appropriate proceedings; and adequate charges, accruals and reserves have been provided for in the financial statements referred to in Section 1(a)(iv) above in respect of all federal, state, local and foreign taxes for all periods as to which the tax liability of the Company or any of its subsidiaries has not been finally determined or remains open to examination by applicable taxing authorities. (xxix) Environmental Laws. Except as described in the Offering Memorandum and except such matters as would not, singly or in the aggregate, result in a Material Adverse Effect, (A) neither the Company nor any of its subsidiaries is in violation of any federal, state, local or foreign statute, law, rule, regulation, ordinance, code, policy or rule of common law or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent, decree or judgment, relating to pollution or protection of human health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products (collectively, "Hazardous Materials") or -9- to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials (collectively, "Environmental Laws"), (B) the Company and its subsidiaries have all permits, authorizations and approvals required under any applicable Environmental Laws and are each in compliance with their requirements, (C) there are no pending or threatened administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigation or proceedings relating to any Environmental Law against the Company or any of its subsidiaries and (D) there are no events or circumstances that might reasonably be expected to form the basis of an order for clean-up or remediation, or an action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company or any of its subsidiaries relating to Hazardous Materials or Environmental Laws. (xxx) Investment Company Act. The Issuer is not, and upon the issuance and sale of the Securities as herein contemplated and the application of the net proceeds therefrom as described in the Offering Memorandum will not be, an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended (the "1940 Act"). (xxxi) Rule 144A Eligibility. The Securities are eligible for resale pursuant to Rule 144A and will not be, at the Closing Time, of the same class as securities listed on a national securities exchange registered under Section 6 of the 1934 Act, or quoted in a U.S. automated interdealer quotation system. (xxxii) No General Solicitation. None of the Company, its affiliates, as such term is defined in Rule 501(b) under the 1933 Act ("Affiliates"), the Issuer or any person acting on its or any of their behalf (other than the Initial Purchasers, as to whom the Company and the Issuer make no representation) has engaged or will engage, in connection with the offering of the Securities, in any form of general solicitation or general advertising within the meaning of Rule 502(c) under the 1933 Act. (xxxiii) No Registration Required. Subject to compliance by the Initial Purchasers with the representations and warranties set forth in Section 2 and the procedures set forth in Section 6 hereof, it is not necessary in connection with the offer, sale and delivery of the Securities to the Initial Purchasers and to each Subsequent Purchaser in the manner contemplated by this Agreement and the Offering Memorandum to register the Securities under the 1933 Act or to qualify the Indenture under the 1939 Act. (b) Officer's Certificates. Any certificate signed by any officer of the Company or any of its subsidiaries or the Issuer delivered to the Representatives or to counsel for the Initial Purchasers shall be deemed a representation and warranty by the Company or the Issuer to each Initial Purchaser as to the matters covered thereby. SECTION 2. Sale and Delivery to Initial Purchasers; Closing. (a) Securities. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Issuer agrees to sell to each Initial Purchaser, severally and not jointly, and each Initial Purchaser, severally and not jointly, agrees to purchase from the Issuer, -10- at the price per Unit set forth in Schedule B, the number of Units set forth in Schedule A opposite the name of such Initial Purchaser, plus any additional number of Units which such Initial Purchaser may become obligated to purchase pursuant to the provisions of Section 11 hereof. (b) Payment. Payment of the purchase price for, and delivery of certificates for, the Securities shall be made at the office of Sullivan & Cromwell, 125 Broad Street, New York, New York 10004, or at such other place as shall be agreed upon by the Initial Purchasers, the Company and the Issuer, at 10:00 A.M. on the eighth business day after the date hereof (unless postponed in accordance with the provisions of Section 11), or such other time not later than ten business days after such date as shall be agreed upon by the Representatives, the Company and the Issuer (such time and date of payment and delivery being herein called the "Closing Time"). Payment shall be made to the Issuer by wire transfer of immediately available funds to a bank account designated by the Issuer, against delivery to the Representatives for the respective accounts of the Initial Purchasers of certificates for the Securities to be purchased by them. It is understood that each Initial Purchaser has authorized Merrill Lynch, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the Securities which it has agreed to purchase. Merrill Lynch, individually and not as representative of the Initial Purchasers, may (but shall not be obligated to) make payment of the purchase price for the Securities to be purchased by any Initial Purchaser whose funds have not been received by the Closing Time, but such payment shall not relieve such Initial Purchaser from its obligations hereunder. Unless otherwise requested by Merrill Lynch, which request shall be made in writing at least one full business day before the Closing Time, the certificates representing the Securities shall be registered in the name of Cede & Co. pursuant to the DTC Agreement and shall be made available for examination by the Initial Purchasers in The City of New York not later than 10:00 A.M. on the last business day prior to the Closing Time. (c) Qualified Institutional Buyer. Each Initial Purchaser severally and not jointly represents and warrants to, and agrees with, the Company that it is a "qualified institutional buyer" within the meaning of Rule 144A under the 1933 Act (a "Qualified Institutional Buyer") or an "accredited investor" within the meaning of Rule 501(a) under the 1933 Act (an "Accredited Investor"). SECTION 3. Covenants of the Company and the Issuer. Each of the Company and the Issuer covenants with each Initial Purchaser as follows: (a) Offering Memorandum. The Company and the Issuer, as promptly as possible, will furnish to each Initial Purchaser, without charge, such number of copies of the Preliminary Offering Memorandum, the Final Offering Memorandum and any amendments and supplements thereto and documents incorporated by reference therein as such Initial Purchaser may reasonably request. (b) Notice and Effect of Material Events. The Company and the Issuer will as promptly as reasonably practicable notify each Initial Purchaser, and confirm such notice in writing, of (x) any filing made by it of information relating to the offering of the Securities with any securities exchange or any other regulatory body in the United States or any other jurisdiction, and (y) prior to the completion of the placement of the Securities by the Initial Purchasers as evidenced by a notice in writing from the Initial Purchasers to the Company and the Issuer, any material changes in or affecting the earnings, business affairs or business prospects of the Company and its subsidiaries or the Issuer which (i) make any statement in the Offering Memorandum false or misleading or (ii) are not disclosed in the Offering -11- Memorandum. In such event or if during such time any event shall occur as a result of which it is necessary, in the reasonable opinion of the Company and the Issuer, their counsel, the Initial Purchasers or counsel for the Initial Purchasers, to amend or supplement the Final Offering Memorandum in order that the Final Offering Memorandum not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances then existing, the Company and the Issuer will forthwith amend or supplement the Final Offering Memorandum by preparing and furnishing to each Initial Purchaser an amendment or amendments of, or a supplement or supplements to, the Final Offering Memorandum (in form and substance satisfactory in the reasonable opinion of counsel for the Initial Purchasers) so that, as so amended or supplemented, the Final Offering Memorandum will 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 the light of the circumstances existing at the time it is delivered to a Subsequent Purchaser, not misleading. (c) Amendment to Offering Memorandum and Supplements. The Company and the Issuer will advise each Initial Purchaser promptly of any proposal to amend or supplement the Offering Memorandum and will not effect such amendment or supplement without the consent of the Initial Purchasers. Neither the consent of the Initial Purchasers, nor the Initial Purchaser's delivery of any such amendment or supplement, shall constitute a waiver of any of the conditions set forth in Section 5 hereof. (d) Qualification of Securities for Offer and Sale. The Company and the Issuer will use their best efforts, in cooperation with the Initial Purchasers, to qualify the Securities for offering and sale under the applicable securities laws of such jurisdictions as the Representatives may designate and will maintain such qualifications in effect as long as required for the sale of the Securities; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. (e) Use of Proceeds. The Issuer will use the net proceeds received by it from the sale of the Securities in the manner specified in the Offering Memorandum under "Use of Proceeds". (f) Restriction on Sale of Securities. During a period of 45 days from the date of the Offering Memorandum, neither the Company nor the Issuer will, without the prior written consent of Merrill Lynch, directly or indirectly, issue, sell, offer or agree to sell, grant any option for the sale of, or otherwise dispose of, any other preferred securities or debt securities of the Company or the Issuer or securities of the Company or the Issuer that are convertible into, or exchangeable for, the Preferred Securities or such other preferred securities or debt securities. (g) Reservation of Junior Shares. To reserve and keep available at all times, free of preemptive rights, a sufficient number of Junior Shares for the purpose of enabling the Issuer to satisfy any obligations to issue the Junior Shares upon exercise of the Warrants. SECTION 4. Payment of Expenses. (a) Expenses. The Company and the Issuer will pay all expenses incident to the performance of their obligations under this Agreement, including (i) the preparation, printing and any filing of the Offering Memorandum (including financial statements and any schedules or exhibits and any document incorporated therein by reference) and of each amendment or supplement thereto, (ii) the preparation, -12- printing and delivery to the Initial Purchasers of this Agreement, any Agreement among Initial Purchasers, the Indenture and such other documents as may be required in connection with the offering, purchase, sale and delivery of the Securities, (iii) the preparation, issuance and delivery of the certificates for the Securities to the Initial Purchasers, certificates for Junior Shares upon exercise of Warrants and certificates for the Notes, including any stock or other transfer taxes and any stamp or other duties payable upon the sale, issuance or delivery of the Securities to the Initial Purchasers' and any charges of DTC in connection therewith; (iv) the fees and disbursements of the Company's and the Issuer's counsel, accountants and other advisors, (v) the qualification of the Securities under securities laws in accordance with the provisions of Section 3(d) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Initial Purchasers in connection therewith and in connection with the preparation of the Blue Sky Survey, any supplement thereto and any Legal Investment Survey, (vi) the fees and expenses of any transfer agent or registrar for the Preferred Securities and the Junior Shares, (vii) the fees and expenses of the Warrant Agent and the Trustee, including the fees and disbursements of counsel for the Warrant Agent and the Trustee, as the case may be, in connection with the Warrant Agreement and the Warrants or Indenture and the Notes, as the case may be, (viii) any fees payable in connection with the rating of the Securities and (ix) any fees payable in connection with the designation of the Units, Preferred Securities and Warrants for trading in PORTAL. (b) Termination of Agreement. If this Agreement is terminated by the Representatives in accordance with the provisions of Section 5 or Section 10(a)(i) hereof, the Company shall reimburse the Initial Purchasers for all of their out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the Initial Purchasers. SECTION 5. Conditions of Initial Purchasers' Obligations. The obligations of the several Initial Purchasers hereunder are subject to the accuracy of the representations and warranties of the Company and the Issuer contained in Section 1 hereof or in certificates of any officer of the Company or any of its subsidiaries or the Issuer delivered pursuant to the provisions hereof, to the performance by each of the Company and the Issuer of its covenants and other obligations hereunder, and to the following further conditions: (a) Opinion of Counsel for Company. At the Closing Time, the Initial Purchasers shall have received the favorable opinions, dated as of the Closing Time, of Willkie Farr & Gallagher, counsel for the Company and the Issuer, and of R. Bruce Easter, Esq., Vice President, General Counsel and Secretary of the Issuer, in form and substance satisfactory to counsel for the Initial Purchasers, to the effect set forth in Exhibits A-1 and A-2 hereto, respectively, and to such further effect as counsel to the Initial Purchasers may reasonably request. (b) Opinion of Counsel for Initial Purchasers. At the Closing Time, the Initial Purchasers shall have received the favorable opinion, dated as of the Closing Time, of Sullivan & Cromwell, counsel for the Initial Purchasers, with respect to the incorporation of the Issuer, the validity of the Securities, the Warrant Agreement, the Indenture, the Preferred Registration Rights Agreement, the Warrant Registration Rights Agreement, the Offering Memorandum and such other related matters. In giving such opinion such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of New York and the federal law of the United States, upon the opinions of counsel satisfactory to the Initial Purchasers. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Company and its subsidiaries and certificates of public officials. -13- (c) Officers' Certificate. At the Closing Time, there shall not have been, since the date hereof or since the respective dates as of which information is given in the Offering Memorandum, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise or the Issuer, whether or not arising in the ordinary course of business, and the Initial Purchasers shall have received a certificate of the President or a Vice President of the Company and of the chief financial or chief accounting officer of the Company and of the President or a Vice President of the Issuer, dated as of the Closing Time, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties in Section 1 hereof are true and correct with the same force and effect as though expressly made at and as of the Closing Time, and (iii) the Company or the Issuer, as the case may be, has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Closing Time. (d) Accountant's Comfort Letter. At the time of the execution of this Agreement, the Initial Purchasers shall have received from Arthur Andersen LLP a letter dated such date, in form and substance satisfactory to the Initial Purchasers containing statements and information of the type ordinarily included in accountants' "comfort letters" to Initial Purchasers with respect to the financial statements and certain financial information contained in the Offering Memorandum. (e) Bring-down Comfort Letter. At the Closing Time, the Initial Purchasers shall have received from Arthur Andersen LLP a letter, dated as of the Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (d) of this Section, except that the specified date referred to shall be a date not more than three business days prior to the Closing Time. (f) Maintenance of Rating. Since the date of this Agreement, there shall not have occurred a downgrading in the rating assigned to the Securities, if any, or any of the Company's debt securities by any nationally recognized securities rating agency, and no such securities rating agency shall have publicly announced that it has under surveillance or review, with possible negative implications, its rating of the Securities or any of the Company's debt securities. (g) Registration Rights Agreements. The Preferred Registration Rights Agreement shall have been duly authorized, executed and delivered by the Issuer and the Warrant Registration Rights Agreement shall have been duly authorized, executed and delivered by the Issuer. (h) Additional Documents. At the Closing Time, counsel for the Initial Purchasers shall have been furnished with such documents and opinions as they may require for the purpose of enabling them to pass upon the issuance and sale of the Securities as herein contemplated, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Issuer and the Company in connection with the issuance and sale of the Securities as herein contemplated and the consummation of the Merger shall be satisfactory in form and substance to the Representatives and counsel for the Initial Purchasers. (i) Termination of Agreement. If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement may be terminated by the Representatives by notice to the Company and the Issuer at any time at or prior to the Closing Time, and such termination shall be without liability of any party to any other party except as provided in Section 4 and except that Sections 1, 7 and 8 shall survive any such termination and remain in full force and effect. -14- SECTION 6. Subsequent Offers and Resales of the Securities. (a) Offer and Sale Procedures. Each of the Initial Purchasers, the Company and the Issuer hereby establish and agree to observe the following procedures in connection with the offer and sale of the Securities: (i) Offers and Sales only to Institutional Accredited Investors or Qualified Institutional Buyers. Offers and sales of the Securities will be made only by the Initial Purchasers or Affiliates thereof qualified to do so in the jurisdictions in which such offers or sales are made. Each such offer or sale shall only be made (A) to persons whom such Initial Purchaser or its Affiliates reasonably believes to be qualified institutional buyers (as defined in Rule 144A under the Securities Act) or (B) to a limited number of other institutional accredited investors (as such term is defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D) that such Initial Purchaser or its Affiliates reasonably believes to be and, with respect to sales and deliveries, that are Accredited Investors ("Institutional Accredited Investors"). (ii) No General Solicitation. The Securities will be offered by approaching prospective Subsequent Purchasers on an individual basis. No general solicitation or general advertising (within the meaning of Rule 502(c) under the 1933 Act) will be used in the United States in connection with the offering of the Securities. (iii) Purchases by Non-Bank Fiduciaries. In the case of a non-bank Subsequent Purchaser of a Security acting as a fiduciary for one or more third parties, in connection with an offer and sale to such purchaser pursuant to clause (a) above, each third party shall, in the judgment of the applicable Initial Purchaser, be an Institutional Accredited Investor or a Qualified Institutional Buyer. (iv) Subsequent Purchaser Notification. Each Initial Purchaser will take reasonable steps to inform, and cause each of its U.S. Affiliates to take reasonable steps to inform, persons acquiring Securities from such Initial Purchaser or affiliate, as the case may be, in the United States that the Securities (A) have not been and will not be registered under the 1933 Act, (B) are being sold to them without registration under the 1933 Act in reliance on Rule 144A or in accordance with another exemption from registration under the 1933 Act, as the case may be, and (C) may not be offered, sold or otherwise transferred except as described in the Offering Memorandum under "Notice to Investors". (v) Restrictions on Transfer. The transfer restrictions and the other provisions set forth in the certificate of designations of rights and preferences relating to the Preferred Securities (the "Certificate of Designations"), the Warrant Agreement and the Indenture, including the legends required thereby, shall apply to the Preferred Securities, the Warrants, the Junior Shares and the Notes, as the case may be, except as otherwise agreed by the Company and the Initial Purchasers. Following the sale of the Securities by the Initial Purchasers to Subsequent Purchasers pursuant to the terms hereof, the Initial Purchasers shall not be liable or responsible to the Company or the Issuer for any losses, damages or liabilities suffered or incurred by the Company or the Issuer, including any losses, damages or liabilities under the 1933 Act, arising from or relating to any resale or transfer of any Security, Preferred Security, Warrant, Junior Share or Note. -15- (b) Covenants of the Company and the Issuer. Each of the Company and the Issuer covenants with each Initial Purchaser as follows: (i) Due Diligence. In connection with the original distribution of the Securities, each of the Company and the Issuer agrees that, prior to any offer or resale of the Securities by the Initial Purchasers, the Initial Purchasers and counsel for the Initial Purchasers shall have the right to make reasonable inquiries into the business of the Company and its subsidiaries or the Issuer, as applicable. The Company also agrees to provide answers to each prospective Subsequent Purchaser of Securities who so requests concerning the Company and its subsidiaries (to the extent that such information is available or can be acquired and made available to prospective Subsequent Purchasers without unreasonable effort or expense and to the extent the provision thereof is not prohibited by applicable law) and the terms and conditions of the offering of the Securities, as provided in the Offering Memorandum. (ii) Integration. It will not and will cause its Affiliates not to make any offer or sale of securities of the Company or the Issuer of any class if, as a result of the doctrine of "integration" referred to in Rule 502 under the 1933 Act, such offer or sale would render invalid (for the purpose of (i) the sale of the Securities by the Issuer to the Initial Purchasers, (ii) the resale of the Securities by the Initial Purchasers to Subsequent Purchasers or (iii) the resale of the Securities by such Subsequent Purchasers to others) the exemption from the registration requirements of the 1933 Act provided by Section 4(2) thereof or by Rule 144A thereunder or otherwise. (iii) Rule 144A Information. In order to render the Securities eligible for resale pursuant to Rule 144A under the 1933 Act, while any of the Preferred Securities, Warrants, Junior Shares issuable upon exercise of Warrants or Notes remain outstanding and constitute "restricted securities" (as such term is defined under Rule 144(a)(3) under the 1933 Act (or any successor thereto)), it will make available, upon request, to any holder of Preferred Securities, Warrants, Junior Shares issuable upon exercise of Warrants or Notes or prospective purchasers of Preferred Securities, Warrants, Junior Shares issuable upon exercise of Warrants or Notes the information specified in Rule 144A(d)(4), unless the Issuer furnishes information to the Commission pursuant to Section 13 or 15(d) of the 1934 Act (such information, whether made available to holders or prospective purchasers or furnished to the Commission, is herein referred to as "Additional Information"). (iv) Restriction on Repurchases. Until the expiration of three years after the original issuance of the Securities, it will not, and will cause its Affiliates not to, purchase or agree to purchase or otherwise acquire any Preferred Securities, Warrants, Junior Shares issuable upon exercise of Warrants or Notes which are "restricted securities" (as such term is defined under Rule 144(a)(3) under the 1933 Act), whether as beneficial owner or otherwise (except as agent acting as a securities broker on behalf of and for the account of customers in the ordinary course of business in unsolicited broker's transactions) unless, immediately upon any such purchase, the Company, the Issuer or any Affiliate shall submit such Preferred Securities, Warrants, Junior Shares issuable upon exercise of Warrants or Notes for cancellation. -16- SECTION 7. Indemnification. (a) Indemnification of Initial Purchasers. Each of the Company and the Issuer, jointly and severally, agrees to indemnify and hold harmless each Initial Purchaser and each person, if any, who controls any Initial Purchaser within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Offering Memorandum or the Final Offering Memorandum (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that (subject to Section 7(d) below) any such settlement is effected with the written consent of the Company and the Issuer; and (iii) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by Merrill Lynch), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above; provided, however, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company and the Issuer by any Initial Purchaser through Merrill Lynch expressly for use in the Offering Memorandum (or any amendment thereto). (b) Indemnification of Company, Directors and Officers. Each Initial Purchaser severally agrees to indemnify and hold harmless the Company, the Issuer and each person, if any, who controls the Company or the Issuer within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Offering Memorandum in reliance upon and in conformity with written information furnished to the Company and the Issuer by such Initial Purchaser through Merrill Lynch expressly for use in the Offering Memorandum. (c) Actions against Parties; Notification. Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially -17- prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. In the case of parties indemnified pursuant to Section 7(a) above, counsel to the indemnified parties shall be selected by Merrill Lynch, and, in the case of parties indemnified pursuant to Section 7(b) above, counsel to the indemnified parties shall be selected by the Company. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 7 or Section 8 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (d) Settlement without Consent if Failure to Reimburse. If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 7(a)(ii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. SECTION 8. Contribution. If the indemnification provided for in Section 7 hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Issuer on the one hand and the Initial Purchasers on the other hand from the offering of the Securities pursuant to this Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Issuer on the one hand and of the Initial Purchasers on the other hand in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Issuer on the one hand and the Initial Purchasers on the other hand in connection with the offering of the Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Securities pursuant to this Agreement (before deducting expenses) received by the Issuer and the total -18- underwriting discount received by the Initial Purchasers, bear to the aggregate initial offering price of the Securities. The relative fault of the Company and the Issuer on the one hand and the Initial Purchasers on the other hand shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or by the Initial Purchasers and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Issuer and the Initial Purchasers agree that it would not be just and equitable if contribution pursuant to this Section 8 were determined by pro rata allocation (even if the Initial Purchasers were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 8. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 8 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this Section 8, no Initial Purchaser shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Initial Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 8, each person, if any, who controls an Initial Purchaser within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such Initial Purchaser, and each person, if any, who controls the Company or the Issuer within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company and the Issuer. The Initial Purchasers' respective obligations to contribute pursuant to this Section 8 are several in proportion to the number of Securities set forth opposite their respective names in Schedule A hereto and not joint. SECTION 9. Presentations, Warranties and Agreements to Survive Delivery. All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Company or the Issuer submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any Initial Purchaser or controlling person, or by or on behalf of the Company or the Issuer, and shall survive delivery of the Securities to the Initial Purchasers. -19- SECTION 10. Termination of Agreement. (a) Termination; General. The Representatives may terminate this Agreement, by notice to the Company and the Issuer, at any time at or prior to the Closing Time (i) if there has been, since the time of execution of this Agreement or since the respective dates as of which information is given in the Offering Memorandum, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, or (ii) if there has occurred any material adverse change in the financial markets in the United States, any outbreak of hostilities or escalation thereof or other calamity or crisis or any change or development involving a prospective change in national or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of the Representatives, impracticable to market the Securities or to enforce contracts for the sale of the Securities, or (iii) if trading in any securities of the Company has been suspended or limited by the Commission, or if trading generally on the American Stock Exchange or the New York Stock Exchange or in the NASDAQ National Market System has been suspended or limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any of said exchanges or by such system or by order of the Commission, the National Association of Securities Dealers, Inc. or any other governmental authority, or (iv) if a banking moratorium has been declared by either Federal or New York authorities. (b) Liabilities. If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof, and provided further that Sections 1, 7 and 8 shall survive such termination and remain in full force and effect. SECTION 11. Default by One or More of the Initial Purchasers. If one or more of the Initial Purchasers shall fail at the Closing Time to purchase the Securities which it or they are obligated to purchase under this Agreement (the "Defaulted Securities"), the Representatives shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting Initial Purchasers, or any other Initial Purchasers, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; if, however, the Representatives shall not have completed such arrangements within such 24-hour period, then: No action taken pursuant to this Section shall relieve any defaulting Initial Purchaser from liability in respect of its default. In the event of any such default which does not result in a termination of this Agreement, either the Representatives or the Issuer shall have the right to postpone the Closing Time for a period not exceeding seven days in order to effect any required changes in the Offering Memorandum or in any other documents or arrangements. SECTION 12. Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any form of telecommunication. Notices to the Initial Purchasers shall be directed to the Representatives at North Tower, World Financial Center, New York, New York 10281-1201, attention of Edmond Moriarty, III; notices to the Company or the Issuer shall be directed to it at 155 108th Avenue NE, Bellevue, Washington 98004, attention of General Counsel. -20- SECTION 13. Parties. This Agreement shall inure to the benefit of and be binding upon the Initial Purchasers, the Company and the Issuer and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the Initial Purchasers, the Company and the Issuer and their respective successors and the controlling persons and officers and directors referred to in Sections 7 and 8 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the Initial Purchasers, the Company and the Issuer and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Securities from any Initial Purchaser shall be deemed to be a successor by reason merely of such purchase. SECTION 14. Provision in case of Special Mandatory Redemption. In the event that the Merger is not consummated on or prior to February 28, 1997 and the Preferred Securities are subject to the special mandatory redemption provision relating thereto, (i) the Initial Purchasers shall, within two business days after the written request of the Issuer and the Company, refund to the Issuer an amount equal to the aggregate underwriting discount referred to in Schedule B hereto and (ii) the Company shall reimburse the Initial Purchasers for all of their out-of-pocket expenses incurred in connection with the offering of the Units, including the reasonable fees and disbursements of counsel for the Initial Purchasers. SECTION 15. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME. SECTION 16. Effect of Headings. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. -21- If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement among the Initial Purchasers, the Company and the Issuer in accordance with its terms. Very truly Yours, NEXTLINK COMMUNICATIONS, L.L.C. By NEXTLINK, INC.: By /s/ Kathleen H. Iskra --------------------------------- Name: Kathleen H. Iskra Title: Vice President NEXTLINK COMMUNICATIONS MERGER, INC. By /s/ R. Bruce Easter --------------------------------- Name: R. Bruce Easter, Jr. Title: Vice President CONFIRMED AND ACCEPTED, as of the date first above written; MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED TORONTO DOMINION SECURITIES (USA) INC. By: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By /s/ Marcy Becker --------------------------------- Authorized Signatory For themselves and as Representatives of the other Initial Purchasers named in Schedule A hereto. -22- SCHEDULE A Number of Name of Initial Purchaser Units ------------------------- --------- Merrill Lynch, Pierce, Fenner & Smith Incorporated...................................... 4,275,000 Toronto Dominion Securities (USA) Inc................... 1,425,000 --------- Total 5,700,000 ========= Sch A - 1 SCHEDULE B NEXTLINK COMMUNICATIONS MERGER, INC. 5,700,000 Units Consisting of Exchangeable Preferred Shares and Contingent Warrants 1. The initial public offering price per Unit shall be $50. 2. The purchase price to be paid by the Initial Purchasers for the Units shall be $48.25 per Unit, resulting in an underwriting discount of $1.75 per Unit. 3. The dividend rate on the Preferred Securities shall be 14% per annum. Sch B - 1 Exhibit A-1 FORM OF OPINION OF WILLKIE FARR & GALLAGHER TO BE DELIVERED PURSUANT TO SECTION 5(b) (i) The Company has been duly formed and is validly existing as a limited liability company in good standing under the laws of the State of Washington. (ii) The Company has power and authority to own, lease and operate its properties and to conduct its business as described in the Offering Memorandum and to enter into and perform its obligations under the Purchase Agreement. (iii) The Company is duly qualified as a foreign limited liability company to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. (iv) The authorized, issued and outstanding capital stock of the Company is as set forth in the Offering Memorandum; the shares of issued and outstanding capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable; and none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive or other similar rights of any securityholder of the Company. (v) Each Designated Subsidiary has been duly formed and is validly existing as a limited liability company or limited partnership in good standing under the laws of the jurisdiction of its formation, has power and authority to own, lease and operate its properties and to conduct its business as described in the Offering Memorandum; all of the issued and outstanding membership interests or partnership interests of each Designated Subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and, except as otherwise set forth in the Offering Memorandum in respect of the minority interests described therein, is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity. (vi) The Issuer has been duly incorporated and is validly existing as a corporation under the laws of the State of Washington. (vii) The Issuer has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Offering Memorandum and to enter into and perform its obligation under the Purchase Agreement. (viii) The Issuer is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. (ix) The authorized, issued and outstanding capital stock of the Issuer is as set forth in the Offering Memorandum; the shares of issued and outstanding capital stock of the Issuer have been duly authorized and validly issued and are fully paid and non-assessable. A-1-1 (x) The Purchase Agreement has been duly authorized, executed and delivered by each of the Company and the Issuer. (xi) The Preferred Securities have been duly authorized and validly issued and are fully paid and non-assessable; no holder of Preferred Securities is or will be subject to personal liability by reason of being such a holder; the Preferred Securities conform to the provisions of the Certificate of Designations; the relative rights, preferences, interests and powers of the Preferred Securities are as set forth in the Certificate of Designations; and all such provisions are valid under the laws of the State of Washington. (xii) The Junior Shares issuable upon exercise of the Warrants have been duly authorized and reserved for issuance upon such exercise by all necessary action; such shares, when issued upon such exercise, will be validly issued and will be fully paid and non-assessable and no holder of such Junior Shares is or will be subject to personal liability by reason of being such a holder. (xiii) Neither the issuance of the Preferred Securities nor the issuance of Junior Shares issuable upon exercise of the Warrants is subject to the preemptive or other similar rights of any securityholder of the Issuer. (xiv) The Warrant Agreement has been duly and validly authorized, executed and delivered by the Issuer and (assuming the due authorization, execution and delivery thereof by the Warrant Agent) constitutes a valid and binding agreement of the Issuer, enforceable against the Issuer in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws relating to or affecting enforcement of creditors' rights generally, or by general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). (xv) The Warrants have been duly authorized, executed, issued and delivered, and constitute valid and binding obligations of the Issuer, enforceable against the Issuer in accordance with their terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws relating to or affecting enforcement of creditors' rights generally, or by general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law), and are entitled to the benefits of the Warrant Agreement. (xvi) The Indenture has been duly authorized by the Issuer and, when executed and delivered by the Issuer (assuming the due authorization, execution and delivery thereof by the Trustee), will constitute a valid and binding agreement of the Issuer, enforceable against it in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws relating to or affecting enforcement of creditors' rights generally, or by general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). (xvii) The Notes have been duly authorized by the Issuer and, when executed by the Issuer and authenticated by the Trustee in the manner provided in the Indenture (and delivered in exchange for Preferred Securities), will constitute valid and binding obligations of the Issuer, enforceable against it in accordance with their terms, except as the enforcement thereof may be limited by bankruptcy, insolvency, A-1-2 reorganization, moratorium (including, without limitation, all laws relating to fraudulent transfers), or other similar laws relating to or affecting enforcement of creditor's rights generally, or by general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law), and will be entitled to the benefits of the Indenture. (xviii) The Preferred Registration Rights Agreement has been duly authorized, executed and delivered by the Issuer and (assuming due authorization, execution and delivery by the Initial Purchasers, constitutes a valid and legally binding agreement of the Issuer, enforceable against it in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws relating to or affecting enforcement of creditors' rights generally, or by general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). (xix) The Warrant Registration Rights Agreement has been duly authorized, executed and delivered by the Issuer and (assuming due authorization, execution and delivery by the Initial Purchasers) constitutes a valid and legally binding agreement of the Issuer, enforceable against the Issuer in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws relating to or affecting enforcement of creditors' rights generally, or by general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). (xx) Each of the Preferred Securities, the Warrants, the Warrant Agreement, the Indenture, the Preferred Registration Rights Agreement and the Warrant Registration Rights Agreement conform in all material respects to the description thereof contained in the Offering Memorandum. (xxi) The information in the Offering Memorandum under "Business--Regulatory Overview" and "Certain Federal Income Tax Considerations", to the extent that it constitutes matters of law, summaries of legal matters, or legal conclusions, has been reviewed by them and is correct in all material respects. (xxii) All descriptions in the Offering Memorandum of contracts and other documents to which the Company or any of its subsidiaries are a party are accurate in all material respects; to the best of our knowledge, there are no franchises, contracts, indentures, mortgages, loan agreements, notes, leases or other instruments that would be required to be described in the Offering Memorandum that are not described or referred to in the Offering Memorandum other than those described or referred to therein and the descriptions thereof or references thereto are correct in all material respects. (xxiii) Neither the Company, nor any of its subsidiaries, nor the Issuer is in violation of its charter or by-laws or other constituting or operative document or agreement and, to the best of our knowledge, no default by the Company, any of its subsidiaries or the Issuer exists in the due performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument that is described or referred to in the Offering Memorandum. (xxiv) No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency is necessary or required for the performance by the Company or the Issuer of its obligations under the Purchase Agreement, in connection A-1-3 with the offering, issuance or sale of the Securities hereunder or the consummation of the actions contemplated by the Purchase Agreement, the Warrant Agreement, the Indenture, the Preferred Registration Rights Agreement or the Warrant Registration Rights Agreement other than such as may be required under state securities or blue sky laws and the filing of certain registration statements with the Commission pursuant to the 1933 Act and the qualification of the Indenture under the 1939 Act as contemplated by the Preferred Registration Rights Agreement and the Warrant Registration Rights Agreement. (xxv) It is not necessary in connection with the offer, sale and delivery of the Securities to the Initial Purchasers and to each Subsequent Purchaser in the manner contemplated by the Purchase Agreement and the Offering Memorandum to register the Securities under the 1933 Act or to qualify the Indenture under the Trust Indenture Act. (xxvi) The issue and sale of the Securities, the execution, delivery and performance of the Purchase Agreement, the Warrant Agreement, the Indenture, the Preferred Registration Rights Agreement, the Warrant Registration Rights Agreement, the Preferred Securities, the Warrants and any other agreement or instrument entered into or issued or to be entered into or issued by the Company or the Issuer in connection with the transactions contemplated thereby or in the Offering Memorandum and the exchange of the Preferred Securities for the Notes and the consummation of the transactions contemplated therein and in the Offering Memorandum (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Offering Memorandum under the caption "Use of Proceeds" and the exchange of the Preferred Securities for the Notes), the consummation or the Merger and compliance by the Company and the Issuer with its respective obligations thereunder have been duly authorized by all necessary action and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or a Repayment Event under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries or the Issuer, as the case may be, pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease, or any other agreement or instrument known to such counsel to which the Company or any of its subsidiaries or the Issuer, as the case may be, is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any subsidiaries thereof or the Issuer, as the case may be, is subject, except for such conflicts, breaches or defaults or liens, charges or encumbrances that, singly or in the aggregate, would not result in a Material Adverse Effect, nor will such action result in any violation of the provisions of the constituting or operative document or agreement of the Company or any of its subsidiaries or the Issuer, as the case may be, or any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any of its subsidiaries or the Issuer, as the case may be, or any of their assets or properties. (xxvii) The Issuer is not, and upon the issuance and sale of the Units and the application of the net proceeds therefrom will not be, an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the 1940 Act. Nothing has come to our attention that would lead us to believe that the Offering Memorandum (except for financial statements and schedules and other financial data included or incorporated by reference therein as to which we make no statement), contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein A-1-4 not misleading or that the Offering Memorandum or any amendment or supplement thereto (except for financial statements and schedules and other financial data included or incorporated by reference therein, as to which such counsel need make no statement), at the time the Offering Memorandum was issued, at the time any such amended or supplemented Offering Memorandum was issued or at the Closing Time, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. In rendering such opinion, such counsel may rely (A) as to matters involving the application of the laws of the State of Washington, upon the opinion of Davis Wright Tremaine, special Washington counsel to the Company and the Issuer (which opinion shall be dated and furnished to the Initial Purchasers at the Closing Time, shall be satisfactory in form and substance to counsel for the Initial Purchasers and shall expressly state that the Initial Purchasers may rely on such opinion as if it were addressed to them), provided that Willkie Farr & Gallagher shall state in their opinion that they believe that they and the Initial Purchasers are justified in relying upon such opinion, and (B), as to matters of fact (but not as to legal conclusions), to the extent they deem proper, on certificates of responsible officers of the Company, the Issuer and public officials. Such opinion shall not state that it is to be governed or qualified by, or that it is otherwise subject to, any treatise, written policy or other document relating to legal opinions, including, without limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991). A-1-5 Exhibit A-2 FORM OF OPINION OF R. BRUCE EASTER TO BE DELIVERED PURSUANT TO SECTION 5(b) (i) There is not pending or, to the best of my knowledge, threatened any action, suit, proceeding, inquiry or investigation, to which the Company or any subsidiary thereof or the Issuer is a party, or to which the property of the Company or any subsidiary or the Issuer thereof is subject, before or brought by any court or governmental agency or body, which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the properties or assets thereof or the consummation of the transactions contemplated in the Purchase Agreement or the performance by the Company or the Issuer of its obligations thereunder or the transactions contemplated by the Offering Memorandum. (ii) To the best of my knowledge and except as set forth in or contemplated by the Offering Memorandum with respect to systems under development, (a) each of the Company and its subsidiaries has all Authorizations of and from, and has made all declarations and filings with, all Federal, state, local and other governmental authorities, all self-regulatory organizations and all courts and other tribunals, which are necessary or appropriate for the Company and its subsidiaries to own, lease, license, use and construct its properties and assets and to conduct its business in the manner described in the Offering Memorandum, except to the extent that the failure to obtain any such Authorizations or make any such declaration or filing would not, singly or in the aggregate, reasonably be expected to result in a Material Adverse Effect, (b) all such Authorizations are in full force and effect with respect to the Company and its subsidiaries, (c) no event has occurred that permits, or after notice or lapse of time could permit, the revocation, termination or modification of any such Authorization and (d) the Company and its subsidiaries are in compliance in all material respects with the terms and conditions of all such Authorizations and with the rules and regulations of the regulatory authorities and governing bodies having jurisdiction with respect thereto. (iii) To the best of my knowledge, neither the execution and delivery of the Purchase Agreement, the Warrant Agreement, the Indenture, the Preferred Registration Rights Agreement, the Warrant Registration Rights Agreement, the Preferred Securities or the Warrants, nor the consummation by the Company and the Issuer of the transactions contemplated hereby or thereby or of the Merger nor compliance with the terms, conditions and provisions thereof by the Company or the Issuer will cause any suspension, revocation, impairment, forfeiture, nonrenewal or termination of any Authorization. (iv) The information in the Offering Memorandum under the caption "Business -- Regulatory Overview", to the extent that it constitutes matters of law, summaries of legal matters or legal conclusions, has been reviewed by me and is correct in all material respects. A-2-1 EX-3.1 3 ARTICLES OF INCORPORATION EXHIBIT 3.1 ARTICLES OF INCORPORATION OF NEXTLINK COMMUNICATIONS MERGER, INC. Pursuant to RCW 23B.02.020 of the Washington Business Corporation Act, the undersigned does hereby submit these Articles of Incorporation for the purpose of forming a business corporation. 1. NAME. The name of the corporation (the "Corporation") is NEXTLINK COMMUNICATIONS MERGER, INC. 2. PURPOSE. The nature of the business or purpose to be conducted or promoted by the Corporation is to engage in any lawful act or activity for which corporations may be organized under the Corporation Law of the State of Washington. 3. SHARES. The Corporation shall have authority to issue Three Hundred Fifty Million (350,000,000) shares of common stock (the "Common Stock"), which shall be divided into two classes, Two Hundred Fifty Million (250,000,000) shares of Class A Common Stock, par value $.01 per share (the "Class A Common Stock"), and One Hundred Million (100,000,000) shares of Class B Common Stock, par value $.01 per share (the "Class B Common Stock"). The Corporation shall have authority to issue Twenty Five Million (25,000,000) shares of preferred stock, par value $.01 per share (the "Preferred Stock"). The Class A and Class B Common Stock are entitled to vote on all matters which come before the stockholders. Subject to the differential voting power hereafter described in this paragraph 3, all Common Stock shall vote together as a single class. Each share of Class A Common Stock shall have one (1) vote and each share of Class B Common Stock shall have ten (10) votes on all matters on which holders of Common Stock are entitled to vote. Each share of Class B Common Stock may be converted, at any time and at the option of the holder, into one share of Class A Common Stock. Page 1- ARTICLES OF INCORPORATION Except with regard to the differential voting power hereinbefore described in this paragraph 3, the Class A Common Stock and the Class B Common Stock shall carry identical characteristics, rights, preferences, and limitations, including but not limited to participating equally in any dividends when and as declared by the Directors out of funds lawfully available therefor and in any distribution resulting from a liquidation or distribution of assets, whether voluntary or involuntary, in each case subject to any preferential rights granted to any series of Preferred Stock that may be then outstanding. Shares of Preferred Stock of the Corporation may be issued from time to time in one or more classes or series, each of which class or series shall have such distinctive designation or title as shall be fixed by the Board of Directors of the Corporation (the "Board of Directors") and recorded in Articles of Amendment adopted and filed as required by RCW 23B.06.020(4) prior to the issuance of any shares thereof. Each such class or series of Preferred Stock shall have such voting powers, full or limited, or no voting powers, and such preferences and relative participating, option or other special rights and such qualifications, limitations or restrictions thereof, as shall be stated in such resolution or resolutions providing for the issue of such class or series of Preferred Stock as may be adopted from time to time by the Board of Directors prior to the issuance of any shares thereof pursuant to the authority hereby expressly vested in it, all in accordance with the laws of the State of Washington. 4. NO PREEMPTIVE RIGHTS. Except as may otherwise be provided by the Board of Directors, no preemptive rights shall exist with respect to shares of stock or securities convertible into shares of stock of this corporation. 5. NO CUMULATIVE VOTING. At each election for directors, every shareholder entitled to vote at such election has the right to vote in person or by proxy the number of shares held by such shareholder for as many persons as there are directors to be elected. No cumulative voting for directors shall be permitted. 6. BYLAWS. In furtherance and not in limitation of the Page 2- ARTICLES OF INCORPORATION powers conferred by statute, the bylaws of the Corporation may be made, altered, amended or repealed by the stockholders or by a majority of the entire Board of Directors. 7. REGISTERED AGENT AND OFFICE. The name of the initial registered agent of this corporation and the address of its initial registered office are as follows: NAME ADDRESS DWTR&J Corp. 2600 Century Square 1501 Fourth Avenue Seattle, WA 98101-1688 8. DIRECTORS. The number of directors of this corporation shall be determined in the manner specified by the Bylaws and may be increased or decreased from time to time in the manner provided therein. The initial Board of Directors shall consist of 6 directors and their names and addresses are as follows: NAME ADDRESS Craig O. McCaw 2300 Carillon Point Kirkland, Wa. 98033 Scot Jarvis 155 108th Ave. N.E., Ste. 810 Bellevue, Wa. 98004 James F. Voelker 155 108th Ave. N.E., Ste. 810 Bellevue, Wa. 98004 C. James Judson 2300 Carillon Point Kirkland, Wa. 98033 Dennis Weibling 2300 Carillon Point Kirkland, Wa. 98033 William A. Hoglund 2300 Carillon Point Kirkland, Wa. 98033 Page 3- ARTICLES OF INCORPORATION The term of the initial directors shall be until the first annual meeting of the shareholders or until their successors are elected and qualified, unless removed in accordance with the provisions of the Bylaws. Elections of directors need not be by written ballot. 9. INCORPORATOR. The name and mailing address of the incorporator are as follows: Greg F. Adams Davis Wright Tremaine 2600 Century Square 1501 Fourth Avenue Seattle, Washington 98101-1688 10. INDEMNIFICATION. (a) The Corporation shall indemnify to the fullest extent permitted under and in accordance with the laws of the State of Washington any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, trustee, employee or agent of or in any other capacity with another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees and costs), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. (b) Expenses incurred in defending a civil or criminal action, suit or proceeding shall (in the case of any action, suit or proceeding against a director of the Corporation) or may (in the case of any action, suit or proceeding against an officer, trustee, Page 4- ARTICLES OF INCORPORATION employee or agent) be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors upon receipt of an undertaking by or on behalf of the indemnified person to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this paragraph 10. (c) The indemnification and other rights set forth in this paragraph 10 shall not be exclusive of any provisions with respect thereto in the bylaws or any other contract or agreement between the Corporation and any officer, director, employee or agent of the Corporation. (d) Neither the amendment nor repeal of this paragraph 10, subparagraph (a), (b) or (c), nor the adoption of any provision of these Articles of Incorporation inconsistent with this paragraph 10, subparagraph (a), (b) or (c), shall eliminate or reduce the effect of this paragraph 10, subparagraphs (a), (b) and (c), in respect of any matter occurring before such amendment, repeal or adoption of an inconsistent provision or in respect of any cause of action, suit or claim relating to any such matter which would have given rise to a right of indemnification or right to receive expenses pursuant to this paragraph 10, subparagraph (a), (b) or (c), if such provision had not been so amended or repealed or if a provision inconsistent therewith had not been so adopted. 11. LIMITATION OF DIRECTOR LIABILITY. A director shall have no liability to the corporation or its shareholders for monetary damages for conduct as a director, except for acts or omissions that involve intentional misconduct by the director, or a knowing violation of law by the director, or for conduct violating RCW 23B.08.310, or for any transaction from which the director will personally receive a benefit in money, property or services to which the director is not legally entitled. If the Washington Business Corporation Act is hereafter amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director shall be eliminated or limited to the full extent permitted by the Washington Business Corporation Act, as so amended. Any repeal or modification of this Article shall not adversely affect any right Page 5- ARTICLES OF INCORPORATION or protection of a director of the corporation existing at the time of such repeal or modification for or with respect to an act or omission of such director occurring prior to such repeal or modification. 12. SHAREHOLDER VOTING ON CERTAIN TRANSACTIONS. In order to obtain shareholder approval in connection with the following corporate actions, such actions must be approved by each voting group of shareholders entitled to vote thereon by a majority of all the votes entitled to be cast by that voting group: amendment of the Articles of Incorporation; a plan of merger or share exchange; the sale, lease, exchange, or other disposition of all, or substantially all, of the corporation's assets other than in the usual and regular course of business; or dissolution of the corporation. THE UNDERSIGNED, being the incorporator hereinbefore named, for the purpose of forming a Corporation pursuant to the Corporation Law of the State of Washington, executes these Articles, hereby declaring and certifying that this is his act and deed and the facts herein stated are true and, accordingly, has hereunto set his hand this 13th day of January, 1997. /s/ GREG F. ADAMS -------------------------- Greg F. Adams Incorporator Page 6- ARTICLES OF INCORPORATION EX-3.2 4 BY-LAWS OF THE COMPANY EXHIBIT 3.2 BYLAWS OF NEXTLINK COMMUNICATIONS MERGER, INC. These Bylaws are intended to conform to the mandatory requirements of the Washington Business Corporation Act, RCW Chapter 23B, (the "Act"). Any ambiguity arising between these Bylaws and the discretionary provisions of the Act shall be resolved in favor of the application of the Act. ARTICLE I SHAREHOLDERS Section 1. - Place. Shareholders meetings shall be held at the registered office of the Corporation unless a different place shall be designated by the Board of Directors. Section 2. - Annual Meeting. The annual meeting of the Shareholders shall be held on the date and time designated by the Board of Directors. The meeting shall be held for the purpose of electing Directors and for the transaction of such other business as may come before the meeting, whether stated in the notice of meeting or not, except as otherwise expressly stated in the articles of incorporation. If the election of Directors shall not be held on the day designated herein, the Board of Directors shall cause the election to be held at a special meeting of the Shareholders on the next convenient day. Section 3. - Special Meetings. Special meetings of the Shareholders may be called by the President or the Board of Directors for any purpose at any time, and shall be called by the President at the request of the holders of shares entitled to cast at least 25% of votes eligible to be cast. Special meetings shall be held at such place or places within or without the state of Washington as shall be designated by the Board of Directors and stated in the notice of such meeting. At a special meeting no business shall be transacted and no corporate action shall be taken other than that stated in the notice of the meeting. BYLAWS - Page 1 Section 4. - Notice. Written or printed notice stating the place, hour and day of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) days nor more than sixty (60) days before the date of the meeting, either personally or by mail, by or at the direction of the President, the Secretary, or the officer or persons calling the meeting to each Shareholder of record entitled to vote at such meeting, or for such other notice period as may be required by the Act. Such notice and the effective date thereof shall be determined as provided in the Act. Section 5. - Quorum. A majority of votes entitled to be cast by the shares issued, outstanding and entitled to vote upon the subject matter at the time of the meeting, represented in person or by proxy, shall constitute a quorum for the transaction of business at any meeting of the Shareholders. Section 6. - Adjourned Meetings. If there is no quorum present at any annual or special meeting the Shareholders present may adjourn to such time and place as may be decided upon by the holders of the majority of the shares present, in person or by proxy, and notice of such adjournment shall be given in accordance with Section 4 of this Article, but if a quorum is present, adjournment may be taken from day to day or to such time and place as may be decided and announced by a majority of the Shareholders present, and subject to the requirements of the Act, no notice of such adjournment need be given. At any such adjourned meeting at which a quorum is present, any business may be transacted which could have been transacted at the meeting originally called. Section 7. - Voting. Each Shareholder entitled to vote on the subject matter shall be entitled to that number of votes provided in the Articles of Incorporation for each share of stock standing in the name of the Shareholder on the books of the Corporation at the time of the closing of the Transfer Books for said meeting, whether represented and present in person or by proxy. The affirmative vote of the holders of a majority of the shares of each class represented at the meeting and entitled to vote on the subject matter shall be the act of the Shareholders. The Shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough Shareholders to leave less than a quorum. BYLAWS - Page 2 The secretary shall prepare and make, at least ten days before every election of directors, a complete list of the Shareholders entitled to vote, arranged in alphabetical order and showing the address of each Shareholder and the number of shares of each Shareholder. Such list shall be open at the offices of the Corporation for said ten days, to the examination of any Shareholder, and shall be produced and kept at the time and place of election during the whole time thereof, and subject to the inspection of any Shareholder who may be present. Section 8. - Proxies. At all meetings of Shareholders, a Shareholder may vote in person or by proxy executed in writing by the Shareholder or by his duly authorized attorney in fact. No proxy shall be valid after eleven (11) months from the date of its execution, unless otherwise provided in the proxy. Section 9. - Record Date. The Board of Directors is authorized to fix in advance a date not exceeding seventy days nor less than ten days preceding the date of any meeting of the Shareholders, or the date for the payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect, or a date in connection with obtaining the consent Shareholders for any purposes, as a record date for the determination of the Shareholders entitled to notice of, and to vote at, any such meeting, and any adjournment thereof, or entitled to receive payment of any such dividend, or to any such allotment of rights, or to exercise the rights in respect of any such change, conversion or exchange of capital stock, or to give such consent, and, in such case, such Shareholders and only such Shareholders as shall be Shareholders of record on the date so fixed shall be entitled to such notice of, and to vote at, such meeting, and any adjournment thereof, or to receive payment of such dividend, or to receive such allotment of rights, or to exercise such rights, or to give such consent, as the case may be, notwithstanding any transfer of any stock on the books of the Corporation, after such record date fixed pursuant to this Section. Section 10. - Conduct of Meetings. The Chairman of the Board of Directors or, in his absence the Chief Executive Officer, President, or the vice-President designated by the Chairman of the Board, shall preside at all regular or special meetings of Shareholders. To the maximum extent permitted by law, such presiding person shall have the power to set procedural rules, including but not limited to rules respecting the time allotted to Shareholders to speak, governing all aspects of the conduct of such meetings. BYLAWS - Page 3 ARTICLE II DIRECTORS Section 1. - In General. The business and affairs of the Corporation shall be managed by a Board of Directors initially consisting of six (6) directors, and thereafter shall consist of such number as may be fixed from time to time by resolution of the Board of Directors. The members of the first Board of Directors shall hold office until the first annual meeting of the Shareholders and until their successors shall have been elected and qualified. Thereafter, the term of the Directors shall begin upon each Director's election by the Shareholders as provided in Article I, Section 7 above, and shall continue until his successor shall have been elected and qualified. Section 2. - Powers. The corporate powers, business, property and interests of the Corporation shall be exercised, conducted and controlled by the Board of Directors, which shall have all power necessary to conduct, manage and control its affairs, and to make such rules and regulations as it may deem necessary as provided by the Act; to appoint and remove all officers, agents and employees; to prescribe their duties and fix their compensation; to call special meetings of Shareholders whenever it is deemed necessary by the Board, to incur indebtedness and to give securities, notes and mortgages for same. It shall be the duty of the Board to cause a complete record to be kept of all the minutes, acts, and proceedings of its meetings. Section 3. - Vacancies. Vacancies in the Board of Directors may be temporarily filled by the affirmative vote of a majority of the remaining Directors even though less than a quorum of the Board of Directors. Such temporary Director or Directors shall hold office until the first meeting of the Shareholders held thereafter, at which time such vacancy or vacancies shall be permanently filled by election according to the procedure specified in Section 1 of this Article II. Section 4. - Annual Meeting. There shall be an annual meeting of the Board of Directors which shall be held immediately after the annual meeting of the Shareholders and at the same place. Section 5. - Special Meeting. Special meetings may be called from time to time by the President or any one of the Directors. Any business may be transacted at any special meeting. BYLAWS - Page 4 Section 6. - Quorum. A majority of the Directors shall constitute a quorum. The act of a majority of the Directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. If less than a quorum is present at a meeting, a majority of the Directors present may adjourn the meeting from time to time without further notice, other than announcement at the meeting, until a quorum shall be present. Interested Directors may be counted for quorum purposes. Section 7. - Notice and Place of Meetings. Notice of all Directors' meetings shall be given in accordance with the Act. No notice need be given of any annual meeting of the Board of Directors. One day prior notice shall be given for all special meetings of the Board, but the purpose of special meetings need not be stated in the notice. Meetings of the Board of Directors may be held at the principal office of the corporation, or at such other place as shall be stated in the notice of such meeting. Members of the Board of Directors, or any committee designated by the board of directors, shall, except as otherwise provided by law, the Articles of Incorporation or these By-laws, have the power to participate in a meeting of the board of Director, or any committee, by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation shall constitute presence in person at this meeting. Section 8. - Compensation. By resolution of the Board of Directors, each Director may either be reimbursed for his expenses, if any, for attending each meeting of the Board of Directors or may be paid a fixed fee for attending each meeting of the Board of Directors, or both. No such payment shall preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor. Section 9. - Removal or Resignation of Directors. Any Director may resign by delivering written notice of the resignation to the Board of Directors or an officer of the Corporation. All or any number of the Directors may be removed, with or without cause, at a meeting expressly called for that purpose by a vote of the holders of the majority of the shares then entitled to vote at an election of Directors. Section 10. - Presumption of Assent. BYLAWS - Page 5 A Director of the Corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken, unless his dissent shall be manifested in the manner required by the Act. Such right to dissent shall not apply to a Director who voted in favor of such action. Section 11. - Committees. The Board of Directors may, by resolution passed by a majority of the whole Board, designate two or more of their number to constitute an Executive Committee to hold office at the pleasure of the board, which committee shall, during the intervals between meetings of the Board of Directors, have and exercise all of the powers of the Board of Directors in the management of the business and affairs of the Corporation, subject only to such restrictions or limitations as the Board of Directors may from time to time specify, or as limited by the Act. Any member of the Executive Committee may be removed at any time, with or without cause, by a resolution of a majority of the whole Board of Directors. Any vacancy in the Executive Committee may be filled from among the directors by a resolution of a majority of the whole Board of Directors. Other committees of two or more Directors, may be appointed by the Board of Directors or the Executive Committee, which committees shall hold office for such time and have such powers and perform such duties as may from time to time be assigned to them by the Board of Directors or the Executive Committee. ARTICLE III OFFICERS AND AGENTS - GENERAL PROVISIONS Section 1. - Number, Election and Term. Officers of the Corporation shall be a President, Secretary, and Treasurer. Officers shall be elected by the Board of Directors at its first meeting, and at each regular annual meeting of the Board of Directors thereafter. Each officer shall hold office until the next succeeding annual meeting of the Directors and until his successor shall be elected and qualified. Any one person may hold more than one office if it is deemed advisable by the Board of Directors. Section 2. - Additional Officers and Agents. The Board of Directors may appoint and create such other officers and agents as may be deemed advisable and prescribe their duties. Section 3. - Resignation or Removal. BYLAWS - Page 6 Any officer or agent of the Corporation may resign from such position by delivering written notice of the resignation to the Board of Directors, but such resignation shall be without prejudice to the contract rights, if any, of the Corporation. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors whenever in its judgment the best interests of the Corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. Section 4. - Vacancies. Vacancies in any office caused by any reason shall be filled by the Board of Directors at any meeting by selecting a suitable and qualified person to act during the unexpired term. Section 5. - Salaries. The salaries of all the officers, agents and other employees of the Corporation shall be fixed by the Board of Directors and may be changed from time to time by the Board, and no officer shall be prevented from receiving such salary by reason of the fact that he is also a Director of the Corporation. All Directors, including interested Directors, are specifically authorized to participate in the voting of such compensation irrespective of their interest. ARTICLE IV DUTIES OF THE OFFICERS Section 1. - Chairman of the Board. The Chairman of the Board, if any, shall be a member of the Board of Directors and, subject to Sections 2 and 3 of this Article IV, shall preside at all meetings of the Shareholders and Directors; perform all duties required by the Bylaws of the Corporation, and as may be assigned from time to time by the Board of Directors; and shall make such reports to the Board of Directors and Shareholders as may be required. Section 2. - Chief Executive Officer. The Chief Executive Officer, if any, shall have general charge and control of the affairs of the Corporation subject to the direction of the Board of Directors; sign as President all Certificates of Stock of the Corporation; perform all duties required by the Bylaws of the Corporation, and as may be assigned from time to time by the Board of Directors; and shall make such reports to the Board of Directors and Shareholders as may be required. In BYLAWS - Page 7 addition, if no Chairman of the Board is elected by the Board or if the Chairman is unavailable, the Chief Executive Officer shall perform all the duties required of such officer by these Bylaws. Section 3. - President. The President shall, if no Chief Executive Officer shall have been appointed or if the Chief Executive Officer is unavailable, perform all of the duties of the Chief Executive Officer. If a Chief Executive Officer shall have been appointed, the President shall perform such duties as shall be assigned by the Board of Directors, and in the case of absence, death or disability of the Chief Executive Officer, shall perform and be vested with all of the duties and powers of the Chief Executive Officer, until the Chief Executive Officer shall have resumed such duties or the Chief Executive Officer's successor shall have been appointed. Section 4. - Vice President. The Vice President, or any of them, shall perform such duties as shall be assigned by the Board of Directors, and in the case of absence, disability or death of the President, the Vice President shall perform and be vested with all the duties and powers of the President, until the President shall have resumed such duties or the President's successor is elected. In the event there is more than one Vice President, the Board of Directors may designate one or more of the Vice Presidents as Executive Vice Presidents, who, in the event of the absence, disability or death of the President shall perform such duties as shall be assigned by the Board of Directors. Section 5. - Secretary. The Secretary shall keep a record of the proceedings at the meetings of the Shareholders and the Board of Directors and shall give notice as required in these Bylaws of all such meetings; have custody of all the books, records and papers of the Corporation, except such as shall be in charge of the Treasurer or some other person authorized to have custody or possession thereof by the Board of Directors; sign all Certificates of Stock of the Corporation; from time to time make such reports to the officers, Board of Directors and Shareholders as may be required and shall perform such other duties as the Board of Directors may from time to time delegate. In addition, if no Treasurer is elected by the Board, the Secretary shall perform all the duties required of the office of Treasurer by the Act and these Bylaws. Section 6. - Treasurer. The Treasurer shall keep accounts of all monies of the Corporation received or disbursed; from time to time make such reports to the officers, Board of Directors and BYLAWS - Page 8 Shareholders as may be required, perform such other duties as the Board of Directors may from time to time delegate. Section 7. - Assistant Secretary. The Assistant Secretary, if any, shall assist the Secretary in all duties of the office of Secretary. In the case of absence, disability or death of the Secretary, the Assistant Secretary shall perform and be vested with all the duties and powers of the Secretary, until the Secretary shall have resumed such duties or the Secretary's successor is elected. ARTICLE V STOCK Section 1. - Certificates. The shares of stock of the Corporation shall be evidenced by an entry in stock transfer records of the Corporation, and may be represented by stock certificates in a form adopted by the Board of Directors and every person who shall become a Shareholder shall be entitled, upon request, to a certificate of stock. All certificates shall be consecutively numbered by class. Certificates, if any, shall be signed by the Chairman of the Board of Directors, the President or one of the Vice Presidents, and the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, provided, however, that where such certificates are signed by a transfer agent or an assistant transfer agent or by a transfer clerk acting on behalf of the corporation and a registrar, the signature of any such officer may be facsimile. Section 2. - Transfer of Certificates. Any certificates of stock transferred by endorsement shall be surrendered, canceled and new certificates issued to the purchaser or assignee. Section 3. - Transfer of Shares. Shares of stock shall be transferred only on the books of the Corporation by the holder thereof, in person or by his attorney, and no transfers of certificates of stock shall be binding upon the Corporation until this Section and, with respect to certificated shares, Section 2 of this Article are met to the satisfaction of the Secretary of the Corporation. The Board of Directors may make other and further rules and regulations concerning the transfer and registration of shares of the Corporation, and may appoint a transfer agent BYLAWS - Page 9 or registrar or both and may require all certificates of stock to bear the signature of either or both. The stock ledgers of the Corporation, containing the names and addresses of the shareholders and the number of shares held by them respectively, shall be kept at the principal offices of the Corporation or at the offices of the transfer agent of the Corporation. Section 4. - Lost Certificates. In the case of loss, mutilation or destruction of a certificate of stock, a duplicate certificate may be issued upon such terms as the Board of Directors shall prescribe. Section 5. - Dividends. The Board of Directors may from time to time declare, and the Corporation may then pay, dividends on its outstanding shares in the manner and upon the terms and conditions provided by the Act and in its Articles of Incorporation. Section 6. - Working Capital. Before the payment of any dividends or the making of any distributions of the net profits, the Board of Directors may set aside out of the net profits of the Corporation such sum or sums as in their discretion they think proper, as a working capital or as a reserve fund to meet contingencies. The Board of Directors may increase, diminish or vary the capital of such reserve fund in their discretion. ARTICLE VI SEAL There shall be no corporate seal. ARTICLE VII WAIVER OF NOTICE Whenever any notice is required to be given to any Shareholder or Director of the Corporation, a waiver signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be equivalent to the giving of such notice. BYLAWS - Page 10 ARTICLE VIII ACTION BY SHAREHOLDERS OR DIRECTORS WITHOUT A MEETING Any action required to be taken at a meeting of the Shareholders or Directors of the Corporation, or any other action which may be taken at a meeting of the Shareholders or Directors, may be taken without a meeting if a consent in writing setting forth the actions so taken shall be signed by all the Shareholders or Directors entitled to vote with respect to the subject matter thereof. Such consent shall have the same effect and force as a unanimous vote of said Shareholders or Directors. ARTICLE IX BORROWING Notwithstanding any other provision in these Bylaws, no officer of the Corporation shall have authority to obligate the Corporation to borrow any funds or to hypothecate any assets thereof, for corporate purposes or otherwise, except as expressly stated in a resolution approved by a majority of Directors. Such resolution may be general or specific. ARTICLE X MISCELLANEOUS Section 1. - Fiscal Year. The fiscal year of the Corporation shall be fixed, and may be changed, by resolution of the Board of Directors. Section 2. - Notices. Except as otherwise expressly provided, any notice required by these By- laws to be given shall be sufficient if given as provided in RCW 23B.01.410. Section 3. - Waiver of Notice. Any Shareholder or director may at any time, by writing or by fax, waive any notice required to be given under these By-laws, and if any Shareholder or director shall be present at any meeting his presence shall constitute a waiver of such notice. BYLAWS - Page 11 Section 4. - Voting Stock of Other Corporations. Except as otherwise ordered by the Board of Directors, the Chairman of the Board, Chief Executive Officer, President or Treasurer shall have full power and authority on behalf of the Corporation to attend and to act and to vote at any meeting of the shareholders of any corporation of which the Corporation is a shareholder and to execute a proxy to any other person to represent the Corporation at any such meeting, and at any such meeting such person shall possess and may exercise any and all rights and powers incident to ownership of such stock and which, as owner thereof, the Corporation might have possessed and exercised if present. ARTICLE XI AMENDMENTS Any and all of these Bylaws may be altered, amended, repealed or suspended by the affirmative vote of a majority of the Directors at any meeting of the Directors. New Bylaws may be adopted in like manner. IDENTIFICATION I hereby certify that I was the Secretary of the first Directors' meeting of NEXTLINK Communications, Inc. and that the foregoing Bylaws in ten typewritten pages numbered consecutively from 1 to 12, were and are the Bylaws adopted by the Directors of the Corporation at that meeting. /s/ R. BRUCE EASTER, JR. -------------------------------------------- R. Bruce Easter, Jr., Secretary BYLAWS - Page 12 EX-4.1 5 FORM OF EXCHANGE NOTE INDENTURE Exhibit 4.1 ================================================================================ NEXTLINK COMMUNICATIONS, INC. TO UNITED STATES TRUST COMPANY OF NEW YORK Trustee ------------------------ Indenture Dated as of ________, _____ ------------------------ $___________ 14% SENIOR SUBORDINATED NOTES DUE 2009 ================================================================================ TABLE OF CONTENTS ARTICLE ONE Page Definitions and Other Provisions of General Application SECTION 101. Definitions...................................... 1 Act ................................................... 2 Acquired Debt............................................ 2 Affiliate................................................ 2 Agent Member............................................. 2 Asset Disposition........................................ 2 Bank Credit Agreement.................................... 2 Board of Directors....................................... 3 Board Resolution......................................... 3 Business Day............................................. 3 Capital Lease Obligation................................. 3 Capital Stock............................................ 3 Change of Control........................................ 3 Commission............................................... 3 Common Equity............................................ 3 Company.................................................. 3 Company Request.......................................... 3 Consolidated Capital Ratio............................... 4 Consolidated Cash Flow Available for Fixed Charges....... 4 Consolidated Income Tax Expense.......................... 4 Consolidated Interest Expense............................ 4 Consolidated Net Income.................................. 4 Consolidated Net Worth................................... 5 Consolidated Tangible Assets............................. 5 Corporate Trust Office................................... 5 corporation.............................................. 5 Debt ................................................... 5 Default.................................................. 6 Defaulted Interest....................................... 6 Depository............................................... 6 Designated Senior Debt................................... 6 Disqualified Stock....................................... 6 DTC ................................................... 7 Eagle River.............................................. 7 Eligible Institution..................................... 7 Event of Default......................................... 7 Exchange Act............................................. 7 -i- Page Exchange and Registration Rights Agreements.............. 7 Exchange Offer........................................... 7 Exchange Security........................................ 7 Global Security.......................................... 7 Government Securities.................................... 7 Guarantee................................................ 7 Holder................................................... 8 Incur ................................................... 8 Indenture................................................ 8 Initial Purchasers....................................... 8 Interest Payment Date.................................... 8 Interest Rate or Currency Protection Agreement........... 8 Investment............................................... 8 Issue Date............................................... 9 Joint Venture............................................ 9 Junior Shares............................................ 9 Lien ................................................... 9 Marketable Securities.................................... 9 Maturity................................................. 9 Net Available Proceeds................................... 9 Offer Expiration Date.................................... 10 Offer to Purchase........................................ 10 Officers' Certificate.................................... 12 Opinion of Counsel....................................... 12 Original Securities...................................... 12 Outstanding.............................................. 12 Paying Agent............................................. 13 Permitted Interest Rate or Currency Protection Agreement. 13 Permitted Investment..................................... 13 Person................................................... 14 Predecessor Security..................................... 14 Preferred Dividends...................................... 14 Preferred Issue Date..................................... 14 Preferred Shares......................................... 14 Preferred Stock.......................................... 14 Public Equity Offering................................... 14 Purchase Date............................................ 14 Purchase Money Debt...................................... 14 Qualifying Event......................................... 15 Qualified Junior Shares.................................. 15 readily marketable cash equivalents...................... 15 Receivables.............................................. 15 Receivables Sale......................................... 15 Redemption Date.......................................... 15 -ii- Page Redemption Price......................................... 15 Registration Default..................................... 15 Regular Record Date...................................... 15 Related Person........................................... 15 Responsible Officer...................................... 16 Restricted Subsidiary.................................... 16 Rule 144................................................. 16 Rule 144A................................................ 16 Secondary Securities..................................... 16 Securities............................................... 16 Securities Act........................................... 16 Security Register........................................ 16 Security Registrar....................................... 16 Senior Debt.............................................. 16 Senior Notes............................................. 17 Significant Subsidiary................................... 17 Special Interest......................................... 17 Special Record Date...................................... 17 Stated Maturity.......................................... 17 Strategic Equity Investment.............................. 17 Strategic Investor....................................... 17 Subordinated Debt........................................ 17 Subsidiary............................................... 18 Successor Security....................................... 18 Telecommunications Assets................................ 18 Telecommunications Business.............................. 18 Trustee.................................................. 19 Trust Indenture Act...................................... 19 Unrestricted Subsidiary.................................. 19 Vendor Financing Facility................................ 19 Vice President........................................... 19 Voting Stock............................................. 19 Wholly-Owned Restricted Subsidiary....................... 20 SECTION 102. Compliance Certificates and Opinions............. 20 SECTION 103. Form of Documents Delivered to Trustee........... 20 SECTION 104. Acts of Holders; Record Dates.................... 21 SECTION 105. Notices, Etc., to Trustee and the Company........ 23 SECTION 106. Notice to Holders; Waiver........................ 23 -iii- Page SECTION 107. The Application of Trust Indenture Act........... 24 SECTION 108. Effect of Headings and Table of Contents......... 24 SECTION 109. Successors and Assigns........................... 24 SECTION 110. Separability Clause.............................. 24 SECTION 111. Benefits of Indenture............................ 24 SECTION 112. Governing Law.................................... 24 SECTION 113. Legal Holidays................................... 25 ARTICLE TWO Security Forms SECTION 201. Forms Generally.................................. 25 SECTION 202. Form of Face of Security......................... 25 SECTION 203. Form of Reverse of Security...................... 29 SECTION 204. Form of Trustee's Certificate of Authentication.. 32 ARTICLE THREE The Securities SECTION 301. Title and Terms.................................. 33 SECTION 302. Denominations.................................... 35 SECTION 303. Execution, Authentication, Delivery and Dating... 35 SECTION 304. Temporary Securities............................. 36 SECTION 305. Global Securities; Registration, Registration of Transfer and Exchange......................... 37 SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities. 40 -iv- Page SECTION 307. Payment of Interest; Interest Rights Preserved... 40 SECTION 308. Persons Deemed Owners............................ 42 SECTION 309. Cancellation..................................... 42 SECTION 310. Computation of Interest.......................... 42 SECTION 311. CUSIP Numbers.................................... 42 -v- Page ARTICLE FOUR Satisfaction and Discharge SECTION 401. Satisfaction and Discharge of Indenture.......... 43 SECTION 402. Application of Trust Money....................... 44 ARTICLE FIVE Remedies SECTION 501. Events of Default................................ 44 SECTION 502. Acceleration of Maturity; Rescission and Annulment.................................... 46 SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee....................... 47 SECTION 504. Trustee May File Proofs of Claim................. 47 SECTION 505. Trustee May Enforce Claims Without Possession of Securities................................... 48 SECTION 506. Application of Money Collected................... 48 SECTION 507. Limitation on Suits.............................. 49 SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and Interest.............. 49 SECTION 509. Restoration of Rights and Remedies............... 49 SECTION 510. Rights and Remedies Cumulative................... 50 SECTION 511. Delay or Omission Not Waiver..................... 50 SECTION 512. Control by Holders............................... 50 SECTION 513. Waiver of Past Defaults.......................... 51 SECTION 514. Undertaking for Costs............................ 51 -vi- Page SECTION 515. Waiver of Stay or Extension Laws................. 51 ARTICLE SIX The Trustee SECTION 601. Certain Duties and Responsibilities.............. 52 SECTION 602. Notice of Defaults............................... 52 SECTION 603. Certain Rights of Trustee........................ 52 SECTION 604. Not Responsible for Recitals or Issuance of Securities................................... 53 SECTION 605. May Hold Securities.............................. 53 SECTION 606. Money Held in Trust.............................. 53 SECTION 607. Compensation and Reimbursement................... 54 SECTION 608. Disqualification; Conflicting Interests.......... 54 SECTION 609. Corporate Trustee Required; Eligibility.......... 55 SECTION 610. Resignation and Removal; Appointment of Successor.................................... 55 SECTION 611. Acceptance of Appointment by Successor........... 56 SECTION 612. Merger, Conversion, Consolidation or Succession to Business.................................. 56 SECTION 613. Preferential Collection of Claims Against Company...................................... 57 SECTION 614. Appointment of Authenticating Agent.............. 57 ARTICLE SEVEN Holders' Lists and Reports by Trustee and the Company -vii- Page SECTION 701. Company to Furnish Trustee Names and Addresses of Holders................................... 59 SECTION 702. Preservation of Information; Communications to Holders...................................... 59 SECTION 703. Reports by Trustee............................... 59 SECTION 704. Reports by Company............................... 60 SECTION 705. Officers' Certificate with Respect to Change in Interest Rates............................... 60 ARTICLE EIGHT Merger, Consolidation, Etc SECTION 801. Mergers, Consolidations and Certain Sales of Assets....................................... 60 SECTION 802. Successor Substituted............................ 61 ARTICLE NINE Supplemental Indentures SECTION 901. Supplemental Indentures Without Consent of Holders...................................... 62 SECTION 902. Supplemental Indentures with Consent of Holders...................................... 63 SECTION 903. Execution of Supplemental Indentures............. 64 SECTION 904. Effect of Supplemental Indentures................ 64 SECTION 905. Conformity with Trust Indenture Act.............. 65 SECTION 906. Reference in Securities to Supplemental Indentures................................... 65 ARTICLE TEN -viii- Page Covenants SECTION 1001. Payment of Principal, Premium and Interest. ....................................65 SECTION 1002. Maintenance of Office or Agency................. 65 SECTION 1003. Money for Security Payments to be Held in Trust. 66 SECTION 1004. Existence....................................... 67 SECTION 1005. Maintenance of Properties and Insurance......... 67 SECTION 1006. Payment of Taxes and Other Claims............... 68 SECTION 1007. Limitation on Consolidated Debt................. 68 SECTION 1008. Limitation on Senior Subordinated Debt ......... 70 SECTION 1009. Limitation on Restricted Payments............... 70 SECTION 1010. Limitation on Dividend and Other Payment Restrictions Affect Restricted Subsidiaries . 72 SECTION 1011. Limitation on Liens............................. 73 SECTION 1012. Limitation on Issuance of Guarantees of Subordinated Debt............................ 73 SECTION 1013. Limitation on Asset Dispositions................ 73 SECTION 1014. Limitation on Issuances and Sales of Capital Stock of Restricted Subsidiaries............. 75 SECTION 1015. Transactions with Affiliates and Related Persons...................................... 75 SECTION 1016. Change of Control............................... 76 SECTION 1017. Provision of Financial Information.............. 77 SECTION 1018. Statement by Officers as to Default............. 77 SECTION 1019. Waiver of Certain Covenants..................... 77 -ix- Page ARTICLE ELEVEN Redemption of Securities SECTION 1101. Right of Redemption............................. 78 SECTION 1102. Applicability of Article........................ 78 SECTION 1103. Election to Redeem; Notice to Trustee............78 SECTION 1104. Securities to Be Redeemed Pro Rata.............. 78 SECTION 1105. Notice of Redemption............................ 79 SECTION 1106. Deposit of Redemption Price..................... 80 SECTION 1107. Securities Payable on Redemption Date........... 80 SECTION 1108. Securities Redeemed in Part..................... 80 ARTICLE TWELVE Defeasance and Covenant Defeasance SECTION 1201. Company's Option to Effect Defeasance or Covenant Defeasance.......................... 81 SECTION 1202. Defeasance and Discharge........................ 81 SECTION 1203. Covenant Defeasance............................. 81 SECTION 1204. Conditions to Defeasance or Covenant Defeasance. 82 SECTION 1205. Deposited Money and U.S. Government Obligations to Be Held in Trust; Other Miscellaneous Provisions. ............. 83 SECTION 1206. Reinstatement................................... 84 SECTION 1207. Repayment to Company............................ 84 ARTICLE THIRTEEN Subordination of Securities -x- Page SECTION 1301. Securities Subordinate to Senior Debt. ......... 85 SECTION 1302. Payment Over of Proceeds Upon Dissolution, Etc.. 85 SECTION 1303. No Payment When Senior Debt in Default.......... 86 SECTION 1304. Payment Permitted If No Default................. 87 SECTION 1305. Subrogation to Rights of Holders of Senior Debt. 87 SECTION 1306. Provisions Solely to Define Relative Rights..... 87 SECTION 1307. Trustee to Effectuate Subordination............. 88 SECTION 1308. No Waiver of Subordination Provisions........... 88 SECTION 1309. Notice to Trustee............................... 89 SECTION 1310. Reliance on Judicial Order or Certificate of Liquidating Agent............................ 89 SECTION 1311. Trustee Not Fiduciary for Holders of Senior Debt 90 SECTION 1312. Rights of Trustee as Holder of Senior Debt; Preservation of Trustee's Rights. ........... 90 SECTION 1313. Article Applicable to Paying Agents............. 90 SECTION 1314. Defeasance of this Article Thirteen............. 90 -xi- NEXTLINK COMMUNICATIONS, INC. Certain Sections of this Indenture relating to Sections 310 through 318 of the Trust Indenture Act of 1939: Trust Indenture Indenture Act Section Section - --------------- --------- ss. 310(a)(1)..............................................................609 (a)(2)..............................................................609 (a)(3)...................................................Not Applicable (a)(4)...................................................Not Applicable (b).................................................................608 ................................................................610 ss. 311(a).................................................................613 (b).................................................................613 ss. 312(a).................................................................701 ..............................................................702(a) (b)..............................................................702(b) (c)..............................................................702(c) ss. 313(a)..............................................................703(a) (a)(4)...........................................................703(a) (b)..............................................................703(a) (c)..............................................................703(a) (d)..............................................................703(b) ss. 314(a).................................................................704 ...............................................................1018 (b)......................................................Not Applicable (c)(1)..............................................................102 (c)(2)..............................................................102 (c)(3)...................................................Not Applicable (d)......................................................Not Applicable (e).................................................................102 ss. 315(a).................................................................601 (b).................................................................602 (c).................................................................601 (d).................................................................601 (e).................................................................514 ss. 316(a)(1)(A)...........................................................502 ..........................................................512 - ---------- Note: This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Indenture. -i- Trust Indenture Indenture Act Section Section - --------------- --------- (a)(1)(B)...........................................................513 (a)(2)...................................................Not Applicable (b).................................................................508 (c).................................................................104 ss. 317(a)(1)..............................................................503 (a)(2)..............................................................504 (b)................................................................1003 ss. 318(a).................................................................107 - ---------- Note: This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Indenture. -ii- INDENTURE, dated as of ________ __, ____ between NEXTLINK Communications, Inc., a corporation organized under the laws of the State of Washington (the "Company"), having its principal office at 155 108th Avenue N.E., 8th Floor, Bellevue, Washington 98004, and United States Trust Company of New York, duly organized and existing under the laws of the State of New York, as Trustee (herein called the "Trustee"). RECITALS OF THE COMPANY The Company has duly authorized the creation of an issue of $___________ initial aggregate principal amount of its 14% Senior Subordinated Notes due February 1, 2009 (the "Securities") of substantially the tenor and amount hereinafter set forth, and to provide therefor the Company has authorized the execution and delivery of this Indenture. The Securities may consist of either or both of Original Securities or Exchange Securities, each as defined herein. The Original Securities and the Exchange Securities shall rank pari passu. All things necessary to make the Securities, when executed by the Company and authenticated and delivered hereunder and duly issued by the Company, the valid obligations of the Company, and to make this Indenture a valid agreement of the Company, in accordance with their and its terms, have been done. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities, as follows: ARTICLE ONE Definitions and Other Provisions of General Application SECTION 101. Definitions. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (1) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular; (2) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; (3) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles (whether or not such is indicated herein) and, except as otherwise herein expressly provided, the term "generally accepted accounting principles" with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted as consistently applied by the Company at the date of such computation; and (4) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. Certain terms, used principally in Article Six, are defined in that Article. "Act", when used with respect to any Holder, has the meaning specified in Section 104. "Acquired Debt" means, with respect to any specified Person, (i) Debt of any other Person existing at the time such Person merges with or into or consolidates with or becomes a Restricted Subsidiary of such specified Person and (ii) Debt secured by a Lien encumbering any asset acquired by such specified Person, which Debt was not Incurred in anticipation of, and was outstanding prior to, such merger, consolidation or acquisition. "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" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agent Member" means any member of, or participant in, the Depository. "Asset Disposition" by any Person means any transfer, conveyance, sale, lease or other disposition by such Person or any of its Restricted Subsidiaries (including a consolidation or merger or other sale of any such Restricted Subsidiary with, into or to another Person in a transaction in which such Restricted Subsidiary ceases to be a Restricted Subsidiary of the specified Person, but excluding a disposition by a Restricted Subsidiary of such Person to such Person or a Wholly-Owned Restricted Subsidiary of such Person or by such Person to a Wholly-Owned Restricted Subsidiary of such Person) of (i) shares of Capital Stock or other ownership interests of a Restricted Subsidiary of such Person (other than pursuant to a transaction in compliance with Section 801), (ii) substantially all of the assets of such Person or any of its Restricted Subsidiaries representing a division or line of business (other than as part of a Permitted Investment) or (iii) other assets or rights of such Person or any of its Restricted Subsidiaries other than (A) in the ordinary course of business or (B) that constitutes a Restricted Payment which is permitted by the provisions of Section 1009; provided that a transaction described in clause (i), (ii) and (iii) shall constitute an Asset Disposition only if the aggregate consideration for such transfer, conveyance, sale, lease or other disposition is equal to $5 million or more in any 12-month period. "Bank Credit Agreement" means any one or more credit agreements (which may include or consist of revolving credits) between the Company or any Restricted Subsidiary of the -2- Company and one or more banks or other financial institutions providing financing for the business of the Company and its Restricted Subsidiaries. "Board of Directors" means the board of directors of the Company. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in The Borough of Manhattan, The City of New York, New York are authorized or obligated by law or executive order to close. "Capital Lease Obligation" of any Person means the obligation to pay rent or other payment amounts under a lease of (or other Debt arrangements conveying the right to use) real or personal property of such Person which is required to be classified and accounted for as a capital lease or a liability on the face of a balance sheet of such Person in accordance with generally accepted accounting principles (a "Capital Lease"). The stated maturity of such obligation shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. The principal amount of such obligation shall be the capitalized amount thereof that would appear on the face of a balance sheet of such Person in accordance with generally accepted accounting principles. "Capital Stock" of any Person means any and all shares, interests, participations or other equivalents (however designated) of corporate stock or other equity participations, including partnership interests, whether general or limited, of such Person. "Certificate of Designations" means the Certificate of Designations of the Powers, Preference and Relative Participating, Optional and Other Special Rights of the Preferred Shares and Qualifications, Limitations and Restrictions thereof. "Change of Control" has the meaning specified in Section 1016. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Common Equity" of any Person means Capital Stock of such Person that is not Disqualified Stock, and a "sale of Common Equity" includes any sale effected by private sale or public offering. "Company" means the Person named as the "Company" in the first paragraph of this instrument until a successor Person shall have become such pursuant to the applicable provisions of this Indenture and thereafter "Company" shall mean such successor Person. -3- "Company Request" or "Company Order" means a written request or order signed in the name of the Company by (i) the Chief Executive Officer, the President, or a Vice President of the Company, and (ii) the Treasurer, Assistant Treasurer or Secretary of the Company, and delivered to the Trustee. "Consolidated Capital Ratio" of any Person as of any date means the ratio of (i) the aggregate consolidated principal amount of Debt of such Person then outstanding to (ii) the aggregate consolidated Capital Stock (other than Disqualified Stock) and paid-in capital (other than in respect of Disqualified Stock) of such Person as of such date. "Consolidated Cash Flow Available for Fixed Charges" for any period means the Consolidated Net Income of the Company and its Restricted Subsidiaries for such period increased by the sum of (i) Consolidated Interest Expense of the Company and its Restricted Subsidiaries for such period, plus (ii) Consolidated Income Tax Expense of the Company and its Restricted Subsidiaries for such period, plus (iii) the consolidated depreciation and amortization expense included in the income statement of the Company and its Restricted Subsidiaries for such period, plus (iv) any non-cash expense related to the issuance to employees of the Company or any Restricted Subsidiary of the Company of options to purchase Capital Stock of the Company or such Restricted Subsidiary, plus (v) any charge related to any premium or penalty paid in connection with redeeming or retiring any Debt prior to its stated maturity; provided, however, that there shall be excluded therefrom the Consolidated Cash Flow Available for Fixed Charges (if positive) of any Restricted Subsidiary of the Company (calculated separately for such Restricted Subsidiary in the same manner as provided above for the Company) that is subject to a restriction which prevents the payment of dividends or the making of distributions to the Company or another Restricted Subsidiary of the Company to the extent of such restriction. "Consolidated Income Tax Expense" for any period means the consolidated provision for income taxes of the Company and its Restricted Subsidiaries for such period calculated on a consolidated basis in accordance with generally accepted accounting principles. "Consolidated Interest Expense" means for any period the consolidated interest expense included in a consolidated income statement (excluding interest income) of the Company and its Restricted Subsidiaries for such period calculated on a consolidated basis in accordance with generally accepted accounting principles, including without limitation or duplication (or, to the extent not so included, with the addition of), (i) the amortization of Debt discounts; (ii) any payments or fees with respect to letters of credit, bankers' acceptances or similar facilities; (iii) fees with respect to interest rate swap or similar agreements or foreign currency hedge, exchange or similar agreements; (iv) Preferred Stock dividends of the Company and its Restricted Subsidiaries (other than dividends paid in shares of Preferred Stock that is not Disqualified Stock) declared and paid or payable; (v) accrued Disqualified Stock dividends of the Company and its Restricted Subsidiaries, whether or not declared or paid; (vi) interest on Debt guaranteed by the Company and its Restricted Subsidiaries; and (vii) the portion of any Capital Lease Obligation paid during such period that is allocable to interest expense. "Consolidated Net Income" for any period means the consolidated net income (or loss) of the Company and its Restricted Subsidiaries for such period determined on a consolidated basis in accordance with generally accepted accounting principles; provided that there shall be -4- excluded therefrom (a) the net income (or loss) of any Person acquired by the Company or a Restricted Subsidiary of the Company in a pooling-of-interests transaction for any period prior to the date of such transaction, (b) the net income (or loss) of any Person that is not a Restricted Subsidiary of the Company except to the extent of the amount of dividends or other distributions actually paid to the Company or a Restricted Subsidiary of the Company by such Person during such period, (c) gains or losses on Asset Dispositions by the Company or its Restricted Subsidiaries, (d) all extraordinary gains and extraordinary losses, (e) the cumulative effect of changes in accounting principles, (f) non-cash gains or losses resulting from fluctuations in currency exchange rates, (g) any non-cash gain or loss realized on the termination of any employee pension benefit plan and (h) the tax effect of any of the items described in clauses (a) through (g) above; provided, further, that for purposes of any determination pursuant to the provisions of Section 1009 there shall further be excluded therefrom the net income (but not net loss) of any Restricted Subsidiary of the Company that is subject to a restriction which prevents the payment of dividends or the making of distributions to the Company or another Restricted Subsidiary of the Company to the extent of such restriction. "Consolidated Net Worth" of any Person means the consolidated stockholders' equity of such Person, determined on a consolidated basis in accordance with generally accepted accounting principles, less amounts attributable to Disqualified Stock of such Person; provided that, with respect to the Company, adjustments following the Issue Date to the accounting books and records of the Company in accordance with Accounting Principles Board Opinions Nos. 16 and 17 (or successor opinions thereto) or otherwise resulting from the acquisition of control of the Company by another Person shall not be given effect to. "Consolidated Tangible Assets" of any Person means the total amount of assets (less applicable reserves and other properly deductible items) which under generally accepted accounting principles would be included on a consolidated balance sheet of such Person and its Restricted Subsidiaries after deducting therefrom all goodwill, trade names, trademarks, patents, unamortized debt discount and expense and other like intangibles, which in each case under generally accepted accounting principles would be included on such consolidated balance sheet; provided that, with respect to the Company, adjustments following the Issue Date to the accounting books and records of the Company in accordance with Accounting Principles Board Opinions Nos. 16 and 17 (or successor opinions thereto) or otherwise resulting from the acquisition of control of the Company by another Person shall not be given effect to. "Corporate Trust Office" means the principal office of the Trustee in the Borough of Manhattan, The City of New York, New York, at which at any particular time its corporate trust business shall be administered, which at the date hereof is located at 114 West 47th Street, New York, New York 10036. "corporation" means a corporation, association, company, limited liability company, joint-stock company or business trust. "Covenant Amendment" means either (i) the defeasance, extinguishment or amendment of certain covenants of the Senior Indenture that would cause the Preferred Shares to be deemed "Disqualified Stock" under the Senior Indenture (and as defined in the Senior Indenture) if the provisions of paragraph (f)(G)(x) and (y) of the Certificate of Designations were a part of the -5- Certificate of Designations, and include, but are not limited to, the definition of Disqualified Stock in the Senior Indenture or (ii) defeasance or extinguishment of the Senior Indenture of its entirety. "Debt" means (without duplication), with respect to any Person, whether recourse is to all or a portion of the assets of such Person and whether or not contingent, (i) every obligation of such Person for money borrowed, (ii) every obligation of such Person evidenced by bonds, debentures, notes or other similar instruments, including any such obligations Incurred in connection with the acquisition of property, assets or businesses, (iii) every reimbursement obligation of such Person with respect to letters of credit, bankers' acceptances or similar facilities issued for the account of such Person, (iv) every obligation of such Person issued or assumed as the deferred purchase price of property or services (including securities repurchase agreements but excluding trade accounts payable or accrued liabilities arising in the ordinary course of business which are not overdue or which are being contested in good faith), (v) every Capital Lease Obligation of such Person, (vi) all Receivables Sales of such Person, together with any obligation of such Person to pay any discount, interest, fees, indemnities, penalties, recourse, expenses or other amounts in connection therewith, (vii) all obligations to redeem Disqualified Stock issued by such Person, (viii) every obligation under Interest Rate or Currency Protection Agreements of such Person and (ix) every obligation of the type referred to in clauses (i) through (viii) of another Person and all dividends of another Person the payment of which, in either case, such Person has Guaranteed. The "amount" or "principal amount" of Debt at any time of determination as used herein represented by (a) any Debt issued at a price that is less than the principal amount at maturity thereof, shall be the amount of the liability in respect thereof determined in accordance with generally accepted accounting principles, (b) any Receivables Sale, shall be the amount of the unrecovered capital or principal investment of the purchaser (other than the Company or a Wholly-Owned Restricted Subsidiary of the Company) thereof, excluding amounts representative of yield or interest earned on such investment, (c) any Disqualified Stock, shall be the maximum fixed redemption or repurchase price in respect thereof, (d) any Capital Lease Obligation, shall be determined in accordance with the definition thereof, or (e) any Permitted Interest Rate or Currency Protection Agreement, shall be zero. In no event shall Debt include any liability for taxes. "Default" means an event that with the passing of time or the giving of notice or both shall constitute an Event of Default. "Defaulted Interest" has the meaning specified in Section 307. "Depository" means, with respect to the Securities issuable or issued in whole or in part in the form of one or more Global Securities, DTC for so long as it shall be a clearing agency registered under the Exchange Act, or such successor as the Company shall designate from time to time in an Officers' Certificate delivered to the Trustee. "Designated Senior Debt" means (i) Debt under the Senior Notes and (ii) any Senior Debt of the Company (a) which at the time of determination exceeds $15 million in aggregate principal amount outstanding or available under a committed facility, (b) which is designated in the instrument evidencing such Senior Debt as "Designated Senior Debt" by the Company and (c) as to which the Trustee has received an Officers' Certificate specifying such Senior Debt as "Designated Senior Debt." -6- "Disqualified Stock" of any Person means any Capital Stock of such Person which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the option of the holder thereof, in whole or in part, on or prior to the final Stated Maturity of the Securities; provided, however, that any Preferred Stock which would not constitute Disqualified Stock but for provisions thereof giving holders thereof the right to require the Company to repurchase or redeem such Preferred Stock upon the occurrence of a Change of Control occurring prior to the final Stated Maturity of the Securities shall not constitute Disqualified Stock if the change of control provisions applicable to such Preferred Stock are no more favorable to the holders of such Preferred Stock than the provisions applicable to the Securities contained in Section 1016 and such Preferred Stock specifically provides that the Company will not repurchase or redeem any such stock pursuant to such provisions prior to the Company's repurchase of such Securities as are required to be repurchased pursuant to Section 1016. "DTC" means The Depository Trust Company. "Eagle River" means Eagle River Investments, L.L.C., a limited liability company formed under the laws of the State of Washington. "Eligible Institution" means a commercial banking institution that has combined capital and surplus of not less than $500 million or its equivalent in foreign currency, whose debt is rated "A-3" or higher, "A-" or higher or "A-" or higher according to Moody's Investors Service, Inc., Standard & Poor's Ratings Group or Duff & Phelps Credit Rating Co. (or such similar equivalent rating by at least one "nationally recognized statistical rating organization" (as defined in Rule 436 under the Securities Act)) respectively, at the time as of which any investment or rollover therein is made. "Event of Default" has the meaning specified in Section 501. "Exchange Act" means the Securities Exchange Act of 1934, as amended (or any successor act) and the rules and regulations thereunder. "Exchange and Registration Rights Agreement" means the Preferred Exchange and Registration Rights Agreement, dated as of January 31, 1997, between the Company and the Initial Purchasers, as it may be amended from time to time, attached hereto as Annex A. "Exchange Offer" has the meaning specified in the Exchange and Registration Rights Agreement. "Exchange Security" means any Security issued in exchange for an Original Security or Original Securities pursuant to the Exchange Offer or otherwise registered under the Securities Act and any Security with respect to which the next preceding Predecessor Security of such Security was an Exchange Security, and their Successor Securities. "Global Security" means, a Security registered in the name of the Depository. -7- "Government Securities" means direct obligations of, or obligations guaranteed by, the United States of America for the payment of which obligations or guarantee the full faith and credit of the United States is pledged and which have a remaining weighted average life to maturity of not more than 18 months from the date of Investment therein. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person guaranteeing, or having the economic effect of guaranteeing, any Debt of any other Person (the "primary obligor") in any manner, whether directly or indirectly, and including, without limitation, any obligation of such Person, (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such Debt, (ii) to purchase property, securities or services for the purpose of assuring the holder of such Debt of the payment of such Debt, or (iii) to maintain working capital, equity capital or other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Debt (and "Guaranteed", "Guaranteeing" and "Guarantor" shall have meanings correlative to the foregoing); provided, however, that the Guarantee by any Person shall not include endorsements by such Person for collection or deposit, in either case, in the ordinary course of business; and provided, further, that the incurrence by a Restricted Subsidiary of the Company of a Lien on real or personal property of such Restricted Subsidiary acquired, constructed or constituting improvements made after the Issue Date to secure Purchase Money Debt which is Incurred for the construction, acquisition and improvement of Telecommunications Assets and is otherwise permitted under this Indenture, shall not be deemed to constitute a Guarantee by such Restricted Subsidiary of any Purchase Money Debt of the Company secured thereby; provided, however, that (a) the net proceeds of any Debt secured by such a Lien does not exceed 100% of such purchase price or cost of construction or improvement of the property subject to such Lien; (b) such Lien attaches to such property prior to, at the time of or within 180 days after the acquisition, completion of construction or commencement of operation of such property; and (c) such Lien does not extend to or cover any property other than the property (or identifiable portions thereof) acquired, constructed or constituting improvements made with the proceeds of such Purchase Money Debt (it being understood and agreed that all Debt owed to any single lender or group or lenders or outstanding under any single credit facility shall be considered a single Purchase Money Debt, whether drawn at one time or from time to time). "Holder" means a Person in whose name a Security is registered in the Security Register. "Incur" means, with respect to any Debt or other obligation of any Person, to create, issue, incur (by conversion, exchange or otherwise), assume, Guarantee or otherwise become liable in respect of such Debt or other obligation including by acquisition of Subsidiaries or the recording, as required pursuant to generally accepted accounting principles or otherwise, of any such Debt or other obligation on the balance sheet of such Person (and "Incurrence", "Incurred", "Incurrable" and "Incurring" shall have meanings correlative to the foregoing); provided, however, that a change in generally accepted accounting principles that results in an obligation of such Person that exists at such time becoming Debt shall not be deemed an Incurrence of such Debt and that neither the accrual of interest nor the accretion of original issue discount shall be deemed an Incurrence of Debt; provided, further, however, that the Company may elect to treat all or any portion of revolving credit debt of the Company or a Subsidiary as being incurred from and after any date beginning the date the revolving credit commitment is extended to the Company or a Subsidiary, by furnishing notice thereof -8- to the Trustee, and any borrowings or reborrowings by the Company or a Subsidiary under such commitment up to the amount of such commitment designated by the Company as Incurred shall not be deemed to be new Incurrences of Debt by the Company or such Subsidiary. "Indenture" means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof. "Initial Purchasers" means Merrill Lynch, Pierce, Fenner & Smith Incorporated and Toronto Dominion Securities (USA) Inc. "Interest Payment Date" means the Stated Maturity of an installment of interest on the Securities. "Interest Rate or Currency Protection Agreement" of any Person means any forward contract, futures contract, swap, option or other financial agreement or arrangement (including, without limitation, caps, floors, collars and similar agreements) relating to, or the value of which is dependent upon, interest rates or currency exchange rates or indices. "Investment" by any Person means any direct or indirect loan, advance or other extension of credit or capital contribution (by means of transfers of cash or other property to others or payments for property or services for the account or use of others, or otherwise) to, or purchase or acquisition of Capital Stock, bonds, notes, debentures or other securities or evidence of Debt issued by, any other Person, including any payment on a Guarantee of any obligation of such other Person, but excluding any loan, advance or extension of credit to an employee of the Company or any of its Restricted Subsidiaries in the ordinary course of business, accounts receivable and other commercially reasonable extensions of trade credit. "Issue Date" means the date on which the Securities are first authenticated and delivered under this Indenture. "Joint Venture" means a corporation, partnership or other entity engaged in one or more Telecommunications Businesses as to which the Company (directly or through one or more Restricted Subsidiaries) exercises managerial control and in which the Company owns (i) a 50% or greater interest, or (ii) a 40% or greater interest, together with options or other contractual rights, exercisable not more than seven years after the Company's initial Investment in such Joint Venture, to increase its interest to not less than 50%. "Junior Shares" means Capital Stock of the Company that does not rank, as to the payment of dividends or other comparable distributions or as to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, prior to or on a parity with the Preferred Shares. "Lien" means, with respect to any property or assets, any mortgage or deed of trust, pledge, hypothecation, assignment, Receivables Sale, deposit arrangement, security interest, lien, charge, easement (other than any easement not materially impairing usefulness or marketability), encumbrance, preference, priority or other security agreement or preferential arrangement of any kind -9- or nature whatsoever on or with respect to such property or assets (including, without limitation, any conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing). "Marketable Securities" means: (i) Government Securities; (ii) any time deposit account, money market deposit and certificate of deposit maturing not more than 270 days after the date of acquisition issued by, or time deposit of, an Eligible Institution; (iii) commercial paper maturing not more than 270 days after the date of acquisition issued by a corporation (other than an Affiliate of the Company) with a rating, at the time as of which any investment therein is made, of "P-1" or higher according to Moody's Investors Service, Inc., "A-1" or higher according to Standard & Poor's Ratings Group or "A-1" or higher according to Duff & Phelps Credit Rating Co. (or such similar equivalent rating by at least one "nationally recognized statistical rating organization" (as defined in Rule 436 under the Securities Act)); (iv) any banker's acceptances or money market deposit accounts issued or offered by an Eligible Institution; (v) repurchase obligations with a term of not more than 7 days for Government Securities entered into with an Eligible Institution; and (vi) any fund investing exclusively in investments of the types described in clauses (i) through (v) above. "Maturity", when used with respect to any Security, means the date on which the principal of such Security becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption or otherwise. "Net Available Proceeds" from any Asset Disposition by any Person means cash or readily marketable cash equivalents received (including by way of sale or discounting of a note, installment receivable or other receivable, but excluding any other consideration received in the form of assumption by the acquiror of Debt or other obligations relating to such properties or assets) therefrom by such Person, net of (i) all legal, title and recording tax expenses, commissions and other fees and expenses Incurred and all federal, state, provincial, foreign and local taxes (including taxes payable upon payment or other distribution of funds from a foreign subsidiary to the Company or another subsidiary of the Company) required to be accrued as a liability as a consequence of such Asset Disposition, (ii) all payments made by such Person or its Restricted Subsidiaries on any Debt which is secured by such assets in accordance with the terms of any Lien upon or with respect to such assets or which must by the terms of such Lien, or in order to obtain a necessary consent to such Asset Disposition or by applicable law, be repaid out of the proceeds from such Asset Disposition, (iii) all distributions and other payments made to minority interest holders in Restricted Subsidiaries of such Person or joint ventures as a result of such Asset Disposition, (iv) appropriate amounts to be provided by such Person or any Restricted Subsidiary thereof, as the case may be, as a reserve in accordance with generally accepted accounting principles against any liabilities associated with such assets and retained by such Person or any Restricted Subsidiary thereof, as the case may be, after such Asset Disposition, including, without limitation, liabilities under any indemnification obligations and severance and other employee termination costs associated with such Asset Disposition, in each case as determined by the Board of Directors, in its reasonable good faith judgment evidenced by a Board Resolution filed with the Trustee; provided, however, that any reduction in such reserve within twelve months following the consummation of such Asset Disposition will be treated for all purposes of this Indenture and the Securities as a new Asset Disposition at the time of such reduction with Net Available Proceeds equal to the amount of such reduction, and (v) any consideration for an Asset Disposition (which would otherwise constitute Net Available Proceeds) that is required to be held in escrow pending determination of whether a purchase price adjustment will be made, but amounts -10- under this clause (v) shall become Net Available Proceeds at such time and to the extent such amounts are released to such Person. "Offer Expiration Date" has the meaning set forth in the definition of "Offer to Purchase" in this Section 101. "Offer to Purchase" means a written offer (the "Offer") sent by the Company by first class mail, postage prepaid, to each Holder at his address appearing in the Security Register on the date of the Offer offering to purchase up to the principal amount of Securities specified in such Offer at the purchase price specified in such Offer (as determined pursuant to this Indenture). Unless otherwise required by applicable law, the Offer shall specify an expiration date (the "Offer Expiration Date") of the Offer to Purchase which shall be, subject to any contrary requirements of applicable law, not less than 30 days or more than 60 days after the date of such Offer and a settlement date (the "Purchase Date") for purchase of Securities within five Business Days after the Offer Expiration Date. The Company shall notify the Trustee at least 15 Business Days (or such shorter period as is acceptable to the Trustee) prior to the mailing of the Offer of the Company's obligation to make an Offer to Purchase, and the Offer shall be mailed by the Company or, at the Company's request, by the Trustee in the name and at the expense of the Company. The Offer shall contain information concerning the business of the Company and its Subsidiaries which the Company in good faith believes will enable such Holders to make an informed decision with respect to the Offer to Purchase (which at a minimum will include (i) the most recent annual and quarterly financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the documents required to be filed with the Trustee pursuant to this Indenture (which requirements may be satisfied by delivery of such documents together with the Offer), (ii) a description of material developments in the Company's business subsequent to the date of the latest of such financial statements referred to in clause (i) (including a description of the events requiring the Company to make the Offer to Purchase), (iii) if applicable, appropriate pro forma financial information concerning the Offer to Purchase and the events requiring the Company to make the Offer to Purchase and (iv) any other information required by applicable law to be included therein). The Offer shall contain all instructions and materials necessary to enable such Holders to tender Securities pursuant to the Offer to Purchase. The Offer shall also state: (a) the Section of this Indenture pursuant to which the Offer to Purchase is being made; (b) the Offer Expiration Date and the Purchase Date; (c) the aggregate principal amount of the Outstanding Securities offered to be purchased by the Company pursuant to the Offer to Purchase (including, if less than 100%, the manner by which such has been determined pursuant to Section 1013 or 1016) (the "Purchase Amount"); (d) the purchase price to be paid by the Company for each $1,000 aggregate principal amount of Securities accepted for payment (as specified pursuant to this Indenture) (the "Purchase Price"); -11- (e) that the Holder may tender all or any portion of the Securities registered in the name of such Holder and that any portion of a Security tendered must be tendered in an integral multiple of $1,000 principal amount; (f) the place or places where Securities are to be surrendered for tender pursuant to the Offer to Purchase; (g) that interest (including Special Interest) on any Security not tendered or tendered but not purchased by the Company pursuant to the Offer to Purchase will continue to accrue; (h) that on the Purchase Date the Purchase Price will become due and payable upon each Security being accepted for payment pursuant to the Offer to Purchase and that interest (including Special Interest) thereon shall cease to accrue on and after the Purchase Date; (i) that each Holder electing to tender a Security pursuant to the Offer to Purchase will be required to surrender such Security at the place or places specified in the Offer prior to the close of business on the Offer Expiration Date (such Security being, if the Company or the Trustee so requires, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing); (j) that Holders will be entitled to withdraw all or any portion of Securities tendered if the Company (or the Paying Agent) receives not later than the close of business on the Offer Expiration Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Security the Holder tendered, the certificate number of the Security the Holder tendered and a statement that such Holder is withdrawing all or a portion of his tender; (k) that (a) if Securities in an aggregate principal amount less than or equal to the Purchase Amount are duly tendered and not withdrawn pursuant to the Offer to Purchase, the Company shall purchase all such Securities and (b) if Securities in an aggregate principal amount in excess of the Purchase Amount are tendered and not withdrawn pursuant to the Offer to Purchase, the Company shall purchase Securities having an aggregate principal amount equal to the Purchase Amount on a pro rata basis (with such adjustments as may be deemed appropriate so that only Securities in denominations of $1,000 or integral multiples thereof shall be purchased); (l) that in the case of any Holder whose Security is purchased only in part, the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities, of any authorized denomination as requested by such Holder, in an aggregate principal amount equal to and in exchange for the unpurchased portion of the Security so tendered; and (m) the CUSIP number or numbers of the Securities offered to be purchased by the Company pursuant to the Offer to Purchase. -12- Any Offer to Purchase shall be governed by and effected in accordance with the Offer for such Offer to Purchase. "Officers' Certificate" means a certificate signed by (i) the Chief Executive Officer, President, an Executive Vice President or a Vice President, and (ii) the Treasurer, Assistant Treasurer, Secretary or an Assistant Secretary, of the Company, and delivered to the Trustee and containing the statements provided for in Section 102. One of the officers signing an Officers' Certificate given pursuant to Section 1018 shall be the principal executive, financial or accounting officer of the Company. "Opinion of Counsel" means a written opinion of legal counsel, who may be counsel for the Company, and who shall be acceptable to the Trustee, and containing the statements provided for in Section 102. "Original Securities" means Securities that are not Exchange Securities. "Outstanding", when used with respect to Securities, means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture (including, as of such date, all Securities represented by Global Securities authenticated and delivered under this Indenture), except the reduced portion or portions of any Global Security, as such reduction or reductions shall have been endorsed on such Global Security by the Trustee as provided herein and, except: (i) Securities theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (ii) Securities for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Securities; provided that, if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture; and (iii) Securities which have been paid pursuant to Section 306 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a bona fide purchaser in whose hands such Securities are valid obligations of the Company; provided, however, that in determining whether the Holders of the requisite principal amount of the Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities which the Trustee knows to be so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the -13- Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor. "Paying Agent" means any Person authorized by the Company to pay the principal of (and premium, if any) or interest on any Securities on behalf of the Company. The Trustee is hereby authorized by the Company to act as a "Paying Agent" for the purposes of this Indenture, until such time as the Company notifies the Trustee in writing that such authorization is revoked. "Permitted Interest Rate or Currency Protection Agreement" of any Person means any Interest Rate or Currency Protection Agreement entered into with one or more financial institutions in the ordinary course of business that is designed to protect such Person against fluctuations in interest rates or currency exchange rates with respect to Debt Incurred and which shall have a notional amount no greater than the payments due with respect to the Debt being hedged thereby and not for purposes of speculation. "Permitted Investment" means (i) any Investment in a Joint Venture (including the purchase or acquisition of any Capital Stock of a Joint Venture), provided the aggregate amount of all outstanding Investments pursuant to this clause (i) in Joint Ventures in which the Company owns, directly or indirectly, a less than 50% interest shall not exceed $25 million, (ii) any Investment in any Person as a result of which such Person becomes a Restricted Subsidiary, or, subject to the proviso to clause (i) of this definition, becomes a Joint Venture of the Company, (iii) any Investment in Marketable Securities, (iv) Investments in Permitted Interest Rate or Currency Protection Agreements, and (v) Investments made as a result of the receipt of noncash consideration from an Asset Disposition that was made pursuant to and in compliance with Section 1013 of this Indenture. "Person" means any individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, trust, unincorporated organization, government or agency or political subdivision thereof or any other entity. "Predecessor Security" of any particular Security means every previous Security issued before, and evidencing all or a portion of the same debt as that evidenced by, such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 306 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security. "Preferred Dividends" for any Person means for any period the quotient determined by dividing the amount of dividends and distributions paid or accrued (whether or not declared) on Preferred Stock of such Person during such period calculated in accordance with generally accepted accounting principles, by 1 minus the maximum statutory income tax rate then applicable to the Company (expressed as a decimal). "Preferred Issue Date" means the date on which the Preferred Shares are initially issued. "Preferred Shares" means the Company's 14% Senior Exchangeable Redeemable Preferred Shares, liquidation preference $50 per share. -14- "Preferred Stock" of any Person means Capital Stock of such Person of any class or classes (however designated) that ranks prior, as to the payment of dividends or as to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of such Person, to shares of Capital Stock of any other class of such Person. "Public Equity Offering" means an underwritten public offering of common stock, par value $.01 per share, of the Company pursuant to an effective registration statement filed with the Commission in accordance with the Securities Act. "Purchase Date" has the meaning set forth in the definition of "Offer to Purchase" in this Section 101. "Purchase Money Debt" means (i) Acquired Debt Incurred in connection with the acquisition of Telecommunications Assets and (ii) Debt of the Company or of any Restricted Subsidiary of the Company (including, without limitation, Debt represented by Capital Lease Obligations, Vendor Financing Facilities, mortgage financings and purchase money obligations) Incurred for the purpose of financing all or any part of the cost of construction, acquisition or improvement by the Company or any Restricted Subsidiary of the Company or any Joint Venture of any Telecommunications Assets of the Company, any Restricted Subsidiary of the Company or any Joint Venture, and including any related notes, Guarantees, collateral documents, instruments and agreements executed in connection therewith, as the same may be amended, supplemented, modified or restated from time to time. "Qualifying Event" means a Public Equity Offering or one or more Strategic Equity Investments which in either case results in aggregate net proceeds to the Company of not less than $75 million. "Qualified Junior Shares" means Junior Shares that do not constitute Disqualified Stock. "readily marketable cash equivalents" means (i) marketable securities issued or directly and unconditionally guaranteed by the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States; (ii) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof and, at the time of acquisition, having the highest rating obtainable from either Standard & Poor's Rating Group or Moody's Investors Service, Inc.; (iii) commercial paper maturing no more than 180 days from the date of acquisition thereof and, at the time of acquisition, having a rating of P-1 according to Moody's Investors Service, Inc., "A-1" or higher according to Standard & Poor's Ratings Group or "A-1" or higher according to Duff & Phelps Credit Rating Co. (or such similar equivalent rating by at least one "nationally recognized statistical rating organization" (as defined in Rule 436 under the Securities Act)); and (iv) certificates of deposit or bankers' acceptance maturing within one year from the date of acquisition thereof issued by any commercial bank organized under the laws of the United States of America or any state thereof or the District of Columbia having unimpaired capital and surplus of not less than $100,000,000. "Receivables" means receivables, chattel paper, instruments, documents or intangibles evidencing or relating to the right to payment of money in respect of the sale of goods or services. -15- "Receivables Sale" of any Person means any sale of Receivables of such Person (pursuant to a purchase facility or otherwise), other than in connection with a disposition of the business operations of such Person relating thereto or a disposition of defaulted Receivables for purpose of collection and not as a financing arrangement. "Redemption Date", when used with respect to any Security to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture. "Redemption Price", when used with respect to any Security to be redeemed, means the price at which it is to be redeemed pursuant to this Indenture. "Registration Default" has the meaning specified in the Exchange and Registration Rights Agreement. "Regular Record Date" for the interest payable on any Interest Payment Date means the January 15 or July 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. "Related Person" of any Person means any other Person directly or indirectly owning (a) 10% or more of the Outstanding Common Equity of such Person (or, in the case of a Person that is not a corporation, 10% or more of the equity interest in such Person) or (b) 10% or more of the combined voting power of the Voting Stock of such Person. "Responsible Officer", when used with respect to the Trustee, means the chairman or any vice-chairman of the board of directors, the chairman or any vice-chairman of the executive committee of the board of directors, the chairman of the trust committee, the president, any vice president, the secretary, any assistant secretary, the treasurer, any assistant treasurer, the cashier, any assistant cashier, any trust officer or assistant trust officer, the controller or any assistant controller or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Restricted Subsidiary" of the Company means any Subsidiary, whether existing on or after the date of this Indenture, unless such Subsidiary is an Unrestricted Subsidiary. "Rule 144" means Rule 144 under the Securities Act (or any successor provision), as it may be amended from time to time. "Rule 144A" means Rule 144A under the Securities Act (or any successor provision), as it may be amended from time to time. "Secondary Securities" has the meaning specified in Section 301. "Securities" has the meaning specified in the second paragraph of this instrument. -16- "Securities Act" means the Securities Act of 1933 and any statute successor thereto, in each case as amended from time to time. "Security Register" and "Security Registrar" have the respective meanings specified in Section 305(b). "Senior Debt" means the principal of (and premium, if any) and interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company whether or not such claim for post-petition interest is allowed in such proceeding) on, or other amount of, (i) Debt for money borrowed of the Company created pursuant to Bank Credit Agreements or Vendor Financing Facilities, (ii) Debt for money borrowed of the Company, whether Incurred on or prior to the Issue Date or thereafter Incurred, other than the Securities, (iii) Debt evidenced by bonds, debentures, notes or other similar instruments, including Debt Incurred in connection with the acquisition of property, assets or businesses, (iv) matured and unmatured reimbursement or other obligations of the Company with respect to letters of credit, bankers' acceptances or similar facilities issued for the account of the Company; (v) obligations of the Company under interest rate swaps, caps, collars and similar arrangements, (vii) Capital Lease Obligations of the Company; (vi) guarantees by the Company of (x) Debt for money borrowed and (y) Debt of a Restricted Subsidiary consisting of performance and other similar bonds and reimbursement obligations Incurred in the ordinary course of business securing the performance of contractual, franchise or license obligations or such Restricted Subsidiary, or in respect of a letter of credit obtained to secure such performance; and (viii) amendments, renewals, extensions, modifications, refinancings and refundings of any such Debt; provided, however, the following shall not constitute Senior Debt: (A) any Debt owed to a Person when such Person is a Subsidiary of the Company, (B) any Debt which by the terms of the instrument creating or evidencing the same is not superior in right of payment to the Securities, (C) any Debt Incurred in violation of this Indenture or (D) any Debt which is subordinated in right of payment in any respect to any other Debt of the Company. "Senior Indenture" means the Indenture, dated as of April 15, 1996 among the Company, NEXTLINK Capital, Inc. and United States Trust Company of New York, as Trustee. "Senior Notes" means the 12 1/2% Senior Notes due April 15, 2006 of the Company and NEXTLINK Capital, Inc. issued pursuant to the Senior Indenture "Significant Subsidiary" means a Restricted Subsidiary that is a "significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X under the Securities Act and the Exchange Act. "Special Interest" has the meaning specified in the Exchange and Registration Rights Agreement. Unless the context otherwise requires, references herein to "interest" on the Securities shall include Special Interest. "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 307. -17- "Stated Maturity", when used with respect to any Security or any installment of interest thereon, means the date specified in such Security as the fixed date on which the principal of such Security or such installment of interest, as the case may be, is due and payable. "Strategic Equity Investment" means an investment in Qualified Junior Shares made by a Strategic Investor in an aggregate amount of not less than $25 million. "Strategic Investor" means a Person engaged in one or more Telecommunications Businesses (which need not be such Person's primary business) that has, or 80% or more of the Voting Stock of which is owned, directly or indirectly, by a Person that has, an equity market capitalization or net worth, at the time of its initial Investment in the Company, in excess of $2.0 billion. "Subordinated Debt" means Debt of the Company as to which the payment of principal of (and premium, if any) and interest and other payment obligations in respect of such Debt shall be subordinate to the prior payment in full of the Securities to at least the following extent: (i) no payments of principal of (or premium, if any) or interest on or otherwise due in respect of such Debt may be permitted for so long as any default in the payment of principal (or premium, if any) or interest on the Securities exists; (ii) in the event that any other default that with the passing of time or the giving of notice, or both, would constitute an Event of Default exists with respect to the Securities, upon notice by 25% or more in principal amount of the Securities to the Trustee, the Trustee shall have the right to give notice to the Company and the holders of such Debt (or trustees or agents therefor) of a payment blockage, and thereafter no payments of principal of (or premium, if any) or interest on or otherwise due in respect of such Debt may be made for a period of 179 days from the date of such notice or for the period until such default has been cured or waived or ceased to exist and any acceleration of the Securities has been rescinded or annulled, whichever period is shorter (which Debt may provide (A) no new period of payment blockage may be commenced by a payment blockage notice unless and until 360 days have elapsed since the effectiveness of the immediately prior notice, (B) no nonpayment default that existed or was continuing on the date of delivery of any payment blockage notice to such holders (or such agents or trustees) shall be, or be made, the basis for a subsequent payment blockage notice and (C) failure of the Company to make payment on such Debt when due or within any applicable grace period, whether or not on account of such payment blockage provisions, shall constitute an event of default thereunder); and (iii) such Debt may not (x) provide for payments of principal of such Debt at the stated maturity thereof or by way of a sinking fund applicable thereto or by way of any mandatory redemption, defeasance, retirement or repurchase thereof by the Company (including any redemption, retirement or repurchase which is contingent upon events or circumstances, but excluding any retirement required by virtue of acceleration of such Debt upon an event of default thereunder), in each case prior to the final Stated Maturity of the Securities or (y) permit redemption or other retirement (including pursuant to an offer to purchase made by the Company) of such other Debt at the option of the holder thereof prior to the final Stated Maturity of the Securities, other than a redemption or other retirement at the option of the holder of such Debt (including pursuant to an offer to purchase made by the Company) which is conditioned upon a change of control of the Company pursuant to provisions substantially similar to those of Section 1016 (and which shall provide that such Debt will not be repurchased pursuant to such provisions prior to the Company's repurchase of the Securities required to be repurchased by the Company pursuant to the provisions of Section 1016. -18- "Subsidiary" of any Person means (i) a corporation more than 50% of the combined voting power of the outstanding Voting Stock of which is owned, directly or indirectly, by such Person or by one or more other Subsidiaries of such Person or by such Person and one or more Subsidiaries thereof or (ii) any other Person (other than a corporation) in which such Person, or one or more other Subsidiaries of such Person or such Person and one or more other Subsidiaries thereof, directly or indirectly, has at least a majority ownership and power to direct the policies, management and affairs thereof. "Successor Security" of any particular Security means every Security issued after, and evidencing all or a portion of the same debt as that evidenced by, such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 306 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security. "Telecommunications Assets" means all assets, rights (contractual or otherwise) and properties, whether tangible or intangible, used or intended for use in connection with a Telecommunications Business. "Telecommunications Business" means the business of (i) transmitting, or providing services relating to the transmission of, voice, video or data through owned or leased transmission facilities, (ii) creating, developing or marketing communications related network equipment, software and other devices for use in a Telecommunication Business or (iii) evaluating, participating or pursuing any other activity or opportunity that is primarily related to those identified in (i) or (ii) above and shall, in any event, include all businesses in which the Company or any of its Subsidiaries are engaged on the Issue Date; provided that the determination of what constitutes a Telecommunications Business shall be made in good faith by the Board of Directors, which determination shall be conclusive. "Trustee" means the Person named as the "Trustee" in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean such successor Trustee. "Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at the date as of which this instrument was executed; provided, however, that in the event the Trust Indenture Act of 1939 is amended after such date, "Trust Indenture Act" means, to the extent required by any such amendment, the Trust Indenture Act of 1939 as so amended. "Unrestricted Subsidiary" means (1) any Subsidiary of the Company designated as such by the Board of Directors as set forth below where (a) neither the Company nor any of its other Subsidiaries (other than another Unrestricted Subsidiary) (i) provides credit support for, or Guarantee of, any Debt of such Subsidiary or any Subsidiary of such Subsidiary (including any undertaking, agreement or instrument evidencing such Debt) or (ii) is directly or indirectly liable for any Debt of such Subsidiary or any Subsidiary of such Subsidiary, and (b) no default with respect to any Debt of such Subsidiary or any Subsidiary of such Subsidiary (including any right which the holders thereof may have to take enforcement action against such Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Debt of the Company and its Restricted Subsidiaries to declare a default on such other Debt or cause the payment thereof to be accelerated or payable prior to its -19- final scheduled maturity and (2) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary to be an Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property of, any other Subsidiary of the Company which is not a Subsidiary of the Subsidiary to be so designated or otherwise an Unrestricted Subsidiary, provided that either (x) the Subsidiary to be so designated has total assets of $1,000 or less or (y) immediately after giving effect to such designation, the Company could Incur at least $1.00 of additional Debt pursuant to the first paragraph of Section 1007 and provided, further, that the Company could make a Restricted Payment in an amount equal to the greater of the fair market value and the book value of such Subsidiary pursuant to Section 1009 and such amount is thereafter treated as a Restricted Payment for the purpose of calculating the aggregate amount available for Restricted Payments thereunder. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary, provided that, immediately after giving effect to such designation, the Company could Incur at least $1.00 of additional Debt pursuant to the first paragraph of Section 1007. "Vendor Financing Facility" means any agreements between the Company or a Restricted Subsidiary of the Company and one or more vendors or lessors of equipment to the Company or any of its Restricted Subsidiaries (or any affiliate of any such vendor or lessor) providing financing for the acquisition by the Company or any such Restricted Subsidiary of equipment from any such vendor or lessor. "Vice President", when used with respect to the Company or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president". "Voting Stock" of any Person means Capital Stock of such Person which ordinarily has voting power for the election of directors (or persons performing similar functions) of such Person, whether at all times or only so long as no senior class of securities has such voting power by reason of any contingency. "Wholly-Owned Restricted Subsidiary" of any Person means a Restricted Subsidiary of such Person 99% or more of the outstanding Capital Stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person or by one or more Wholly-Owned Restricted Subsidiaries of such Person or by such Person and one or more Wholly-Owned Restricted Subsidiaries of such Person. SECTION 102. Compliance Certificates and Opinions. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee such certificates and opinions as may be required under the Trust Indenture Act and under this Indenture. Each such certificate or opinion shall be given in the form of an Officers' Certificate, if to be given by an officer of the Company, or an Opinion of Counsel, if to be given by counsel, and shall comply with the requirements of the Trust Indenture Act and any other requirement set forth in this Indenture. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include -20- (1) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (2) 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; (3) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. SECTION 103. Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate of an officer of the Company may be based, insofar as it relates to legal matters, upon an opinion of counsel submitted therewith, unless such officer knows, or in the exercise of reasonable care should know, that the opinion with respect to the matters upon which his certificate is based is erroneous. Any opinion of counsel may be based, insofar as it relates to factual matters, upon a certificate of an officer or officers of the Company submitted therewith stating the information on which counsel is relying, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate with respect to such matters is erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. SECTION 104. Acts of Holders; Record Dates. Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied -21- therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 601) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. The fact and date of the execution by any Person of any such instrument or writing pursuant to this Section 104 may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient. The ownership of Securities shall be proved by the Security Register. Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security. The Company may set any day as a record date for the purpose of determining the Holders of Outstanding Securities entitled to give, make or take any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by this Indenture to be given, made or taken by Holders of Securities, provided that the Company may not set a record date for, and the provisions of this paragraph shall not apply with respect to, the giving or making of any notice, declaration, request or direction referred to in the next paragraph. If not set by the Company prior to the first solicitation of a Holder made by any Person in respect of any such matter referred to in the foregoing sentence, the record date for any such matter shall be the 30th day (or, if later, the date of the most recent list of Holders required to be provided pursuant to Section 701) prior to such first solicitation. If any record date is set pursuant to this paragraph, the Holders of Outstanding Securities on such record date, and no other Holders, shall be entitled to take the relevant action, whether or not such Holders remain Holders after such record date; provided that no such action shall be effective hereunder unless taken on or prior to the applicable Expiration Date by Holders of the requisite principal amount of Outstanding Securities on such record date. Nothing in this paragraph shall be construed to prevent the Company from setting a new record date for any action for which a record date has previously been set pursuant to this paragraph (whereupon the record date previously set shall automatically and with no action by any Person be cancelled and of no effect), and nothing in this paragraph shall be construed to render ineffective any action taken by Holders of the requisite principal amount of Outstanding Securities on the date such action is taken. Promptly after any record date is set pursuant to this paragraph, the Company, at its own expense, shall cause notice of such record date, the proposed action by Holders and the applicable Expiration Date to be given to the Trustee in writing and to each Holder of Securities in the manner set forth in Section 106. The Trustee may set any day as a record date for the purpose of determining the Holders of Outstanding Securities entitled to join in the giving or making of (i) any Notice of Default, -22- (ii) any declaration of acceleration referred to in Section 502, (iii) any request to institute proceedings referred to in Section 507(2) or (iv) any direction referred to in Section 512. If any record date is set pursuant to this paragraph, the Holders of Outstanding Securities on such record date, and no other Holders, shall be entitled to join in such notice, declaration, request or direction, whether or not such Holders remain Holders after such record date; provided that no such action shall be effective hereunder unless taken on or prior to the applicable Expiration Date by Holders of the requisite principal amount of Outstanding Securities on such record date. Nothing in this paragraph shall be construed to prevent the Trustee from setting a new record date for any action for which a record date has previously been set pursuant to this paragraph (whereupon the record date previously set shall automatically and with no action by any Person be cancelled and of no effect), and nothing in this paragraph shall be construed to render ineffective any action taken by Holders of the requisite principal amount of Outstanding Securities on the date such action is taken. Promptly after any record date is set pursuant to this paragraph, the Trustee, at the Company's expense, shall cause notice of such record date, the proposed action by Holders and the applicable Expiration Date to be given to the Company in writing and to each Holder of Securities in the manner set forth in Section 106. With respect to any record date set pursuant to this Section, the party hereto which sets such record dates may designate any day as the "Expiration Date" and from time to time may change the Expiration Date to any earlier or later day; provided that no such change shall be effective unless notice of the proposed new Expiration Date is given to the other party hereto in writing, and to each Holder of Securities in the manner set forth in Section 106, on or prior to the existing Expiration Date. If an Expiration Date is not designated with respect to any record date set pursuant to this Section, the party hereto which set such record date shall be deemed to have initially designated the 180th day after such record date as the Expiration Date with respect thereto, subject to its right to change the Expiration Date as provided in this paragraph. Notwithstanding the foregoing, no Expiration Date shall be later than the 180th day after the applicable record date. Without limiting the foregoing, a Holder entitled hereunder to take any action hereunder with regard to any particular Security may do so with regard to all or any part of the principal amount of such Security or by one or more duly appointed agents each of which may do so pursuant to such appointment with regard to all or any part of such principal amount. SECTION 105. Notices, Etc., to Trustee and the Company. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with, (1) the Trustee by any Holder or by the Company shall be sufficient for every purpose hereunder if delivered in writing to the Trustee at its Corporate Trust Office, Attention: Corporate Trust Administration, or (2) the Company by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company addressed to the Company at the address of its -23- principal office specified in the first paragraph of this instrument or at any other address previously furnished in writing to the Trustee by the Company. SECTION 106. Notice to Holders; Waiver. Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if (i) in the case of a Global Security, in writing by facsimile and/or by overnight mail to the Depository, and (ii) in the case of securities other than Global Securities, in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at his address as it appears in the Security Register, not later than the latest date (if any), and not earlier than the earliest date (if any), prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder. SECTION 107. The Application of Trust Indenture Act. The Trust Indenture Act shall apply as a matter of contract to this Indenture for purposes of interpretation, construction and defining the rights and obligations hereunder. If any provision hereof limits, qualifies or conflicts with a provision of the Trust Indenture Act that is required under such Act to be a part of and govern this Indenture, the latter provision shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or to be excluded, as the case may be. SECTION 108. Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 109. Successors and Assigns. All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not. -24- SECTION 110. Separability Clause. 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 111. Benefits of Indenture. Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, the holders of Senior Debt (subject to Article Thirteen hereof) and the Holders of Securities, any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 112. Governing Law. This Indenture and the Securities shall be governed by and construed in accordance with the laws of the State of New York. SECTION 113. Legal Holidays. In any case where any Interest Payment Date, Redemption Date, Purchase Date or Stated Maturity of any Security shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Securities) payment of interest or principal (and premium, if any) need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date, Redemption Date, Purchase Date or at the Stated Maturity, provided that no interest shall accrue for the period from and after such Interest Payment Date, Redemption Date, Purchase Date or Stated Maturity, as the case may be. ARTICLE TWO Security Forms SECTION 201. Forms Generally. The Original Securities, the Exchange Securities and the Trustee's certificates of authentication thereof shall be in substantially the forms set forth in this Article, with such appropriate legends, insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange or as may, consistently herewith, be determined by the officers executing such Securities, as evidenced by their execution of the Securities. -25- The definitive Securities shall be printed, lithographed or engraved or produced by any combination of these methods on steel engraved borders or may be produced in any other manner all as determined by the officers executing such Securities, as evidenced by their execution of such Securities. In certain cases described elsewhere herein, the legends set forth in Section 202 may be omitted from Securities issued hereunder and additional legends may be placed on all or certain of the Securities. SECTION 202. Form of Face of Security. [If a Global Security not to be held by The Depository Trust Company, then insert -- THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE THEREOF. THIS SECURITY MAY NOT BE EXCHANGED IN WHOLE OR IN PART FOR A SECURITY REGISTERED, AND NO TRANSFER OF THIS SECURITY IN WHOLE OR IN PART MAY BE REGISTERED, IN THE NAME OF ANY PERSON OTHER THAN SUCH DEPOSITARY OR A NOMINEE THEREOF, EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE.] [If a Global Security to be held by The Depository Trust Company, then insert -- UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER 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.] [If applicable, then insert -- THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION AND SUBJECT TO COMPLIANCE WITH OTHER APPLICABLE LAWS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE WHICH IS THREE YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF THIS SECURITY) (THE "RESALE RESTRICTION TERMINATION DATE"), ONLY (A) TO THE COMPANY; (B) PURSUANT TO A -26- REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THESE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144, (E) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT OR (F) IN THE CASE OF EITHER ANY INITIAL INVESTOR THAT IS A QUALIFIED INSTITUTIONAL BUYER OR ANY SUBSEQUENT INVESTOR, TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (a)(1), (2), (3) or (7) OR RULE 501 UNDER THE SECURITIES ACT PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT (IF AVAILABLE), AND OTHERWISE IN COMPLIANCE WITH OTHER APPLICABLE LAWS, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (C), (D), (E) OR (F) TO REQUIRE THE DELIVERY OF A TRANSFER CERTIFICATE AND, IN THE CASE OF CLAUSE (F), AN OPINION OF COUNSEL OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM. THE LEGEND WILL BE REMOVED UPON THE REQUEST OF A HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE.] NEXTLINK Communications, Inc. 14% Senior Subordinated Notes due 2009 CUSIP NUMBER: __________ No. __________ $_______________ NEXTLINK Communications, Inc., a corporation organized under the laws of the State of Washington (herein called the "Company", which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to __________, or registered assigns, the principal sum of __________ Dollars on February 1, 2009, and to pay interest thereon from [insert Issue Date or relevant Interest Payment Date with respect to a Secondary Security (as applicable)] or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually on February 1 and August 1 in each year, commencing [insert the first Interest Payment date after the Issue Date or the relevant Interest Payment Date with respect to a Secondary Security (as applicable)] at the rate of 14% per annum, until the principal hereof is paid or made available for payment. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the January 15 or July 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the -27- Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture. In the case of a default in payment of principal and premium, if any, upon acceleration or redemption, interest shall be payable pursuant to the preceding paragraph on such overdue principal (and premium, if any), such interest shall be payable on demand and, if not so paid on demand, such interest shall itself bear interest at the rate of 1% per annum (to the extent that the payment of such interest shall be legally enforceable), and shall accrue from the date of such demand for payment to the date payment of such interest has been made or duly provided for, and such interest on unpaid interest shall also be payable on demand. On each Interest Payment Date occurring on or prior to February 1, 2002, the Company may, at its option, subject to and in accordance with the provisions of this Security and the Indenture, issue Secondary Securities (as hereinafter defined) in lieu of the payment in cash of any portion of the interest due and payable on such Interest Payment Date. If the Company elects to issue Secondary Securities in lieu of the payment in cash of such portion of interest, it shall execute and deliver to the Trustee for authentication, and the Trustee shall authenticate and deliver to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on such Regular Record Date, additional Securities dated such Interest Payment Date in a principal amount equal to such portion of interest (such additional Securities being referred to herein as the "Secondary Securities"), and the due issuance of such Secondary Securities shall constitute full payment of such portion of interest. Payment of the principal of (and premium, if any) and interest on this Security will be made at the corporate trust office of the Trustee and at the office or agency of the Company maintained for that purpose in the Borough of Manhattan, The City of New York, New York, and at any other office or agency maintained by the Company for such purpose, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that at the option of the Company payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. -28- IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed. Dated: NEXTLINK COMMUNICATIONS, INC. By______________________________ Title: Attest: ______________________________ Title: SECTION 203. Form of Reverse of Security. This Security is one of a duly authorized issue of Securities of the Company designated as its 14% Senior Subordinated Notes due February 1, 2009 (the "Securities") issued under an Indenture, dated as of ________, ____ (herein called the "Indenture"), between the Company and United States Trust Company of New York, as trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture). The Securities are limited (except as otherwise provided in the Indenture referred to below) in aggregate principal amount to $[insert the aggregate of preferred of the Preferred Shares at time of exchange]. Reference is hereby made to the Indenture and all indentures supplemental thereto for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. [If after a Covenant Amendment the Securities become redeemable then insert -- The Securities are subject to redemption upon not less than 30 nor more than 60 days' notice by mail to each Holder of Securities to be redeemed at such Holder's address appearing in the Security Register, in amounts of $1,000 or an integral multiple of $1,000, at any time on or after February 1, 2002 and prior to maturity, as a whole or in part, at the election of the Company, at the following Redemption Prices (expressed as percentages of the principal amount) plus accrued and unpaid interest (including Special Interest) to but excluding the Redemption Date (subject to the right of Holders of record on the relevant Regular Record Date to receive interest due on an Interest Payment that is on or prior to the Redemption Date), if redeemed during the 12-month period beginning February 1, of each of the years indicated below: -29- Redemption Year Price ---- ---------- 2002 107.00% 2003 105.25% 2004 103.50% 2005 101.75% and thereafter at a Redemption Price equal to 100% of the principal amount, together in the case of any such redemption with accrued interest to the Redemption Date, but interest installments whose Stated Maturity is on or prior to such Redemption Date will be payable to the Holders of such Securities, or one or more Predecessor Securities, of record at the close of business on the relevant Record Dates referred to on the face hereof, all as provided in the Indenture. The Securities are further subject to redemption prior to February 1, 2002 only in the event that on or before February 1, 2000 the Company receives net cash proceeds from one or more Qualifying Events (other than a Qualifying Event that results in a Change of Control, in which case the Company may, at its option, use all or a portion of any such net proceeds to redeem Securities in a principal amount not to exceed $99.75 million; provided, however, that Securities in an amount equal to at least $185.25 million remain Outstanding after such redemption. Such redemption must occur on a Redemption Date within 60 days after the receipt by the Company of the proceeds of any such Qualifying Event and upon not less than 30 nor more than 60 days' notice by mail to each Holder of Securities to be redeemed at such Holder's address appearing in the Security Register, in amounts of $1,000 or an integral multiple of $1,000 at a Redemption Price of 114% of their principal amount plus accrued and unpaid interest, if any to but excluding the Redemption Date (subject to the right of Holders of record on the relevant Regular Record Date to receive interest due on an Interest Payment Date that is on or prior to the Redemption Date).] [The Securities are not subject to redemption.] The Securities do not have the benefit of any sinking fund obligations. [If applicable insert -- . The Holder of this Security [if this Security is a Global Security, then insert-- (and any Person that has a beneficial interest in this Security)] is entitled to the benefits of an Exchange and Registration Rights Agreement, dated as of January 31, 1996, as the same may be amended from time to time (the "Exchange and Registration Rights Agreement"), executed by the Company. In the event of any Registration Default, Special Interest will accrue and be payable on this Security upon the terms of, and in the manner provided by, the Exchange and Registration Rights Agreement. Whenever in this Security there is a reference, in any context, to interest on, or in respect of, any Security such mention shall be deemed to include mention of Special Interest accrued or payable to the extent that, in such context, Special Interest is, was or would be accrued or payable in respect of such Security and express mention of Special Interest in any provisions of this Security -30- shall not be construed as excluding Special Interest in those provisions of this Security where such express mention is not made. The Indenture provides that, subject to certain conditions, if (i) a Change of Control occurs or (ii) certain Net Available Proceeds are available to the Company as a result of any Asset Disposition, the Company shall be required to make an Offer to Purchase for all or a specified portion of the Securities. In the event of [redemption or] purchase pursuant to an Offer to Purchase of this Security in part only, a new Security or Securities of like tenor for the [unredeemed or] unpurchased portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. The indebtedness evidenced by this Security is, to the extent provided in the Indenture, subordinate and subject in right of payment to the prior payment in full of all Senior Debt, and this Security is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Security, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination so provided and (c) appoints the Trustee his attorney-in-fact for any and all such purposes. If an Event of Default shall occur and be continuing, the principal of all the Securities may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture contains provisions for defeasance at any time of (i) the entire indebtedness of this Security, or (ii) certain restrictive covenants and Events of Default with respect to this Security, in each case upon compliance with certain conditions set forth therein. Unless the context otherwise requires, the Original Securities (as defined in the Indenture) and the Exchange Securities (as defined in the Indenture) shall constitute one series for all purposes under the Indenture, including without limitation, amendments, waivers, redemptions and Offers to Purchase. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities under the Indenture at any time by the Company and the Trustee with the consent of the Holders of a majority in aggregate principal amount of the Securities at the time Outstanding. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Securities at the time Outstanding, on behalf of the Holders of all the Securities, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to -31- pay the principal of (and premium, if any) and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in the Borough of Manhattan, The City of New York, New York, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities, of authorized denominations and like tenor and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Securities are issuable only in registered form without coupons in denominations of $1 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities are exchangeable for a like tenor and aggregate principal amount of Securities of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and none of the Company, the Trustee or any such agent shall be affected by notice to the contrary. Interest on this Security shall be computed on the basis of a 360-day year of twelve 30-day months[; provided, however, that Special Interest shall be computed on the basis of a 365 or 366 day year, as the case may be, and the number of days actually elapsed]. All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture. -32- OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Security purchased in its entirety by the Company pursuant to Section 1013 or 1016 of the Indenture, check the box: |_| If you want to elect to have only a part of this Security purchased by the Company pursuant to Section 1013 or 1016 of the Indenture, state the amount: $___________ Dated:________________ Your Signature:___________________________________ (Sign exactly as name appears on the other side of this Security) Signature Guarantee:______________________________________________________ Notice: Signature(s) must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Trustee, which requirements will include membership or participation in STAMP or such other "signature guarantee program" as may be determined by the Trustee in addition to, or in substitution for STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. SECTION 204. Form of Trustee's Certificate of Authentication. This is one of the Securities referred to in the within-mentioned Indenture. United States Trust Company of New York, as Trustee By ____________________________________ Authorized Signatory -33- ARTICLE THREE The Securities SECTION 301. Title and Terms. The Securities shall be issued in exchange for the outstanding Preferred Shares in accordance with the terms thereof. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is limited to an amount not to exceed the aggregate liquidation preference of the outstanding Preferred Shares at the Issue Date, except for Securities authenticated and delivered as Secondary Securities pursuant to the fourth paragraph of this Section and Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities pursuant to Section 304, 305, 306, 906 or 1108 or in connection with an Offer to Purchase pursuant to Section 1013 or 1016. If prior to the Issue Date the Company has not exchanged the Preferred Shares initially issued for Preferred Shares registered under the Securities Act pursuant to the Exchange Offer, the Company may issue Exchange Securities from time to time pursuant to an Exchange Offer or otherwise, in each case pursuant to a Board Resolution, subject to Section 303, included in an Officers' Certificate delivered to the Trustee, in authorized denominations in exchange for a like principal amount of Original Securities. Upon any such exchange the Original Securities shall be cancelled in accordance with Section 309 and shall no longer be deemed Outstanding for any purpose. In no event shall the aggregate principal amount of Original Securities and Exchange Securities Outstanding exceed an amount not to exceed the sum of the aggregate liquidation preference of the outstanding Preferred Shares at the Issue Date plus the aggregate principal amount of Secondary Securities issued in accordance herewith. The Securities shall be known and designated as the "14% Senior Subordinated Notes due 2009" of the Company. The Stated Maturity of the Securities shall be February 1, 2009. The Securities shall bear interest at the rate of 14% per annum, from the Issue Date or from the most recent Interest Payment Date thereafter to which interest has been paid or duly provided for, as the case may be, payable semi-annually on February 1 and August 1, commencing the first such date after the Issue Date until the principal thereof is paid or made available for payment. In addition, in the event of any Registration Default, Special Interest will accrue and be payable on the Securities upon the terms of, and in the manner provided by, the Exchange and Registration Rights Agreement, the terms of which are hereby incorporated by reference and made a part hereof. Accrued Special Interest, if any, shall be paid in arrears semi-annually on February 1 and August 1 in each year, and the amount of accrued Special Interest shall be determined on the basis of the number of days actually elapsed and computed as provided in Section 310. In the case of a default in payment of principal and premium, if any, upon acceleration or redemption, interest shall be payable pursuant to the preceding paragraph on such overdue principal (and premium, if any), such interest shall be payable on demand and, if not so paid on demand, such interest shall itself bear interest at the rate of 1% per annum (to the extent that the payment of such interest shall be legally enforceable), and shall accrue from the date of such demand for payment to the date payment of such interest has been made or duly provided for, and such interest on unpaid interest shall also be payable on demand. -34- On each Interest Payment Date occurring on or prior to February 1, 2002, the Company may, at its option, in lieu of the payment in cash of any portion of interest due and payable on such Interest Payment Date, by giving notice to the Trustee not less than 10 nor more than 30 days prior to the Regular Record Date for such Interest Payment Date, execute, and deliver to the Trustee for authentication, together with a Company Order given not less than 10 nor more than 30 days prior to such Interest Payment Date for the authentication and delivery of additional Securities dated such Interest Payment Date in an aggregate principal amount equal to such portion of interest; and the Trustee in accordance with such Company Order shall authenticate and deliver to the Holders of record on such Regular Record Date such additional Securities requested in such Company Order (such duly executed and authenticated additional Securities being of the same series as the Securities and referred to herein as "Secondary Securities"), and the due issuance of such Secondary Securities shall constitute full payment of such portion of interest; provided, however, that interest shall not so be payable in whole or part in Secondary Securities in lieu of cash from and after the date of any deposit of money pursuant to Section 401 or the defeasance or covenant defeasance of the Securities pursuant to Article Twelve. The Company shall pay interest on each Secondary Security from the Interest Payment Date to which its issuance relates. Each issuance of Secondary Securities in lieu of the payment in cash of all or any portion of interest on the Securities shall be made pro rata with respect to the Outstanding Securities. All Secondary Securities shall be issued in the same series as the Securities originally issued pursuant to the Indenture, and all Holders of Secondary Securities shall be treated as Holders of Securities for any and all purposes of any Act of Holders or of other action of Holders or otherwise pursuant to this Indenture except as may otherwise be required by law. Any such Secondary Securities shall be governed by the Indenture and the terms of each such Secondary Security shall be identical to the terms of this Security except with respect to, as the case may be, the designation of such Secondary Security (which may (but need not) indicate the Interest Payment Date of its original issuance), its aggregate principal amount, its CUSIP number or other required identifications, any required legends (including with respect to taxation) and the date from which interest accrues and except as may otherwise be required by law. Notwithstanding the foregoing, Secondary Securities may be issued on any given Interest Payment Date in separate series if such is required pursuant to a change in law after the Issue Date, and, in such event, the Holders of Secondary Securities shall continue to be treated in all respects as Holders of Securities for all purposes of this Indenture (including with respect to any Act of Holders or any other action of Holders or otherwise pursuant to this Indenture) except as required by such change in law. The principal of and premium, if any, and interest on the Securities shall be payable at the corporate trust office of the Trustee in the Borough of Manhattan, The City of New York, New York, maintained for such purpose and at any other office or agency maintained by the Company for such purpose; provided, however, that at the option of the Company payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register. The Securities shall be subject to repurchase by the Company pursuant to an Offer to Purchase as provided in Sections 1013 and 1016. The Securities shall not have the benefit of any sinking fund obligations. Unless provided pursuant to clause (8) of Section 901 following a Covenant Amendment, the Securities shall not be redeemable at the option of the Company. -35- The Securities shall be subject to defeasance at the option of the Company as provided in Article Twelve. The Securities shall be subordinated in right of payment to Senior Debt as provided in Article Thirteen. Unless the context otherwise requires, the Original Securities and the Exchange Securities shall constitute one series for all purposes under this Indenture, including without limitation, amendments, waivers, redemptions and Offers to Purchase. SECTION 302. Denominations. The Securities are issuable only in registered form without coupons in denominations of $1 and any integral multiple thereof. SECTION 303. Execution, Authentication, Delivery and Dating. The Securities shall be executed on behalf of the Company by its Chief Executive Officer, its President or one of its Vice Presidents, and attested by its Secretary or one of its Assistant Secretaries. The signature of any of these officers on the Securities may be manual or facsimile. Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities; and the Trustee in accordance with such Company Order shall authenticate and deliver such Securities as in this Indenture provided and not otherwise. If prior to the Issue Date the Company has not exchanged Preferred Shares initially issued for Preferred Shares registered under the Securities Act pursuant to the Exchange Offer, at any time and from time to time after the Issue Date and after the effectiveness of a Registration Statement under the Securities Act with respect thereto, the Company may deliver Exchange Securities executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Exchange Securities and a like principal amount of Original Securities for cancellation in accordance with Section 309, and the Trustee in accordance with such Company Order shall authenticate and deliver such Securities. In authenticating such Exchange Securities, and accepting the additional responsibilities under this Indenture in relation to such Securities, the Trustee shall be entitled to receive, and (subject to Section 601) shall be fully protected in relying upon, an Opinion of Counsel stating, -36- (a) if the form of such Exchange Securities has been established by or pursuant to a Board Resolution, as permitted by Section 301, that such form has been established in conformity with the provisions of this Indenture; (b) if the terms of such Exchange Securities have been established by or pursuant to a Board Resolution, as permitted by Section 301, that such terms have been established in conformity with the provisions of this Indenture; (c) that such Exchange Securities have been duly and validly issued in accordance with the terms of the Indenture, and are entitled to all the rights and benefits set forth herein; and (d) that the issuance of the Exchange Securities in exchange for the Original Securities has been effected in compliance with the Securities Act. If such form or terms have been so established, the Trustee shall not be required to authenticate such Exchange Securities if the issue of such Exchange Securities pursuant to this Indenture will affect the Trustee's own rights, duties or immunities under the Exchange Securities and this Indenture or otherwise in a manner which is not reasonably acceptable to the Trustee. Each Security shall be dated the date of its authentication (except as may be otherwise provided herein with respect to Secondary Securities). No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein executed by the Trustee by manual signature, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder. SECTION 304. Temporary Securities. Pending the preparation of definitive Securities, the Company may execute, and upon a Company Order the Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as evidenced by their execution of such Securities. If temporary Securities are issued, the Company will cause definitive Securities to be prepared without unreasonable delay. After the preparation of definitive Securities, the temporary Securities shall be exchangeable for definitive Securities upon surrender of the temporary Securities at any office or agency of the Company designated pursuant to Section 1002, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like tenor and principal amount of definitive Securities of authorized denominations. Until so exchanged, the temporary -37- Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities. SECTION 305. Global Securities; Registration, Registration of Transfer and Exchange. (a) Global Securities. The provisions of Clauses (1) through (7) below shall apply only to Global Securities: (1) Each Global Security authenticated under this Indenture shall be registered in the name of the Depository or a nominee thereof and delivered to the Depository or a nominee thereof or custodian therefor, and each such Global Security shall constitute a single Security for all purposes of this Indenture. (2) Notwithstanding any other provision in this Indenture, no Global Security may be exchanged in whole or in part for Securities registered, and no transfer of a Global Security in whole or in part may be registered, in the name of any Person other than the Depository or a nominee thereof unless (A) the Depository (i) has notified the Company that it is unwilling or unable to continue as Depository for such Global Security and the Company thereupon fails to appoint a successor Depository or (ii) has ceased to be a clearing agency registered under the Exchange Act. (3) If any Global Security is to be exchanged for other Securities or cancelled in whole, it shall be surrendered by or on behalf of the Depository or its nominee to the Trustee, as Security Registrar, for exchange or cancellation as provided in this Article Three. If any Global Security is to be exchanged for other Securities or cancelled in part, or if another Security is to be exchanged in whole or in part for a beneficial interest in any Global Security, such Global Security shall be so surrendered for exchange or cancellation as provided in this Article Three or, if the Trustee is acting as custodian for the Depository or its nominee (or is party to a similar arrangement) with respect to such Global Security, the principal amount thereof shall be reduced or increased by an amount equal to the portion thereof to be so exchanged or cancelled, or the principal amount of such other Security to be so exchanged for a beneficial interest therein, as the case may be, in each case by means of an appropriate adjustment made on the records of the Trustee, whereupon the Trustee, in accordance with the procedures of the Depository, shall instruct the Depository or its authorized representatives to make a corresponding adjustment to its records. Upon any such surrender or adjustment of a Global Security, the Trustee shall, subject to Section 305(a)(2) and as otherwise provided in this Article Three, authenticate and deliver any Securities issuable in exchange for such Global Security (or any portion thereof) to or upon the order of, and registered in such names as may be directed by, the Depository or its authorized representative. Upon the request of the Trustee in connection with the occurrence of any of the events specified in the preceding paragraph, the Company shall promptly make available to the Trustee a reasonable supply of Securities that are not in the form of Global Securities. The Trustee shall be entitled to rely upon any order, direction or request of the Depository or its authorized representative which is given or made pursuant to this Article Three if such order, direction or request is given or made in accordance with the Applicable Procedures. -38- (4) Every Security authenticated and delivered upon registration of transfer of, or in exchange for or in lieu of, a Global Security or any portion thereof, whether pursuant to this Article Three, Section 906, 1013, 1016 or 1108 or otherwise, shall be authenticated and delivered in the form of, and shall be, a Global Security, unless such Security is registered in the name of a Person other than the Depository or a nominee thereof. (5) None of the Company, the Trustee, any agent of the Trustee, any Paying Agent or the Security Registrar will have any responsibility or liability for any aspect of the Depository's records (or the records of the participant of such Depository) relating to or payments made on account of beneficial ownership interests of a Global Security or for maintaining, supervising or reviewing any records of the Depository relating to such beneficial ownership interests. (6) Subject to the provisions of any legend upon a Security, the registered Holder of a Security may grant proxies and otherwise authorize any Person, including Agent Members and Persons who may hold interests in Agent Members, to take any action that such Holder is entitled to take under this Indenture. (7) Neither Agent Members nor any other Person on whose behalf Agent Members may act shall have any rights under this Indenture with respect to any Global Security held on their behalf by the Depository or under the Global Security, and the Depository 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. 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 Depository or impair, as between the Depository and its Agent Members, the operation of customary practices governing the exercise of the rights of a Holder of any Security. (b) Registration, Registration of Transfer and Exchange and Legends. The Company shall cause to be kept at the Corporate Trust Office of the Trustee a register (the register maintained in such office and in any other office or agency designated pursuant to Section 1002 being herein sometimes collectively referred to as the "Security Register") in which, subject to such reasonable regulations as they may prescribe, the Company shall provide for the registration of Securities and of transfers and exchanges of Securities. The Trustee is hereby appointed "Security Registrar" for the purpose of registering Securities and transfers and exchanges of Securities as herein provided. Such Security Register shall distinguish between Original Securities and Exchange Securities. Upon surrender for registration of transfer of any Security at an office or agency of the Company designated pursuant to Section 1002 for such purpose in accordance with the terms hereof, the Company shall, subject to the other provisions of this Section 305, execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of any authorized denominations and of a like tenor and aggregate principal amount and bearing the applicable legends set forth in Section 202. -39- At the option of the Holder, Securities may be exchanged for other Securities of any authorized denominations and of a like tenor and aggregate principal amount and bearing the applicable legends required to be placed thereon, upon surrender of the Securities to be exchanged at such office or agency. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same debt, and (subject to the provisions in the Original Securities regarding the payment of Special Interest) entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange. Every Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed, by the Holder thereof or his attorney duly authorized in writing. No service charge shall be made to the Holder for any registration of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 303, 304, 305, 906 or 1108 or in accordance with any Offer to Purchase pursuant to Section 1013 or 1016 not involving any transfer. The Company shall not be required (i) to issue, register the transfer of or exchange any Security during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of Securities selected for redemption under Section 1104 and ending at the close of business on the day of such mailing, or (ii) to register the transfer of or exchange any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part. Unless the Company shall determine otherwise, each Security initially issued hereunder in exchange for Preferred Shares shall bear the legends regarding restrictions on transfers, if any, that were borne by the certificates evidencing the Preferred Shares with respect to which such Security was issued and each Secondary Security issued shall bear the same legends regarding restrictions on transfers as the Security with respect to which it was issued. Any such required legend on a Security shall not be removed unless the Company shall have delivered to the Trustee (and the Securities Registrar, if other than the Trustee) a Company Order which states that the Security may be issued without such legend thereon. If a legend has been removed from a Security as provided above, no other Security issued in exchange for all or any part of such Security shall bear such legend, unless the Company has reasonable cause to believe that such other Security is a "restricted security" within the meaning of Rule 144 of the Securities Act and instructs the Trustee to cause a legend to appear thereon. Unless the Company shall determine otherwise, in the event that the Preferred Shares in exchange for which any Security is issued are subject to certification requirements for transfer pursuant to the Certificate of Designations, the Securities issued in exchange therefor shall be subject -40- to identical certification requirements hereunder. The Company shall promptly notify the Trustee and the Securities Registrar (if other than the Trustee) of any such transfer certification requirements. SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities. If any mutilated Security is surrendered to the Trustee, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Security of like tenor and principal amount and bearing a number not contemporaneously outstanding. If there shall be delivered to the Company and the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Security and (ii) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security, a new Security of like tenor and principal amount and bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in the discretion of the Company may, instead of issuing a new Security, pay such Security. Upon the issuance of any new Security under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Security issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. SECTION 307. Payment of Interest; Interest Rights Preserved. Interest on any Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest. Any interest (including Special Interest) on any Security which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "Defaulted -41- Interest") shall (a) bear interest at the rate per annum stated in the form of Security included herein (to the extent that the payment of such interest shall be legally enforceable), and (b) forthwith cease to be payable to the Holder on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in Clause (1) or (2) below: (1) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Securities (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this Clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder at his address as it appears in the Security Register, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Securities (or their respective Predecessor Securities) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following Clause (2). (2) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this Clause, such manner of payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall -42- carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security. SECTION 308. Persons Deemed Owners. Prior to due presentment of a Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Security is registered as the owner of such Security for the purpose of receiving payment of principal of and premium, if any, and (subject to Section 307) interest on such Security and for all other purposes whatsoever, whether or not such Security be overdue, and none of the Company, the Trustee or any agent of the Company or the Trustee shall be affected by notice to the contrary. SECTION 309. Cancellation. All Securities surrendered for payment, redemption, registration of transfer, exchange or pursuant to any Offer to Purchase pursuant to Section 1013 or 1016 shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly cancelled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and all Securities so delivered shall be promptly cancelled by the Trustee. No Securities shall be authenticated in lieu of or in exchange for any Securities cancelled as provided in this Section, except as expressly permitted by this Indenture. All cancelled Securities held by the Trustee shall be disposed of in accordance with its standard procedures or as directed by a Company Order; provided, however, that the Trustee shall not be required to destroy such Securities. SECTION 310. Computation of Interest. Interest on the Securities shall be computed on the basis of a 360-day year of twelve 30-day months, provided, however, that any Special Interest payable on Original Securities shall be computed on the basis of a 365 or 366 day year, as the case may be, and the number of days actually elapsed. SECTION 311. CUSIP Numbers. The Company shall in issuing the Securities use CUSIP numbers, and the Trustee shall use the applicable CUSIP number in notices of redemption or exchange as a convenience to the Holders; provided, that any such notice may state that no representation is made as to the accuracy of correctness of the CUSIP number or numbers printed in the notice or on the certificates representing the Securities and that reliance may be placed only on the other identification numbers printed on the certificates representing the Securities. -43- ARTICLE FOUR Satisfaction and Discharge SECTION 401. Satisfaction and Discharge of Indenture. This Indenture shall cease to be of further effect as to all outstanding Securities (except as to (i) rights of registration of transfer and exchange and, if applicable, the Company's right of optional redemption, (ii) substitution of apparently mutilated, defaced, destroyed, lost or stolen Securities, (iii) rights of holders of Securities to receive payment of principal of and premium, if any, and interest on the Securities, (iv) rights, obligations and immunities of the Trustee under this Indenture and (v) rights of the holders of the Securities as beneficiaries of this Indenture with respect to any property deposited with the Trustee payable to all or any of them), and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when (1) either (A) the Company will have paid or caused to be paid the principal of and premium, if any, and interest on the Securities as and when the same will have become due and payable; or (B) all outstanding Securities (except lost, stolen or destroyed Securities which have been replaced or paid) have been delivered to the Trustee for cancellation; and the Company, in the case of (A) above, has deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose an amount sufficient to pay and discharge the entire indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for principal of and premium, if any, and interest to the date of such deposit (in the case of Securities which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be; (2) the Company has paid or caused to be paid all other sums payable hereunder by the Company; (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with; and (4) the Trustee shall have received such other documents and assurances as the Trustee shall have reasonably requested. Notwithstanding the satisfaction and discharge of this Indenture, (i) the obligations of the Company to the Trustee under Section 607, (ii) substitution of apparently mutilated, defaced, destroyed, lost or stolen Securities, (iii) rights of holders of Securities to receive payment of principal of and premium, if any, and interest on the Securities, (iv) rights, obligations and immunities of the Trustee under this Indenture (including, if money shall have been deposited with the Trustee pursuant to subclause (B) of -44- Clause (1) of this Section, the obligations of the Trustee under Section 402 and the last paragraph of Section 1003), and (v) rights of holders of the Securities as beneficiaries of this Indenture with respect to any property deposited with the Trustee payable to all or any of them, shall survive. SECTION 402. Application of Trust Money. Subject to the provisions of the last paragraph of Section 1003, all money deposited with the Trustee pursuant to Section 401 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal (and premium, if any) and interest for whose payment such money has been deposited with the Trustee. ARTICLE FIVE Remedies SECTION 501. Events of Default. "Event of Default", wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be occasioned by the provisions of Article Thirteen or be voluntary or be involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) default in the payment of any interest upon any Security when it becomes due and payable, and continuance of such default for a period of 30 day; or (2) default in the payment of the principal of (or premium, if any, on) any Security when due; or (3) default in the payment of principal and interest upon any Security required to be purchased pursuant to an Offer to Purchase pursuant to Sections 1013 or 1016 when due and payable; or (4) default in the performance, or breach, of Section 801; or (5) default in the performance, or breach, of any covenant or warranty of the Company in this Indenture or in any Security (other than a covenant or warranty a default in whose performance or whose breach is elsewhere in this Section specifically dealt with), and continuance of such default or breach for a period of 60 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in aggregate principal amount of the Outstanding -45- Securities a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (6) a default or defaults under any bond(s), debenture(s), note(s) or other evidence(s) of Debt by the Company or any Significant Subsidiary of the Company or under any mortgage(s), indenture(s) or instrument(s) under which there may be issued or by which there may be secured or evidenced any Debt of such type by the Company or any such Significant Subsidiary with a principal amount then outstanding, individually or in the aggregate, in excess of $10 million, whether such Debt now exists or shall hereafter be created, which default or defaults shall constitute a failure to pay such Debt when due at the final maturity thereof, or shall have resulted in such Debt becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable; or (7) a final judgment or final judgments (not subject to appeal) for the payment of money are entered against the Company or any Significant Subsidiary in an aggregate amount in excess of $15 million by a court or courts of competent jurisdiction, which judgments remain undischarged or unstayed for a period (during which execution shall not be effectively stayed) of 45 days after the right to appeal all such judgments has expired; or (8) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Company or any Significant Subsidiary in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order adjudging the Company or any Significant Subsidiary a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company or any Significant Subsidiary under any applicable Federal or State law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or any Significant Subsidiary or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 60 consecutive days; or (9) the commencement by the Company or any Significant Subsidiary of a voluntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree or order for relief in respect of the Company or any Significant Subsidiary in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable Federal or State law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or any Significant Subsidiary or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company or any Significant Subsidiary in furtherance of any such action. -46- SECTION 502. Acceleration of Maturity; Rescission and Annulment. If an Event of Default (other than an Event of Default specified in Section 501(8) or (9) with respect to the Company) occurs and is continuing, then and in every such case the Trustee or the Holders of not less than 25% in aggregate principal amount of the Outstanding Securities may declare the Default Amount of all the Securities to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Holders), and upon any such declaration such Default Amount and any accrued interest, together with all other amounts due under this Indenture, shall become immediately due and payable. If an Event of Default specified in Section 501(8) or (9) with respect to the Company occurs, the Default Amount of and any accrued interest on the Securities then Outstanding, together with all other amounts due under this Indenture, shall ipso facto become immediately due and payable without any declaration or other Act on the part of the Trustee or any Holder. The "Default Amount" in respect of any particular Security as of any particular date of acceleration shall equal the principal amount of the Security plus accrued and unpaid interest to such date. At any time after such a declaration of acceleration has been made and before a judgment or decree for payment of the money due based on acceleration has been obtained by the Trustee as hereinafter in this Article provided, the Holders of a majority in aggregate principal amount of the Outstanding Securities, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if: (1) the Company has paid or deposited with the Trustee a sum sufficient to pay (A) all overdue interest on all Securities, (B) the principal of (and premium, if any, on) any Securities which have become due otherwise than by such declaration of acceleration (including any Securities required to have been purchased on the Purchase Date pursuant to an Offer to Purchase made by the Company) and interest thereon at the rate borne by the Securities, (C) to the extent that payment of such interest is lawful, interest upon overdue interest at the applicable rate borne by the Securities, and (D) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and (2) all Events of Default, other than the non-payment of the principal of Securities which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 513. -47- No such rescission shall affect any subsequent default or impair any right consequent thereon. SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee. The Company covenants that if (1) default is made in the payment of any interest on any Security when such interest becomes due and payable and such default continues for a period of 30 days, or (2) default is made in the payment of the principal of (or premium, if any, on) any Security at the Maturity thereof or, with respect to any Security required to have been purchased pursuant to an Offer to Purchase made by the Company, at the Purchase Date thereof, the Company will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Securities, the whole amount then due and payable on such Securities for principal (and premium, if any) and interest, and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal (and premium, if any) and on any overdue interest, at the rate provided by the Securities, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses incurred by the Trustee under this Indenture, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree, and may enforce the same against the Company or any other obligor upon the Securities and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon the Securities, wherever situated. If an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders by such appropriate judicial proceedings as the Trustee shall deem most effective to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 504. Trustee May File Proofs of Claim. In case of any judicial proceeding relative to the Company (or any other obligor upon the Securities), its property or its creditors, the Trustee shall be entitled and empowered, by intervention in such proceeding or otherwise, to take any and all actions authorized under the Trust Indenture Act in order to have claims of the Holders and the Trustee allowed in any such proceeding. In particular, the Trustee shall be authorized to collect and receive any moneys, securities or other property payable or deliverable upon the exchange of the Securities or upon any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such -48- payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 607. No provision of this Indenture shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding; provided, however, that the Trustee may, on behalf of the Holders, vote for the election of a trustee in bankruptcy or similar official and be a member of a creditors or other similar committee. SECTION 505. Trustee May Enforce Claims Without Possession of Securities. All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered. SECTION 506. Application of Money Collected. Subject to Article Thirteen, any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal (or premium, if any) or interest, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the payment of all amounts due the Trustee under Section 607; and SECOND: To the extent provided in Article Thirteen, to the holders of Senior Debt in accordance with Article Thirteen; and THIRD: To the payment of the amounts then due and unpaid for principal of (and premium, if any) and interest on the Securities in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal (and premium, if any) and interest, respectively. The Trustee, upon prior written notice to the Company, may fix a record date and payment date for any payment to the Holders pursuant to this Section 506. -49- SECTION 507. Limitation on Suits. No Holder of any Security shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (1) such Holder has previously given written notice to the Trustee of a continuing Event of Default; (2) the Holders of at least 25% in aggregate principal amount of the Outstanding Securities shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (3) such Holder or Holders have offered and, if requested, provided to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (4) the Trustee for 60 days after its receipt of such notice, request and offer and, if requested, provision of indemnity has failed to institute any such proceeding; and (5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Securities; it being understood and intended that no one or more Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all the Holders. SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and Interest. Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment of the principal of (and premium, if any) and (subject to Section 307) interest on such Security on the respective Stated Maturities expressed in such Security (or, in the case of redemption, on the Redemption Date or, in the case of an Offer to Purchase made by the Company and required to be accepted as to such Security, on the Purchase Date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder. SECTION 509. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, sub- -50- ject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 510. Rights and Remedies Cumulative. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in the last paragraph of Section 306, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 511. Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Security to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. SECTION 512. Control by Holders. The Holders of a majority in aggregate principal amount of the Outstanding Securities shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee, provided that (1) such direction shall not be in conflict with any rule of law or with this Indenture or expose the Trustee to personal liability (as determined in the sole discretion of the Trustee), and (2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. The Trustee may refuse, however, to follow any direction that the Trustee, in its sole discretion, determines may be unduly prejudicial to the rights of another Holder or that may subject the Trustee to any liability or expense if the Trustee determines, in its sole discretion, that it lacks indemnification against such loss or expense. -51- SECTION 513. Waiver of Past Defaults. The Holders of not less than a majority in aggregate principal amount of the Outstanding Securities may on behalf of the Holders of all the Securities by written notice to the Trustee waive any past default hereunder and its consequences, except a default (1) in the payment of the principal of (or premium, if any) or interest on any Security (including any Security which is required to have been purchased pursuant to an Offer to Purchase which has been made by the Company), or (2) in respect of a covenant or provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each Outstanding Security affected or (3) arising from failure to purchase any Security tendered pursuant to Sections 1013 and 1016. Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. SECTION 514. 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 Trustee, a court may require any party litigant in such suit to file an undertaking to pay the costs of such suit, and may assess costs against any such party litigant, in the manner and to the extent provided in the Trust Indenture Act; provided that neither this Section nor the Trust Indenture Act shall be deemed to authorize any court to require such an undertaking or to make such an assessment in any suit instituted by the Company. SECTION 515. Waiver of Stay or Extension Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenant that they will not 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 had been enacted. -52- ARTICLE SIX The Trustee SECTION 601. Certain Duties and Responsibilities. The duties and responsibilities of the Trustee shall be as provided by the Trust Indenture Act. Notwithstanding the foregoing, no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section. SECTION 602. Notice of Defaults. The Trustee shall give the Holders notice of any Default hereunder as and to the extent provided by the Trust Indenture Act, unless such Default has been cured or waived; provided, however, that in the case of any Default of the character specified in Section 501(5), no such notice to Holders shall be given until at least 30 days after the occurrence thereof. SECTION 603. Certain Rights of Trustee. Subject to the provisions of Section 601: (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or a Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution; (c) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate or an Opinion of Counsel; (d) the Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; -53- (e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction reasonably satisfactory to the Trustee; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; and (h) the Trustee shall not be liable for any action taken, suffered or omitted by it in good faith which the Trustee reasonably believed to have been authorized or within its rights or powers. SECTION 604. Not Responsible for Recitals or Issuance of Securities. The recitals contained herein and in the Securities, except the Trustee's certificates of authentication, shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or the Securities. The Trustee shall not be accountable for the use or application by the Company of Securities or the proceeds thereof. SECTION 605. May Hold Securities. The Trustee, any Paying Agent, any Security Registrar (if other than the Trustee) or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities and, subject to Sections 608 and 613, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Paying Agent, Security Registrar or such other agent. SECTION 606. Money Held in Trust. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Company. -54- SECTION 607. Compensation and Reimbursement. The Company agrees (1) to pay to the Trustee from time to time reasonable compensation for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (2) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and (3) to indemnify the Trustee for, and to hold it harmless against, any loss, liability or expense (including the reasonable compensation, expenses and disbursements of its agents, accountants, experts and counsel) incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of enforcing this Indenture against the Company (including, without limitation, this Section 607) and of defending itself against any claim (whether asserted by any Holder or the Company) or liability in connection with the exercise or performance of any of its powers or duties hereunder. The provisions of this Section 607 shall survive any termination of this Indenture and the resignation or removal of the Trustee. As security for the performance of the obligations of the Company under this Section 607, the Trustee shall have a lien prior to the Securities upon all property and funds held or collected by the Trustee, except funds held in trust for the payment of principal of (and premium, if any) or interest on particular Securities. The Trustee's right to receive payment of any amounts due under this Section 607 shall not be subordinate to any other liability or indebtedness of the Company (even though the Securities may be so subordinated). When the Trustee incurs expenses or renders services after an Event of Default specified in Section 501(8) or (9) occurs, the expenses and the compensation for such services are intended to constitute expenses of administration under Title 11, U.S. Code, or any similar Federal state or foreign law for the relief of debtors. SECTION 608. Disqualification; Conflicting Interests. If the Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Indenture. -55- SECTION 609. Corporate Trustee Required; Eligibility. There shall at all times be a Trustee hereunder which shall be a Person that is eligible pursuant to the Trust Indenture Act to act as such and has a combined capital and surplus of at least $50,000,000 and its Corporate Trust Office in the Borough of Manhattan, The City of New York, New York. If such Person publishes reports of condition at least annually, pursuant to law or to the requirements of a Federal, State, Territorial or District of Columbia supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. SECTION 610. Resignation and Removal; Appointment of Successor. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee under Section 611, at which time the retiring Trustee shall be fully discharged from its obligations hereunder. (b) The Trustee may resign at any time by giving written notice thereof to the Company. If an instrument of acceptance by a successor Trustee shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. (c) The Trustee may be removed at any time by Act of the Holders of a majority in principal amount of the Outstanding Securities, delivered to the Trustee and to the Company. (d) If at any time: (1) the Trustee shall fail to comply with Section 608 after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or (2) the Trustee shall cease to be eligible under Section 609 and shall fail to resign after written request therefor by the Company or by any such Holder, or (3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, (i) the Company by Board Resolution may remove the Trustee, or (ii) subject to Section 514, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. -56- (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Company, by Board Resolution, shall promptly appoint a successor Trustee. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor Trustee and supersede the successor Trustee appointed by the Company. If no successor Trustee shall have been so appointed by the Company or the Holders and accepted appointment in the manner hereinafter provided, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee to all Holders in the manner provided in Section 106. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. SECTION 611. Acceptance of Appointment by Successor. Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on request of the Company or the successor Trustee under Section 607, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder. Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts. No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. SECTION 612. Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided that such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities. -57- SECTION 613. Preferential Collection of Claims Against the Company. If and when the Trustee shall be or become a creditor of the Company (or any other obligor upon the Securities), the Trustee shall be subject to the provisions of the Trust Indenture Act regarding the collection of claims against the Company (or any such other obligor). SECTION 614. Appointment of Authenticating Agent. The Trustee may appoint an Authenticating Agent or Agents with respect to the Securities which shall be authorized to act on behalf of the Trustee to authenticate Securities issued upon original issue and upon exchange, registration of transfer or partial redemption thereof or pursuant to Section 306, and Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Wherever reference is made in this Indenture to the authentication and delivery of Securities by the Trustee or the Trustee's certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Company and shall at all times be a corporation organized and doing business under the laws of the United States of America, any State thereof or the District of Columbia, authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of not less than $50,000,000 and subject to supervision or examination by Federal or State authority. If such Authenticating Agent publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section. Any corporation into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any corporation succeeding to the corporate agency or corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent, provided such corporation shall be otherwise eligible under this Section, without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent. An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee and to the Company. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Trustee may appoint a successor Authenticating Agent which shall be acceptable to the Company and shall give notice of such appointment in the manner provided in Section 106 to all Holders of Securities. Any successor Authenticating Agent upon acceptance of its appointment -58- hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent. No successor Authenticating Agent shall be appointed unless eligible under the provisions of this Section. The Trustee agrees to pay to each Authenticating Agent from time to time reasonable compensation for its services under this Section, and the Trustee shall be entitled to be reimbursed for such payments, subject to the provisions of Section 607. If an appointment is made pursuant to this Section, the Securities may have endorsed thereon, in lieu of the Trustee's certificate of authentication, an alternative certificate of authentication in the following form: This is one of the Securities referred to in the within-mentioned Indenture. United States Trust Company of New York, As Trustee By______________________________________, As Authenticating Agent By______________________________________ Authorized Signatory -59- ARTICLE SEVEN Holders' Lists and Reports by Trustee and the Company SECTION 701. The Company to Furnish Trustee Names and Addresses of Holders. The Company will furnish or cause to be furnished to the Trustee (a) semi-annually, not more than 15 days after each Regular Record Date, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders as of such Regular Record Date, and (b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; excluding from any such list names and addresses received by the Trustee in its capacity as Security Registrar. SECTION 702. Preservation of Information; Communications to Holders. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 701 and the names and addresses of Holders received by the Trustee in its capacity as Security Registrar. The Trustee may destroy any list furnished to it as provided in Section 701 upon receipt of a new list so furnished. (b) The rights of Holders to communicate with other Holders with respect to their rights under this Indenture or under the Securities, and the corresponding rights and duties of the Trustee, shall be as provided by the Trust Indenture Act. (c) Every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that none of the Company, the Trustee or any agent of any of them shall be held accountable by reason of any disclosure of information as to names and addresses of Holders made pursuant to the Trust Indenture Act. SECTION 703. Reports by Trustee. (a) The Trustee shall transmit to Holders such reports concerning the Trustee and its actions under this Indenture as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto. (b) A copy of each such report shall, at the time of such transmission to Holders, be filed by the Trustee with each stock exchange upon which the Securities are listed, with the -60- Commission and with the Company. The Company will notify the Trustee when the Securities are listed on any stock exchange. SECTION 704. Reports by the Company. The Company shall file with the Trustee and the Commission, and transmit to Holders, such information, documents and other reports, and such summaries thereof, as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant to such Act and in the manner set forth in Section 1017; provided that any such information, documents or reports required to be filed with the Commission pursuant to Section 13 or 15(d) of the Exchange Act ("SEC Reports") shall be filed with the Trustee within 15 days after the same is so required to be filed with the Commission. In the event the Company shall cease to be required to file SEC Reports pursuant to the Exchange Act, the Company will nonetheless continue to file such reports with the Commission (unless the Commission will not accept such a filing) and the Trustee and to furnish copies of such SEC Reports to the Holders of Securities at the time the Company are required to file such reports with the Trustee and will make such information available to investors who request it in writing. SECTION 705. Officers' Certificate with Respect to Change in Interest Rates. In the event that (i) any Special Interest becomes payable on the Securities, (ii) the amount of Special Interest so payable increases, or (iii) any Special Interest ceases to be so payable, then within three Business Days of such event the Company shall deliver an Officers' Certificate to the Trustee stating the new interest rate and the date on which it became effective. ARTICLE EIGHT Merger, Consolidation, Etc. SECTION 801. Mergers, Consolidations and Certain Sales of Assets. (a) The Company may not, in a single transaction or a series of related transactions, (i) consolidate with or merge into any other Person or permit any other Person to consolidate with or merge into the Company (other than a consolidation or merger of a Wholly-Owned Restricted Subsidiary organized under the laws of a State of the United States into the Company), or (ii) directly or indirectly, transfer, sell, lease or otherwise dispose of all or substantially all of its assets (determined on a consolidated basis for the Company and its Restricted Subsidiaries taken as a whole and provided that the creation of a Lien on or in any of its assets shall not in and of itself constitute the transfer, sale, lease or disposition of the assets subject to the Lien), unless: (1) in a transaction in which the Company does not survive or in which the Company sells, leases or otherwise disposes of all or substantially all of its assets to any other Person, the successor entity to the Company is organized under the laws of the United States of America or any State thereof or the District of Columbia and shall expressly assume, by a supplemental indenture executed and delivered to the Trustee in form satisfactory to the Trustee, all of the Company's obligations -61- under this Indenture; (2) immediately after giving pro forma effect to such transaction as if such transaction had occurred at the beginning of the last full fiscal quarter immediately prior to the consummation of such transaction with the appropriate adjustments with respect to the transaction being included in such pro forma calculation and treating any Debt which becomes an obligation of the Company or a Subsidiary as a result of such transaction as having been Incurred by the Company or such Subsidiary at the time of the transaction, no Default or Event of Default shall have occurred and be continuing; (3) immediately after giving effect to such transaction, the Consolidated Net Worth of the Company (or other successor entity to the Company) is equal to or greater than that of the Company immediately prior to the transaction; (4) if, as a result of any such transaction, property or assets of the Company would become subject to a Lien prohibited by the provisions of Section 1011, the Company or the successor entity to the Company shall have secured the Securities as required by Section 1011; and (5) the Company has delivered to the Trustee an Officer's Certificate and an Opinion of Counsel, each in form and substance satisfactory to the Trustee stating that such consolidation, merger, conveyance, transfer, lease or acquisition and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture, complies with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with, and, with respect to such Officer's Certificate, setting forth the manner of determination of the Consolidated Net Worth in accordance with Clause (3) of Section 801, of the Company or, if applicable, of the Successor Company as required pursuant to the foregoing. (b) In the event of any transaction (other than a lease) described in and complying with the immediately preceding paragraph in which the Company is not the surviving Person and the surviving Person assumes all the obligations of the Company under the Securities and this Indenture pursuant to a supplemental indenture, such surviving Person shall succeed to, and be substituted for, and may exercise every right and power of, the Company, and the Company will be discharged from its obligations under this Indenture and the Securities; provided that solely for the purpose of calculating amounts under Section 1009(3), any such surviving Person shall only be deemed to have succeeded to and be substituted for the Company with respect to the period subsequent to the effective time of such transaction, and the Company (before giving effect to such transaction) shall be deemed to be the "Company" for such purposes for all prior periods. SECTION 802. Successor Substituted. Upon any consolidation of the Company with, or merger of the Company with or into, any other Person or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety in accordance with Section 801, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease 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 had been named as the Company herein, and thereafter, except in the case of a lease, the predecessor Person shall be relieved of all obligations and covenants under this Indenture and the Securities. -62- ARTICLE NINE Supplemental Indentures SECTION 901. Supplemental Indentures Without Consent of Holders. Without the consent of any Holders, the Company, when authorized by Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (1) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company herein and in the Securities; or (2) to add to the covenants of the Company for the benefit of the Holders, or to surrender any right or power herein conferred upon the Company; or (3) to secure the Securities pursuant to the requirements of Section 1011 or otherwise; or (4) to modify, eliminate or add to the provisions of this Indenture to such extent as shall be necessary to comply with any requirement of the Commission in order to effect qualification of this Indenture under the Trust Indenture Act in connection with the Exchange Offer Registration Statement or thereafter to maintain the qualification of this Indenture under the Trust Indenture Act; (5) to modify the restrictions on, and procedures for, resale and other transfers of the Securities to the extent required by any change in applicable law or regulation (or the interpretation thereof) of the United States of America or in practices relating to the resale or transfer of restricted securities (as defined in Rule 144) generally; or (6) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture which shall not be inconsistent with the provisions of this Indenture, provided that such action pursuant to this Clause (6) shall not adversely affect the legal rights of the Holders; (7) to provide for uncertificated Securities in addition to or in place of certificated Securities; or (8) following a Covenant Amendment, to add provisions making the Securities redeemable at the option of the Company as follows: (i) at any time on or after February 1, 2002 and prior to maturity, in whole or in part, upon not less than 30 nor more than 60 days' notice mailed to each Holder to be redeemed at such Holder's address appearing in the Security Register, in amounts of $1,000 or an integral multiple of $1,000, at the following Redemption Prices (expressed as percentages of the principal amount) plus accrued interest to but -63- excluding the Redemption Date (subject to the right of Holders of record on the relevant Regular Record Date to receive interest due on an Interest Payment Date that is on or prior to the Redemption Date), if redeemed during the 12-month period beginning February 1 of the years indicated: Redemption Year Price ---- ---------- 2002.................................................... 107.00% 2003.................................................... 105.25% 2004.................................................... 103.50% 2005.................................................... 101.75% 2006 and thereafter..................................... 100.00% (ii) prior to February 1, 2000, in part, in an aggregate principal amount not to exceed $99.75 million out of the net cash proceeds of one or more Qualifying Events (other than a Qualifying Event that results in a Change of Control), provided, however, that Securities in an aggregate principal amount equal to at least $185.25 million remain outstanding after such redemption. Such redemption must occur on a Redemption Date within 60 days after the receipt by the Company of the proceeds of such Qualifying Event and upon not less than 30 or nor more than 60 days' notice mailed to each Holder of Securities to be redeemed at such Holder's address appearing in the Note Register, in amounts of $1,000 or an integral multiple of $1,000 at a redemption price of 114% of their principal amount plus accrued and unpaid interest to but excluding the Redemption Date (subject to the right of holders of record on the relevant Regular Record Date to receive interest due on an Interest Payment Date that is on or prior to the Redemption Date). SECTION 902. Supplemental Indentures with Consent of Holders. With the consent of the Holders of not less than a majority in aggregate principal amount of the Outstanding Securities, by Act of said Holders delivered to the Company and the Trustee, and consistent with Section 513, the Company, when authorized by Board Resolution and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security affected thereby, (1) change the Stated Maturity of the principal of, or any installment of interest on, any Security, or reduce the principal amount thereof or the rate of interest thereon or any premium payable thereon, or change the place of payment where, or the coin or currency in which, any Security or any premium or interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof -64- (or, in the case of redemption, on or after the Redemption Date) or, in the case of an Offer to Purchase which has been made, on or after the applicable Purchase Date, or (2) reduce the percentage in principal amount of the Outstanding Securities, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences) provided for in this Indenture, or (3) modify any of the provisions of this Section, Section 513 or Section 1019, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Security affected thereby, or (4) following the mailing of an Offer with respect to an Offer to Purchase pursuant to Section 1013 or 1016 and until the Expiration Date of such Offer to Purchase, modify the provisions of this Indenture with respect to such Offer to Purchase in a manner materially adverse to such Holder, or (5) modify any of the provisions of this Indenture relating to the subordination of the Securities in a manner adverse to the Holders. It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. SECTION 903. Execution of Supplemental Indentures. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 601) 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. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 904. Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. No such supplemental indenture shall directly or indirectly modify the provisions of Article Thirteen in any manner which might terminate or impair the rights of the Senior Debt pursuant to such subordination provisions. -65- SECTION 905. Conformity with Trust Indenture Act. Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act. SECTION 906. Reference in Securities to Supplemental Indentures. Securities authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities so modified as to conform, in the opinion of the Trustee and the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities. ARTICLE TEN Covenants SECTION 1001. Payment of Principal, Premium and Interest. The Company will duly and punctually pay the principal of and premium, if any, and interest on the Securities in accordance with the terms of the Securities and this Indenture. SECTION 1002. Maintenance of Office or Agency. The Company will maintain in the Borough of Manhattan, The City of New York, New York, an office or agency where Securities may be presented or surrendered for payment, where Securities may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. The Company may also from time to time designate one or more other offices or agencies (in or outside the Borough of Manhattan, The City of New York, New York) where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, The City of New York, New York for such purposes. The Company will give prompt -66- written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. SECTION 1003. Money for Security Payments to be Held in Trust. If the Company shall at any time act as its own Paying Agent, they will, on or before each due date of the principal of (and premium, if any) or interest on any of the Securities, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal (and premium, if any) or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee in writing of its action or failure so to act. As provided in Section 504, upon any bankruptcy or reorganization proceeding relative to the Company, the Trustee shall serve as the Paying Agent for the Securities. Whenever the Company shall have one or more Paying Agents, it will, prior to each due date of the principal of (and premium, if any) or interest on any Securities, deposit with a Paying Agent a sum sufficient to pay the principal (and premium, if any) or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal, premium or interest, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee in writing of its action or failure so to act. As provided in Section 504, upon any bankruptcy or reorganization proceeding relative to the Company the Trustee shall serve as the Paying Agent for the Securities. The Company will cause each Paying Agent other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will: (1) hold all sums held by it for the payment of the principal of (and premium, if any) or interest on Securities in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (2) give the Trustee notice of any default by the Company (or any other obligor upon the Securities) in the making of any payment of principal (and premium, if any) or interest; (3) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent; and (4) acknowledge, accept and agree to comply in all respects with the provisions of this Indenture relating to the duties, rights and obligations of such Paying Agent. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the -67- Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of (and premium, if any) or interest on any Security and remaining unclaimed for two years after such principal (and premium, if any) or interest has become due and payable shall be paid to the Company on a Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in the Borough of Manhattan, The City of New York, New York, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company. SECTION 1004. Existence. Subject to Article Eight, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its existence, rights (charter and statutory) and franchises; provided, however, that the Company shall not be required to preserve any such right or franchise if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and that the loss thereof is not disadvantageous in any material respect to the Holders. SECTION 1005. Maintenance of Properties and Insurance. The Company will cause all properties used or useful in the conduct of its business or the business of any Subsidiary to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this Section shall prevent the Company from discontinuing the operation or maintenance of any of such properties if such discontinuance is, as determined in the good faith judgment of the Board of Directors and evidenced by a Board Resolution, desirable in the conduct of its business or, in the case of the Company, the business of any Subsidiary, and not disadvantageous in any material respect to the Holders. The Company shall, and shall cause the Subsidiaries of the Company to, keep at all times all of their properties which are of an insurable nature insured against loss or damage with insurers believed by the Company to be responsible to the extent that property of similar character is usually so insured by corporations similarly situated and owning like properties in accordance with good business practice. -68- SECTION 1006. Payment of Taxes and Other Claims. The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (1) all taxes, assessments and governmental charges levied or imposed upon the Company or any Subsidiaries of the Company or upon the income, profits or property of the Company or any Subsidiaries, and (2) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien upon the property of the Company or any Subsidiaries of the Company; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings. SECTION 1007. Limitation on Consolidated Debt. The Company may not, and may not permit any Restricted Subsidiary of the Company to, Incur any Debt unless either (a) the ratio of (i) the aggregate consolidated principal amount of Debt of the Company outstanding as of the most recent available quarterly or annual balance sheet, after giving pro forma effect to the Incurrence of such Debt and any other Debt Incurred since such balance sheet date and the receipt and application of the proceeds thereof to (ii) Consolidated Cash Flow Available for Fixed Charges for the four full fiscal quarters next preceding the Incurrence of such Debt for which consolidated financial statements are available, determined on a pro forma basis as if any such Debt had been Incurred and the proceeds thereof had been applied at the beginning of such four fiscal quarters, would be less than 5.5 to 1 for such four-quarter periods ending on or prior to December 31, 1999 and 5.0 to 1 for such periods ending thereafter, or (b) the Company's Consolidated Capital Ratio as of the most recent available quarterly or annual balance sheet, after giving pro forma effect to the Incurrence of such Debt and any other Debt Incurred since such balance sheet date and the receipt and application of the proceeds thereof, is less than 2.0 to 1. Notwithstanding the foregoing limitation, the Company and any Restricted Subsidiary may Incur the following: (i) Debt under any one or more Bank Credit Agreements or Vendor Financing Facilities in an aggregate principal amount at any one time not to exceed $125 million, and any renewal, extension, refinancing or refunding thereof in an amount which, together with any principal amount remaining outstanding or available under all Bank Credit Agreements and Vendor Financing Facilities of the Company and its Restricted Subsidiaries, plus the amount of any premium required to be paid in connection with such refinancing pursuant to the terms of any Bank Credit Agreement so refinanced plus the amount of expenses incurred in connection with such refinancing, does not exceed the aggregate principal amount outstanding or available under all such Bank Credit Agreements and Vendor Financing Facilities of the Company and its Restricted Subsidiaries immediately prior to such renewal, extension, refinancing or refunding; (ii) Purchase Money Debt Incurred to finance the construction, acquisition or improvement of Telecommunications Assets, provided that the net proceeds of such Purchase -69- Money Debt do not exceed 80% of the cost of construction, acquisition or improvement price of the applicable Telecommunications Assets; (iii) Debt owed by the Company to any Wholly-Owned Restricted Subsidiary of the Company or Debt owed by a Restricted Subsidiary of the Company to the Company or another Wholly-Owned Restricted Subsidiary of the Company; provided, however, that upon either (x) the transfer or other disposition by such Wholly-Owned Restricted Subsidiary or the Company of any Debt so permitted to a Person other than the Company or another Wholly-Owned Restricted Subsidiary of the Company or (y) the issuance (other than directors' qualifying shares), sale, lease, transfer or other disposition of shares of Capital Stock (including by consolidation or merger) of such Wholly-Owned Restricted Subsidiary to a Person other than the Company or another such Wholly-Owned Restricted Subsidiary, the provisions of this clause (iii) shall no longer be applicable to such Debt and such Debt shall be deemed to have been Incurred at the time of such transfer or other disposition; (iv) Debt Incurred to renew, extend, refinance or refund (each, a "refinancing") (a) Debt referred to in clause (vi) of this paragraph, (b) Debt Incurred pursuant to the preceding paragraph or clause (ii) of this paragraph or (c) the Securities, in an aggregate principal amount not to exceed the aggregate principal amount of and accrued interest on the Debt so refinanced plus the amount of any premium required to be paid in connection with such refinancing pursuant to the terms of the Debt so refinanced or the amount of any premium reasonably determined by the Company as necessary to accomplish such refinancing by means of a tender offer or privately negotiated repurchase, plus the amount of expenses of the Company incurred in connection with such refinancing; provided, however, that Debt the proceeds of which are used to refinance the Securities or Debt which is pari passu to the Securities or debt which is subordinate in right of payment to the Securities shall only be permitted if (1) in the case of any refinancing of the Securities or Debt which is pari passu to the Securities, the refinancing Debt is made pari passu to the Securities or subordinated to the Securities, and, in the case of any refinancing of Debt which is subordinated to the Securities, the refinancing Debt constitutes Subordinated Debt and (2) in either case, the refinancing Debt by its terms, or by the terms of any agreement or instrument pursuant to which such Debt is issued, (x) does not provide for payments of principal of such Debt at the stated maturity thereof or by way of a sinking fund applicable thereto or by way of any mandatory redemption, defeasance, retirement or repurchase thereof by the Company (including any redemption, retirement or repurchase which is contingent upon events or circumstances, but excluding any retirement required by virtue of acceleration of such Debt upon any event of default thereunder), in each case prior to the time the same are required by the terms of the Debt being refinanced and (y) does not permit redemption or other retirement (including pursuant to an offer to purchase made by the Company) of such Debt at the option of the holder thereof prior to the final stated maturity of the Debt being refinanced, other than a redemption or other retirement at the option of the holder of such Debt (including pursuant to an offer to purchase made by the Company) which is conditioned upon a change substantially similar to the provisions of Section 1016 or which is pursuant to provisions substantially similar to the provisions of Section 1013; (v) Debt consisting of Permitted Interest Rate and Currency Protection Agreements; -70- (vi) Debt outstanding at the Issue Date; (vii) Debt outstanding under the Securities; (viii) Subordinated Debt invested by (a) a group of employees of the Company, which includes the Chief Executive Officer of the Company, who own, directly or indirectly, through an employee stock ownership plan or arrangement, shares of the Company's Capital Stock or (b) any other Person that controls the Company (i) on the Issue Date or (ii) after a Change of Control, provided that the Company is not in default with respect to its obligations under Section 1016; (ix) Debt consisting of performance and other similar bonds and reimbursement obligations Incurred in the ordinary course of business securing the performance of contractual, franchise or license obligations of the Company or a Restricted Subsidiary, or in respect of a letter of credit obtained to secure such performance; and (x) Debt not otherwise permitted to be Incurred pursuant to clauses (i) through (ix) above, which, together with any other outstanding Debt Incurred pursuant to this clause (x), has an aggregate principal amount (or, in the case of Debt issued at a discount, an accreted amount (determined in accordance with generally accepted accounting principles) at the time of Incurrence) not in excess of $10 million at any time outstanding. For purposes of determining compliance with this Section 1007, in the event that an item of Debt meets the criteria of more than one of the types of Debt the Company is permitted to incur pursuant to the foregoing clauses (i) through (x), the Company shall have the right, in its sole discretion, to classify such item of Debt and shall only be required to include the amount and type of such Debt under the clause permitting the Debt as so classified. For purposes of determining any particular amount of Debt under such covenant, Guarantees or Liens with respect to letters of credit supporting Debt otherwise included in the determination of a particular amount shall not be included. SECTION 1008. Limitation on Senior Subordinated Debt The Company shall not Incur any Debt which by its terms is both (i) subordinated in right of payment to any Senior Debt and (ii) senior in right of payment to the Securities. SECTION 1009. Limitation on Restricted Payments. The Company (i) may not, directly or indirectly, declare or pay any dividend, or make any distribution, in respect of its Capital Stock or to the holders thereof (in their capacity as such), excluding any dividends or distributions payable solely in shares of its Capital Stock (other than Disqualified Stock) or in options, warrants or other rights to acquire its Capital Stock (other than Disqualified Stock); (ii) may not, and may not permit any Restricted Subsidiary to, purchase, redeem, or otherwise retire or acquire for value (a) any Capital Stock of the Company or any Related Person of the Company; or (b) any options, warrants or rights to purchase or acquire shares of Capital Stock of the Company or any Related Person of the Company or any securities convertible or exchangeable -71- into shares of Capital Stock of the Company or any Related Person of the Company; (iii) may not make, or permit any Restricted Subsidiary to make, any Investment in, or payment on a Guarantee of any obligation of, any Person, other than the Company or a Restricted Subsidiary of the Company, except for Permitted Investments; and (iv) may not, and may not permit any Restricted Subsidiary to, redeem, defease, repurchase, retire or otherwise acquire or retire for value, prior to any scheduled maturity, repayment or sinking fund payment, Debt of the Company which is subordinate in right of payment to the Securities (each of clauses (i) through (iv) being a "Restricted Payment") if: (1) a Default or an Event of Default shall have occurred and is continuing; or (2) upon giving effect to such Restricted Payment, the Company could not Incur at least $1.00 of additional Debt pursuant to the provisions of the first paragraph of Section 1007; or (3) upon giving effect to such Restricted Payment, the aggregate of all Restricted Payments from the Preferred Issue Date exceeds the sum of: (a) 50% of cumulative Consolidated Net Income (or, in the case Consolidated Net Income shall be negative, less 100% of such deficit) since the end of the last full fiscal quarter prior to the Preferred Issue Date through the last day of the last full fiscal quarter ending immediately preceding the date of such Restricted Payment; plus (b) $5 million; plus (c) 100% of the net reduction in Investments in any Unrestricted Subsidiary resulting from payments of interest on Debt, dividends, repayments of loans or advances, or other transfers of assets, in each case to the Company or any Restricted Subsidiary of the Company from such Unrestricted Subsidiary (except to the extent that any such payment is included in the calculation of Consolidated Net Income) or from redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries; provided that the amount included in this clause (c) shall not exceed the amount of Investments previously made by the Company and its Restricted Subsidiaries in such Unrestricted Subsidiary; provided, further, that the Company or a Restricted Subsidiary of the Company may make any Restricted Payment with the aggregate net proceeds received after the Preferred Issue Date, including the fair value of property other than cash (determined in good faith by the Board of Directors, as conclusively evidenced by a Board Resolution), as capital contributions to the Company or from the issuance (other than to a Restricted Subsidiary) of Capital Stock (other than Disqualified Stock) of the Company and warrants, rights or options on Capital Stock (other than Disqualified Stock) of the Company and the principal amount of Debt of the Company that has been converted into Capital Stock (other than Disqualified Stock and other than by a Restricted Subsidiary) of the Company after the Preferred Issue Date. Notwithstanding the foregoing, the Company may (i) pay any dividend on Capital Stock of any class within 60 days after the declaration thereof if, on the date when the dividend was declared, the Company could have paid such dividend in accordance with the foregoing provisions; (ii) repurchase any shares of its Common Equity or options to acquire its Common Equity from Persons who were formerly officers or employees of the Company, provided that the aggregate amount of all such repurchases made pursuant to this clause (ii) shall not exceed $2 million, plus the aggregate cash proceeds received by the Company since the date of this Indenture from issuances of its Common Equity or options to acquire its Common Equity to members, officers, managers and employees of the Company or any of its Subsidiaries; (iii) the Company and its Restricted Subsidiaries may refinance any Debt otherwise permitted by clause (iv) of the second paragraph of Section 1007; and (iv) the Company and its Restricted Subsidiaries may retire or repurchase any Capital Stock of the Company or of any Restricted Subsidiary of the Company in exchange for, or out of the proceeds of the substantially concurrent sale (other than to a Restricted Subsidiary of the Company) of, Capital Stock (other than Disqualified Stock) of the Company. If the Company makes a Restricted Payment which, at the time of the making of such Restricted Payment, would in the good faith determination of the Company be permitted under this Indenture, such Restricted Payment shall -72- be deemed to have been made in compliance with this Indenture notwithstanding any subsequent adjustments made in good faith to the Company financial statements affecting Consolidated Net Income for any period. SECTION 1010. Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries. The Company may not, and may not permit any Restricted Subsidiary to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary of the Company (i) to pay dividends (in cash or otherwise) or make any other distributions in respect of its Capital Stock owned by the Company or any other Restricted Subsidiary of the Company or pay any Debt or other obligation owed to the Company or any other Restricted Subsidiary; (ii) to make loans or advances to the Company or any other Restricted Subsidiary; or (iii) to transfer any of its property or assets to the Company or any other Restricted Subsidiary. Notwithstanding the foregoing, the Company may, and may permit any Restricted Subsidiary to, suffer to exist any such encumbrance or restriction (a) pursuant to any agreement in effect on the Issue Date; (b) pursuant to an agreement relating to any Acquired Debt, which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person so acquired and its Subsidiaries; (c) pursuant to any one or more Bank Credit Agreements or Vendor Financing Facilities (and renewals, extensions, refinancings or refundings thereof) which is permitted to be outstanding under clause (i) of Section 1007, provided that such restriction is consistent with, and not materially more restrictive (as conclusively determined in good faith by the Chief Financial Officer of the Company), taken as a whole, than, comparable provisions included in similar agreements or facilities extended to comparable credits engaged in the Telecommunications Business; (d) pursuant to an agreement effecting a renewal, refunding or extension of Debt Incurred pursuant to an agreement referred to in clause (a) or (b) above or (e) below, provided, however, that the provisions contained in such renewal, refunding or extension agreement relating to such encumbrance or restriction are not materially more restrictive (as conclusively determined in good faith by the Chief Financial Officer of the Company), taken as a whole, than the provisions contained in the agreement the subject thereof; (e) in the case of clause (iii) above, restrictions contained in any security agreement (including a Capital Lease Obligation) securing Debt of the Company or a Restricted Subsidiary otherwise permitted under this Indenture, but only to the extent such restrictions restrict the transfer of the property subject to such security agreement; (f) in the case of clause (iii) above, customary nonassignment provisions entered into in the ordinary course of business in leases and other agreements; (g) any restriction with respect to a Restricted Subsidiary of the Company imposed pursuant to an agreement which has been entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Restricted Subsidiary, provided that consummation of such transaction would not result in a Default or an Event of Default, that such restriction terminates if such transaction is not consummated and that such consummation or abandonment of such transaction occurs within one year of the date such agreement was entered into; (h) pursuant to applicable law or regulations; (i) pursuant to this Indenture and the Securities; or (j) any restriction on the sale or other disposition of assets or property securing Debt as a result of a Permitted Lien on such assets or property. -73- SECTION 1011. Limitation on Liens Securing Subordinated Debt. The Company may not, and may not permit any Restricted Subsidiary of the Company to, Incur or suffer to exist any Lien on or with respect to any property or assets now owned or hereafter acquired to secure any Debt which is pari passu with or subordinated in right of payment to the Securities without making, or causing such Restricted Subsidiary to make, effective provision for securing the Securities (and, if the Company shall so determine, any other Debt of the Company which is not subordinate to the Securities or of such Restricted Subsidiary) (x) equally and ratably with such Debt as to such property or assets for so long as such Debt shall be so secured or (y) in the event such Debt is Debt of the Company which is subordinate in right of payment to the Securities, prior to such Debt as to such property for so long as such Debt shall be so secured. The foregoing restrictions shall not apply to: (i) Liens in respect of Debt existing at the Issue Date; (ii) Liens securing only the Securities; (iii) Liens in favor of the Company or a Wholly-Owned Restricted Subsidiary; or (iv) Liens to secure Debt incurred to extend, renew, refinance or refund (or successive extensions, renewals, refinancings or refundings), in whole or in part, any Debt secured by Liens referred to in the foregoing clauses (i) or (ii) so long as such Lien does not extend to any other property and the principal amount of Debt so secured is not increased except as otherwise permitted under Clause (iv) of the second paragraph of Section 1007. SECTION 1012. Limitation on Issuance of Guarantees of Subordinated Debt. The Company shall not permit any Restricted Subsidiary, directly or indirectly, to assume, Guarantee or in any other manner become liable with respect to any Debt of the Company that is expressly by its terms subordinated or junior in right of payment to any other Debt of the Company unless such Restricted Subsidiary shall make effective provision for guaranteeing the Securities (x) with respect to Debt that ranks pari passu with the Securities, to the same extent as such Debt is to be guaranteed by such Restricted Subsidiary or (y) with respect to Debt that is subordinated in right of payment to the Securities, to a greater extent than such other Debt is to be guaranteed by such Restricted Subsidiary. SECTION 1013. Limitation on Asset Dispositions. (a) The Company may not, and may not permit any Restricted Subsidiary to, make any Asset Disposition in one or more related transactions occurring within any 12-month period unless: (i) the Company or the Restricted Subsidiary, as the case may be, receives consideration for such disposition at least equal to the fair market value for the assets sold or disposed of as determined by the Board of Directors in good faith and evidenced by a Board Resolution, which determination shall be conclusive; (ii) at least 75% of the consideration for such disposition consists of (1) cash or readily marketable cash equivalents or the assumption of Debt of the Company (other than Debt that is subordinated to the Securities) or of the Restricted Subsidiary and release from all liability on the Debt assumed; (2) Telecommunications Assets; or (3) shares of publicly-traded Voting Stock of any Person engaged in the Telecommunications Business in the United States; and (iii) all Net Available Proceeds, less any amounts invested within 360 days of such disposition in new Telecommunications Assets, are applied within 360 days of such disposition (1) first, to the permanent repayment or -74- reduction of Senior Debt then outstanding under any agreements or instruments that would require such application or prohibit payments pursuant to clause (2) following, (2) second, to the extent of remaining Net Available Proceeds, to make an Offer to Purchase outstanding Securities at 100% of their principal amount plus accrued interest to the date of purchase and, to the extent required by the terms thereof, any other Debt of the Company that is pari passu with the Securities at a price no greater than 100% of the principal amount thereof plus accrued interest to the date of purchase, and (3) third, to the extent of any remaining Net Available Proceeds following the completion of the Offer to Purchase, to the repayment of other Debt of the Company or Debt of a Restricted Subsidiary of the Company, to the extent permitted under the terms thereof. To the extent any Net Available Proceeds remain after such uses, the Company and its Restricted Subsidiaries may use such amounts for any purposes not prohibited by this Indenture. (b) The Company will mail the Offer for an Offer to Purchase required pursuant to Section 1013(a) not more than 360 days after consummation of the disposition referred to in Section 1013(a). The aggregate principal amount of the Securities to be offered to be purchased pursuant to the Offer to Purchase shall equal the Net Available Proceeds available therefor pursuant to Clause (iii)(2) of Section 1013(a) (rounded down to the next lowest integral multiple of $1,000). Each Holder shall be entitled to tender all or any portion of the Securities owned by such Holder pursuant to the Offer to Purchase, subject to the requirement that any portion of a Security tendered must be tendered in an integral multiple of $1,000 principal amount. The Company shall not be entitled to any credit against its obligations under this Section 1013 for the principal amount of any Securities acquired or redeemed by the Company otherwise than pursuant to the Offer to Purchase pursuant to this Section 1013. (c) Not later than the date of the Offer with respect to an Offer to Purchase pursuant to this Section 1013, the Company shall deliver to the Trustee an Officers' Certificate as to (i) the Purchase Amount, (ii) the allocation of the Net Available Proceeds from the Asset Disposition pursuant to which such Offer is being made, including, if amounts are invested in Telecommunication Assets, the amount of the assets acquired and (iii) the compliance of such allocation with the provisions of Section 1013(a). The Company and the Trustee shall perform their respective obligations specified in the Offer for the Offer to Purchase. On or prior to the Purchase Date, the Company shall (i) accept for payment (on a pro rata basis, if necessary) Securities or portions thereof tendered pursuant to the Offer, (ii) deposit with the Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 1003) money sufficient to pay the purchase price of all Securities or portions thereof so accepted and (iii) deliver or cause to be delivered to the Trustee all Securities so accepted together with an Officers' Certificate stating the Securities or portions thereof accepted for payment by the Company. The Paying Agent (or the Company, if so acting) shall promptly mail or deliver to Holders of Securities so accepted payment in an amount equal to the purchase price, and the Trustee shall promptly authenticate and mail or deliver to such Holders a new Security of like tenor equal in principal amount to any unpurchased portion of the Security surrendered. Any Security not accepted for payment shall be promptly mailed or delivered by the Company to the Holder thereof. -75- (d) Notwithstanding the foregoing, this Section 1013 shall not apply to any Asset Disposition which constitutes a transfer, conveyance, sale, lease or other disposition of all or substantially all of the Company's properties or assets within the meaning of Section 801 hereof. SECTION 1014. Limitation on Issuances and Sales of Capital Stock of Restricted Subsidiaries. The Company may not, and may not permit any Restricted Subsidiary of the Company to, issue, transfer, convey, sell or otherwise dispose of any shares of Capital Stock of a Restricted Subsidiary of the Company or securities convertible or exchangeable into, or options, warrants, rights or any other interest with respect to, Capital Stock of a Restricted Subsidiary of the Company to any person other than the Company or a Wholly-Owned Restricted Subsidiary of the Company except (i) in a transaction consisting of a sale of Capital Stock of such Restricted Subsidiary owned by the Company or any Restricted Subsidiary of the Company and that complies with the provisions of Section 1013 to the extent such provisions apply; (ii) if required, the issuance, transfer, conveyance, sale or other disposition of directors' qualifying shares; (iii) in a transaction in which, or in connection with which, the Company or a Restricted Subsidiary acquires at the same time sufficient Capital Stock of such Restricted Subsidiary to at least maintain the same percentage ownership interest it had prior to such transaction; and (iv) Disqualified Stock issued in exchange for, or upon conversion of, or the proceeds of the issuance of which are used to redeem, refinance, replace or refund shares of Disqualified Stock of such Restricted Subsidiary, provided that the amounts of the redemption obligations of such Disqualified Stock shall not exceed the amounts of the redemption obligations of, and such Disqualified Stock shall have redemption obligations no earlier than those required by, the Disqualified Stock being exchanged, converted, redeemed, refinanced, replaced or refunded. SECTION 1015. Transactions with Affiliates and Related Persons. The Company may not, and may not permit any Restricted Subsidiary of the Company to, enter into any transaction (or series of related transactions) with an Affiliate or Related Person of the Company (other than the Company or a Wholly-Owned Restricted Subsidiary of the Company), including any Investment, but excluding transactions pursuant to employee compensation arrangements approved by the Board of Directors, either directly or indirectly, unless such transaction is on terms no less favorable to the Company or such Restricted Subsidiary than those that could be obtained in a comparable arm's-length transaction with an entity that is not an Affiliate or Related Person and is in the best interests of such Company or such Restricted Subsidiary. For any transaction that involves in excess of $1 million but less than or equal to $5 million, the Chief Executive Officer of the Company shall determine that the transaction satisfies the above criteria and shall evidence such a determination by an Officer's Certificate filed with the Trustee. For any transaction that involves in excess of $5 million, the Company shall also obtain an opinion from a nationally recognized expert with experience in appraising the terms and conditions, taken as a whole, of the type of transaction (or series of related transactions) for which the opinion is required stating that such transaction (or series of related transactions) is on terms and conditions, taken as a whole, no less favorable to the Company or such Restricted Subsidiary than those that could be obtained in a comparable arm's-length transaction with an entity that is not an Affiliate or Related Person of the Company, which opinion shall be filed with the Trustee. This covenant shall not apply to Investments by an Affiliate or -76- a Related Person of the Company in the Capital Stock (other than Disqualified Stock) of the Company or any Restricted Subsidiary of the Company. SECTION 1016. Change of Control. (a) Within 30 days of the occurrence of a Change of Control, the Company will be required to make an Offer to Purchase all Outstanding Securities at a purchase price equal to 101% of their principal amount plus accrued and unpaid interest to the date of purchase. (b) The Company and Trustee shall perform their respective obligations specified in the Offer for the Offer to Purchase. On or prior to the Purchase Date, the Company shall (i) accept for payment Securities or portions thereof tendered pursuant to the Offer, (ii) deposit with the Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 1003) money sufficient to pay the purchase price of all Securities or portions thereof so accepted and (iii) deliver or cause to be delivered to the Trustee all Securities so accepted together with an Officers' Certificate stating the Securities or portions thereof accepted for payment by the Company. The Paying Agent shall promptly mail or deliver to Holders of Securities so accepted payment in an amount equal to the purchase price, and the Trustee shall promptly authenticate and mail or deliver to such Holders a new Security or Securities equal in principal amount to any unpurchased portion of the Security surrendered as requested by the Holder. Any Security not accepted for payment shall be promptly mailed or delivered by the Company to the Holder thereof. (c) A "Change of Control" will be deemed to have occurred at such time as either (i) any Person or any Persons acting together that would constitute a "group" (a "Group") for purposes of Section 13(d) of the Exchange Act, or any successor provision thereto (other than Eagle River, Mr. Craig O. McCaw and their respective Affiliates or an underwriter engaged in a firm commitment underwriting on behalf of the Company), shall beneficially own (within the meaning of Rule 13d-3 under the Exchange Act, or any successor provision thereto) more than 50% of the aggregate voting power of all classes of Voting Stock of the Company; (ii) neither Mr. Craig O. McCaw nor any person designated by him to the Company as acting on his behalf shall be a director of the Company; or (iii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (together with any new directors whose election by the Board of Directors or whose nomination for election by the shareholders of the Company was proposed by a vote of a majority of the directors of the Company then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors then in office. (d) In the event that the Company makes an Offer to Purchase the Securities, the Company intends to comply with any applicable securities laws and regulations, including any applicable requirements of Section 14(e) of, and Rule 14e-1 under, the Exchange Act. (e) Unless the Company defaults in the payment of the Purchase Price, any Security accepted for payment pursuant to an Offer to Purchase shall cease to accrue interest after the Purchase Date. -77- SECTION 1017. Provision of Financial Information. The Company has agreed that, for so long as any Securities remain outstanding, it will furnish to the Holders of the Securities and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. In addition, the Company will file with the Trustee within 15 days after it files them with the Commission copies of the SEC Reports. In the event the Company shall cease to be required to file SEC Reports pursuant to the Exchange Act, the Company will nevertheless continue to file such reports with the Commission (unless the Commission will not accept such a filing) and the Trustee. The Company will furnish copies of the SEC Reports to the Holders of Securities at the time the Company is required to file the same with the Trustee and will make such information available to investors who request it in writing. The Company shall not be required to furnish information pursuant to this Section 1017 at any time to a prospective purchaser located outside the United States who is not a "U.S. Person" within the meaning of Regulation S if such Security may then be sold to such prospective purchaser in accordance with Rule 904 under the Securities Act (or any successive provision thereto). SECTION 1018. Statement by Officers as to Default. (a) The Company will deliver to the Trustee, within 90 days after the end of each quarter of each fiscal year of the Company ending after the date hereof, an Officers' Certificate, stating whether or not to the best knowledge of the signers thereof the Company is in default in the performance and observance of any of the terms, provisions and conditions of this Indenture and if the Company shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge. (b) The Company shall deliver to the Trustee, as soon as possible and in any event within 10 days after the Company becomes aware of the occurrence of a Default or an Event of Default, an Officers' Certificate setting forth the details of such Default or Event of Default and the action which the Company proposes to take with respect thereto. SECTION 1019. Waiver of Certain Covenants. The Company may omit in any particular instance to comply with any covenant or condition set forth in Sections 1004 to 1017, inclusive, if before or after the time for such compliance the Holders of at least a majority in aggregate principal amount of the Outstanding Securities shall, by Act of such Holders, either waive such compliance in such instance or generally waive compliance with such covenant or condition, but no such waiver shall extend to or affect such covenant or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such covenant or condition shall remain in full force and effect. -78- ARTICLE ELEVEN Redemption of Securities SECTION 1101. Right of Redemption. The Securities shall not be redeemable at the election of the Company prior to their Stated Maturity unless the Company and the Trustee execute an indenture supplemental hereto pursuant to Section 901(8). SECTION 1102. Applicability of Article. Redemption of Securities at the election of the Company, as permitted or required by any provision of this Indenture, shall be made in accordance with such provision and this Article. SECTION 1103. Election to Redeem; Notice to Trustee. In the event the Securities become redeemable, the election of the Company to redeem any Securities shall be evidenced by a Board Resolution. In case of any redemption at the election of the Company of less than all the Securities, the Company shall, at least 60 days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee in writing of such Redemption Date and of the principal amount of Securities to be redeemed. In the case of any redemption of Securities prior to the expiration of any restriction on such redemption provided in the terms of such Securities or elsewhere in this Indenture, the Company shall furnish the Trustee with an Officers' Certificate evidencing compliance with such restriction. SECTION 1104. Securities to Be Redeemed Pro Rata. If less than all the Securities are to be redeemed in any redemption, the Securities to be redeemed shall be selected by the Trustee by prorating, as nearly as may be practicable, the principal amount of Securities to be redeemed. In any proration pursuant to this Section, the Trustee shall make such adjustments, reallocations and eliminations as it shall deem proper (and in compliance with the requirements of the principal national securities exchange, if any, on which the Securities are listed) to the end that the principal amount of Securities so prorated shall be $1,000 or a multiple thereof, by increasing or decreasing or eliminating the amount which would be allocable to any Holder on the basis of exact proportion by an amount not exceeding $1,000. The Trustee in its discretion may determine the particular Securities (if there are more than one) registered in the name of any Holder which are to be redeemed, in whole or in part. The Trustee shall promptly notify the Company and each Security Registrar (other than the Trustee) in writing of the Securities selected for redemption and, in the case of any Securities selected for partial redemption, the principal amount thereof to be redeemed. -79- For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Securities redeemed or to be redeemed only in part, to the portion of the principal amount of such Securities which has been or is to be redeemed. SECTION 1105. Notice of Redemption. Notice of redemption shall be given by first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption Date, to each Holder of Securities to be redeemed, at such Holder's address appearing in the Security Register. All notices of redemption shall state: (1) the Redemption Date, (2) the Redemption Price, (3) whether the redemption is being made pursuant to Clause (a) or (b) of Section 901(8) and, if being made pursuant to such Clause (b), a brief statement setting forth the Company's right to effect such redemption and the Company's basis therefor, (4) if less than all the Outstanding Securities are to be redeemed, the identification (and, in the case of partial redemption of any Securities, the principal amounts) of the particular Securities to be redeemed, (5) that on the Redemption Date the Redemption Price will become due and payable upon each such Security to be redeemed and that interest thereon will cease to accrue on and after said date, (6) the place or places where such Securities are to be surrendered for payment of the Redemption Price, (7) that in the case that a Security is only redeemed in part, the Company shall execute and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities in an aggregate amount equal to the unredeemed portion of the Security, (8) the aggregate principal amount of Securities being redeemed, and (9) the CUSIP number or numbers of the Securities being redeemed. Notice of redemption of Securities to be redeemed at the election of the Company shall be given by the Company or, if request is made to the Trustee no less than 30 days prior to the Redemption Date, by the Trustee in the name and at the expense of the Company. -80- SECTION 1106. Deposit of Redemption Price. Prior to any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 1003) an amount of money sufficient to pay the Redemption Price of, and (except if the Redemption Date shall be an Interest Payment Date) accrued and unpaid interest on, all the Securities which are to be redeemed on that date. SECTION 1107. Securities Payable on Redemption Date. Notice of redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified, and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued and unpaid interest) such Securities shall cease to bear interest. Upon surrender of any such Security for redemption in accordance with said notice, such Security shall be paid by the Company at the Redemption Price, together with accrued and unpaid interest to the Redemption Date; provided, however, that installments of interest whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such at the close of business on the relevant Record Dates according to their terms and the provisions of Section 307. If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal (and premium, if any) shall, until paid, bear interest from the Redemption Date at the rate provided by the Security. SECTION 1108. Securities Redeemed in Part. Any Security which is to be redeemed only in part shall be surrendered at an office or agency of the Company designated for that purpose pursuant to Section 1002 (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities of like tenor, of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security so surrendered. -81- ARTICLE TWELVE Defeasance and Covenant Defeasance SECTION 1201. The Company's Option to Effect Defeasance or Covenant Defeasance. The Company may at its option by Board Resolution at any time (subject to 10-day prior written notification to the Trustee), elect to have either Section 1202 or Section 1203 applied to the Outstanding Securities upon compliance with the conditions set forth below in this Article Twelve. SECTION 1202. Defeasance and Discharge. Upon the Company's exercise of the option provided in Section 1201 applicable to this Section, the Company shall be deemed to have been discharged from its obligations with respect to the Outstanding Securities on the date the conditions set forth below are satisfied (hereinafter, "defeasance"). For this purpose, such defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the Outstanding Securities and to have satisfied all its other obligations under such Securities and this Indenture insofar as such Securities are concerned (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (A) the rights of Holders of Outstanding Securities to receive, solely from the trust fund described in Section 1204 and as more fully set forth in such Section, payments in respect of the principal of (and premium, if any) and interest on such Securities when such payments are due, (B) the Company's obligations with respect to such Securities under Sections 304, 305, 306, 1002 and 1003, (C) the rights, powers, trusts, duties and immunities of the Trustee hereunder and (D) this Article Twelve. Subject to compliance with this Article Twelve, the Company may exercise its option under this Section 1202 notwithstanding the prior exercise of their option under Section 1203. SECTION 1203. Covenant Defeasance. Upon the Company's exercise of the option provided in Section 1201 applicable to this Section (i) the Company shall be released from its obligations under Sections 1005 through 1017, inclusive, and Clauses (3) and (4) of Section 801, (ii) the occurrence of an event specified in Sections 501(3), 501(4) (with respect to Clauses (3) and (4) of Section 801), and 501 (5) (with respect to Sections 1005 through 1017, inclusive) shall not be deemed to be an Event of Default and (iii) the provisions of Article Thirteen hereof shall cease to be effective, on and after the date the conditions set forth below are satisfied (hereinafter, "covenant defeasance"). For this purpose, such covenant defeasance means that the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such Section, Clause or Article, whether directly or indirectly by reason of any reference elsewhere herein to any such Section, Clause or Article or by reason of any reference in any such Section or Article to any other provision herein or in any other document, but the remainder of this Indenture and such Securities shall be unaffected thereby. -82- SECTION 1204. Conditions to Defeasance or Covenant Defeasance. The following shall be the conditions to application of either Section 1202 or Section 1203 to the Outstanding Securities: (1) The Company shall irrevocably have deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of such Securities, (A) money in an amount, or (B) U.S. Government Obligations which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount, or (C) a combination thereof, sufficient, in the opinion of a nationally recognized firm of independent certified public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee to pay and discharge, the principal of, premium, if any, and each installment of interest on the Securities on the Stated Maturity of such principal or installment of interest on the day on which such payments are due and payable in accordance with the terms of this Indenture and of such Securities. For this purpose, "U.S. Government Obligations" means securities that are (x) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (y) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depositary receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act) as custodian with respect to any such U.S. Government Obligation or a specific payment of principal of or interest on any such U.S. Government Obligation held by such custodian for the account of the holder of such depositary receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depositary receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of principal of or interest on the U.S. Government Obligation evidenced by such depositary receipt. (2) No Default or Event of Default shall have occurred and be continuing on the date of such deposit or, insofar as subsections 501(8) and (9) are concerned, at any time during the period ending on the 91st day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period). (3) Such defeasance or covenant defeasance shall not cause the Trustee to have a conflicting interest as defined in Section 608 and for purposes of the Trust Indenture Act with respect to any securities of the Company. (4) Such defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a default under, this Indenture or any other agreement or instrument to which the Company is a party or by which it is bound. (5) The Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to -83- either the defeasance under Section 1202 or the covenant defeasance under Section 1203 (as the case may be) have been complied with. (6) In the case of an election under Section 1202, the Company shall have delivered to the Trustee an Opinion of Counsel stating that (x) the Company has received from, or there has been published by, the Internal Revenue Service a ruling, or (y) since the date of this Indenture there has been a change in the applicable Federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the Holders of the Outstanding Securities will not recognize income, gain or loss for Federal income tax purposes as a result of such deposit, defeasance and discharge and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such deposit, defeasance and discharge had not occurred. (7) In the case of an election under Section 1203, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of the Outstanding Securities will not recognize income, gain or loss for Federal income tax purposes as a result of such deposit and covenant defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred. (8) The Company shall have delivered to the Trustee an Opinion of Counsel to the effect that such deposit and defeasance or covenant defeasance shall not result in the trust arising from such deposit constituting an investment company as defined in the Investment Company Act of 1940, as amended, or such trust shall be qualified under such act or exempt from regulation thereunder. (9) At the time of such deposit: (A) no default in the payment of all or a portion of principal of (or premium, if any) or interest on or other obligations in respect of any Senior Debt shall have occurred and be continuing, and no event of default with respect to any Senior Debt shall have occurred and be continuing and shall have resulted in such Senior Debt becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable and (B) no other event of default with respect to any Senior Debt shall have occurred and be continuing permitting (after notice or the lapse of time, or both) the holders of such Senior Debt (or a trustee on behalf of the holders thereof) to declare such Senior Debt due and payable prior to the date on which it would otherwise have become due and payable, or, in the case of either Clause (A) or Clause (B) above, each such default or event of default shall have been cured or waived or shall have ceased to exist. SECTION 1205. Deposited Money and U.S. Government Obligations to Be Held in Trust; Other Miscellaneous Provisions. Subject to the provisions of the last paragraph of Section 1003, all money and U.S. Government Obligations (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee--collectively, for purposes of this Section 1205, the "Trustee") pursuant to Section 1204 in respect of the Securities shall be held in trust and applied by the Trustee, in accordance with the provisions of such Securities and this Indenture, to the payment, either directly or -84- through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Holders of such Securities, of all sums due and to become due thereon in respect of principal (and premium, if any) and interest, but such money need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to Section 1204 or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the Outstanding Securities. Anything in this Article Twelve to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any money or U.S. Government Obligations held by it as provided in Section 1204 which, in the opinion of a nationally recognized accounting firm expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect an equivalent defeasance or covenant defeasance. SECTION 1206. Reinstatement If the Trustee or the Paying Agent is unable to apply any money in accordance with Section 1202 or 1203 by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Company's obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to this Article Twelve until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 1202 and 1203; provided, however, that if the Company makes any payment of principal of (and premium, if any) any Security following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money held by the Trustee or the Paying Agent. SECTION 1207. Repayment to Company Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of, premium, if any, or interest on any Security and remaining unclaimed for two years after such principal, and premium, if any, or interest has become due and payable shall be paid to the Company on its written request or (if then held by the Company) shall be discharged from such trust; and the Holder of such security shall thereafter, as a creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in the New York Times and The Wall Street Journal (national edition), notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such notification or publication, any unclaimed balance of such money then remaining will be repaid to the Company. -85- ARTICLE THIRTEEN Subordination of Securities SECTION 1301. Securities Subordinate to Senior Debt. The Company covenants and agrees, and each Holder of a Security, by his acceptance thereof, likewise covenants and agrees, that, to the extent and in the manner hereinafter set forth in this Article (subject to the provisions of Article Four and Article Twelve), the payment of the principal of (and premium, if any) and interest on each and all of the Securities are hereby expressly made subordinate and subject in right of payment to the prior payment in full of all Senior Debt. SECTION 1302. Payment Over of Proceeds Upon Dissolution, Etc. In the event of (a) any insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding in connection therewith, relative to the Company or to its creditors, as such, or to its assets, or (b) any liquidation, dissolution or other winding up of the Company, whether voluntary or involuntary and whether or not involving insolvency or bankruptcy, or (c) any assignment for the benefit of creditors or any other marshalling of assets and liabilities of the Company, then and in any such event specified in (a), (b) or (c) above (each such event, if any, herein sometimes referred to as a "Proceeding") the holders of Senior Debt shall be entitled to receive payment in full of all amounts due or to become due on or in respect of all Senior Debt, or provision shall be made for such payment in cash or cash equivalents or otherwise in a manner satisfactory to the holders of Senior Debt, before the Holders of the Securities are entitled to receive any payment or distribution of any kind or character, whether in cash, property or securities (including any payment or distribution which may be payable or deliverable by reason of the payment of any other Debt of the Company subordinated to the payment of the Securities, such payment or distribution being hereinafter referred to as a "Junior Subordinated Payment"), on account of principal of (or premium, if any) or interest on the Securities or on account of any purchase or other acquisition of Securities by the Company or any Subsidiary of the Company (all such payments, distributions, purchases and acquisitions herein referred to, individually and collectively, as a "Securities Payment"), and to that end the holders of Senior Debt shall be entitled to receive, for application to the payment thereof, any Securities Payment which may be payable or deliverable in respect of the Securities in any such Proceeding. In the event that, notwithstanding the foregoing provisions of this Section, the Trustee or the Holder of any Security shall have received any Securities Payment before all Senior Debt is paid in full or payment thereof provided for in cash or cash equivalents or otherwise in a manner satisfactory to the holders of Senior Debt, and if such fact shall, at or prior to the time of such Securities Payment, have been made known in writing to the Trustee or, as the case may be, such Holder, then and in such event such Securities Payment shall be paid over or delivered forthwith to the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other Person making payment or distribution of assets of the Company for application to the payment of all Senior Debt remaining unpaid, to the extent necessary to pay all Senior Debt in full, after giving effect to any concurrent payment or distribution to or for the holders of Senior Debt. -86- For purposes of this Article only, the words "any payment or distribution of any kind or character, whether in cash, property or securities" shall not be deemed to include a payment or distribution of stock or securities of the Company provided for by a plan of reorganization or readjustment authorized by an order or decree of a court of competent jurisdiction in a reorganization proceeding under any applicable bankruptcy law or of any other corporation provided for by such plan of reorganization or readjustment which stock or securities are subordinated in right of payment to all then outstanding Senior Debt to substantially the same extent as the Securities are so subordinated as provided in this Article. The consolidation of the Company with, or the merger of the Company into, another Person or the liquidation or dissolution of the Company following the conveyance or transfer of all or substantially all of its properties and assets as an entirety to another Person upon the terms and conditions set forth in Article Eight shall not be deemed a Proceeding for the purposes of this Section if the Person formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer such properties and assets as an entirety, as the case may be, shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions set forth in Article Eight. SECTION 1303. No Payment When Senior Debt in Default. In the event that any Senior Payment Default (as defined below) shall have occurred and be continuing, then no Securities Payment shall be made unless and until such Senior Payment Default shall have been cured or waived or shall have ceased to exist or all amounts then due and payable in respect of Senior Debt shall have been paid in full, or provision shall have been made for such payment in cash or cash equivalents or otherwise in a manner satisfactory to the holders of Senior Debt. "Senior Payment Default" means any default in the payment of principal of (or premium, if any) or interest on any Senior Debt when due, whether at the Stated Maturity of any such payment or by declaration of acceleration, call for redemption or otherwise. In the event that any Senior Nonmonetary Default (as defined below) shall have occurred and be continuing, then, upon the receipt by the Company and the Trustee of written notice of the occurrence such Senior Nonmonetary Default from a holder of or agent or trustee for the holders of any Designated Senior Debt that is the subject of such Senior Nonmonetary Default, no Securities Payment shall be made during a period (the "Payment Blockage Period") commencing on the date of such receipt of such written notice and ending the earlier of (i) the date on which such Senior Nonmonetary Default shall have been cured or waived or ceased to exist or all Designated Senior Debt the subject of such Senior Nonmonetary Default shall have been discharged or (ii) the 179th day after the date of the receipt of such written notice. No more than one Payment Blockage Period may be commenced with respect to the Securities during any 360-day period and there shall be a period of at least 181 consecutive days in each 360-day period when no Payment Blockage Period is in effect. For all purposes of this paragraph, no Senior Nonmonetary Default or Senior Payment Default that existed or was continuing on the date of commencement of any Payment Blockage Period shall be, or be made, the basis for the commencement of a subsequent Payment Blockage Period by holders of Senior Debt or their representatives unless such Senior Nonmonetary Default or Senior Payment Default shall have been cured for a period of not less than 90 consecutive days. "Senior Nonmonetary Default" means a default with respect to any Designated Senior Debt, other than a Senior Payment Default, which with the giving of notice of the passage of time, or both, shall give the holders of such Designated Senior Debt (or a trustee or other agent on behalf of the holders -87- thereof) the right to declare such Designated Senior Debt due and payable prior to the date on which it would otherwise become due and payable. In the event that, notwithstanding the foregoing, the Company shall make any Securities Payment to the Trustee or any Holder prohibited by the foregoing provisions of this Section, and if such fact shall, at or prior to the time of such Securities Payment, have been made known in writing to the Trustee or, as the case may be, such Holder, then and in such event such Securities Payment shall be paid over and delivered forthwith to the Company. The provisions of this Section shall not apply to any Securities Payment with respect to which Section 1302 would be applicable. SECTION 1304. Payment Permitted If No Default. Nothing contained in this Article or elsewhere in this Indenture or in any of the Securities shall prevent (a) the Company, at any time except during the pendency of any Proceeding referred to in Section 1302 or under the conditions described in Section 1303, from making Securities Payments, or (b) the application by the Trustee of any money deposited with it hereunder to Securities Payments or the retention of such Securities Payment by the Holders, if, two Business Days prior to such application by the Trustee, it did not have written notice that such Securities Payment would have been prohibited by the provisions of this Article. SECTION 1305. Subrogation to Rights of Holders of Senior Debt. Subject to the payment in full of all amounts due or to become due on or in respect of Senior Debt, or the provision for such payment in cash or cash equivalents or otherwise in a manner satisfactory to the holders of Senior Debt, the Holders of the Securities shall be subrogated to the rights of the holders of such Senior Debt to receive payments and distributions of cash, property and securities applicable to the Senior Debt until the principal of (and premium, if any) and interest on the Securities shall be paid in full. For purposes of such subrogation, no payments or distributions to the holders of the Senior Debt of any cash, property or securities to which the Holders of the Securities or the Trustee would be entitled except for the provisions of this Article, and no payments over pursuant to the provisions of this Article to the holders of Senior Debt by Holders of the Securities or the Trustee, shall, as among the Company, its creditors other than holders of Senior Debt and the Holders of the Securities, be deemed to be a payment or distribution by the Company to or on account of the Senior Debt. SECTION 1306. Provisions Solely to Define Relative Rights. The provisions of this Article are and are intended solely for the purpose of defining the relative rights of the Holders 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 (a) impair, as among the Company, its creditors other than holders of Senior Debt and the Holders of the Securities, the obligation of the Company, which is absolute and unconditional -88- (and which, subject to the rights under this Article of the holders of Senior Debt, is intended to rank equally with all other general obligations of the Company), to pay to the Holders of the Securities the principal of (and premium, if any) and interest on the Securities as and when the same shall become due and payable in accordance with their terms; or (b) affect the relative rights against the Company of the Holders of the Securities and creditors of the Company other than the holders of Senior Debt; or (c) prevent the Trustee or the Holder of any Security 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 to receive cash, property and securities otherwise payable or deliverable to the Trustee or such Holder. SECTION 1307. Trustee to Effectuate Subordination. 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. SECTION 1308. No Waiver of Subordination Provisions. 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 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 or extend the time 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 deal with 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 and any other Person. SECTION 1309. Notice to Trustee. 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 to or by the Trustee in respect of the Securities. Notwithstanding the provisions of this Article or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts which would -89- prohibit the making of any payment to or by the Trustee in respect of the Securities, unless and until the Trustee shall have received written notice thereof from the Company or a holder 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 601, shall be entitled in all respects to assume that no such facts exist; provided, however, that if the Trustee shall not have received the notice provided for in this Section at least 2 Business Days prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of (and premium, if any) or interest on any Security), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such money and to apply the same to the purpose for which such money was received and shall not be affected by any notice to the contrary which may be received by it within 2 Business Days prior to such date. Subject to the provisions of Section 601, the Trustee shall be entitled to rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Debt (or a trustee therefor) to establish that such notice has been given by a holder of Senior Debt (or a trustee therefor). In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of Senior 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. SECTION 1310. Reliance on Judicial Order or Certificate of Liquidating Agent. Upon any payment or distribution of assets of the Company referred to in this Article, the Trustee, subject to the provisions of Section 601, and the Holders of the Securities shall be entitled to rely upon any order or decree entered by any court of competent jurisdiction in which such Proceeding is pending, or a certificate of the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit of creditors, agent or other Person making such payment or distribution, delivered to the Trustee or to the Holders of Securities, for the purpose of ascertaining the Persons entitled to participate in such payment or 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. SECTION 1311. Trustee Not Fiduciary for Holders of Senior Debt. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Debt and shall not be liable to any such holders if it shall in good faith mistakenly pay over or distribute to Holders of Securities or to the Company or to any other Person cash, property or securities to which any holders of Senior Debt shall be entitled by virtue of this Article or otherwise. -90- SECTION 1312. Rights of Trustee as Holder of Senior Debt; Preservation of Trustee's Rights. The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article with respect to any Senior Debt which may at any time be held by it, to the same extent as any other holder of Senior Debt, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder. Nothing in this Article shall apply to claims of, or payments to, the Trustee under or pursuant to Section 607. SECTION 1313. Article Applicable to Paying Agents. In case at any time any Paying Agent other than the Trustee shall have been appointed by the Company and be then acting hereunder, the term "Trustee" as used in this Article shall in such case (unless the context otherwise requires) be construed as extending to and including such Paying Agent within its meaning as fully for all intents and purposes as if such Paying Agent were named in this Article in addition to or in place of the Trustee; provided, however, that Section 1312 shall not apply to the Company or any Affiliate of the Company if it or such Affiliate acts as Paying Agent. SECTION 1314. Defeasance of this Article Thirteen. The subordination of the Securities provided by this Article Thirteen is expressly made subject to the provisions for defeasance or covenant defeasance in Article Twelve hereof and, anything herein to the contrary notwithstanding, upon the effectiveness of any such defeasance or covenant defeasance, the Securities then outstanding shall thereupon cease to be subordinated pursuant to this Article Thirteen. ------------------------ This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. -91- IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed and attested, all as of the day and year first above written. NEXTLINK COMMUNICATIONS, INC. By___________________________________ Name: Title: Attest: ___________________________ By UNITED STATES TRUST COMPANY OF NEW YORK By___________________________________ Name: Title: Attest: ___________________________ By STATE OF _________ ) ss.: COUNTY OF ________ ) On this ____________ day of _______, 19__, before me personally appeared _______________, to me known, who, being duly sworn, did depose and say that he is the ____________ of _______________NEXTLINK Communications, Inc., one of the corporations described in and which executed the foregoing instrument, and duly acknowledged to me that he executed the same by authority of the Board of Directors of said corporations. ________________________________ Notary Public STATE OF _________ ) ss.: COUNTY OF ________ ) On this ____________ day of _______, 19__, before me personally appeared _______________, to me known, who, being duly sworn, did depose and say that he is the ____________ of United States Trust Company of New York, one of the corporations described in and which executed the foregoing instrument, and duly acknowledged to me that he executed the same by authority of the Board of Directors of said corporation. ________________________________ Notary Public EX-4.3 6 PREFERRED EXCHANGE AND REGISTRATION RIGHTS AGMNT CERTIFICATE OF DESIGNATION OF THE POWERS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL AND OTHER SPECIAL RIGHTS OF 14% SENIOR EXCHANGEABLE REDEEMABLE PREFERRED SHARES AND QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF - ------------------------------------------------------------------------------ Pursuant to Section 23B.06.020 of the Business Corporation Act of the State of Washington - ------------------------------------------------------------------------------ NEXTLINK Communications Merger, Inc. (the "Corporation"), a corporation organized and existing under the Business Corporation Act of the State of Washington, does hereby certify that, pursuant to authority conferred upon the board of directors of the Corporation (the "Board of Directors") by its Articles of Incorporation, as amended (hereinafter referred to as the "Articles of Incorporation"), and pursuant to the provisions of Section 23B.06.020 of the Business Corporation Act of the State of Washington, said Board of Directors, at a meeting thereof on January 27, 1997, duly approved and adopted the following resolution (the "Resolution"): RESOLVED, that, pursuant to the authority vested in the Board of Directors by its Articles of Incorporation, the Board of Directors does hereby create, authorize and provide for the issuance of 14% Senior Exchangeable Redeemable Preferred Shares, par value $.01 per share, with a stated value of $50 per share, in an amount not to exceed 11,700,000 shares, having the designations, preferences, relative, participating, optional and other special rights and the qualifications, limitations and restrictions thereof that are set forth in the Articles of Incorporation and in this Resolution as follows: (a) DESIGNATION. There is hereby created out of the authorized and unissued Preferred Shares of the Corporation a class of Preferred Shares designated as the "14% Senior Exchangeable Redeemable Preferred Shares." The number of shares constituting such class shall not exceed 11,700,000 and are referred to as the "Senior Exchangeable Redeemable Preferred Shares." The liquidation preference of the Senior Exchangeable Redeemable Preferred Shares shall be $50 per share. The Senior Exchangeable Redeemable Preferred Shares shall consist of the Original Shares and the Exchange Shares. (b) RANKING. The Senior Exchangeable Redeemable Preferred Shares shall, with respect to dividends and distributions upon liquidation, winding-up and dissolution of the Corporation, rank (i) senior to each class of Capital Stock of the Corporation (including, without limitation, the Corporation's Class A Common Stock, par value $.01 per share and the Class B Common Stock, par value $.01 per share) outstanding or hereafter created the terms of which do not expressly provide that it ranks senior to, or on a parity with, the Senior Exchangeable Redeemable Preferred Shares as to dividends and distributions upon liquidation, winding-up and dissolution of the Corporation (collectively referred to as "Junior Shares"); (ii) on a parity with any class of Capital Stock of the Corporation or series of Preferred Shares of the Corporation hereafter created the terms of which expressly provide that such class or series will rank on a parity with the Senior Exchangeable Redeemable Preferred Shares as to dividends and distributions upon liquidation, winding-up and dissolution (collectively referred to as "Parity Shares"); PROVIDED that any such Parity Shares that were not issued in compliance with paragraph (f)(ii)(A) hereof shall be deemed to be Junior Shares and not Parity Shares; and (iii) junior to each class of Capital Stock of the Corporation or series of Preferred Shares of the Corporation hereafter created that has been issued in compliance with paragraph (f)(ii)(B) hereof and the terms of which expressly provide that such class or series will rank senior to the Senior Exchangeable Redeemable Preferred Shares as to dividends and distributions upon liquidation, winding-up and dissolution of the Corporation (collectively referred to as "Senior Shares"). (c) DIVIDENDS. (i) (A) Beginning on the Issue Date, the Holders of the outstanding Senior Exchangeable Redeemable Preferred Shares shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available therefor, distributions in the form of dividends on each Senior Exchangeable Redeemable Preferred Shares, at a rate PER ANNUM equal to 14% of the liquidation preference per share of the Senior Exchangeable Redeemable Preferred Shares, payable quarterly. No interest shall be payable in respect to any dividends that may be in arrears. All dividends shall be cumulative, whether or not earned or declared, on a daily basis from their date of issuance and shall be payable quarterly in arrears on each Dividend Payment Date, commencing on the first Dividend Payment Date after the Issue Date. Dividends may be paid at the Corporation's option on any Dividend Payment Date occurring on or before February 1, 2002 either in cash or by issuing additional fully paid and nonassessable Senior Exchangeable Redeemable Preferred Shares with an aggregate liquidation preference equal to the amount of such dividends. After February 1, 2002, dividends shall be paid only in cash. Each dividend shall be payable to the Senior Exchangeable Redeemable Preferred Shares held by Holders of record as they appear on the share books of the Corporation on the Dividend Record Date immediately preceding the related Dividend Payment Date. Dividends shall cease to accumulate in respect of the Senior Exchangeable Redeemable Preferred Shares on the Exchange Date or on the date of their earlier redemption unless the Corporation shall have failed to issue the appropriate aggregate principal amount of Exchange Notes in respect of the Senior Exchangeable Redeemable Preferred Shares on such Exchange Date or shall have failed to pay the relevant redemption price on the date fixed for redemption. (B) In the event that (1) the Corporation has not filed the registration statement relating to the Exchange Offer (or, if applicable, the registration statement relating to -2- the shelf registration of the Senior Exchangeable Redeemable Preferred Shares for resale by holders contemplated by the Registration Rights Agreement (the "Resale Registration")) on or before the 45th day after the Issue Date, (2) such registration statement (or, if applicable, the Resale Registration) has not become effective on or before the 120th day after the Issue Date, (3) the Exchange Offer has not been consummated within 30 Business Days following the initial effective date of the registration statement relating to the Exchange Offer or (4) any registration statement required by the Registration Rights Agreement is filed and declared effective but shall thereafter cease to be effective (except as specifically permitted therein) without being succeeded immediately by an additional registration statement filed and declared effective (any such event referred to in clauses (1) through (4), a "Registration Default"), then additional dividends will accrue (in addition to the stated dividends on the Senior Exchangeable Redeemable Preferred Shares) at the rate of 0.25% PER ANNUM on the liquidation preference of the Senior Exchangeable Redeemable Preferred Shares for the period from and including the occurrence of the Registration Default until such time as no Registration Default is in effect. Such additional dividends (the "Special Dividends") will be payable quarterly in arrears on each regular Dividend Payment Date in accordance with the provisions of this paragraph (c). For each 90-day period that the Registration Default continues, the PER ANNUM rate of such Special Dividends will increase by an additional 0.25%; PROVIDED that such rate shall in no event exceed 1.0% PER ANNUM in the aggregate. At such time as the Registration Default is no longer in effect, the dividend rate on the Senior Exchangeable Redeemable Preferred Shares shall be the rate stated in paragraph (c)(i)(A) hereof and no further Special Dividends will accrue unless and until another Registration Default shall occur. (ii) All dividends paid with respect to the Senior Exchangeable Redeemable Preferred Shares pursuant to paragraph (c)(i) shall be paid PRO RATA to the Holders entitled thereto. (iii) Nothing herein contained shall in any way or under any circumstances be construed or deemed to require the Board of Directors to declare, or the Corporation to pay or set apart for payment, any dividends on the Senior Exchangeable Redeemable Preferred Shares at any time. (iv) Dividends on account of arrears for any past Dividend Period and dividends in connection with any mandatory redemption pursuant to paragraph (e)(ii) may be declared and paid at any time, without reference to any regular Dividend Payment Date, to Holders of record on such date, not more than forty-five (45) days prior to the payment thereof, as may be fixed by the Board of Directors of the Corporation. (v) No full dividends shall be declared by the Board of Directors or paid or set apart for payment by the Corporation on any Parity Shares for any period unless full cumulative dividends have been or contemporaneously are declared and paid in full, or declared and, if payable in cash, a sum in cash set apart sufficient for such payment, on the Senior Exchangeable Redeemable Preferred Shares for all Dividend Periods terminating on -3- or prior to the date of payment of such full dividends on such Parity Shares. If full dividends are not so paid, all dividends declared upon the Senior Exchangeable Redeemable Preferred Shares and any other Parity Shares shall be declared PRO RATA so that the amount of dividends declared per share on the Senior Exchangeable Redeemable Preferred Shares and such Parity Shares shall in all cases bear to each other the same ratio that accrued dividends per share on the Senior Exchangeable Redeemable Preferred Shares and such Parity Shares bear to each other. (vi) (A) Holders of the Senior Exchangeable Redeemable Preferred Shares shall be entitled to receive the dividends provided for in paragraph (c)(i) hereof in preference to and in priority over any dividends upon any of the Junior Shares. (B) No dividends may be paid or set apart for such payment on Junior Shares (except dividends on Junior Shares payable in additional Junior Shares) if full cumulative dividends have not been paid in full on the Senior Exchangeable Redeemable Preferred Shares. So long as any Senior Exchangeable Redeemable Preferred Shares are outstanding, the Corporation shall not make any payment on account of, or set apart for payment money for a sinking or other similar fund for, the purchase, redemption or other retirement of, any Parity Shares or Junior Shares, or any warrants, rights, calls or options to purchase any Parity Shares or Junior Shares, whether in cash, obligations or shares of the Corporation or other property, and shall not permit any corporation or other entity directly or indirectly controlled by the Corporation to purchase or redeem any Parity Shares or Junior Shares or any such warrants, rights, calls or options unless full cumulative dividends determined in accordance herewith on the Senior Exchangeable Redeemable Preferred Shares have been paid in full. (vii) Dividends payable on the Senior Exchangeable Redeemable Preferred Shares for any period shorter than a quarterly dividend period shall be computed on the basis of a 360-day year of twelve 30-day months and the actual number of days elapsed in the period for which payable. (d) LIQUIDATION PREFERENCE (i) In the event of any voluntary or involuntary liquidation, dissolution or winding-up of affairs of the Corporation, the Holders of Senior Exchangeable Redeemable Preferred Shares then outstanding shall be entitled to be paid, out of the assets of the Corporation available for distribution to its shareholders, an amount in cash equal to the liquidation preference of $50 per Senior Exchangeable Redeemable Preferred Share, plus, without duplication, an amount in cash equal to accumulated and unpaid dividends thereon to the date fixed for liquidation, dissolution or winding-up (including an amount equal to a prorated dividend for the period from the last Dividend Payment Date to the date fixed for liquidation, dissolution or winding-up) before any payment shall be made or any assets distributed to the holders of any of the Junior Shares including, without limitation, common stock of the Corporation. Except as provided in the preceding sentence, Holders of Senior Exchangeable Redeemable Preferred Shares shall not be entitled to any -4- distribution in the event of any liquidation, dissolution or winding-up of the affairs of the Corporation. If the assets of the Corporation are not sufficient to pay in full the liquidation payments payable to the Holders of outstanding Senior Exchangeable Redeemable Preferred Shares and all Parity Shares, then the holders of all such shares shall share equally and ratably in such distribution of assets in proportion to the full liquidation preference, including, without duplication, all accrued and unpaid dividends, to which each is entitled. (ii) For the purposes of this paragraph (d), neither the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Corporation nor the consolidation or merger of the Corporation with or into one or more entities shall be deemed to be a liquidation, dissolution or winding-up of the affairs of the Corporation. (e) REDEMPTION. (i) SPECIAL MANDATORY REDEMPTION. If the merger of the Corporation and NEXTLINK Communications, L.L.C. pursuant to the Agreement and Plan of Merger dated January 23, 1997, between the Corporation and NEXTLINK Communications, L.L.C. has not been consummated on or prior to February 28, 1997, the Corporation shall redeem promptly from any source of funds legally available therefor, in the manner provided for in paragraph (e)(iii) hereof, all of the Senior Exchangeable Redeemable Preferred Shares, at a price equal to 100% of the liquidation preference thereof plus, without duplication, an amount in cash equal to all accumulated and unpaid dividends per share through and including the Redemption Date (the "Special Mandatory Redemption Price"). (ii) MANDATORY REDEMPTION. On February 1, 2009, the Corporation shall redeem, to the extent of funds legally available therefor, in the manner provided for in paragraph (e)(iii) hereof, all of the Senior Exchangeable Redeemable Preferred Shares then outstanding at a redemption price equal to 100% of the liquidation preference per share, plus, without duplication, an amount in cash equal to all accumulated and unpaid dividends per share (including an amount equal to a prorated dividend for the period from the Dividend Payment Date immediately prior to the Redemption Date to the Redemption Date) (the "Mandatory Redemption Price"). (iii) PROCEDURES FOR REDEMPTION. (A) At least (x) five (5) days and not more than seven (7) days prior to the date fixed for any redemption of the Senior Exchangeable Preferred Shares pursuant to paragraph (e)(i) and (y) thirty (30) days and not more than sixty (60) days prior to the date fixed for any redemption of the Senior Exchangeable Redeemable Preferred Shares pursuant to paragraph (e)(ii) hereof, written notice (each, a "Redemption Notice") shall be given by first class mail, postage prepaid, to each Holder of record on the record date fixed for such redemption of the Senior Exchangeable Redeemable Preferred Shares at such Holder's address as it appears on the stock books of the Corporation, PROVIDED that no failure to give such notice nor any deficiency therein shall affect the validity of the procedure -5- for the redemption of any Senior Exchangeable Redeemable Preferred Shares to be redeemed except as to the Holder or Holders to whom the Corporation has failed to give said notice or except as to the Holder or Holders whose notice was defective. The Redemption Notice shall state: (1) whether the redemption is pursuant to paragraph (e)(i) or (e)(ii) hereof; (2) the Special Mandatory Redemption Price or the Mandatory Redemption Price, as the case may be; (3) the Redemption Date; (4) that the Holder is to surrender to the Corporation, in the manner, at the place or places and at the price designated, his certificate or certificates representing the Senior Exchangeable Redeemable Preferred Shares to be redeemed; and (5) that dividends on the Senior Exchangeable Redeemable Preferred Shares to be redeemed shall cease to accumulate on such Redemption Date unless the Corporation defaults in the payment of the Special Mandatory Redemption Price or the Mandatory Redemption Price, as the case may be. (B) Each Holder of Senior Exchangeable Redeemable Preferred Shares shall surrender the certificate or certificates representing such Senior Exchangeable Redeemable Preferred Shares to the Corporation, duly endorsed (or otherwise in proper form for transfer, as determined by the Corporation), in the manner and at the place designated in the Redemption Notice, and on the Redemption Date the full Special Mandatory Redemption Price or Mandatory Redemption Price, as the case may be, for such shares shall be payable in cash to the Person whose name appears on such certificate or certificates as the owner thereof, and each surrendered certificate shall be canceled and retired. (C) On and after the Redemption Date, unless the Corporation defaults in the payment in full of the applicable redemption price, dividends on the Senior Exchangeable Redeemable Preferred Shares called for redemption shall cease to accumulate on the Redemption Date, and all rights of the Holders of redeemed shares shall terminate with respect thereto on the Redemption Date, other than the right to receive the Special Mandatory Redemption Price or the Mandatory Redemption Price, as the case may be, without interest; PROVIDED, HOWEVER, that if a notice of redemption shall have been given as provided in paragraph (iii)(A) above and the funds necessary for redemption (including an amount in respect of all dividends that will accrue to the Redemption Date) shall have been irrevocably deposited in trust for the equal and ratable benefit for the Holders of the shares called for redemption, then, at the close of business on the day on which such funds are segregated and set apart, the Holders of the shares to be redeemed shall cease to be shareholders of the Corporation and shall be entitled only to receive the Special Redemption Price or the Mandatory Redemption Price, as the case may be, without interest. -6- (f) VOTING RIGHTS. (i) The Holders of Senior Exchangeable Redeemable Preferred Shares, except as otherwise required under Washington law or as set forth in paragraphs (ii), (iii) and (iv) below, shall not be entitled or permitted to vote on any matter required or permitted to be voted upon by the shareholders of the Corporation. (ii) (A) So long as any Senior Exchangeable Redeemable Preferred Shares are outstanding, the Corporation shall not authorize or issue any Parity Shares (other than additional Senior Exchangeable Redeemable Preferred Shares issued as dividends on the Senior Exchangeable Redeemable Preferred Shares in accordance with the terms hereof and Exchange Shares) without the affirmative vote or consent of Holders of at least a majority of the then outstanding Senior Exchangeable Redeemable Preferred Shares, voting or consenting, as the case may be, as a separate class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting, if after giving effect to the issuance of such Parity Shares, the aggregate liquidation preference of the outstanding Parity Shares (other than (i) the Senior Exchangeable Redeemable Preferred Shares originally issued on the Issue Date, (ii) additional Senior Exchangeable Redeemable Preferred Shares issued as dividends in accordance with the terms hereof on the Senior Exchangeable Redeemable Preferred Shares originally issued on the Issue Date and additional Senior Exchangeable Redeemable Preferred Shares issued as dividends on the Senior Exchangeable Redeemable Preferred Shares in accordance with the terms hereof and (iii) any Exchange Shares) would exceed the sum of (x) $50 million and (y) the aggregate amount of gross proceeds received after the Issue Date and on or prior to the date of issuance of such Parity Shares from the issuance of Qualified Junior Shares. (B) So long as any Senior Exchangeable Redeemable Preferred Shares are outstanding, the Corporation shall not authorize any class of Senior Shares without the affirmative vote or consent of Holders of at least two-thirds of the outstanding Senior Exchangeable Redeemable Preferred Shares, voting or consenting, as the case may, as a separate class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting. (C) So long as any Senior Exchangeable Redeemable Preferred Shares are outstanding, the Corporation shall not amend, alter or repeal any of the provisions of the Corporation's Articles of Incorporation (including this Certificate of Designations) or the by-laws of the Corporation so as to affect adversely the specified rights, powers, preferences, privileges or voting rights of the holders of Senior Exchangeable Redeemable Preferred Shares or reduce the time for any notice which the holders of the Senior Exchangeable Redeemable Preferred Shares may be entitled without the affirmative vote or consent of Holders of at least two-thirds of the issued and outstanding Senior Exchangeable Redeemable Preferred Shares, voting or consenting, as the case may be, as one class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting. -7- (D) Notwithstanding the foregoing, modifications and amendments of the terms of this Certificate of Designations contained in paragraphs (h) and (l) below may be made by the Corporation with the consent of the Holders of a majority of the outstanding Senior Exchangeable Redeemable Preferred Shares; PROVIDED, HOWEVER, that no such modification or amendment may, without the consent of the Holder of each outstanding Senior Exchangeable Redeemable Preferred Share affected thereby following the mailing of any Offer to Purchase and until the Expiration Date of that Offer to Purchase, modify any Offer to Purchase for the Senior Exchangeable Redeemable Preferred Shares required by paragraph (h) hereof in a manner materially adverse to the holders of outstanding Senior Exchangeable Redeemable Preferred Shares. In addition, the holders of a majority of the outstanding Senior Exchangeable Redeemable Preferred Shares, on behalf of all holders of Senior Exchangeable Redeemable Preferred Shares, may waive compliance by the Corporation with the covenants described below in paragraphs (h) and (l) and may waive any past default under the Certificate of Designations, except a default arising from failure to purchase any Senior Exchangeable Redeemable Preferred Shares tendered pursuant to an Offer to Purchase. (E) Prior to the exchange of Senior Exchangeable Redeemable Preferred Shares for Exchange Notes, the Corporation shall not amend or modify the form of the Indenture for the Exchange Notes as it exists on the Issue Date (the "Indenture") (except as expressly provided therein in respect of amendments that may be made without the consent of Holders of Exchange Notes) without the affirmative vote or consent of Holders of at least a majority of the Senior Exchangeable Redeemable Preferred Shares then outstanding, voting or consenting, as the case may be, as one class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting. (F) Except as set forth in paragraphs (f)(ii)(A),(f)(ii)(B) and (f)(ii)(C) above, (x) the creation, authorization or issuance of any shares of any Junior Shares, Parity Shares or Senior Shares or (y) the increase or decrease in the amount of authorized Capital Stock of any class, including Senior Shares or Parity Shares, shall not require the consent of Holders of Senior Exchangeable Redeemable Preferred Shares and shall not be deemed to affect adversely the rights, preferences, privileges or voting rights of Holders of Senior Exchangeable Redeemable Preferred Shares. (G) Notwithstanding the foregoing, at any time following a Covenant Amendment, the Corporation may, at its election and without the consent of any Holder of Senior Exchangeable Redeemable Preferred Shares, amend the Corporation's Articles of Incorporation (including this Certificate of Designations) to add provisions making the Senior Exchangeable Redeemable Preferred Shares redeemable at the option of the Corporation (subject to contractual and other restrictions with respect thereto and the legal availability of funds therefor) as follows: (x) at any time on or after February 1, 2002, in whole or in part, at the option of the Corporation, at the redemption prices (expressed in percentages of the liquidation -8- preference thereof) set forth below, plus, without duplication, an amount in cash equal to all accumulated and unpaid dividends to the Redemption Date (including an amount in cash equal to a prorated dividend for the period from the Dividend Payment Date immediately prior to the Redemption Date), if redeemed during the 12-month period beginning February 1 of each of the years set forth below: YEAR PERCENTAGE ---- ---------- 2002 107.00% 2003 105.25 2004 103.50 2005 101.75 2006 and thereafter 100.00 In the event of redemption of only a portion of the then outstanding Senior Exchangeable Redeemable Preferred Shares, the Corporation shall effect such redemption on a PRO RATA basis. (y) prior to February 1, 2000, in part, in an amount not to exceed 35% of the initial aggregate liquidation preference of the Senior Exchangeable Redeemable Preferred Shares originally issued out of the net cash proceeds of one or more Qualifying Events (other than any Qualifying Event that results in a Change of Control) at a redemption price of 114.0% of the liquidation preference thereof plus, without duplication, an amount in cash equal to all accumulated and unpaid dividends to the redemption date (including an amount in cash equal to a prorated dividend for the period from the Dividend Payment Date immediately prior to the Redemption Date); PROVIDED, HOWEVER, that after any such redemption, the aggregate liquidation preference of the Senior Exchangeable Redeemable Preferred Shares outstanding must equal at least 65% of the Senior Exchangeable Redeemable Preferred Shares issued on the Issue Date. Any such redemption shall occur on or prior to 60 days after the receipt by the Corporation of the proceeds of such Qualifying Event. (iii) Without the affirmative vote or consent of Holders of a majority of the issued and outstanding Senior Exchangeable Redeemable Preferred Shares, voting or consenting, as the case may be, as a separate class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting, the Corporation shall not, in a single transaction or series of related transactions, consolidate with or merge with or into, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its assets to, another Person or adopt a plan of liquidation unless: (A) either (1) the Corporation is the surviving or continuing Person or (2) the Person (if other than the Corporation) formed by such consolidation or into which the Corporation is merged or the Person that acquires by conveyance, transfer or lease the properties and assets of the Corporation substantially as an entirety or in the case of a plan of liquidation, the Person to which assets of the Corporation have been transferred, shall be a corporation, limited liability Corporation, partnership or trust organized and existing under the laws of the United States or any State thereof or the District of Columbia; (B) the Senior Exchangeable Redeemable Preferred Shares shall be converted into or exchanged for and shall become -9- shares of Capital Stock of such successor, transferee or resulting Person, having in respect of such successor, transferee or resulting Person, having the same powers, preferences and relative, participating, optional or other special rights and the qualifications, limitations or restrictions thereon, that the Senior Exchangeable Redeemable Preferred Shares had immediately prior to such transaction; (C) immediately after giving pro forma effect to such transaction, no Voting Rights Triggering Event shall have occurred or be continuing; and (D) the Corporation has delivered to the Transfer Agent prior to the consummation of the proposed transaction an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger or transfer complies with the terms hereof and that all conditions precedent herein relating to such transaction have been satisfied. For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise, in a single transaction or series of related transactions) of all or substantially all of the properties or assets of one or more Subsidiaries of the Corporation, the Capital Stock of which constitutes all or substantially all of the properties and assets of the Corporation, shall be deemed to be the transfer of all or substantially all of the properties and assets of the Corporation. (iv) (A) If (1) dividends on the Senior Exchangeable Redeemable Preferred Shares are in arrears and unpaid (and, if after February 1, 2002, such dividends are not paid in cash) for six or more Dividend Periods (whether or not consecutive) (a "Dividend Default"); (2) the Corporation fails to redeem all of the then outstanding Senior Exchangeable Redeemable Preferred Shares on February 1, 2009 or fails otherwise to discharge any redemption obligation with respect to the Senior Exchangeable Redeemable Preferred Shares; (3) the Corporation fails to make an Offer to Purchase (whether pursuant to the terms of paragraph (h)(i) or otherwise) following a Change of Control if such Offer to Purchase is required by paragraph (h) hereof or fails to purchase Senior Exchangeable Redeemable Preferred Shares from Holders who elect to have such shares purchased pursuant to the Offer to Purchase; (4) the Corporation breaches or violates one of the provisions set forth in any paragraphs (f)(iii) or (1) hereof and the breach or violation continues for a period of 30 days or more after the Corporation receives notice thereof specifying the default from the Holders of at least 25% of the Senior Exchangeable Redeemable Preferred Shares then outstanding, or (5) the Corporation fails to pay at the final stated maturity (giving effect to any extensions thereof) the principal amount of any Debt of the Corporation or any Subsidiary of the Corporation, or the final stated maturity of any such Debt is accelerated, if the aggregate principal amount of such Debt, together with the aggregate principal amount of any other such Debt in default for failure to pay principal at the final stated maturity (giving effect to any extensions thereof) or that has been accelerated, aggregates $15,000,000 or more at any time, in each case, after a 10-day period during which such default shall not have been cured or such acceleration rescinded, then in the case of any of clauses (1)-(5) the number of directors constituting the Board of Directors shall be adjusted by the number, if any, necessary to permit the Holders of the Senior Exchangeable Redeemable Preferred Shares, voting together with any outstanding Parity Shares separately as a single class, to elect the lesser of two directors and that number of directors constituting 25% of -10- the members of the Board of Directors. Each such event described in clauses (1), (2), (3), (4) and (5) is a "Voting Rights Triggering Event." Holders of a majority of the issued and outstanding Senior Exchangeable Redeemable Preferred Shares, voting together with any outstanding Parity Shares separately as a single class, shall have the exclusive right to elect the lesser of two directors and that number of directors constituting 25% of the members of the Board of Directors at a meeting therefor called upon occurrence of such Voting Rights Triggering Event, and at every subsequent meeting at which the terms of office of the directors so elected (other than as described in (f)(iv)(B) below). The voting rights provided herein shall be the exclusive remedy at law or in equity of the holders of the Senior Exchangeable Redeemable Preferred Shares for any Voting Rights Triggering Event. (B) The right of the Holders of Senior Exchangeable Redeemable Preferred Shares to elect members of the Board of Directors as set forth in subparagraph (f)(iv)(A) above shall continue until such time as (x) in the event such right arises due to a Dividend Default, all accumulated dividends that are in arrears on the Senior Exchangeable Redeemable Preferred Shares are paid in full (and, in the case of dividends payable after February 1, 2002, paid in cash) and (y) in all other cases, the failure, breach or default giving rise to such Voting Rights Triggering Event is remedied or waived by the holders of at least a majority of the Senior Exchangeable Redeemable Preferred Shares then outstanding, at which time (1) the special right of the Holders of Senior Exchangeable Redeemable Preferred Shares so to vote for the election of directors and (2) the term of office of the directors elected by the Holders of the Senior Exchangeable Redeemable Preferred Shares shall each terminate and the directors elected by the holders of Voting Stock other than the Senior Exchangeable Redeemable Preferred Shares shall constitute the entire Board of Directors. At any time after voting power to elect directors shall have become vested and be continuing in the Holders of Senior Exchangeable Redeemable Preferred Shares pursuant to paragraph (f)(iv)(A) hereof, or if vacancies shall exist in the offices of directors elected by the Holders of Senior Exchangeable Redeemable Preferred Shares, a proper officer of the Corporation may, and upon the written request of the Holders of record of at least twenty-five percent (25%) of the Senior Exchangeable Redeemable Preferred Shares then outstanding addressed to the Secretary of the Corporation shall, call a special meeting of the Holders of Senior Exchangeable Redeemable Preferred Shares, for the purpose of electing the directors which such Holders are entitled to elect. If such meeting shall not be called by a proper officer of the Corporation within twenty (20) days after personal service of said written request upon the Secretary of the Corporation, or within twenty (20) days after mailing the same within the United States by certified mail, addressed to the Secretary of the Corporation at its principal executive offices, then the Holders of record of at least twenty-five percent (25%) of the outstanding Senior Exchangeable Redeemable Preferred Shares may designate in writing one of their number to call such meeting at the expense of the Corporation, and such meeting may be called by the Person so designated upon the notice required for the annual meetings of shareholders of the Corporation and shall be held at the place for holding the annual meetings of shareholders. Any Holder of Senior -11- Exchangeable Redeemable Preferred Shares so designated shall have, and the Corporation shall provide, access to the lists of shareholders to be called pursuant to the provisions hereof. (C) At any meeting held for the purpose of electing directors at which the Holders of Senior Exchangeable Redeemable Preferred Shares voting together with any outstanding shares of Parity Shares as a separate class shall have the right as described herein to elect directors, the presence in person or by proxy of the Holders of at least a majority of the then outstanding Senior Exchangeable Redeemable Preferred Shares and Parity Shares shall be required to constitute a quorum of such Senior Exchangeable Redeemable Preferred Shares and Parity Shares. (D) Any vacancy occurring in the office of a director elected by the Holders of Senior Exchangeable Redeemable Preferred Shares and Parity Shares may be filled by the remaining directors elected by the Holders of Senior Exchangeable Redeemable Preferred Shares and Parity Shares unless and until such vacancy shall be filled by the Holders of Senior Exchangeable Redeemable Preferred Shares and Parity Shares. (v) In any case in which the Holders of Senior Exchangeable Redeemable Preferred Shares shall be entitled to vote pursuant to this paragraph (f) or pursuant to Washington law, each Holder of Senior Exchangeable Redeemable Preferred Shares entitled to vote with respect to such matter shall be entitled to one vote for each share of Senior Exchangeable Redeemable Preferred Shares held. (g) EXCHANGE. (i) REQUIREMENTS. The outstanding Senior Exchangeable Redeemable Preferred Shares are exchangeable as a whole but not in part, at the option of the Corporation at any time on any Dividend Payment Date for the Corporation's 14% Senior Subordinated Notes due 2009 (the "Exchange Notes") to be substantially in the form set forth in the Indenture, a copy of which is on file with the secretary of the Corporation and the Transfer Agent, PROVIDED that any such exchange may only be made if on or prior to the date of such exchange (A) the Corporation has paid all accumulated dividends on the Senior Exchangeable Redeemable Preferred Shares (including the dividends payable on the date of exchange) and there shall be no contractual impediment to such exchange and (B) immediately after giving effect to such exchange, no Default or Event of Default (as defined in the Indenture) would exist under the Indenture and no default or event of default would exist under the Existing Indenture. The exchange rate shall be $1.00 principal amount of Exchange Notes for each $1.00 of the aggregate liquidation preference of Senior Exchangeable Redeemable Preferred Shares, including, to the extent necessary, Exchange Notes in principal amounts less than $1,000. (ii) PROCEDURE FOR EXCHANGE. (A) At least thirty (30) days and not more than sixty (60) days prior to the date fixed for exchange, written notice (the "Exchange Notice") shall be given by first class mail, postage prepaid, to each Holder of record on the record date fixed for such exchange of the Senior Exchangeable Redeemable -12- Preferred Shares at such Holder's address as the same appears on the share books of the Corporation, PROVIDED that no failure to give such notice nor any deficiency therein shall affect the validity of the procedure for the exchange of any Senior Exchangeable Redeemable Preferred Shares to be exchanged except as to the Holder or Holders to whom the Corporation has failed to give said notice or except as to the Holder or Holders whose notice was defective. The Exchange Notice shall state: (1) the Exchange Date; (2) that the Holder is to surrender to the Corporation, in the manner and at the place or places designated, his certificate or certificates representing the Senior Exchangeable Redeemable Preferred Shares to be exchanged; (3) that dividends on the Senior Exchangeable Redeemable Preferred Shares to be exchanged shall cease to accrue on such Exchange Date whether or not certificates for Senior Exchangeable Redeemable Preferred Shares are surrendered for exchange on such Exchange Date unless the Corporation shall default in the delivery of Exchange Notes; and (4) that interest on the Exchange Notes shall accrue from the Exchange Date whether or not certificates for Senior Exchangeable Redeemable Preferred Shares are surrendered for exchange on such Exchange Date. (B) On or before the Exchange Date, each Holder of Senior Exchangeable Redeemable Preferred Shares shall surrender the certificate or certificates representing such Senior Exchangeable Redeemable Preferred Shares, in the manner and at the place designated in the Exchange Notice. The Corporation shall cause the Exchange Notes to be executed on the Exchange Date and, upon surrender in accordance with the Exchange Notice of the certificates for any Senior Exchangeable Redeemable Preferred Shares so exchanged, duly endorsed (or otherwise in proper form for transfer, as determined by the Corporation), such shares shall be exchanged by the Corporation into Exchange Notes. The Corporation shall pay interest on the Exchange Notes at the rate and on the dates specified therein from the Exchange Date. (C) If notice has been mailed as aforesaid, and if before the Exchange Date specified in such notice (1) the Indenture shall have been duly executed and delivered by the Corporation and the trustee thereunder and (2) all Exchange Notes necessary for such exchange shall have been duly executed by the Corporation and delivered to the trustee under the Indenture with irrevocable instructions to authenticate the Exchange Notes necessary for such exchange, then the rights of the Holders of Senior Exchangeable Redeemable Preferred Shares so exchanged as shareholders of the Corporation shall cease (except the right to receive Exchange Notes, an amount in cash equal to the amount of accrued and unpaid dividends to the Exchange Date), and the Person or Persons entitled to receive the Exchange Notes issuable upon exchange shall be treated for all purposes as the registered Holder or Holders of such Exchange Notes as of the Exchange Date. -13- (iii) NO EXCHANGE IN CERTAIN CASES. Notwithstanding the foregoing provisions of this paragraph (g), the Corporation shall not be entitled to exchange the Senior Exchangeable Redeemable Preferred Shares for Exchange Notes if such exchange, or any term or provision of the Indenture or the Exchange Notes, or the performance of the Corporation's obligations under the Indenture or the Exchange Notes, shall materially violate or conflict with any applicable law or if, at the time of such exchange, the Corporation is insolvent or if it would be rendered insolvent by such exchange. (h) CHANGE OF CONTROL. (i) Within 30 days following a Change of Control (the date of such occurrence being the "Change of Control Date"), the Corporation shall notify the Holders of the Senior Exchangeable Redeemable Preferred Shares in writing of such occurrence and shall make an Offer to Purchase all of the then outstanding Senior Exchangeable Redeemable Preferred Shares at a purchase price of 101% of the liquidation preference thereof plus, without duplication, an amount in cash equal to all accumulated and unpaid dividends per share (including an amount in cash equal to a prorated dividend for the period from the Dividend Payment Date immediately prior to the Payment Date to the Payment Date). (ii) The Corporation will comply with any securities laws and regulations, to the extent such laws and regulations are applicable to the repurchase of the Senior Exchangeable Redeemable Preferred Shares in connection with an Offer to Purchase. (iii) On the Payment Date the Corporation shall (A) accept for payment the Senior Exchangeable Redeemable Preferred Shares validly tendered pursuant to the Offer to Purchase, (B) pay to the Holders of shares so accepted the purchase price therefor in cash and (C) cancel and retire each surrendered certificate. Unless the Corporation defaults in the payment for the Senior Exchangeable Redeemable Preferred Shares tendered pursuant to the Offer to Purchase, dividends will cease to accrue with respect to the Senior Exchangeable Redeemable Preferred Shares tendered and all rights of Holders of such tendered shares will terminate, except for the right to receive payment therefor, on the Payment Date. (v) Notwithstanding the foregoing, the Corporation will not repurchase or redeem any Senior Exchangeable Redeemable Preferred Shares pursuant to the provisions of this paragraph prior to the Corporation's repurchase of such Senior Notes as are required to be repurchased pursuant to the Existing Indenture. (i) CONVERSION OR EXCHANGE. The Holders of Senior Exchangeable Redeemable Preferred Shares shall not have any rights hereunder to convert such shares into or exchange such shares for shares of any other class or classes or of any other series of any class or classes of Capital Stock of the Corporation. -14- (j) REISSUANCE OF SENIOR EXCHANGEABLE REDEEMABLE PREFERRED SHARES. Senior Exchangeable Redeemable Preferred Shares that have been issued and reacquired in any manner, including shares purchased or redeemed or exchanged, shall (upon compliance with any applicable provisions of the laws of Washington) have the status of authorized and unissued shares of Preferred Shares undesignated as to series and may be redesignated and reissued as part of any series of Preferred Shares, other than Senior Exchangeable Redeemable Preferred Shares. (k) BUSINESS DAY. If any payment, redemption or exchange shall be required by the terms hereof to be made on a day that is not a Business Day, such payment, redemption or exchange shall be made on the immediately succeeding Business Day. (l) CERTAIN ADDITIONAL PROVISIONS. (i) LIMITATION ON CONSOLIDATED DEBT. The Corporation may not, and may not permit any Restricted Subsidiary of the Corporation to, Incur any Debt unless either (a) the ratio of (i) the aggregate consolidated principal amount of Debt of the Corporation outstanding as of the most recent available quarterly or annual balance sheet, after giving pro forma effect to the Incurrence of such Debt and any other Debt Incurred since such balance sheet date and the receipt and application of the proceeds thereof to (ii) Consolidated Cash Flow Available for Fixed Charges for the four full fiscal quarters next preceding the Incurrence of such Debt for which consolidated financial statements are available, determined on a pro forma basis as if any such Debt had been Incurred and the proceeds thereof had been applied at the beginning of such four fiscal quarters, would be less than 5.5 to 1 for such four-quarter periods ending on or prior to December 31, 1999 and 5.0 to 1 for such periods ending thereafter, or (b) the Corporation's Consolidated Capital Ratio as of the most recent available quarterly or annual balance sheet, after giving pro forma effect to the Incurrence of such Debt and any other Debt Incurred since such balance sheet date and the receipt and application of the proceeds thereof, is less than 2.0 to 1. Notwithstanding the foregoing limitation, the Corporation and any Restricted Subsidiary may Incur the following: (A) Debt under any one or more Bank Credit Agreements or Vendor Financing Facilities in an aggregate principal amount at any one time not to exceed $125 million, and any renewal, extension, refinancing or refunding thereof in an amount which, together with any principal amount remaining outstanding or available under all Bank Credit Agreements and Vendor Financing Facilities of the Corporation and its Restricted Subsidiaries, plus the amount of any premium required to be paid in connection with such refinancing pursuant to the terms of any Bank Credit Agreement so refinanced plus the amount of expenses incurred in connection with such refinancing, does not exceed the aggregate principal amount outstanding or available -15- under all such Bank Credit Agreements and Vendor Financing Facilities of the Corporation and its Restricted Subsidiaries immediately prior to such renewal, extension, refinancing or refunding; (B) Purchase Money Debt Incurred to finance the construction, acquisition or improvement of Telecommunications Assets, PROVIDED that the net proceeds of such Purchase Money Debt do not exceed 80% of the cost of construction, acquisition or improvement price of the applicable Telecommunications Assets; (C) Debt owed by the Corporation to any Wholly-Owned Restricted Subsidiary of the Corporation or Debt owed by a Restricted Subsidiary of the Corporation to the Corporation or another Wholly-Owned Restricted Subsidiary of the Corporation; PROVIDED, HOWEVER, that upon either (x) the transfer or other disposition by such Wholly-Owned Restricted Subsidiary or the Corporation of any Debt so permitted to a Person other than the Corporation or another Wholly-Owned Restricted Subsidiary of the Corporation or (y) the issuance (other than directors' qualifying shares), sale, lease, transfer or other disposition of shares of Capital Stock (including by consolidation or merger) of such Wholly-Owned Restricted Subsidiary to a Person other than the Corporation or another such Wholly-Owned Restricted Subsidiary, the provisions of this clause (C) shall no longer be applicable to such Debt and such Debt shall be deemed to have been Incurred at the time of such transfer or other disposition; (D) Debt Incurred to renew, extend, refinance or refund (each, a "refinancing") Debt (1) referred to in clause (F) below or (2) Incurred pursuant to the preceding paragraph or clause (B) of this paragraph in an aggregate principal amount not to exceed the aggregate principal amount of and accrued interest on the Debt so refinanced plus the amount of any premium required to be paid in connection with such refinancing pursuant to the terms of the Debt so refinanced or the amount of any premium reasonably determined by the Corporation as necessary to accomplish such refinancing by means of a tender offer or privately negotiated repurchase, plus the amount of expenses of the Corporation incurred in connection with such refinancing; PROVIDED, HOWEVER, that, the refinancing Debt by its terms, or by the terms of any agreement or instrument pursuant to which such Debt is issued, (x) does not provide for payments of principal of such Debt at the stated maturity thereof or by way of a sinking fund applicable thereto or by way of any mandatory redemption, defeasance, retirement or repurchase thereof by the Corporation (including any redemption, retirement or repurchase which is contingent upon events or circumstances, but excluding any retirement required by virtue of acceleration of such Debt upon any event of default thereunder), in each case prior to the time the same are required by the terms of the Debt being refinanced and (y) does not permit redemption or other retirement (including pursuant to an offer to purchase made by the Corporation) of such Debt at the option of the holder thereof prior to the final stated maturity of the Debt being refinanced, other than a redemption or other retirement at the option of the holder of such Debt (including pursuant to an offer to purchase made by the Corporation) which is conditioned upon a change substantially similar to the provisions of paragraph (h) above or which is pursuant to provisions substantially -16- similar to the provisions of Section 1013 of the Existing Indenture as in effect on the Issue Date (whether or not the Existing Notes are outstanding or the Existing Indenture is in effect); (E) Debt consisting of Permitted Interest Rate and Currency Protection Agreements; (F) Debt outstanding at the Issue Date; (G) Subordinated Debt invested by (a) a group of employees of the Corporation, which includes the Chief Executive Officer of the Corporation, who own, directly or indirectly, through an employee stock ownership plan or arrangement, shares of the Corporation's Capital Stock or (b) any other Person that controls the Corporation (i) on the Issue Date or (ii) after a Change of Control, PROVIDED that the Corporation is not in default with respect to its obligations under paragraph (h) above; (H) Debt consisting of performance and other similar bonds and reimbursement obligations Incurred in the ordinary course of business securing the performance of contractual, franchise or license obligations of the Corporation or a Restricted Subsidiary, or in respect of a letter of credit obtained to secure such performance; and (I) Debt not otherwise permitted to be Incurred pursuant to clauses (A) through (H) above, which, together with any other outstanding Debt Incurred pursuant to this clause (I), has an aggregate principal amount (or, in the case of Debt issued at a discount, an accreted amount (determined in accordance with generally accepted accounting principles) at the time of Incurrence) not in excess of $10 million at any time outstanding. For purposes of determining compliance with this paragraph (l)(i), in the event that an item of Debt meets the criteria of more than one of the types of Debt the Corporation is permitted to Incur pursuant to the foregoing clauses (A) through (I), the Corporation shall have the right, in its sole discretion, to classify such item of Debt and shall only be required to include the amount and type of such Debt under the clause permitting the Debt as so classified. For purposes of determining any particular amount of Debt under this covenant, Guarantees or Liens with respect to letters of credit supporting Debt otherwise included in the determination of a particular amount shall not be included. (ii) REPORTS. So long as any Senior Exchangeable Redeemable Preferred Shares are outstanding, the Corporation will provide to the holders of Senior Exchangeable Redeemable Preferred Shares, within 15 days after it files them with the Securities and Exchange Commission (or any successor agency performing similar functions), copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may by rules and regulation prescribe) which the Corporation files with the Commission pursuant to Section 13 or 15(d) of the Exchange Act. In the event that the Corporation is no longer required to furnish such reports to its securityholders pursuant to the Exchange Act, the Corporation will cause its -17- consolidated financial statements, comparable to those which would have been required to appear in annual or quarterly reports, to be delivered to the Holders of Senior Exchangeable Redeemable Preferred Shares. (m) DEFINITIONS. As used in this Certificate of Designations, the following terms shall have the following meanings (with terms defined in the singular having comparable meanings when used in the plural and VICE VERSA), unless the context otherwise requires. Any reference in any of the following terms to any term in or provision of the Existing Indenture shall refer to such term or provision as in effect on the Issue Date and as may be amended in accordance with the terms of the Existing Indenture (whether or not the Existing Notes are outstanding or the Existing Indenture is in effect): "Acquired Debt" means, with respect to any specified Person, (i) Debt of any other Person existing at the time such Person merges with or into or consolidates with or becomes a Restricted Subsidiary of such specified Person and (ii) Debt secured by a Lien encumbering any asset acquired by such specified Person, which Debt was not Incurred in anticipation of, and was outstanding prior to, such merger, consolidation or acquisition. "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" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Asset Disposition" by any Person means any transfer, conveyance, sale, lease or other disposition by such Person or any of its Restricted Subsidiaries (including a consolidation or merger or other sale of any such Restricted Subsidiary with, into or to another Person in a transaction in which such Restricted Subsidiary ceases to be a Restricted Subsidiary of the specified Person, but excluding a disposition by a Restricted Subsidiary of such Person to such Person or a Wholly-Owned Restricted Subsidiary of such Person or by such Person to a Wholly-Owned Restricted Subsidiary of such Person) of (i) shares of Capital Stock or other ownership interests of a Restricted Subsidiary of such Person (other than as permitted by the provisions of Section 1008 of the Existing Indenture or pursuant to a transaction in compliance with Section 801 of the Existing Indenture), (ii) substantially all of the assets of such Person or any of its Restricted Subsidiaries representing a division or line of business (other than as part of a Permitted Investment (as defined in the Existing Indenture)) or (iii) other assets or rights of such Person or any of its Restricted Subsidiaries other than (A) in the ordinary course of business or (B) that constitutes a Restricted Payment (as defined in the Existing Indenture) which is permitted by the provisions of Section 1009 of the Existing Indenture; PROVIDED that a transaction described in clause (i), (ii) and (iii) shall constitute an Asset Disposition -18- only if the aggregate consideration for such transfer, conveyance, sale, lease or other disposition is equal to $5 million or more in any 12-month period. "Bank Credit Agreement" means any one or more credit agreements (which may include or consist of revolving credits) between the Corporation or any Restricted Subsidiary of the Corporation and one or more banks or other financial institutions providing financing for the business of the Corporation and its Restricted Subsidiaries. "Board of Directors" shall have the meaning ascribed to it in the first paragraph of this Resolution. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in The Borough of Manhattan, The City of New York, New York are authorized or obligated by law or executive order to close. "Capital Lease Obligation" of any Person means the obligation to pay rent or other payment amounts under a lease of (or other Debt arrangements conveying the right to use) real or personal property of such Person which is required to be classified and accounted for as a capital lease or a liability on the face of a balance sheet of such Person in accordance with generally accepted accounting principles (a "Capital Lease"). The stated maturity of such obligation shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. The principal amount of such obligation shall be the capitalized amount thereof that would appear on the face of a balance sheet of such Person in accordance with generally accepted accounting principles. "Capital Stock" of any Person means any and all shares, interests, participations or other equivalents (however designated) of corporate stock or other equity participations, including partnership interests, whether general or limited, of such Person. "Change of Control" will be deemed to have occurred at such time as either (a) any Person or any Persons acting together that would constitute a "group" (a "Group") for purposes of Section 13(d) of the Exchange Act, or any successor provision thereto (other than Eagle River, Mr. Craig O. McCaw and their respective Affiliates or an underwriter engaged in a firm commitment underwriting on behalf of the Corporation), shall beneficially own (within the meaning of Rule 13d-3 under the Exchange Act, or any successor provision thereto) more than 50% of the aggregate voting power of all classes of Voting Stock of the Corporation; (b) neither Mr. Craig O. McCaw nor any person designated by him to the Corporation as acting on his behalf shall be a director of the Corporation; or (c) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (together with any new directors whose election by the Board of Directors or whose nomination for election by the shareholders of the Corporation was proposed by a vote of a majority of the directors of the Corporation then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors then in office. -19- "Change of Control Date" shall have the meaning ascribed to it in paragraph (h)(i) hereof. "Consolidated Capital Ratio" of any Person as of any date means the ratio of (i) the aggregate consolidated principal amount of Debt of such Person then outstanding to (ii) the aggregate consolidated Capital Stock (other than Disqualified Stock) and paid-in capital (other than in respect of Disqualified Stock) of such Person as of such date. "Consolidated Cash Flow Available for Fixed Charges" for any period means the Consolidated Net Income of the Corporation and its Restricted Subsidiaries for such period increased by the sum of (i) Consolidated Interest Expense of the Corporation and its Restricted Subsidiaries for such period, plus (ii) Consolidated Income Tax Expense of the Corporation and its Restricted Subsidiaries for such period, plus (iii) the consolidated depreciation and amortization expense included in the income statement of the Corporation and its Restricted Subsidiaries for such period, plus (iv) any non-cash expense related to the issuance to employees of the Corporation or any Restricted Subsidiary of the Corporation of options to purchase Capital Stock of the Corporation or such Restricted Subsidiary, plus (v) any charge related to any premium or penalty paid in connection with redeeming or retiring any Debt prior to its stated maturity; PROVIDED, HOWEVER, that there shall be excluded therefrom the Consolidated Cash Flow Available for Fixed Charges (if positive) of any Restricted Subsidiary of the Corporation (calculated separately for such Restricted Subsidiary in the same manner as provided above for the Corporation) that is subject to a restriction which prevents the payment of dividends or the making of distributions to the Corporation or another Restricted Subsidiary of the Corporation to the extent of such restriction. "Consolidated Income Tax Expense" for any period means the consolidated provision for income taxes of the Corporation and its Restricted Subsidiaries for such period calculated on a consolidated basis in accordance with generally accepted accounting principles. "Consolidated Interest Expense" means for any period the consolidated interest expense included in a consolidated income statement (excluding interest income) of the Corporation and its Restricted Subsidiaries for such period calculated on a consolidated basis in accordance with generally accepted accounting principles, including without limitation or duplication (or, to the extent not so included, with the addition of), (i) the amortization of Debt discounts; (ii) any payments or fees with respect to letters of credit, bankers' acceptances or similar facilities; (iii) fees with respect to interest rate swap or similar agreements or foreign currency hedge, exchange or similar agreements; (iv) Preferred Stock dividends of the Corporation and its Restricted Subsidiaries (other than dividends paid in shares of Preferred Stock that is not Disqualified Stock) declared and paid or payable; (v) accrued Disqualified Stock dividends of the Corporation and its Restricted Subsidiaries, whether or not declared or paid; (vi) interest on Debt guaranteed by the Corporation and its Restricted Subsidiaries; and (vii) the portion of any Capital Lease Obligation paid during such period that is allocable to interest expense. -20- "Consolidated Net Income" for any period means the consolidated net income (or loss) of the Corporation and its Restricted Subsidiaries for such period determined on a consolidated basis in accordance with generally accepted accounting principles; PROVIDED that there shall be excluded therefrom (i) the net income (or loss) of any Person acquired by the Corporation or a Restricted Subsidiary of the Corporation in a pooling-of-interests transaction for any period prior to the date of such transaction, (ii) the net income (or loss) of any Person that is not a Restricted Subsidiary of the Corporation except to the extent of the amount of dividends or other distributions actually paid to the Corporation or a Restricted Subsidiary of the Corporation by such Person during such period, (iii) gains or losses on Asset Dispositions by the Corporation or its Restricted Subsidiaries, (iv) all extraordinary gains and extraordinary losses, (v) the cumulative effect of changes in accounting principles, (vi) non-cash gains or losses resulting from fluctuations in currency exchange rates, (vii) any non-cash gain or loss realized on the termination of any employee pension benefit plan and (viii) the tax effect of any of the items described in clauses (i) through (vii) above. "corporation" means a corporation, association, company, limited liability company, joint-stock company or business trust. "Covenant Amendment" means either (i) the defeasance, extinguishment or amendment of certain covenants of the Existing Indenture that would cause the Senior Exchangeable Redeemable Preferred Shares to be deemed Disqualified Stock (under the Existing Indenture) if the provisions of paragraph (f)(G)(x) and (y) were a part of this Certificate of Designations, and include, but are not limited to, the definition of Disqualified Stock (under the Existing Indenture) or (ii) defeasance or extinguishment of the Existing Indenture in its entirety. "Debt" means (without duplication), with respect to any Person, whether recourse is to all or a portion of the assets of such Person and whether or not contingent, (i) every obligation of such Person for money borrowed, (ii) every obligation of such Person evidenced by bonds, debentures, notes or other similar instruments, including any such obligations Incurred in connection with the acquisition of property, assets or businesses, (iii) every reimbursement obligation of such Person with respect to letters of credit, bankers' acceptances or similar facilities issued for the account of such Person, (iv) every obligation of such Person issued or assumed as the deferred purchase price of property or services (including securities repurchase agreements but excluding trade accounts payable or accrued liabilities arising in the ordinary course of business which are not overdue or which are being contested in good faith), (v) every Capital Lease Obligation of such Person, (vi) all Receivables Sales of such Person, together with any obligation of such Person to pay any discount, interest, fees, indemnities, penalties, recourse, expenses or other amounts in connection therewith, (vii) all obligations to redeem Disqualified Stock issued by such Person, (viii) every obligation under Interest Rate and Currency Protection Agreements of such Person and (ix) every obligation of the type referred to in clauses (i) through (viii) of another Person and all dividends of another Person the payment of which, in either case, such Person has Guaranteed. The "amount" or "principal amount" of Debt at any time of determination as used herein represented by (a) any Debt issued at a price -21- that is less than the principal amount at maturity thereof, shall be the amount of the liability in respect thereof determined in accordance with generally accepted accounting principles, (b) any Receivables Sale, shall be the amount of the unrecovered capital or principal investment of the purchaser (other than the Corporation or a Wholly-Owned Restricted Subsidiary of the Corporation) thereof, excluding amounts representative of yield or interest earned on such investment, (c) any Disqualified Stock, shall be the maximum fixed redemption or repurchase price in respect thereof, (d) any Capital Lease Obligation, shall be determined in accordance with the definition thereof, or (e) any Permitted Interest Rate or Currency Protection Agreement, shall be zero. In no event shall Debt include any liability for taxes. "Disqualified Stock" of any Person means any Capital Stock of such Person which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the option of the holder thereof, in whole or in part, on or prior to February 1, 2009; PROVIDED, HOWEVER, that any Preferred Stock which would not constitute Disqualified Stock but for provisions thereof giving holders thereof the right to require the Corporation to repurchase or redeem such Preferred Stock upon the occurrence of a Change of Control occurring prior to February 1, 2009 shall not constitute Disqualified Stock if the change of control provisions applicable to such Preferred Stock are no more favorable to the holders of such Preferred Stock than the provisions contained in paragraph (h) hereof and such Preferred Stock specifically provides that the Corporation will not repurchase or redeem any such stock pursuant to such provisions prior to the Corporation's repurchase of such Senior Exchangeable Redeemable Preferred Shares as are required to be purchased pursuant to paragraph (h) hereof. "Dividend Payment Date" means February 1, May 1, August 1 and November 1, of each year. "Dividend Period" means the Initial Dividend Period and, thereafter, each Quarterly Dividend Period. "Dividend Record Date" means January 15, April 15, July 15 and October 15 of each year. "Eagle River" means Eagle River Investments, L.L.C., a limited liability company formed under the laws of the State of Washington. "Exchange Act" means the Securities Exchange Act of 1934, and the rules and regulations promulgated thereunder. "Exchange Date" means the date on which Senior Exchangeable Redeemable Preferred Shares are exchanged by the Corporation for Exchange Notes. "Exchange Notes" shall have the meaning ascribed to it in paragraph (g)(i) hereof. -22- "Exchange Notice" shall have the meaning ascribed to it in paragraph (g)(ii) hereof. "Exchange Offer" means the exchange offer contemplated by the Registration Rights Agreement. "Exchange Shares" means any Senior Exchangeable Redeemable Preferred Shares issued in exchange for an Original Share or Original Shares pursuant to the Exchange Offer or otherwise registered under the Securities Act and any Senior Exchangeable Redeemable Preferred Shares with respect to which the next preceding Predecessor Shares of such Senior Exchangeable Redeemable Preferred Shares was an Exchange Share, and their Successor Shares. "Existing Notes" means the Corporation's $350,000,000 aggregate principal amount of 12 1/2% Senior Notes due April 15, 2006, as the same may be modified or amended from time to time. "Existing Indenture" means the Indenture governing the Existing Notes as such Indenture may be amended or supplemented from time to time in accordance with the terms thereof. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person guaranteeing, or having the economic effect of guaranteeing, any Debt of any other Person (the "primary obligor") in any manner, whether directly or indirectly, and including, without limitation, any obligation of such Person, (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such Debt, (ii) to purchase property, securities or services for the purpose of assuring the holder of such Debt of the payment of such Debt, or (iii) to maintain working capital, equity capital or other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Debt (and "Guaranteed", "Guaranteeing" and "Guarantor" shall have meanings correlative to the foregoing); PROVIDED, HOWEVER, that the Guarantee by any Person shall not include endorsements by such Person for collection or deposit, in either case, in the ordinary course of business; and PROVIDED, FURTHER, that the incurrence by a Restricted Subsidiary of the Corporation of a lien permitted under clause (iv) of the second paragraph of Section 1011 of the Existing Indenture shall not be deemed to constitute a Guarantee by such Restricted Subsidiary of any Purchase Money Debt of the Corporation secured thereby. "Holder" means a holder of Senior Exchangeable Redeemable Preferred Shares as reflected in the share books of the Corporation. "Incur" means, with respect to any Debt or other obligation of any Person, to create, issue, incur (by conversion, exchange or otherwise), assume, Guarantee or otherwise become liable in respect of such Debt or other obligation including by acquisition of Subsidiaries or the recording, as required pursuant to generally accepted -24- accounting principles or otherwise, of any such Debt or other obligation on the balance sheet of such Person (and "Incurrence", "Incurred", "Incurrable" and "Incurring" shall have meanings correlative to the foregoing); PROVIDED, HOWEVER, that a change in generally accepted accounting principles that results in an obligation of such Person that exists at such time becoming Debt shall not be deemed an Incurrence of such Debt and that neither the accrual of interest nor the accretion of original issue discount shall be deemed an Incurrence of Debt; PROVIDED, FURTHER, HOWEVER, that the Corporation may elect to treat all or any portion of revolving credit debt of the Corporation or a Subsidiary as being incurred from and after any date beginning the date the revolving credit commitment is extended to the Corporation or a Subsidiary, by furnishing notice thereof to the Transfer Agent, and any borrowings or reborrowings by the Corporation or a Subsidiary under such commitment up to the amount of such commitment designated by the Corporation as Incurred shall not be deemed to be new Incurrences of Debt by the Corporation or such Subsidiary. "Initial Dividend Period" means the dividend period commencing on the Issue Date and ending on the first Dividend Payment Date to occur thereafter. "Initial Purchaser" means Merrill Lynch, Pierce, Fenner & Smith Incorporated or Toronto Dominion Securities (USA) Inc. "Interest Rate or Currency Protection Agreement" of any Person means any forward contract, futures contract, swap, option or other financial agreement or arrangement (including, without limitation, caps, floors, collars and similar agreements) relating to, or the value of which is dependent upon, interest rates or currency exchange rates or indices. "Investment" by any Person means any direct or indirect loan, advance or other extension of credit or capital contribution (by means of transfers of cash or other property to others or payments for property or services for the account or use of others, or otherwise) to, or purchase or acquisition of Capital Stock, bonds, notes, debentures or other securities or evidence of Debt issued by, any other Person, including any payment on a Guarantee of any obligation of such other Person, but excluding any loan, advance or extension of credit to an employee of the Corporation or any of its Restricted Subsidiaries in the ordinary course of business, accounts receivable and other commercially reasonable extensions of trade credit. "Issue Date" means the date of original issuance of the Senior Exchangeable Redeemable Preferred Shares. "Joint Venture" means a corporation, partnership or other entity engaged in one or more Telecommunications Businesses as to which the Corporation (directly or through one or more Restricted Subsidiaries) exercises managerial control and in which the Corporation owns (i) a 50% or greater interest, or (ii) a 40% or greater interest, together with options or other contractual rights, exercisable not more than seven years after the -25- Corporation's initial Investment in such Joint Venture, to increase its interest to not less than 50%. "Junior Shares" shall have the meaning ascribed to it in paragraph (b) hereof. "Lien" means, with respect to any property or assets, any mortgage or deed of trust, pledge, hypothecation, assignment, Receivables Sale, deposit arrangement, security interest, lien, charge, easement (other than any easement not materially impairing usefulness or marketability), encumbrance, preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever on or with respect to such property or assets (including, without limitation, any conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing). "Mandatory Redemption Price" shall have the meaning ascribed to it in paragraph (e)(ii) hereof. "Offer to Purchase" means a written offer (the "Offer") sent by the Corporation by first class mail, postage prepaid, to each Holder at his address appearing in the records of the Corporation on the date of the Offer offering to purchase any and all of the Senior Exchangeable Redeemable Preferred Shares at the purchase price specified in such Offer (as determined pursuant to this Certificate of Designations). Unless otherwise required by applicable law, the Offer shall specify an expiration date (the "Expiration Date") of the Offer to Purchase which shall be, subject to any contrary requirements of applicable law, not less than 30 days or more than 60 days after the date of such Offer and a settlement date (the "Payment Date") for purchase of Senior Exchangeable Redeemable Preferred Shares within five Business Days after the Expiration Date. The Corporation shall notify the Transfer Agent at least 15 Business Days (or such shorter period as is acceptable to the Transfer Agent) prior to the mailing of the Offer of the Corporation's obligation to make an Offer to Purchase, and the Offer shall be mailed by the Corporation or, at the Corporation's request, by the Transfer Agent in the name and at the expense of the Corporation. The Offer shall contain information concerning the business of the Corporation and its Subsidiaries which the Corporation in good faith believes will enable such Holders to make an informed decision with respect to the Offer to Purchase (which at a minimum will include (i) the most recent annual and quarterly financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the documents required to be filed with the Securities and Exchange Commission or provided to the Transfer Agent pursuant to this Certificate of Designations (which requirements may be satisfied by delivery of such documents together with the Offer), (ii) a description of material developments in the Corporation's business subsequent to the date of the latest of such financial statements referred to in clause (i) (including a description of the events requiring the Corporation to make the Offer to Purchase), (iii) if applicable, appropriate pro forma financial information concerning the Offer to Purchase and the events requiring the Corporation to make the Offer to Purchase and (iv) any other information required by applicable law to be included therein). The Offer shall contain all instructions and materials necessary to enable such Holders to -26- tender Senior Exchangeable Redeemable Preferred Shares pursuant to the Offer to Purchase. The Offer shall also state: (a) the paragraph of this Certificate of Designations pursuant to which the Offer to Purchase is being made; (b) the Expiration Date and the Payment Date; (c) the purchase price to be paid by the Corporation for each Senior Exchangeable Redeemable Preferred Shares accepted for payment (as specified pursuant to this Certificate of Designations) (the "Purchase Price"); (d) that the Holder may tender all or any portion of the Senior Exchangeable Redeemable Preferred Shares registered in the name of such Holder; (e) the place or places where Senior Exchangeable Redeemable Preferred Shares are to be surrendered for tender pursuant to the Offer to Purchase; (f) that dividends on any Senior Exchangeable Redeemable Preferred Share not tendered or tendered but not purchased by the Corporation pursuant to the Offer to Purchase will continue to accrue; (g) that on the Payment Date the Purchase Price will become due and payable upon each Senior Exchangeable Redeemable Preferred Share being accepted for payment pursuant to the Offer to Purchase and that dividends thereon shall cease to accrue on and after the Purchase Date; (h) that each Holder electing to tender a Senior Exchangeable Redeemable Preferred Share pursuant to the Offer to Purchase will be required to surrender such Senior Exchangeable Redeemable Preferred Share at the place or places specified in the Offer prior to the close of business on the Expiration Date (such Senior Exchangeable Redeemable Preferred Share being, if the Corporation or the Transfer Agent so requires, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Corporation and the Transfer Agent duly executed by, the Holder thereof or his attorney duly authorized in writing); (i) that Holders will be entitled to withdraw all or any portion of Senior Exchangeable Redeemable Preferred Shares tendered if the Corporation (or its paying agent) receives not later than the close of business on the Expiration Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the number of the Senior Exchangeable Redeemable Preferred Shares the Holder tendered, the certificate number(s) of the Senior Exchangeable Redeemable Preferred Shares the Holder tendered and a statement that such Holder is withdrawing all or a portion of his tender; (j) that the Corporation shall purchase all Senior Exchangeable Redeemable Preferred Shares tendered; -27- (k) that in the case of any Holder whose Senior Exchangeable Redeemable Preferred Share is purchased only in part, the Corporation shall issue and deliver to the Holder of such Senior Exchangeable Redeemable Preferred Share without service charge, a new Senior Exchangeable Redeemable Preferred Share or Senior Exchangeable Redeemable Preferred Shares as requested by such Holder; and (l) the CUSIP number or numbers of the Senior Exchangeable Redeemable Preferred Shares offered to be purchased by the Corporation pursuant to the Offer to Purchase. Any Offer to Purchase shall be governed by and effected in accordance with the Offer for such Offer to Purchase. "Officers' Certificate" means a certificate signed by (i) the Chief Executive Officer, President, an Executive Vice President or a Vice President, and (ii) the Treasurer, Assistant Treasurer, Secretary or an Assistant Secretary, of the Corporation and delivered to the Transfer Agent and containing the following: (a) a statement that each individual signing such certificate has read such covenant or condition and the definitions herein relating thereto; (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 each such individual, he has made such examination or investigation as is necessary to enable him 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, in the opinion of each such individual, such condition or covenant has been complied with. "Opinion of Counsel" means a written opinion of legal counsel, who may be counsel for the Corporation and containing the following statements: (a) a statement that such counsel has read such covenant or condition and the definitions herein relating thereto; (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 each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and -28- (d) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. "Original Shares" means Senior Exchangeable Redeemable Preferred Shares that are not Exchange Shares. "Parity Shares" shall have the meaning ascribed to it in paragraph (b) hereof. "Payment Date" shall have the meaning ascribed to it in the definition of Offer to Purchase. "Permitted Interest Rate or Currency Protection Agreement" of any Person means any Interest Rate or Currency Protection Agreement entered into with one or more financial institutions in the ordinary course of business that is designed to protect such Person against fluctuations in interest rates or currency exchange rates with respect to Debt Incurred and which shall have a notional amount no greater than the payments due with respect to the Debt being hedged thereby and not for purposes of speculation. "Person" means any individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, trust, unincorporated organization, government or agency or political subdivision thereof or any other entity. "Predecessor Share" of any particular Senior Exchangeable Redeemable Preferred Share means every previous Senior Exchangeable Redeemable Preferred Share issued before, and evidencing all or a portion of the same interest as that evidenced by, such particular Senior Exchangeable Redeemable Preferred Share; and, for the purposes of this definition, any Senior Exchangeable Redeemable Preferred Share issued and delivered in exchange for or in lieu of a mutilated, destroyed, lost or stolen Senior Exchangeable Redeemable Preferred Share shall be deemed to evidence the same interest as the mutilated, destroyed, lost or stolen Senior Exchangeable Redeemable Preferred Share. "Preferred Stock" of any Person means Capital Stock of such Person of any class or classes (however designated) that ranks prior, as to the payment of dividends or as to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of such Person, to shares of Capital Stock of any other class of such Person. "Public Equity Offering" means a underwritten public offering of common stock, par value $.01 per share, of the Corporation pursuant to an effective registration statement filed with the Securities and Exchange Commission in accordance with the Securities Act. "Purchase Money Debt" means (i) Acquired Debt Incurred in connection with the acquisition of Telecommunications Assets and (ii) Debt of the Corporation or of any Restricted Subsidiary of the Corporation (including, without limitation, Debt represented by Capital Lease Obligations, Vendor Financing Facilities, mortgage financings and purchase money obligations) Incurred for the purpose of financing all or any part of the cost of construction, acquisition or improvement by the Corporation or any Restricted Subsidiary of the Corporation or any Joint Venture of any Telecommunications Assets of -29- the Corporation, any Restricted Subsidiary of the Corporation or any Joint Venture, and including any related notes, Guarantees, collateral documents, instruments and agreements executed in connection therewith, as the same may be amended, supplemented, modified or restated from time to time. "Qualified Junior Shares" shall mean Junior Shares that do not constitute Disqualified Stock. "Qualifying Event" means a Public Equity Offering or one or more Strategic Equity Investments which in either case results in aggregate net proceeds to the Corporation of not less than $75 million. "Quarterly Dividend Period" shall mean the quarterly period commencing on each February 1, May 1, August 1 and November 1 and ending on the next succeeding Dividend Payment Date, respectively. "Receivables" means receivables, chattel paper, instruments, documents or intangibles evidencing or relating to the right to payment of money in respect of the sale of goods or services. "Receivables Sale" of any Person means any sale of Receivables of such Person (pursuant to a purchase facility or otherwise), other than in connection with a disposition of the business operations of such Person relating thereto or a disposition of defaulted Receivables for purpose of collection and not as a financing arrangement. "Redemption Date", with respect to any Senior Exchangeable Redeemable Preferred Shares, means the date on which such Senior Exchangeable Redeemable Preferred Shares are redeemed by the Corporation. "Redemption Notice" shall have the meaning ascribed to it in paragraph (e) hereof. "Restricted Subsidiary" of the Corporation means any Subsidiary, whether existing on or after the date of this Certificate of Designations, unless such Subsidiary is an Unrestricted Subsidiary. "Registration Rights Agreement" means that certain Preferred Exchange and Registration Rights Agreement, dated as of January 31, 1997, by and between the Corporation and Merrill Lynch, Pierce, Fenner & Smith Incorporated and Toronto Dominion Securities (USA) Inc. "Senior Exchangeable Redeemable Preferred Shares" shall have the meaning ascribed to it in paragraph (a) hereof. "Special Mandatory Redemption Price" shall have the meaning ascribed to it in paragraph (e)(i) hereof. -30- "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "Senior Shares" shall have the meaning ascribed to it in paragraph (b) hereof. "Strategic Equity Investment" means an investment in Qualified Junior Shares made by a Strategic Investor in an aggregate amount of not less than $25 million. "Strategic Investor" means a Person engaged in one or more Telecommunications Businesses (which need not be such Person's primary business) that has, or 80% or more of the Voting Stock of which is owned, directly or indirectly, by a Person that has, an equity market capitalization or net worth, at the time of its initial investment in the Corporation, in excess of $2.0 billion. "Subordinated Debt" means Debt of the Corporation as to which the payment of principal of (and premium, if any) and interest and other payment obligations in respect of such Debt shall be subordinate to the prior payment in full of the Exchange Notes, or the Existing Notes if the Exchange Notes have not yet been issued, to at least the following extent: (i) no payments of principal of (or premium, if any) or interest on or otherwise due in respect of such Debt may be permitted for so long as any default in the payment of principal (or premium, if any) or interest on the Exchange Notes or Existing Notes, as applicable, exists; (ii) in the event that any other default that with the passing of time or the giving of notice, or both, would constitute an Event of Default exists with respect to the Exchange Notes or the Existing Notes, as applicable, upon notice by 25% or more in principal amount of the Exchange Notes or the Existing Notes, as applicable, to the relevant trustee, the relevant trustee shall have the right to give notice to the Corporation and the holders of such Debt (or trustees or agents therefor) of a payment blockage, and thereafter no payments of principal of (or premium, if any) or interest on or otherwise due in respect of such Debt may be made for a period of 179 days from the date of such notice or for the period until such default has been cured or waived or ceased to exist and any acceleration of the Exchange Notes or the Existing Notes, as applicable, has been rescinded or annulled, whichever period is shorter (which Debt may provide (A) no new period of payment blockage may be commenced by a payment blockage notice unless and until 360 days have elapsed since the effectiveness of the immediately prior notice, (B) no nonpayment default that existed or was continuing on the date of delivery of any payment blockage notice to such holders (or such agents or trustees) shall be, or be made, the basis for a subsequent payment blockage notice and (C) failure of the Corporation to make payment on such Debt when due or within any applicable grace period, whether or not on account of such payment blockage provisions, shall constitute an event of default thereunder); and (iii) such Debt may not (x) provide for payments of principal of such Debt at the stated maturity thereof or by way of a sinking fund applicable thereto or by way of any mandatory redemption, defeasance, retirement or repurchase thereof by the Corporation (including any redemption, retirement or repurchase which is contingent upon events or circumstances, but excluding any retirement required by virtue of acceleration of such Debt upon an event of default thereunder), in each case prior to the final Stated Maturity (as defined in the Existing Indenture) of the Exchange Notes or the Existing -31- Notes, as applicable, or (y) permit redemption or other retirement (including pursuant to an offer to purchase made by the Corporation) of such other Debt at the option of the holder thereof prior to the final Stated Maturity (as defined in the Existing Indenture) of the Exchange Notes or the Existing Notes, as applicable, other than a redemption or other retirement at the option of the holder of such Debt (including pursuant to an offer to purchase made by the Corporation) which is conditioned upon a change of control of the Corporation pursuant to provisions substantially similar to those contained in paragraph (h) hereof (and which shall provide that such Debt will not be repurchased pursuant to such provisions prior to the Corporation's repurchase of the Exchange Notes or the Existing Notes, as applicable, required to be repurchased by the Corporation pursuant to the provisions of Section 1016 of the Existing Indenture or Section 1016 of the Indenture, as applicable. "Subsidiary" of any Person means (i) a corporation more than 50% of the combined voting power of the outstanding Voting Stock of which is owned, directly or indirectly, by such Person or by one or more other Subsidiaries of such Person or by such Person and one or more Subsidiaries thereof or (ii) any other Person (other than a corporation) in which such Person, or one or more other Subsidiaries of such Person or such Person and one or more other Subsidiaries thereof, directly or indirectly, has at least a majority ownership and power to direct the policies, management and affairs thereof. "Successor Share" of any particular Senior Exchangeable Redeemable Preferred Share means every Senior Exchangeable Redeemable Preferred Share issued after, and evidencing all or a portion of the same interest as that evidenced by, such particular Senior Exchangeable Redeemable Preferred Share; and, for the purposes of this definition, any Senior Exchangeable Redeemable Preferred Share issued and delivered in exchange for or in lieu of a mutilated, destroyed, lost or stolen Senior Exchangeable Redeemable Preferred Share shall be deemed to evidence the same interest as the mutilated, destroyed, lost or stolen Senior Exchangeable Redeemable Preferred Share. "Telecommunications Assets" means all assets, rights (contractual or otherwise) and properties, whether tangible or intangible, used or intended for use in connection with a Telecommunications Business. "Telecommunications Business" means the business of (i) transmitting, or providing services relating to the transmission of, voice, video or data through owned or leased transmission facilities, (ii) creating, developing or marketing communications related network equipment, software and other devices for use in a Telecommunication Business or (iii) evaluating, participating or pursuing any other activity or opportunity that is primarily related to those identified in (i) or (ii) above and shall, in any event, include all businesses in which the Corporation or any of its Subsidiaries are engaged on the Issue Date; PROVIDED that the determination of what constitutes a Telecommunications Business shall be made in good faith by the Board of Directors of the Corporation, which determination shall be conclusive. -32- "Transfer Agent" means the transfer agent for the Senior Exchangeable Redeemable Preferred Shares designated by the Corporation from time to time. "Unrestricted Subsidiary" means (1) any Subsidiary of the Corporation designated as such by the Board of Directors as set forth below where (a) neither the Corporation nor any of its other Subsidiaries (other than another Unrestricted Subsidiary) (i) provides credit support for, or Guarantee of, any Debt of such Subsidiary or any Subsidiary of such Subsidiary (including any undertaking, agreement or instrument evidencing such Debt) or (ii) is directly or indirectly liable for any Debt of such Subsidiary or any Subsidiary of such Subsidiary, and (b) no default with respect to any Debt of such Subsidiary or any Subsidiary of such Subsidiary (including any right which the holders thereof may have to take enforcement action against such Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Debt of the Corporation and its Restricted Subsidiaries to declare a default on such other Debt or cause the payment thereof to be accelerated or payable prior to its final scheduled maturity and (2) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary to be an Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property of, any other Subsidiary of the Corporation which is not a Subsidiary of the Subsidiary to be so designated or otherwise an Unrestricted Subsidiary, PROVIDED that either (x) the Subsidiary to be so designated has total assets of $1,000 or less or (y) immediately after giving effect to such designation, the Corporation could incur at least $1.00 of additional Debt pursuant to paragraph (l)(i) hereof. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary, PROVIDED that, immediately after giving effect to such designation, the Corporation could incur at least $1.00 of additional Debt pursuant to the paragraph (l)(i) hereof. "Vendor Financing Facility" means any agreements between the Corporation or a Restricted Subsidiary of the Corporation and one or more vendors or lessors of equipment to the Corporation or any of its Restricted Subsidiaries (or any affiliate of any such vendor or lessor) providing financing for the acquisition by the Corporation or any such Restricted Subsidiary of equipment from any such vendor or lessor. "Vice President", when used with respect to the Corporation means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president". "Voting Stock" of any Person means Capital Stock of such Person which ordinarily has voting power for the election of directors (or persons performing similar functions) of such Person, whether at all times or only so long as no senior class of securities has such voting power by reason of any contingency. "Voting Rights Triggering Event" shall have the meaning ascribed to it in paragraph f(iv) hereof. "Wholly-Owned Restricted Subsidiary" of any Person means a Restricted Subsidiary of such Person 99% or more of the outstanding Capital Stock or other -33- ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person or by one or more Wholly-Owned Restricted Subsidiaries of such Person or by such Person and one or more Wholly-Owned Restricted Subsidiaries of such Person. (n) RESTRICTIONS ON TRANSFER (i) Each Original Share shall contain a legend substantially to the following effect until the Resale Restriction Termination Date (as defined below) unless the Corporation determines otherwise: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION AND SUBJECT TO COMPLIANCE WITH OTHER APPLICABLE LAWS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE WHICH IS THREE YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE CORPORATION OR ANY AFFILIATE OF THE CORPORATION WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF THIS SECURITY) (THE "RESALE RESTRICTION TERMINATION DATE"), ONLY (A) TO THE CORPORATION; (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THESE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144, (E) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT OR (F) IN THE CASE OF EITHER ANY INITIAL INVESTOR THAT IS A QUALIFIED INSTITUTIONAL BUYER OR ANY SUBSEQUENT INVESTOR, TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (a)(1), (2), (3) or (7) OF RULE 501 UNDER THE SECURITIES ACT PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT (IF AVAILABLE), AND OTHERWISE IN COMPLIANCE WITH OTHER APPLICABLE LAWS, SUBJECT -34- TO THE CORPORATION'S AND THE TRANSFER AGENT AND REGISTRAR'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (C), (D), (E) OR (F) TO REQUIRE THE DELIVERY OF A TRANSFER CERTIFICATE AND IN THE CASE OF CLAUSE (F) AN OPINION OF COUNSEL /OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM. THE LEGEND WILL BE REMOVED UPON THE REQUEST OF A HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. (ii) If prior to the Resale Restriction Termination Date (or such shorter period as may be prescribed by Rule 144(k) under the Securities Act (or any successor thereto)) a Holder of Original Shares that acquired Senior Exchangeable Redeemable Preferred Shares from an Initial Purchaser in a sale that was not made in reliance upon Rule 144A under the Securities Act wishes to transfer such Original Shares, such transfer may be effected only upon receipt by the Corporation or the Transfer Agent of a certificate substantially in the form of Exhibit A hereto duly executed by such Holder or his attorney duly authorized in writing. [Balance of page intentionally blank.] -35- IN WITNESS WHEREOF, said NEXTLINK Communications Merger, Inc., has caused this Certificate to be signed by R. Bruce Easter, Jr., its Vice President, this 30th day of January 1997. NEXTLINK COMMUNICATIONS MERGER, INC. By: /s/ R. Bruce Easter, Jr. ---------------------------- Name: R. Bruce Easter, Jr. Title: Vice President -36- EX-4.4 7 EXHIBIT 4.4 FORM OF STOCK CERT 14% SR EX REDEEM
NUMBER SHARES NEXTLINK COMMUNICATIONS, INC. INCORPORATED UNDER THE LAWS OF THE 14% SENIOR EXCHANGEABLE REDEEMABLE CUSIP No. STATE OF WASHINGTON PREFERRED SHARES, PAR VALUE $.01 PER SHARE THE RIGHTS, PREFERENCES AND LIMITATIONS OF THE SENIOR EXCHANGEABLE REDEEMABLE PREFERRED SHARES REPRESENTED BY THIS CERTIFICATE ARE DETERMINED BY THE CERTIFICATE OF DESIGNATION ESTABLISHING THE RIGHTS, PREFERENCES AND LIMITATIONS OF THIS CLASS OF SHARES, WHICH WAS APPROVED BY THE BOARD OF DIRECTORS OF THE CORPORATION AND FILED WITH THE SECRETARY OF STATE OF THE STATE OF WASHINGTON. A COPY OF THE CERTIFICATE OF DESIGNATION IS AVAILABLE FROM THE CORPORATION WITHOUT CHARGE TO SHAREHOLDERS UPON WRITTEN REQUEST. This CERTIFIES that is the owner of FULLY PAID AND NON-ASSESSABLE SHARES OF THE 14% SENIOR EXCHANGEABLE REDEEMABLE PREFERRED SHARES, PAR VALUE $.01 PER SHARE, OF NEXTLINK COMMUNICATIONS, INC. transferable on the books of the corporation by the holder hereof in person or by a duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid until countersigned and registered by the Transfer Agent and Registrar. IN WITNESS WHEREOF, the corporation has caused this Certificate to be signed by its duly authorized officers. COUNTERSIGNED AND REGISTERED: Dated: January 31, 1997 CONTINENTAL STOCK TRANSFER & TRUST COMPANY, SECRETARY VICE PRESIDENT as TRANSFER AGENT AND REGISTRAR AUTHORIZED SIGNATURE
NEXTLINK COMMUNICATIONS, INC. THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION AND SUBJECT TO COMPLIANCE WITH OTHER APPLICABLE LAWS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE WHICH IS THREE YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE CORPORATION OR ANY AFFILIATE OF THE CORPORATION WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF THIS SECURITY) (THE "RESALE RESTRICTION TERMINATION DATE"), ONLY (A) TO THE CORPORATION; (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THESE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144, (E) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT OR (F) IN THE CASE OF EITHER ANY INITIAL INVESTOR THAT IS A QUALIFIED INSTITUTIONAL BUYER OR ANY SUBSEQUENT INVESTOR, TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (a)(1), (2), (3) or (7) OF RULE 501 UNDER THE SECURITIES ACT PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT (IF AVAILABLE), AND OTHERWISE IN COMPLIANCE WITH OTHER APPLICABLE LAWS, SUBJECT TO THE CORPORATION'S AND THE TRANSFER AGENT AND REGISTRAR'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (C), (D), (E) OR (F) TO REQUIRE THE DELIVERY OF A TRANSFER CERTIFICATE AND IN THE CASE OF CLAUSE (F) AN OPINION OF COUNSEL AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM. THE LEGEND WILL BE REMOVED UPON THE REQUEST OF A HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. UNTIL THE EARLIEST TO OCCUR OF: (I) AUGUST 1, 1997, (II) THE EFFECTIVE DATE OF THE EXCHANGE OFFER REGISTRATION STATEMENT AND (III) A CHANGE OF CONTROL, THE CONTINGENT WARRANTS EVIDENCED HEREBY MAY NOT BE SOLD, ASSIGNED OR OTHERWISE TRANSFERRED TO ANY PERSON UNLESS, FOR EACH TRANSFER OF A CONTINGENT WARRANT, SIMULTANEOUSLY WITH SUCH TRANSFER, THE HOLDER HEREOF TRANSFERS TO THE SAME TRANSFEREE ONE SHARE OF THE 14% SENIOR EXCHANGEABLE REDEEMABLE PREFERRED SHARES OF NEXTLINK COMMUNICATIONS, INC. UNTIL THE EARLIEST TO OCCUR OF: (I) AUGUST 1, 1997, (II) THE EFFECTIVE DATE OF THE EXCHANGE OFFER REGISTRATION STATEMENT AND (III) A CHANGE OF CONTROL, THE 14% SENIOR EXCHANGEABLE REDEEMABLE PREFERRED SHARES EVIDENCED HEREBY MAY NOT BE TRANSFERRED OR EXCHANGED SEPARATELY FROM, BUT MAY BE TRANSFERRED OR EXCHANGED ONLY TOGETHER WITH, CONTINGENT WARRANTS ISSUED BY NEXTLINK COMMUNICATIONS, INC. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations. TEN COM - as tenants in common UNIF GIFT MIN ACT -- ...........Custodian................ TEN ENT - as tenants by the entireties (Cust) (Minor) JT TEN - as joint tenants with right of Under Uniform Gifts to Minors survivorship and not as tenants in common Act................................. (State)
Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE [ ] - ----------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) shares - ------------------------------------------------------------------- of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint Attorney - ------------------------------------------------------------------- to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated __________________ X__________________________________________ NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OF ENLARGEMENT OR ANY CHANGE WHATEVER. In presence of X_________________________ EX-10.1 8 STOCK PLAN OF THE COMPANY NEXTLINK COMMUNICATIONS, INC. STOCK OPTION PLAN SECTION 1. PURPOSE. The purpose of this Stock Option Plan (this "Plan") is to provide a means whereby Nextlink Communications, Inc. (the "Company") or any parent or subsidiary of the Company, as defined in Subsection 5.9 (the "related entities"), may continue to attract, motivate and retain selected employees, officers and independent contractors who can materially contribute to the Company's growth and success, and to encourage stock ownership in the Company through granting incentive stock options or nonqualified stock options, or both, to purchase the Class A Common Stock of the Company (as defined in Section 3), so that such key employees and other persons and entities will more closely identify their interests with those of the Company and its shareholders. In addition, options under this Plan may serve as replacement options for options issued under the Equity Option Plan sponsored by the Company's predecessor SECTION 2. ADMINISTRATION. This Plan shall be administered by the Board of Directors of the Company (the "Board") or, in the event the Board shall appoint or authorize a committee to administer this Plan, by such committee. The administrator of this Plan shall hereinafter be referred to as the "Plan Administrator." If the Company registers any of its equity securities pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), then with respect to grants made to officers or other optionees affected by Section 16(b) of the Exchange Act, the Plan Administrator shall be constituted at all times so as to meet the requirements of the exemption under the rules of Section 16(b) of the Exchange Act, as amended from time to time. 2.1 PROCEDURES. The Board may designate one of the members of the Plan Administrator as chairperson. The Plan Administrator may hold meetings at such times and places as it shall determine. The acts of a majority of the members of the Plan Administrator present at meetings at which a quorum exists, or acts reduced to or approved in writing by all Plan Administrator members, shall be valid acts of the Plan Administrator. 2.2 RESPONSIBILITIES. Except for the terms and conditions explicitly set forth in this Plan, the Plan Administrator shall have the authority, in its discretion, to determine all matters relating to the options to be granted under this Plan, including selection of the individuals to be granted options, the number of shares to be subject to each option, the exercise price, and all other terms and conditions of the options. Grants under this Plan need not be identical in any respect, even Page 1- STOCK OPTION PLAN when made simultaneously. The interpretation and construction by the Plan Administrator of any terms or provisions of this Plan or any option issued under this Plan, or of any rule or regulation promulgated in connection with this Plan, shall be conclusive and binding on all interested parties, so long as such interpretation and construction with respect to incentive stock options correspond to the requirements of Internal Revenue Code (the "Code") Section 422, as amended, and the regulations thereunder. 2.3 SECTION 16(B) COMPLIANCE AND BIFURCATION OF PLAN. In the event the Company registers any of its equity securities pursuant to Section 12(b) or 12(g) of the Exchange Act, it is the intention of the Company that this Plan comply in all respects with Rule 16b-3 under the Exchange Act and, if any Plan provision is later found not to be in compliance with such Section, the provision shall be deemed null and void, and in all events the Plan shall be construed in favor of its meeting the requirements of Rule 16b-3. Notwithstanding anything in this Plan to the contrary, the Board, in its absolute discretion, may bifurcate this Plan so as to restrict, limit or condition the use of any provision of this Plan to participants who are officers and directors subject to Section 16(b) of the Exchange Act without so restricting, limiting or conditioning other Plan participants. SECTION 3. STOCK SUBJECT TO THIS PLAN. The stock subject to this Plan shall be the Company's Class A Common Stock (the "Class A Common Stock"), presently authorized but unissued or now held or subsequently acquired by the Company as treasury shares. Subject to adjustment as provided in Section 7 of this Plan, the aggregate amount of Class A Common Stock to be delivered upon the exercise of all options granted under this Plan shall not exceed 10,000,000 shares as such Class A Common Stock was constituted on the effective date of this Plan. If any option granted under this Plan expires or is surrendered, canceled, terminated or exchanged for another option for any reason without having been exercised in full, the unpurchased shares subject to such option shall again be available for purposes of this Plan, including for replacement options which may be granted in exchange for such surrendered, canceled or terminated options. SECTION 4. ELIGIBILITY. An incentive stock option may be granted only to an individual who, at the time the option is granted, is an employee of the Company (or a corporate related entity, as described in Section 5.9) and who the Board may from time to time select for participation in this Plan. Members of the Board shall not be eligible for grants of incentive stock options unless they are also employees of the Company. At the discretion of the Plan Administrator, employees and independent contractors of the Company (including nonemployee directors) or any related entity may receive nonqualified stock options. Any party to whom an Page 2- STOCK OPTION PLAN option is granted under this Plan shall be referred to in this Plan as an "Optionee." SECTION 5. TERMS AND CONDITIONS OF OPTIONS. Options granted under this Plan shall be evidenced by written agreements that contain such terms, conditions, limitations and restrictions as the Plan Administrator shall deem advisable and which are not inconsistent with this Plan. Notwithstanding the foregoing, options shall include or incorporate by reference the following terms and conditions: 5.1 NUMBER OF SHARES. The maximum number of shares that may be purchased pursuant to the exercise of each option, which shall be as established by the Plan Administrator. 5.2 PRICE OF SHARES. The price per share at which each option is exercisable (the "exercise price") shall be as established by the Plan Administrator, provided that the Plan Administrator shall act in good faith to establish the exercise price as follows: 5.2.1 INCENTIVE STOCK OPTIONS AND NONQUALIFIED STOCK OPTIONS. With respect to incentive stock options intended to qualify under Section 422 of the Code, and subject to Subsection 5.2.2 below, the exercise price shall be not less than the fair market value per share of the Class A Common Stock at the time the option is granted. With respect to nonqualified stock options, the exercise price shall be the amount set by the Plan Administrator, provided that if the Company has registered any of its equity securities pursuant to Section 12(b) or 12(g) of the Exchange Act, the exercise price shall not be less than 85 percent of the fair market value of a share of the Class A Common Stock at the time the option is granted, unless the option represents a replacement of an option granted under a predecessor plan and the exercise price relates to the original exercise price under the predecessor plan. 5.2.2 INCENTIVE STOCK OPTIONS TO GREATER THAN 10% SHAREHOLDERS. With respect to incentive stock options granted to greater than 10% shareholders of the Company, the exercise price shall be as required by Section 6. 5.2.3 FAIR MARKET VALUE. The fair market value per share of the Class A Common Stock for the purpose of determining the exercise price under this Section 5.2 shall be determined by the Board in good faith at the time the option is granted. 5.3 TERM AND MATURITY. Subject to the restrictions contained in Section 6 with respect to granting incentive stock options to greater than 10% shareholders of the Company, the term of each incentive stock option shall be 10 years from the date it Page 3- STOCK OPTION PLAN is granted unless a shorter period of time is established by the Plan Administrator, but in no event shall the term of any incentive stock option exceed 10 years. The term of each nonqualified stock option shall be 15 years from the date it is granted, unless a shorter period of time is established by the Plan Administrator in the individual option agreement. To ensure that the Company or related entities will achieve the purpose and receive the benefits contemplated in this Plan, any option granted to any Optionee under this Plan shall, unless this condition is waived or modified by the Plan Administrator in the agreement evidencing the option, or by subsequent resolution of the Plan Administrator, be exercisable according to the following schedule: Period of Optionee's Continuous Relationship With the Company or Related Entity from the DATE Portion of Total Option Which THE OPTION IS GRANTED IS EXERCISABLE - --------------------------------- ------------------------------ After one year 25% After two years 50% After three years 75% After four years 100% 5.4 EXERCISE. Subject to the vesting schedule described in subsection 5.3 above, if any, and to any additional holding period required by applicable law, each option may be exercised in whole or in part; provided, however, that only whole shares will be issued pursuant to the exercise of any option and that the exercise price shall not be less than the par value per share of the Class A Common Stock at the time the option is exercised. During an Optionee's lifetime, any stock options granted under this Plan are personal to him or her and are exercisable solely by such Optionee, except as provided in Section 5.8. Options shall be exercised by delivery to the Company of notice of the number of shares with respect to which the option is exercised, together with payment of the exercise price. 5.5 PAYMENT OF EXERCISE PRICE. Payment of the option exercise price shall be made in full at the time the notice of exercise of the option is delivered to the Company and shall be in cash, bank certified or cashier's check or personal check (unless at the time of exercise the Plan Administrator in a particular case determines not to accept a personal check) for the Class A Common Stock being purchased. The Plan Administrator can determine at the time the option is granted for incentive stock options, or at any time before exercise for nonqualified stock options, that additional forms of payment will be permitted, including installment payments Page 4- STOCK OPTION PLAN on such terms and over such period as the Plan Administrator may determine in its discretion. To the extent permitted by the Plan Administrator and applicable laws and regulations (including, but not limited to, federal tax and securities laws and regulations and state corporate law), an option may be exercised by: (a) delivery of shares of stock of the Company held by an Optionee having a fair market value equal to the exercise price, such fair market value to be determined in good faith by the Plan Administrator; (b) delivery of a full-recourse promissory note executed by the Optionee, provided that (i) such note delivered in connection with an incentive stock option shall, and such note delivered in connection with a nonqualified stock option may, in the sole discretion of the Plan Administrator, bear interest at a rate specified by the Plan Administrator but in no case less than the rate required to avoid imputation of interest (taking into account any exceptions to the imputed interest rules) for federal income tax purposes; (ii) the Plan Administrator in its sole discretion shall specify the term and other provisions of such note at the time an incentive stock option is granted or at any time prior to exercise of a nonqualified stock option; (iii) the Plan Administrator may require that the Optionee pledge the Optionee's shares to the Company for the purpose of securing the payment of such note and may require that the certificate representing such shares be held in escrow in order to perfect the Company's security interest; (iv) the note provides that 90 days following the Optionee's termination of employment with the Company or a related entity, the entire outstanding balance under the note shall become due and payable, if not previously due and payable; and (v) the Plan Administrator in its sole discretion may at any time restrict or rescind this right upon notification to the Optionee; (c) delivery of a properly executed exercise notice, together with irrevocable instructions to a broker, all in accordance with the regulations of the Federal Reserve Board, to promptly deliver to the Company the amount of sale or loan proceeds to pay the exercise price and any federal, state or local withholding tax obligations that may arise in connection with the exercise; provided, that the Plan Administrator, in its sole discretion, may at any time determine that this Subparagraph (c), to the extent the instructions to the broker call for an immediate sale of the shares, shall not be applicable to any Optionee who is subject to Section 16(b) of the Exchange Act if such transaction would result in a violation of Section 16(b), or is not an employee at the time of exercise; (d) delivery of a properly executed exercise notice together with instructions to the Company to withhold from the Page 5- STOCK OPTION PLAN shares that would otherwise be issued upon exercise that number of shares having a fair market value equal to the option exercise price. 5.6 SHAREHOLDERS' AGREEMENT. Upon exercise of an option the Optionee shall agree to enter into and be bound by the agreement then in effect, if any, between the Company and its shareholders relating to the repurchase by the Company of its outstanding Class A Common Stock. 5.7 WITHHOLDING TAX REQUIREMENT. The Company or any related entity shall have the right to retain and withhold from any payment of cash or Class A Common Stock under this Plan the amount of taxes required by any government to be withheld or otherwise deducted and paid with respect to such payment. At its discretion, the Company may require an Optionee receiving shares of Class A Common Stock to reimburse the Company or a related entity for any such taxes required to be withheld and may withhold any distribution in whole or in part until the Company, or related entity, is so reimbursed. In lieu of such withholding or reimbursement, the Company (or related entity) shall have the right to withhold from any other cash amounts due or to become due from the Company (or related entity) to the Optionee an amount equal to such taxes or to retain and withhold a number of shares having a market value not less than the amount of such taxes required to be withheld as reimbursement for any such taxes and cancel (in whole or in part) any such shares so withheld. 5.8 NONTRANSFERABILITY OF OPTION. Options granted under this Plan and the rights and privileges conferred by this Plan may not be transferred, assigned, pledged or hypothecated in any manner (whether by operation of law or otherwise) other than by will or by the applicable laws of descent and distribution, or to a trust created by an Optionee for the benefit of his or her descendants, and shall not be subject to execution, attachment or similar process. Any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of any option under this Plan or of any right or privilege conferred by this Plan, contrary to the Code or to the provisions of this Plan, or the sale or levy or any attachment or similar process upon the rights and privileges conferred by this Plan shall be null and void. Notwithstanding the foregoing, an Optionee may during the Optionee's lifetime, designate a person who may exercise the option after the Optionee's death by giving written notice of such designation to the Plan Administrator. Such designation may be changed from time to time by the Optionee by giving written notice to the Plan Administrator revoking any earlier designation and making a new designation. 5.9 TERMINATION OF RELATIONSHIP. If the Optionee's employment relationship with the Company or any related entity Page 6- STOCK OPTION PLAN ceases for any reason other than termination for cause, death or total disability, and unless by its terms the option sooner terminates or expires, then the Optionee may exercise, for a period of three months after such cessation, that portion of the Optionee's option which is exercisable at the time of such cessation. The Optionee's option, however, shall terminate at the end of the three month period following such cessation as to all Shares for which it has not been exercised, unless such provision is waived in the agreement evidencing the option or by resolution adopted by the Plan Administrator. If, in the case of an incentive stock option, an Optionee's relationship with the Company or related entity changes (I.E., from employee to nonemployee, such as a consultant), such change shall constitute a termination of an Optionee's employment with the Company or related entity and the Optionee's incentive stock option shall terminate in accordance with this subsection. Upon the expiration of the three month period following cessation of employment, the Plan Administrator shall have sole discretion in a particular circumstance to extend the exercise period following such cessation beyond that specified above. If, however, in the case of an incentive stock option, the Optionee does not exercise the Optionee's option within three months after cessation of employment, the option will no longer qualify as an incentive stock option under the Code. Upon an Optionee's termination of employment for cause, all of the optionee's outstanding (i.e., unexercised) options issued under this Plan shall immediately expire and no longer be available for exercise. For purposes of this Plan, a termination shall be considered for "cause" if the termination is attributable to the Optionee's: (a) Embezzlement; (b) use of illegal drugs or alcohol that materially impairs the Optionee's ability to fulfill his or her duties as an employee or independent contractor; (c) willful disclosure of trade secrets or confidential information of the Company; (d) dishonesty which results in substantial harm to the Company; or (e) conviction or confession of a criminal felony. If an Optionee's relationship with the Company or any related entity ceases because of a total disability, the Optionee's option shall not terminate, and in the case of an incentive stock option, shall not cease to be treated as an incentive stock option, until the end of the 12-month period following such cessation (unless by its terms it sooner terminates and expires). As used in this Plan, the term "total disability" refers to a mental or physical impairment of the Optionee which is expected to result in death or which has lasted or is expected to last for a continuous period of 12 months or more and which causes, in the opinion of the Company and two independent physicians, the Optionee to be unable to perform his or her duties for the Company, following reasonable accommodation, and to be engaged in any substantial gainful activity. Total disability shall be deemed to have occurred on the Page 7- STOCK OPTION PLAN first day after the Company and the two independent physicians have furnished their opinion of total disability to the Plan Administrator. For purposes of this subsection 5.9, a transfer of relationship between or among the Company and/or any related entity shall not be deemed to constitute a cessation of relationship with the Company or any of its related entities. For purposes of this subsection 5.9, with respect to incentive stock options, employment shall be deemed to continue while the Optionee is on military leave, sick leave or other bona fide leave of absence (as determined by the Plan Administrator). The foregoing notwithstanding, employment shall not be deemed to continue beyond the first 90 days of such leave, unless the Optionee's reemployment rights are guaranteed by statute or by contract. As used in this Plan, the term "related entity," when referring to a subsidiary, shall mean any business entity (other than the Company) which, at the time of the granting of the option, is in an unbroken chain of entities ending with the Company, if stock or voting interests possessing 50% or more of the total combined voting power of all classes of stock or other ownership interests of each of the entities other than the Company is owned by one of the other entities in such chain. When referring to a parent entity, the term "related entity" shall mean any entity in an unbroken chain of entities ending with the Company if, at the time of the granting of the option, each of the entities other than the Company owns stock or other ownership interests possessing 50% or more of the total combined voting power of all classes of stock (or other ownership interests) in one of the other entities in such chain. In addition, with respect to an incentive stock option, the definition of "related entity" as used in this Plan shall apply by only considering entities that are corporations. 5.10 DEATH OF OPTIONEE. If an Optionee dies while he or she has a relationship with the Company or any related entity or dies within the three month period (or 12-month period in the case of totally disabled Optionees) following cessation of such relationship, any option held by such Optionee to the extent that the Optionee would have been entitled to exercise such option, may be exercised within one year after his or her death by the personal representative of his or her estate or by the person or persons to whom the Optionee's rights under the option shall pass by will or by the applicable laws of descent and distribution. 5.11 STATUS OF SHAREHOLDER. Neither the Optionee nor any party to which the Optionee's rights and privileges under the option may pass shall be, or have any of the rights or privileges of, a shareholder of the Company with respect to any of the shares Page 8- STOCK OPTION PLAN issuable upon the exercise of any option granted under this Plan unless and until such option has been exercised. 5.12 CONTINUATION OF EMPLOYMENT. Nothing in this Plan or in any option granted pursuant to this Plan shall confer upon any Optionee any right to continue in the employ of the Company or of a related entity, or to interfere in any way with the right of the Company or of any related entity to terminate his or her employment or other relationship with the Company or a related entity at any time. 5.13 MODIFICATION AND AMENDMENT OF OPTION. Subject to the requirements of Code Section 422 with respect to incentive stock options and to the terms and conditions and within the limitations of this Plan, the Plan Administrator may modify or amend outstanding options granted under this Plan. The modification or amendment of an outstanding option shall not, without the consent of the Optionee, impair or diminish any of his or her rights or any of the obligations of the Company under such option. Except as otherwise provided in this Plan, no outstanding option shall be terminated without the consent of the Optionee. Unless the Optionee agrees otherwise, any changes or adjustments made to outstanding incentive stock options granted under this Plan shall be made in such a manner so as not to constitute a "modification" as defined in Code Section 424(h) and so as not to cause any incentive stock option issued hereunder to fail to continue to qualify as an incentive stock option as defined in Code Section 422(b). 5.14 LIMITATION ON VALUE FOR INCENTIVE STOCK OPTIONS. As to all incentive stock options granted under the terms of this Plan, to the extent that the aggregate fair market value (determined at the time the incentive stock option is granted) of the stock with respect to which incentive stock options are exercisable for the first time by the Optionee during any calendar year (under this Plan and all other incentive stock option plans of the Company, a related entity or a predecessor corporation) exceeds $100,000, those options (or the portion of an option) beyond the $100,000 threshold shall be treated as nonqualified stock options. The previous sentence shall not apply if the Internal Revenue Service publicly rules, issues a private ruling to the Company, any Optionee, or any legatee, personal representative or distributee of an Optionee or issues regulations changing or eliminating such annual limit. SECTION 6. GREATER THAN 10% SHAREHOLDERS. 6.1 EXERCISE PRICE AND TERM OF INCENTIVE STOCK OPTIONS. If incentive stock options are granted under this Plan to employees who own more than 10% of the total combined voting power of all Page 9- STOCK OPTION PLAN classes of stock of the Company or any related entity, the term of such incentive stock options shall not exceed five years and the exercise price shall be not less than 110% of the fair market value of the Class A Common Stock at the time the incentive stock option is granted. This provision shall control notwithstanding any contrary terms contained in an option agreement or any other document. 6.2 ATTRIBUTION RULE. For purposes of subsection 6.1, in determining stock ownership, an employee shall be deemed to own the stock owned, directly or indirectly, by or for his brothers, sisters, spouse, ancestors and lineal descendants. Stock owned, directly or indirectly, by or for a corporation, partnership, estate or trust shall be deemed to be owned proportionately by or for its shareholders, partners or beneficiaries. If an employee or a person related to the employee owns an unexercised option or warrant to purchase stock of the Company, the stock subject to that portion of the option or warrant which is unexercised shall not be counted in determining stock ownership. For purposes of this Section 6, stock owned by an employee shall include all stock actually issued and outstanding immediately before the grant of the incentive stock option to the employee. SECTION 7. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. The aggregate number and class of shares for which options may be granted under this Plan, the number and class of shares covered by each outstanding option and the exercise price per share thereof (but not the total price), and each such option, shall all be proportionately adjusted for any increase or decrease in the number of issued shares of Class A Common Stock of the Company resulting from a split-up or consolidation of shares or any like capital adjustment, or the payment of any stock dividend. 7.1 EFFECT OF LIQUIDATION, REORGANIZATION OR CHANGE IN CONTROL. 7.1.1 CASH, STOCK OR OTHER PROPERTY FOR STOCK. Except as provided in subsection 7.1.2, upon a merger (other than a merger of the Company in which the holders of Class A Common Stock immediately prior to the merger have the same proportionate ownership of Class A Common Stock in the surviving corporation immediately after the merger), consolidation, acquisition of property or stock, separation, reorganization (other than a mere reincorporation or the creation of a holding company) or liquidation of the Company, as a result of which the shareholders of the Company receive cash, stock or other property in exchange for or in connection with their shares of Class A Common Stock, any option granted under this Plan shall terminate. Notwithstanding the foregoing, the Optionee shall have the right immediately prior to any such merger, consolidation, acquisition of property or Page 10- STOCK OPTION PLAN stock, separation, reorganization or liquidation to exercise such option in whole or in part, to the extent the vesting requirements set forth in this Plan have been satisfied, unless stated otherwise in the Optionee's individual option agreement. 7.1.2 CONVERSION OF OPTIONS ON STOCK FOR STOCK EXCHANGE. If the shareholders of the Company receive capital stock of another corporation ("Exchange Stock") in exchange for their shares of Class A Common Stock in any transaction involving a merger (other than a merger of the Company in which the holders of Class A Common Stock immediately prior to the merger have the same proportionate ownership of common stock in the surviving corporation immediately after the merger), consolidation, acquisition of property or stock, separation or reorganization (other than a mere reincorporation or the creation of a holding company), all options granted under this Plan shall be converted into options to purchase shares of Exchange Stock unless the Company and the corporation issuing the Exchange Stock, in their sole discretion, determine that any or all such options granted under this Plan shall not be converted into options to purchase shares of Exchange Stock, but instead shall terminate in accordance with the provisions of subsection 7.1.1. The amount and price of converted options shall be determined by adjusting the amount and price of the options granted under this Plan in the same proportion as used for determining the number of shares of Exchange Stock the holders of the Class A Common Stock receive in such merger, consolidation, acquisition of property or stock, separation or reorganization. Unless accelerated by the Board, the vesting schedule set forth in the option agreement shall continue to apply for the Exchange Stock. 7.1.3 CHANGE IN CONTROL. In the event of a "Change in Control", as defined in Section 7.1.4 below, of the Company after the Company has registered any of its equity securities pursuant to Section 12(b) or 12(g) of the Exchange Act, unless otherwise determined by the Board prior to the occurrence of such Change in Control, any options or portions of such options outstanding as of the date such Change in Control is determined to have occurred that are not yet fully vested on such date shall become immediately exercisable in full. 7.1.4 DEFINITION OF "CHANGE IN CONTROL." For purposes of this Plan, a "Change in Control" shall mean (a) the first approval by the Board or by the stockholders of the Company of an Extraordinary Event, (b) a Purchase, or (c) a Board Change. For purposes of the Plan, an "Extraordinary Event" shall mean any of the following actions: Page 11- STOCK OPTION PLAN (i) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of Class A Common Stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of common stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger; (ii) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, the assets of the Company; or (iii) the adoption of any plan or proposal for liquidation or dissolution of the Company. For purposes of the Plan, a "Purchase" shall mean the acquisition by any person (as such term is defined in Section 13(d) of the Exchange Act) of any shares of Class A Common Stock or securities convertible into Class A Common Stock) without the prior approval of a majority of the Continuing Directors (as defined below) of the Company, if after making such acquisition such person is the beneficial owner (as such term is defined in Rule 13d-3 under the Exchange Act) directly or indirectly of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities (calculated as provided in paragraph (d) of such Rule 13d-3). For purposes of the Plan, a "Board Change" shall have occurred if individuals who constitute the Board of the Company at the time of adoption of this Plan (the "Continuing Directors") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a Director subsequent to the date of adoption of this Plan whose nomination for election was approved by a vote of at least a majority of the Continuing Directors (other than a nomination of an individual whose initial assumption of office is in connection with an actual threatened election contest relating to the election of the Directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A under the Exchange Act) shall be deemed to be a Continuing Director. 7.2 FRACTIONAL SHARES. In the event of any adjustment in the number of shares covered by any option, any fractional shares resulting from such adjustment shall be disregarded and each such option shall cover only the number of full shares resulting from such adjustment. 7.3 DETERMINATION OF BOARD TO BE FINAL. All Section 7 adjustments shall be made by the Board, and its determination as to what adjustments shall be made, and the extent of such adjustments, Page 12- STOCK OPTION PLAN shall be final, binding and conclusive. Unless an Optionee agrees otherwise, any change or adjustment to an incentive stock option shall be made in such a manner so as not to constitute a "modification" as defined in Code Section 424(h) and so as not to cause his or her incentive stock option issued under this Plan to fail to continue to qualify as an incentive stock option as defined in Code Section 422(b). SECTION 8. SECURITIES REGULATION. Shares shall not be issued with respect to an option granted under this Plan unless the exercise of such option and the issuance and delivery of such shares pursuant to the exercise of such option shall comply with all relevant provisions of law, including, without limitation, any applicable state securities laws, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance, including the availability of an exemption from registration for the issuance and sale of any shares under this Plan. Inability of the Company to obtain from any regulatory body having jurisdiction, the authority deemed by the Company's counsel to be necessary for the lawful issuance and sale of any shares under this Plan or the unavailability of an exemption from registration for the issuance and sale of any shares under this Plan shall relieve the Company of any liability in respect of the nonissuance or sale of such shares as to which such requisite authority shall not have been obtained. As a condition to the exercise of an option, the Company may require the Optionee to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any relevant provision of the aforementioned laws. At the option of the Company, a stop-transfer order against any shares of stock may be placed on the official stock books and records of the Company, and a legend indicating that the stock may not be pledged, sold or otherwise transferred unless an opinion of counsel is provided (concurred in by counsel for the Company) stating that such transfer is not in violation of any applicable law or regulation, may be stamped on stock certificates in order to assure exemption from registration. The Plan Administrator may also require such other action or agreement by the Optionees as may from time to time be necessary to comply with the federal and state securities laws. THIS PROVISION SHALL NOT OBLIGATE THE COMPANY TO UNDERTAKE REGISTRATION OF THE OPTIONS OR STOCK HEREUNDER. Page 13- STOCK OPTION PLAN Should any of the Company's capital stock of the same class as the stock subject to options granted under this Plan be listed on a national securities exchange, all stock issued under this Plan if not previously listed on such exchange shall be authorized by that exchange for listing on such exchange prior to the issuance of such stock. SECTION 9. AMENDMENT AND TERMINATION. 9.1 BOARD ACTION. The Board may at any time suspend, amend or terminate this Plan, provided that except as set forth in Section 7, the approval of the Company's shareholders is necessary within 12 months before or after the adoption by the Board of any amendment which will: (a) increase the number of shares which are to be reserved for the issuance of options under this Plan; (b) permit the granting of stock options to a class of persons other than those presently permitted to receive stock options under this Plan; or (c) require shareholder approval under applicable law, including Section 16(b) of the Exchange Act. Any amendment made to this Plan which would constitute a "modification" to incentive stock options outstanding on the date of such amendment, shall not be applicable to such outstanding incentive stock options, but shall have prospective effect only, unless the Optionee agrees otherwise. 9.2 AUTOMATIC TERMINATION. Unless sooner terminated by the Board, this Plan shall terminate ten years from the earlier of (a) the date on which this Plan is adopted by the Board or (b) the date on which this Plan is approved by the shareholders of the Company. No option may be granted after such termination or during any suspension of this Plan. The amendment or termination of this Plan shall not, without the consent of the option holder, alter or impair any rights or obligations under any option previously granted under this Plan. SECTION 10. EFFECTIVENESS OF THIS PLAN. This Plan shall become effective upon adoption by the Board so long as it is approved by the Company's shareholders any time within 12 months before or after the adoption of this Plan. Adopted by the Board of Directors on January 15, 1997, and approved by the shareholders on January 15, 1997. Page 14- STOCK OPTION PLAN EX-10.3 9 WARRANT AGREEMENT Exhibit 10.3 ================================================================================ WARRANT AGREEMENT Dated as of January 31, 1997 by and between NEXTLINK COMMUNICATIONS, INC. and CONTINENTAL STOCK TRANSFER & TRUST COMPANY ================================================================================ WARRANT AGREEMENT TABLE OF CONTENTS* Page ---- SECTION 1. Certain Definitions ........................................... 1 SECTION 2. Appointment of Warrant Agent .................................. 5 SECTION 3. Issuance of Contingent Warrants ............................... 5 SECTION 4. Warrant Certificates .......................................... 5 SECTION 5. Execution of Warrant Certificates ............................. 6 SECTION 6. Transfers of Contingent Warrants Prior to the Separation of Contingent Warrants and Preferred Shares; Separation of Contingent Warrants and Preferred Shares .............................................. 7 SECTION 7. Registration .................................................. 8 SECTION 8. Registration of Transfers and Exchanges ....................... 9 SECTION 9. Terms of Contingent Warrants; Exercise of Contingent Warrants ........................................... 11 SECTION 10. Mutilated or Missing Warrant Certificates ..................... 13 SECTION 11. Reservations of Warrant Shares ................................ 14 SECTION 12. Adjustment of Exercise Rate ................................... 15 SECTION 13. No Dilution or Impairment ..................................... 19 SECTION 14. Fractional Interests .......................................... 19 SECTION 15. Notices to Contingent Warrant Holders; Rights of Contingent Warrant Holders .................................... 20 SECTION 16. Warrant Agent ................................................. 21 - -------- * This Table of Contents does not constitute a part of this Agreement or have any bearing upon the interpretation of any of its terms or provisions. -i- Page ---- SECTION 17. Merger, Consolidation, or Change of Name of Warrant Agent ......................................................... 23 SECTION 18. Resignation and Removal of Warrant Agent; Appointment of Successor .................................................. 23 SECTION 19. Notices to the Company and Warrant Agent ...................... 24 SECTION 20. Supplements and Amendments .................................... 25 SECTION 21. Reports ....................................................... 25 SECTION 22. Successors .................................................... 25 SECTION 23. Termination ................................................... 26 SECTION 24. Governing Law ................................................. 26 SECTION 25. Benefits of This Agreement .................................... 26 SECTION 26. Counterparts .................................................. 26 EXHIBIT A Form of Contingent Warrant Certificate......................... A-1 EXHIBIT B Form of Certificate for Transfers of Certificated Warrants ...................................................... B-1 -ii- WARRANT AGREEMENT, dated as of January 31, 1997, between NEXTLINK Communications, Inc., a Washington corporation (the "Company"), and Continental Stock Transfer & Trust Company, a corporation duly organized and existing under the laws of the State of New York, as Warrant Agent (the "Warrant Agent"). RECITALS WHEREAS, pursuant to a Purchase Agreement, dated January 21, 1997, by and among the Company, NEXTLINK Communications, L.L.C., a Washington limited liability company, and the initial purchasers named therein (the "Initial Purchasers"), the Company has agreed to sell to the Initial Purchasers 5,700,000 units (the "Units"), each consisting of (i) one share of the Company's 14% Senior Exchangeable Redeemable Preferred Stock Shares, liquidation preference $50 per share (the "Preferred Shares"), and (ii) one Contingent Warrant (the "Contingent Warrants") entitling the holder thereof to purchase, subject to the conditions contained herein, a number of shares of each class of Junior Shares outstanding as of February 1, 1998 equal to 1/5,700,000 of the aggregate Contingent Warrant Share Amount (the Junior Shares issuable on exercise of the Contingent Warrants are referred to herein as the "Warrant Shares"); and WHEREAS, the Company desires the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing so to act, in connection with the issuance of Contingent Warrants and other matters as provided herein (capitalized terms not defined herein shall have the respective meanings specified in the Indenture); NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereto agree as follows: SECTION 1. Certain Definitions. For purposes of this Agreement, the following terms shall have the following respective meanings: "Affiliate" of any Person means any other Person directly or indirectly controlling or controlled under direct or indirect common control with such Person. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities. by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Board of Directors" means either the board of directors of the Company or any committee of that board duty authorized to act for it in respect thereof; provided, however, that for purposes of the definition of "Change of Control", "Board of Directors" means the Board of Directors of the Company only and not a committee thereof. "Board Resolution" means a copy of a resolution certified by the Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Warrant Agent. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in The Borough of Manhattan, The City of New York, New York are authorized or obligated by law or executive order to close. "Capital Stock" of any Person means any and all shares, interests, participations or other equivalents (however designated) of corporate stock or other equity participations, including partnership interests, whether general or limited, of such Person. "Certificate of Designations" means the certificate of designations, rights and preferences relating to the Preferred Shares. "Change of Control" means such time as either (a) any Person or any Persons acting together that would constitute a "group" (a "Group") for purposes of Section 13(d) of the Exchange Act (other than Eagle River, Mr. Craig O. McCaw and their respective Affiliates or an underwriter engaged in a firm commitment underwriting on behalf of the Company), shall beneficially own (within the meaning of Rule 13d-3 under the Exchange Act, or any successor provision thereto) more than 50% of the aggregate voting power of all classes of Voting Stock of the Company, (b) neither Mr. Craig O. McCaw nor any person designated by him to the Company as acting on his behalf shall be a director of the Company or (c) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (together with any new directors whose election by the Board of Directors or whose nomination for election by the shareholders of the Company was proposed by a vote of a majority of the directors of the Company then still in office who were either directors at the beginning of such period of whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under applicable law, then the body performing such duties at such time. "Current Market Price" per Junior Share or any other security at any date means (i) if the security is not registered under the Exchange Act, (a) the value of the security, determined in good faith by the Board of Directors, based on the most recently completed arm's-length transaction between the Company and a person other than an Affiliate of the Company and the closing of which occurs on such date or shall have occurred within the six-month period preceding such date, or (b) if no such transaction shall have occurred on such date or within such six-month period, the value of the security as determined by an independent financial expert (provided that, in the case of the calculation of Current Market Price for determining the cash value of fractional shares, any such determination within six months that is, in the good faith judgment of the Board of Directors, a reasonable determination, may be utilized) or (ii) (a) if the security is registered under the Exchange Act, the average of the daily market prices of the security for the 20 consecutive trading days immediately preceding such date, or (b) if the security has been registered under the Exchange Act for less than 20 consecutive trading days before such date, then the average of -2- the closing sales prices for all of the trading days before such date for which closing sales prices are available, in the case of each of (ii) (a) and (ii) (b), as certified to the Warrant Agent by the President, any Vice President or the Chief Financial Officer of the Company. The market price for each such trading day shall be: (A) in the case of a security listed or admitted to trading on any national securities exchange or quotation system, the closing sales price, regular way, on such day, or if no sale takes place on such day, the average of the closing bid and asked prices on such day, (B) in the case of a security not then listed or admitted to trading on any national securities exchange or quotation system, the last reported sale price on such day, or if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reputable quotation source designated by the Company, (C) in the case of a security not then listed or admitted to trading on any national securities exchange or quotation system and as to which no such reported sale price or bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported by a reputable quotation service, or a newspaper of general circulation in the Borough of Manhattan, City and State of New York, customarily published on each Business Day, designated by the Company, or, if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than 30 days prior to the date in question) for which prices have been so reported and (D) if there are no bid and asked prices reported during the 30 days prior to the date in question, the Current Market Price shall be determined as if the securities were not registered under the Exchange Act. "Disqualified Stock" of any Person means any Capital Stock of such Person which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the option of the holder thereof, in whole or in part, on or prior to February 1, 2009; provided however, that any Preferred Stock which would not constitute Disqualified Stock but for provisions thereof giving holders thereof the right to require the Company to repurchase or redeem such Preferred Stock upon the occurrence of a Change of Control occurring prior to February 1, 2009 shall not constitute Disqualified Stock if the change of control provisions applicable to such Preferred Stock are no more favorable to the holders of such Preferred Stock than the provisions applicable to the change of control covenant with respect to the Preferred Shares contained in the Certificate of Designations and such Preferred Stock specifically provides that the Company will not repurchase or redeem any such stock pursuant to such provisions prior to the Company's repurchase of the Preferred Shares as are required to be repurchased pursuant to such covenant. "Eagle River" means Eagle River Investments, L.L.C., a limited liability company formed under the laws of the States of Washington. "Exchange Act" means the Securities Exchange Act of 1934 and (unless the context otherwise requires) includes the rules and regulations of the Commission promulgated thereunder. "Exchange Offer Registration Statement" means the registration statement filed under the Securities Act relating to the exchange offer of the Company made pursuant to -3- the Preferred Exchange and Registration Rights Agreement, dated as of January 31, 1997, between the Company and the Initial Purchasers. "Junior Shares" means Capital Stock of the Company that does not rank, as to the payment of dividends or other comparable distributions or as to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, prior to or on a parity with the Preferred Shares. At the date hereof, the Company's Class A Common Stock, par value $.01 per share, and Class B Common Stock, par value $.01 per share, are the only authorized and outstanding classes of Junior Shares. "Person" means any individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, trust, unincorporated organization, government or agency or political subdivision thereof or any other entity. "Preferred Stock" of any Person means Capital Stock of such Person of any class or classes (however designated) that ranks prior, as to the payment of dividends or as to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of such Person, to shares of Capital Stock of any other class of such Person. "Public Equity Offering" means an underwritten public offering of common stock, par value $.01 per share, of the Company pursuant to an effective registration statement filed with the Commission in accordance with the Securities Act. "Qualified Junior Shares" means Junior Shares that do not constitute Disqualified Stock. "Qualifying Event" means a Public Equity Offering or one or more Strategic Equity Investments which in either case results in aggregate net proceeds to the Company of not less than $75 million. "Resale Restriction Termination Date" has the meaning specified in Section 8. "Rule 144" means Rule 144 under the Securities Act. "Rule 144A" means Rule 144A under the Securities Act. "SEC Reports" means the annual and quarterly reports and the information, documents, and other reports that the Company is required to file with the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act. "Securities Act" means the Securities Act of 1933 and (unless the context otherwise requires) includes the rules and regulations of the Commission promulgated thereunder. "Strategic Equity Investment" means an investment in Qualified Junior Shares made by a Strategic Investor in an aggregate amount of not less than $25 million. -4- "Strategic Investor" means a Person engaged in one or more Telecommunications Businesses (which need not be such Person's primary business) that has, or 80% or more of the Voting Stock of which is owned, directly or indirectly, by a Person that has, an equity market capitalization or net worth, at the time of its initial investment in the Company, in excess of $2.0 billion. "Subsidiary" of any Person means (i) a corporation more than 50% of the combined voting power of the outstanding Voting Stock of which is owned, directly or indirectly, by such Person or by one or more other Subsidiaries of such Person or by such Person and one or more Subsidiaries thereof or (ii) any other Person (other than a corporation) in which such Person, or one or more other Subsidiaries of such Person or such Person and one or more other Subsidiaries thereof, directly or indirectly, has at least a majority ownership and power to direct the policies, management and affairs thereof. "Telecommunications Business" means the business of (i) transmitting, or providing services relating to the transmission of, voice, video or data through owned or leased transmission facilities, (ii) creating, developing or marketing communications related network equipment, software and other devices for use in a Telecommunication Business or (iii) evaluating, participating or pursuing any other activity or that is primarily related to those identified in (i) or (ii) above and shall, in any event, include all businesses in which the Company or any of its Subsidiaries are engaged on the date hereof; provided that termination of what constitutes a Telecommunications Business shall be made in good faith by the Board of Directors of the Company, which determination shall be conclusive. "Voting Stock" of any Person means Capital Stock of such Person which ordinarily has voting power for the election of directors (or persons performing similar functions) of such Person, whether at all times or only so long as no senior class of securities has such voting power by reason of any contingency. Unless the context otherwise requires, any reference herein to a "Section", "paragraph", "subsection" or "clause" refers to a Section, paragraph, subsection or clause, as the case may be, of this Agreement, and the words "herein," "hereof," and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Section or other subdivision. Unless the context otherwise requires, any reference to a statute, rule or regulation refers to the same (including any successor statute, rule or regulation thereto) as it may be amended from time to time. SECTION 2. Appointment of Warrant Agent. The Company hereby appoints the Warrant Agent to act as agent for the Company in accordance with the instructions set forth herein, and the Warrant Agent hereby accepts such appointment. SECTION 3. Issuance of Contingent Warrants. The Contingent Warrants shall be originally issued in connection with the issuance of the Preferred Shares and shall not be separately transferable from the Preferred Shares until the earliest to occur of the following (the "Separation Date"): (i) August 1, 1997, (ii) the effective date of the Exchange Offer Registration Statement or (iii) a Change of Control. -5- SECTION 4. Warrant Certificates. The Units will be issued in the form of fully registered Units in global form, each comprised of Preferred Shares in global form ("Global Preferred Shares") and Contingent Warrants in global form ("Global Warrants"). Contingent Warrants in definitive form ("Certificated Warrants") will not be issued except in the circumstances described below when Certificated Warrants are distributed to the beneficial owners of the Global Warrants and, except in the case of the initial sale of the Units, when such sale is not made in reliance upon Rule 144A. Global Warrants and Certificated Warrants are sometimes collectively referred to herein as "Warrant Certificates." Any Warrant Certificates to be issued and delivered pursuant to this Agreement shall be in registered form only and shall be substantially in the form set forth in Exhibit A hereto. All Warrant Certificates issued hereunder prior to the Resale Restriction Termination Date shall, upon issuance, bear the Securities Act legend contained in Exhibit A and such required legend shall not be removed unless the Company shall have delivered to the Warrant Agent a notice and an opinion of counsel to the Company, each stating that Warrant Certificates may be issued without such legend thereon. If such legend required for a Warrant Certificate has been or may be so removed from a Warrant Certificate as provided above, no other Warrant Certificate issued in exchange for all or any part of the Contingent Warrants evidenced thereby shall bear such legend, unless the Company has reasonable cause to believe that such other Contingent Warrants constitute "restricted securities" within the meaning of Rule 144 and instructs the Warrant Agent to cause a legend to appear thereon. Any Global Warrant issued hereunder to The Depository Trust Company (the "Depository") or its nominee and registered in the name of such Depository or nominee shall bear the legends specified in Exhibit A. SECTION 5. Execution of Warrant Certificates. Warrant Certificates evidencing an aggregate of 5,700,000 Contingent Warrants shall be duly executed, on or after the date of this Agreement, by the Company and delivered to the Warrant Agent for countersignature, and the Warrant Agent shall thereupon countersign the Warrant Certificates. After the Separation Date the Warrant Agent shall retain custody of the Global Warrants and deliver Certificated Warrants to the registered holders of any Preferred Shares that have been issued in certificated form ("Certificated Preferred Shares") in accordance with the provisions of Section 6 hereof. The Warrant Agent is hereby authorized to countersign and deliver Warrant Certificates from time to time as required under the provisions of this Agreement. Warrant Certificates shall be signed on behalf of the Company by its Chairman of the Board, its Chief Executive Officer, its President, or one of its Vice Presidents and attested by its Secretary or one of its Assistant Secretaries. The signature of any of these officers on the Warrant Certificates may be manual or facsimile. Each Warrant Certificate shall be dated the date of its countersignature. Warrant Certificates bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the countersignature and delivery of such Warrant Certificates or did not hold such offices at the date of such Warrant Certificates. -6- No Warrant Certificate shall be entitled to any benefit under this Agreement or be valid or obligatory for any purpose unless such Warrant Certificate has been manually countersigned by the Warrant Agent, and such countersignature upon any Warrant Certificate shall be conclusive evidence, and the only evidence, that such Warrant Certificate has been duly issued, countersigned and delivered hereunder. SECTION 6. Transfers of Contingent Warrants Prior to the Separation of Contingent Warrants and Preferred Shares; Separation of Contingent Warrants and Preferred Shares. Notwithstanding the provisions of Section 8 hereof, each Certificated Warrant will be held by the Warrant Agent, as custodian for the holders of the Units, until such time on or after the Separation Date as the registered holder of Certificated Preferred Shares containing a Warrant Endorsement substantially in the form set forth in this Section 6 shall have surrendered such Certificated Preferred Shares to the Warrant Agent at its principal corporate trust office (the "Warrant Agent Office") for a Warrant Certificate or Certificates evidencing the underlying Contingent Warrants and for a like number of Certificated Preferred Shares and not containing a Warrant Endorsement (such surrender and exchange being referred to herein as a "Separation" and the related Contingent Warrants being referred to as "Separated"). Prior to Separation, beneficial ownership of the Certificated Warrants will be evidenced by the Certificated Preferred Shares registered in the names of the holders of the Certificated Preferred Shares, which certificates will bear thereon a Warrant Endorsement, and the right to receive or exercise Contingent Warrants evidenced by Certificated Warrants will be transferable only in connection with the transfer of such Certificated Preferred Shares. In connection with the foregoing, upon original issuance and thereafter until Separation, the Global Warrant and each Certificated Warrant will bear the following Warrant Endorsement: UNTIL THE EARLIEST TO OCCUR OF: (I) AUGUST 1, 1997, (II) THE EFFECTIVE DATE OF THE EXCHANGE OFFER REGISTRATION STATEMENT AND (III) A CHANGE OF CONTROL, THE CONTINGENT WARRANTS EVIDENCED HEREBY MAY NOT BE SOLD, ASSIGNED OR OTHERWISE TRANSFERRED TO ANY PERSON UNLESS, FOR EACH TRANSFER OF A CONTINGENT WARRANT, SIMULTANEOUSLY WITH SUCH TRANSFER, THE HOLDER HEREOF TRANSFERS TO THE SAME TRANSFEREE ONE SHARE OF THE 14% SENIOR EXCHANGEABLE REDEEMABLE PREFERRED SHARES OF NEXTLINK COMMUNICATIONS, INC. The Company shall give the Warrant Agent and the registrar and transfer agent of the Preferred Shares (the "Registrar and Transfer Agent") written notice of the Separation Date as soon as practicable after becoming aware of such date. With respect to the Global Warrants and the Global Preferred Shares, Separation may be effected in any commercially reasonable manner satisfactory to the Company, the Warrant Agent, the Registrar and Transfer Agent and the applicable Depository. The Warrant Agent shall continue to hold the Global Warrants, as custodian for the Depository and the owners of beneficial interests in the Global Warrant, after Separation. -7- The Global Preferred Shares and Certificated Preferred Shares issued prior to the Separation Date shall have printed on the face thereof the following Warrant Endorsement: UNTIL THE EARLIEST TO OCCUR OF: (I) AUGUST 1, 1997, (II) THE EFFECTIVE DATE OF THE EXCHANGE OFFER REGISTRATION STATEMENT AND (III) A CHANGE OF CONTROL, THE 14% SENIOR EXCHANGEABLE REDEEMABLE PREFERRED SHARES EVIDENCED HEREBY MAY NOT BE TRANSFERRED OR EXCHANGED SEPARATELY FROM, BUT MAY BE TRANSFERRED OR EXCHANGED ONLY TOGETHER WITH, CONTINGENT WARRANTS ISSUED BY NEXTLINK COMMUNICATIONS, INC. All Certificated Preferred Shares containing a Warrant Endorsement presented for Separation shall be duly endorsed or be accompanied by a written instrument or instruments of exchange or transfer in form satisfactory to the Warrant Agent and the Registrar and Transfer Agent. The Warrant Agent shall deliver such Certificated Preferred Shares to the Registrar and Transfer Agent with instructions to issue new Certificated Preferred Shares not containing a Warrant Endorsement equal to the number of the Certificated Preferred Shares registered in the name of such registered holder or holders or, if such Certificated Preferred Shares also are being presented for registration of transfer, in the name of the transferee or transferees. The Warrant Agent, as custodian, shall deliver (or cause to be delivered) the Certificated Preferred Shares not bearing a Warrant Endorsement so received from the Registrar and Transfer Agent and in number equal to the aggregate number of the Certificated Preferred Shares surrendered and a Warrant Certificate or Certificates executed by the Company and countersigned by the Warrant Agent in the name of such registered holder of or holders of such transferee or transferees for a number of Contingent Warrants as shall equal the number of Preferred Shares so exchanged for Separation, bearing numbers or other distinguishing symbols not contemporaneously outstanding, to the Person or Persons entitled thereto. SECTION 7. Registration. The Warrant Agent, on behalf of the Company, shall number and register the Warrant Certificates in a register as they are issued by the Company. The Company and the Warrant Agent may deem and treat the registered holder(s) of the Warrant Certificates as the absolute owner(s) thereof (notwithstanding any notation of ownership or other writing thereon made by anyone), for all purposes, and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary. Prior to a Separation of Contingent Warrants underlying a Unit, the registered holder of a Preferred Share containing a Warrant Endorsement relating to such Contingent Warrants shall be deemed the registered holder of such Contingent Warrants for all purposes hereunder. The Company agrees to arrange for the Registrar and Transfer Agent to act as registrar hereunder with respect to Contingent Warrants that are not Separated. References herein to "Contingent Warrant holder(s)" or "holders of the Warrant Certificates" means in each case registered holders of Warrant Certificates. SECTION 8. Registration of Transfers and Exchanges. Prior to the Separation Date, the Contingent Warrants shall not be transferable separately but shall be -8- transferable only as a Unit with the Preferred Shares as provided in Section 6. With respect to beneficial interests in a Global Warrant, transfers shall only be made on the books and records of the Depository. No beneficial owner of an interest in any Global Warrant will be able to transfer that interest except in accordance with the Depository's applicable procedures (in addition to those under the Certificate of Designations and this Agreement, as applicable). With respect to Certificated Warrants, the Company shall cause to be kept at the Warrant Agent Office a register in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Warrant Certificates and of transfers or exchanges of Warrant Certificates at the Contingent Warrant holder's option by the Warrant Agent as herein provided. The Warrant Agent shall from time to time register the transfer of any outstanding Certificated Warrants upon the records to be maintained by it for that purpose, upon surrender thereof. Upon any such registration of transfer, a new Warrant Certificate shall be issued to the transferee(s) and the surrendered Warrant Certificate shall be cancelled by the Warrant Agent. Cancelled Warrant Certificates shall thereafter be disposed of by the Warrant Agent in accordance with its customary procedures and a certificate of their destruction delivered to the Company. Whenever any Warrant Certificates are surrendered for exchange, the Company shall execute, and the Warrant Agent shall countersign and deliver, the Warrant Certificates that the Contingent Warrant holder making the exchange is entitled to receive. All Certificated Warrants issued upon any registration of transfer or exchange of Warrant Certificates shall be the valid obligations of the Company, evidencing the same obligations, and entitled to the same benefit under this Agreement, as the Certificated Warrants surrendered for such registration of transfer or exchange. Every Certificated Warrant surrendered for registration of transfer or exchange shall (if so required by the Company or the Warrant Agent) be duly endorsed, or be accompanied by a written instrument of transfer in the form contained Exhibit A hereto or such other form satisfactory to the Company and as Warrant Agent, duly executed by the holder thereof or his attorney duly authorized in writing (with, in the case of transfer, such signature guaranteed by an Eligible Guarantor Institution). If the holder of a Certificated Warrant wishes at any time prior to the date which is three years (or such shorter period as may be prescribed by Rule 144(k)) after the later of the date of original issuance of the Contingent Warrants and the last day on which the Company or any affiliate (as defined in Rule 144) of the Company was the owner of such Contingent Warrants, or any predecessor thereto (the "Resale Restriction Termination Date"), such transfer may be effected only in accordance with the provisions of this Section 8 and subject to the applicable procedures of the Depository. Upon receipt by the Warrant Agent of (i) such Certificated Warrant and instructions satisfactory to the Warrant Agent directing that a specified number of Contingent Warrants not greater than the number of Contingent Warrants represented by such Certificated Warrant be credited to a specified account at the Depository and (ii) a certificate substantially in the form of Exhibit B hereto duly executed by the Contingent Warrant holder or his attorney duly authorized in writing, then the Warrant Agent shall cancel such Certificated Warrant (and issue a new Certificated Warrant in respect -9- of any untransferred Contingent Warrants) and increase the aggregate number of Contingent Warrants represented by such Contingent Warrants so transferred. No service charge shall be made for any registration of transfer or exchange upon surrender of Certificated Warrants or any issuance of Warrant Certificates in connection with a Separation, but the Company may require payment of a sum sufficient to cover any stamp or other governmental charge or tax that may be imposed in connection with any such transfer or exchange. Notwithstanding the foregoing, except in the circumstances referred to below, owners of beneficial interests in a Global Warrant will not be entitled to have such Global Warrant or any Contingent Warrants presented thereby registered in their names, will not receive or be entitled to receive physical delivery of Certificated Warrants in exchange therefor and will not be considered to be the owners or holders of such Global Warrant or any Contingent Warrants represented thereby for any purpose under this Agreement. Any Global Warrant shall be exchangeable pursuant to this Section 8 for Certificated Warrants registered in the names of persons other than the Depository or its nominee only if the Depository notifies the Company that it is unwilling or unable to continue as Depository or if at any time the Depository ceases to be a clearing agency registered under the Exchange Act. Any Global Warrant that is exchangeable pursuant to the preceding sentence shall be exchangeable for Certificated Warrants registered in such names as the Depository shall direct. Notwithstanding any other provision in this Agreement, a Global Warrant may not be transferred except in whole by the Depository to a nominee of the Depository or by a nominee of the Depository to the Depository or another nominee of the Depository. Neither the Company, the Warrant Agent nor any agent of the Company or the Warrant Agent will have any responsibility or liability for any actions or omissions of the Depository or for any aspect of the records relating to or payments made on account of beneficial ownership interests of a Global Warrant or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. Any Certificated Warrant when duly endorsed in blank (with signature guaranteed) shall be deemed negotiable. The holder of any Certificated Warrant duly endorsed in blank may be treated by the Company, the Warrant Agent and all other persons dealing therewith as the absolute owner thereof for any purpose and as the person entitled to exercise the rights represented thereby, or to the transfer thereof on the register of the Company maintained by Warrant Agent, any notice to the contrary notwithstanding; but until such transfer on such register, the Company and the Warrant Agent may treat the registered holder thereof as the owner for all purposes. Notwithstanding the foregoing, with respect to any Global Warrant, nothing herein shall prevent the Company, the Warrant Agent or any agent of the Company or the Warrant Agent, from giving effect to any written certification, proxy or other authorization furnished by any Depository (or its nominee), as a Contingent Warrant holder, with respect to such Global Warrant or impair, as between such Depository and owners of beneficial interests in such Global Warrant, the operation of customary practices governing the exercise of the rights of such Depository (or its nominee) as the holder of such Global Warrant. -10- SECTION 9. Terms of Contingent Warrants; Exercise of Contingent Warrants. Subject to the terms of this Agreement, the Contingent Warrants are only exercisable on any Business Day after February 1, 1998 if a Qualifying Event has not occurred on or prior to February 1, 1998. The Contingent Warrants will expire at 5:00 P.M., New York City time, on February 1, 2009 or, if a Qualifying Event has occurred on or prior to February 1, 1998, the date of such Qualifying Event (the "Expiration Date"). In the event that a Qualifying Event has occurred on or prior to February 1, 1998, the Company shall, within the earlier of 15 Business Days after such Qualifying Event or the first Business Day after February 1, 1998, inform the Warrant Agent and send a written notice by first-class mail, postage prepaid to each Contingent Warrant holder at his or her address appearing on the Warrant register to the effect that (i) a Qualifying Event has occurred on the date on which such event occurred, together with a description of the transaction(s) constituting such Qualifying Event that is sufficient to indicate that the event(s) described so constitute a Qualifying Event and (ii) the Contingent Warrants expired on such date without becoming exercisable. In the event that a Qualifying Event has not occurred on or prior to February 1, 1998, the Company shall, as soon as practicable but in any event within two Business Days after February 1, 1998, inform the Warrant Agent and send a written notice by first-class mail, postage prepaid to each Contingent Warrant holder at his or her address appearing in the Warrant register stating (i) that a Qualifying Event has not occurred on or prior to February 1, 1998 and, accordingly, the Contingent Warrants are exercisable on any Business Day until the Expiration Date, (ii) the Expiration Date and (iii) the class or classes of Junior Shares for which the Contingent Warrants are so exercisable and the Exercise Rate as of the date of such notice with respect to each such class. Each Contingent Warrant, when exercised, will enable the holder thereof to purchase from the Company (and the Company shall issue and sell to such holder of a Contingent Warrant) at any time on or after the date on which the Contingent Warrants become exercisable and on or prior to the close of business on the Expiration Date a number of fully paid and non-assessable shares of each class of Junior Shares outstanding as of February 1, 1998 equal to 1/5,700,000 of the aggregate Contingent Warrant Shares Amount (and any other securities or property purchasable or deliverable upon exercise of such Warrant as provided in Section 12 hereof), subject to adjustment as provided in Section 12, at an exercise price of $.01 per Warrant Share to be received upon exercise of such Contingent Warrant, subject to adjustment as provided in Section 12 hereof (the "Exercise Price"). The number of shares of a class of Junior Shares for which a particular Contingent Warrant may be exercised (the "Exercise Rate") shall be subject to adjustment from time to time as set forth in Section 12 hereof. No cash dividend shall be paid to a holder of Warrant Shares issuable upon the exercise of Contingent Warrants unless such holders was, as of the record date for the declaration of such dividend, the record holders of such Warrants Shares. The "Contingent Warrant Shares Amount" with respect to a class of Junior Shares equals the number of Junior Shares of such class that would collectively represent 5.0% of such class on a fully diluted basis as of February 1, 1998 (giving effect to, among other things, the issuance of such shares). -11- Each Contingent Warrant not exercised prior to 5:00 p.m., New York City time, on the Expiration Date shall become void and all rights thereunder and all rights in respect thereof under this Agreement shall cease as of such time. The Company shall give written notice of the Expiration Date to the registered holders of the then outstanding Contingent Warrants not less than 90 nor more than 120 days prior to the Expiration Date; provided, however, that if the Company fails to give such notice, the Contingent Warrants shall still terminate and become void on the applicable Expiration Dates. A Contingent Warrant may be exercised upon surrender to the Company at the office of the Warrant Agent of the Warrant Certificate or Certificates evidencing the Contingent Warrants to be exercised with the form of election to exercise on the reverse thereof duly completed and executed, together with payment to the Warrant Agent for the account of the Company of the Exercise Price for each Warrant Share to be received. Each Contingent Warrant may be exercised only in whole. The Exercise Price may be paid (i) in cash or by certified or official bank check or (ii) by the surrender (which surrender shall be evidenced by cancellation of the number of Contingent Warrants represented by any Warrant Certificate presented in connection with a Cashless Exercise) of a Contingent Warrant or Warrants (represented by one or more relevant Warrant Certificates), and without the payment of the Exercise Price in cash, in return for the delivery to the surrendering holder of such number of Junior Shares equal to the product of (1) the number of Junior Shares for which such Contingent Warrant is exercisable as of the date of exercise (if the Exercise Price were being paid in cash) and (2) the Cashless Exercise Ratio. For purposes of this Agreement, the "Cashless Exercise Ratio" with respect to a class of Junior Shares shall equal a fraction, the numerator of which is the excess of the Current Market Price per share of such class on the date of exercise over the Exercise Price per share as of the date of exercise and the denominator of which is the Current Market Price per share of such class on the date of exercise. An exercise of a Contingent Warrant in accordance with clause (ii) of the second preceding sentence is herein called a "Cashless Exercise". If a Contingent Warrant is exercisable for Junior Shares of more than one class, the Cashless Exercise Ratio shall be determined on the basis of the Current Market Price of the Junior Shares of all such classes taken together, and shall be applied to the Junior Shares of each class for which such Contingent Warrant is exercisable. Upon surrender of a Warrant Certificate representing more than one Contingent Warrant in connection with the holder's option to elect a Cashless Exercise, the number of Warrant Shares deliverable upon a Cashless Exercise shall be equal to the number of Contingent Warrants that the holder specifies is to be exercised pursuant to a Cashless Exercise multiplied by the Cashless Exercise Ratio. All provisions of this Agreement shall be applicable with respect to an exercise of a Warrant Certificate pursuant to a Cashless Exercise for less than the full number of Contingent Warrants represented thereby. If, pursuant to the Securities Act, the Company is not able to effect the registration under the Securities Act of the issuance and sale of the Warrant Shares by the Company to the holders of the Contingent Warrants upon the exercise thereof as required by this Agreement, the holders of the Contingent Warrants will be required to effect the exercise of the Contingent Warrants solely pursuant to the Cashless Exercise option. Upon surrender of the Warrant Certificate or Certificates and payment of the Exercise Price, the Company shall issue and cause the Warrant Agent to deliver with all reasonable dispatch, to or upon the written order of the Contingent Warrant holder and in -12- such name or names as the Contingent Warrant holder may designate, a certificate or certificates for the number of Warrant Shares issuable or other securities or property to which such holder is entitled hereunder upon the exercise of such Contingent Warrants, including, at the Company's option, any cash payable in lieu of fractional interests as provided in Section 14 hereof. Such certificate or certificates shall be deemed to have been issued and any person so designated to be named therein shall be deemed to have become a holder of record of such Warrants Shares as of the date of the surrender of such Contingent Warrants and payment of the Exercise Price. The Company may issue fractional shares of Common Stock upon exercise of any Contingent Warrants in accordance with the provision of Section 14 hereof. All Warrant Shares or other securities by the Company upon the exercise of the Contingent Warrants must be validly issued, fully paid and nonassessable. In the event that a Certificated Warrant is exercised in respect of fewer than all of the Contingent Warrants evidenced thereby on such exercise at any time prior to the date of expiration of the Contingent Warrants, a new certificate evidencing such remaining Contingent Warrants will be issued, and the Warrant Agent is hereby irrevocably authorized to countersign and to deliver the required new Certificated Warrants pursuant to the provisions of this Section 9 and Section 8, and the Company, whenever required by the Warrant Agent, will supply the Warrant Agent with Certificated Warrants duly executed on behalf of the Company for such purpose. All Certificated Warrants surrendered upon exercise of Contingent Warrants shall be cancelled by the Warrant Agent and disposed of by the Warrant Agent in accordance with its customary procedures, and a certificate of their destruction shall be delivered to the Company. The Warrant Agent shall account promptly in writing to the Company with respect to Contingent Warrants exercised and concurrently pay to the Company all monies received by the Warrant Agent for the purchase of the Warrant Shares through the exercise of such Contingent Warrants. In the event that the Company shall purchase or otherwise acquire Certificated Warrants, the Company may elect to have the Certificated Warrants cancelled and retired by delivery of Certificated Warrants to the Warrant Agent who, upon the written request of the Company, shall promptly cancel and retire such Certificated Warrants. The Warrant Agent shall keep copies of this Agreement and any notices given or received hereunder available for inspection by the registered Contingent Warrant holders during normal business hours and upon reasonable notice at its office. The Company shall supply the Warrant Agent from time to time with such numbers of copies of this Agreement as the Warrant Agent may request. SECTION 10. Mutilated or Missing Warrant Certificates. If any mutilated Warrant Certificate is surrendered to the Warrant Agreement, the Company shall execute and the Warrant Agreement shall countersign and deliver in exchange therefor a new Warrant Certificate representing a like number of Contingent Warrants. If there shall be delivered to the Company and the Warrant Agreement (i) evidence to their satisfaction of the destruction, loss or theft of any Warrant Certificate and -13- (ii) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Company or the Warrant Agent that such Warrant Certificate has been acquired by a bona fide purchaser, the Company shall execute and the Warrant Agent shall countersign and deliver, in lieu of any such destroyed, lost or stolen Warrant Certificate, a new Warrant Certificate representing a like number of Contingent Warrants. Upon the issuance of any new Warrant Certificate under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Warrant Agent) connected therewith. Every new Warrant Certificate issued pursuant to this Section in lieu of any destroyed, lost or stolen Warrant Certificate shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Warrant Certificate shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Agreement equally and proportionately with any and all other Warrant Certificates duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Warrant Certificates. SECTION 11. Reservations of Warrant Shares. The Company shall with respect to each class of Junior Shares for which the Contingent Warrants are exercisable at all times reserve and keep available, free from preemptive rights, out of the aggregate of the authorized but unissued shares of such class for the purpose of enabling it to satisfy any obligation to issue Warrant Shares upon exercise of Contingent Warrants, the maximum number of Junior Shares of such class which would then be deliverable upon the exercise of all outstanding Contingent Warrants if all such outstanding Contingent Warrants were then exercisable. The Company agrees that any Warrant Shares issued upon exercise of the Contingent Warrants shall be duly issued out of authorized and previously unissued shares of such class. The transfer agent for each class of Junior Shares for which the Contingent Warrants are exercisable (which may be the Company if it is acting as such transfer agent) and every subsequent transfer agent for any shares of the Company's Capital Stock issuable upon the exercise of any of the rights of purchase aforesaid will be irrevocably authorized and directed at all times to reserve such number of authorized shares as shall be required for such purpose. The Company will keep a copy of this Agreement on file with each such transfer agent. The Warrant Agent is hereby irrevocably authorized to requisition from time to time from each such transfer agent the stock certificates required to honor outstanding Contingent Warrants upon exercise thereof in accordance with the terms of this Agreement. The Company will supply each such transfer agent with duly executed certificates for such purposes and will provide or otherwise make available any cash which may be payable as provided in Section 14 hereof. The Company will furnish each such transfer agent a copy of -14- all notices of adjustments and certificates related thereto which are transmitted to each Contingent Warrant holder pursuant to Section 15 hereof. The Company covenants that all Warrant Shares which may be issued upon exercise of Contingent Warrants will, upon payment of the Exercise Price and issuance, be duly and validly issued, fully paid and nonassessable, free of preemptive rights and free from all taxes, liens, charges and security interests with respect to the issue thereof. SECTION 12. Adjustment of Exercise Rate. The Exercise Rate with respect to a class of Junior Shares shall be subject to adjustment from time to time upon the occurrence of the events enumerated in this Section 12. (a) If at any time after February 1, 1998 the Company: (1) pays a dividend or makes a distribution on any of its Capital Stock in Junior Shares or other shares of its Capital Stock; (2) subdivides, reclassifies or recapitalizes any class of Junior Shares into a greater number of shares; (3) combines, reclassifies or recapitalizes any class of Junior Shares of Junior Shares into a smaller number of shares; (4) issues by reclassification of any class of Junior Shares any shares of its Capital Stock (excluding any such reclassification in connection with a consolidation or merger); then the Exercise Rate with respect to a class of Junior Shares in effect immediately prior to such action shall be proportionately adjusted if necessary so that the holder of any Contingent Warrant thereafter exercised may receive the aggregate number and kind of shares of Capital Stock of the Company which such holder would have owned immediately following such action if such Contingent Warrant had been exercised immediately prior to such action (without giving effect to the Cashless Option). Any adjustment required by this subsection (a) shall be made successively immediately after the record date, in the case of a dividend or distribution, or the effective date, in the case of a subdivision, combination, reclassification or recapitalization, to allow the purchase of such aggregate number and kind of shares. (b) In case after February 1, 1998 the Company shall issue rights, options or warrants to all holders of a class of Junior Shares entitling them to subscribe for or purchase shares of such class at a price per share less than the Current Market Price per share of such class on the date fixed for the determination of shareholders entitled to receive such rights, options or warrants, the Exercise Rate with respect to such class of Junior Shares in effect at the opening of business on the day following the date fixed for such determination shall be increased by dividing such Exercise Rate by a fraction of which the numerator shall be the number of shares of such class outstanding at the close of business on the date fixed for -15- such determination plus the number of shares which the aggregate of the offering price of the total number of shares so offered for subscription or purchase would purchase at such Current Market Price and the denominator shall be the number of shares of such class outstanding at the close of business on the date fixed for such determination plus the number of shares so offered for subscription or purchase, such increase to become effective immediately after the opening of business on the day following the date fixed for such determination. For the purposes of this subsection (b), the number of Junior Shares of a class at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of such shares. The Company will not issue any rights, options or warrants in respect of any Junior Shares held in the treasury of the Company. (c) In case after February 1, 1998 the Company shall, by dividend or otherwise, distribute to all holders of a class of Junior Shares evidences of its indebtedness, shares of any class of Capital Stock, or other property (including securities, but excluding (i) any rights, options or warrants referred to in subsection (b) of this Section 12, (ii) any dividend or distribution paid exclusively in cash, (iii) any dividend or distribution referred to in subsection (a) of this Section 12 and (iv) any merger or consolidation to which subsection (i) of this Section 12 applies), the Exercise Rate with respect to such class of Junior Shares shall be adjusted so that the same shall equal the rate determined by dividing such Exercise Rate in effect immediately prior to the close of business on the date fixed for the determination of shareholders entitled to receive such distribution by a fraction of which the numerator shall be the Current Market Price per share of such class on the date fixed for such determination less the then fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) of the portion of the assets, shares or evidences of indebtedness so distributed applicable to one share of such class and the denominator shall be such Current Market Price per share of such class, such adjustment to become effective immediately prior to the opening of business on the day following the date fixed for the determination of shareholders entitled to receive such distribution. (d) In case after February 1, 1998 the Company shall, by dividend or otherwise, distribute to all holders of a class of Junior Shares cash (excluding any cash that is distributed upon a merger or consolidation to which subsection (i) of this Section 12 applies or as part of a distribution referred to in paragraph (c) of this Section) in an aggregate amount that, combined together with (I) the aggregate amount of any other cash distributions to all holders of such Junior Shares made exclusively in cash within the 12 months preceding the date of payment of such distribution and in respect of which no adjustment pursuant to this subsection (d) has been made and (II) the aggregate of any cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) of consideration payable in respect of any tender offer by the Company or any of its subsidiaries for all or any portion of such class of Junior Shares concluded within the 12 months preceding the date of payment of such distribution and in respect of which no adjustment pursuant to subsection (c) of this Section has been made (the "combined cash and tender amount") exceeds 10% of the product of the Current Market Price per share of such class on the date for the determination of holders of such shares of such class entitled to receive such distribution times the number of such shares of such class -16- outstanding on such date (the "aggregate current market price"), then, and in each such case, immediately after the close of business on such date for determination, the Exercise Rate with respect to such class of Junior Shares shall be adjusted so that the same shall equal the rate determined by dividing such Exercise Rate in effect immediately prior to the close of business on the date fixed for determination of the shareholders entitled to receive such distribution by a fraction (i) the numerator of which shall be equal to the Current Market Price per share of such class on the date fixed for such determination less an amount equal to the quotient of (x) the excess of such combined cash and tender amount over such aggregate current market price divided by (y) the number of shares of such class outstanding on such date for determination and (ii) the denominator of which shall be equal to the Current Market Price per share of such class on such date for determination. (e) In case after February 1, 1998 a tender offer made by the Company or any subsidiary for all or any portion of any class of Junior Shares shall expire and such tender offer (as amended upon the expiration thereof) shall require the payment to shareholders (based on the acceptance (up to any maximum specified in the terms of the tender offer) of Purchased Shares (as defined below)) of an aggregate consideration having a fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) that combined together with (I) the aggregate of the cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution), as of the expiration of such tender offer, of consideration payable in respect of any other tender offer by the Company or any subsidiary for all or any portion of the such class of Junior Shares expiring within the 12 months preceding the expiration of such tender offer and in respect of which no adjustment pursuant to this subsection (e) has been made and (II) the aggregate amount of any cash distributions to all holders of such class of Junior Shares within 12 months preceding the expiration of such tender offer and in respect of which no adjustment pursuant to subsection (d) of this Section 12 has been made (the "combined tender and cash amount") exceeds 10% of the product of the Current Market Price per share of such class as of the last time (the "Expiration Time") tenders could have been made pursuant to such tender offer (as it may be amended) times the number of such shares of such class outstanding (including any tendered shares) as of the Expiration Time, then, and in each such case, immediately prior to the opening of business on the day after the date of the Expiration Time, the Exercise Rate with respect to such class of Junior Shares shall be adjusted so that the same shall equal the rate determined by dividing such Exercise Rate in effect immediately prior to the close of business on the date of the Expiration Time by a fraction (i) the numerator of which shall be equal to (A) the product of (I) the Current Market Price per share of such of such class on the date of the Expiration Time multiplied by (II) the number of such shares of such class outstanding (including any tendered shares) on the Expiration Time less (B) the combined tender and cash amount, and (ii) the denominator of which shall be equal to the product of (A) the Current Market Price per share of such class as of the Expiration Time multiplied by (B) the number of shares of such class outstanding (including any tendered shares) as of the Expiration Time less the number of all shares validly tendered and not withdrawn as of the Expiration Time (the shares deemed so accepted up to any such maximum, being referred to as the "Purchased Shares"). -17- (f) No adjustment in the Exercise Rate with respect to a class of Junior Shares need be made unless the adjustment would require an increase or decrease of at least 1% in such Exercise Rate; provided, however, that any adjustments that are not made shall be carried forward and taken into account in any subsequent adjustment. Upon each adjustment of an Exercise Rate with respect to a class of Junior Shares, the corresponding Exercise Price with respect to the Warrant Shares of such class shall be adjusted by multiplying such Exercise Price in effect immediately prior to such adjustment by the Exercise Rate in effect immediately prior to such adjustment and dividing the product thereof by the Exercise Rate resulting from such adjustment. All calculations under this Section 12 shall be made to the nearest 1/1,000th of a share or nearest 1/100th of a cent, as the case may be. (g) Whenever the Exercise Rate with respect to a class of Junior Shares and the corresponding Exercise Price are adjusted, the Company shall provide the notices required by Section 15 hereof. (h) The Company from time to time may increase the Exercise Rate with respect to a class of Junior Shares, and decrease the corresponding Exercise Price, by any amount for any period of time if the period is at least 20 days and if the increase or decrease, as the case may be, is irrevocable during the period. Whenever an Exercise Rate is increased and corresponding Exercise Price decreased, the Company shall mail to the registered Contingent Warrant holders a notice of the increase and related decrease. The Company shall mail the notice at least 15 days before the date such increased Exercise Rate and decreased Exercise Price takes effect. The notice shall state the increased Exercise Rate and decreased Exercise Price and the period it will be in effect. Any increase in an Exercise Rate and corresponding decrease in an Exercise Price made pursuant to this subsection (h) shall not change or adjust any Exercise Rate or Exercise Price otherwise in effect, or as used for calculations, for purposes of subsections (a) through (c) of this Section 12. (i) Except as provided below, in the event that the Company consolidates with, merges with or into, or sells all or substantially all of its property and assets to another Person, each Contingent Warrant thereafter shall, if and when exercisable, entitle the holder thereof to receive upon exercise thereof and payment of the Exercise Price the number of shares of capital stock or other securities or property which the holder would have received immediately after such transaction if such holder had exercised the Contingent Warrant immediately before the effective date of the transaction (whether or not the Contingent Warrants were then exercisable and without giving effect to the Cashless Exercise option), assuming (to the extent applicable) that such holder (i) was not a Person with which the Company consolidated or merged with or into or which merged with or into the Company or to which such conveyance, sale, transfer or lease was made, as the case may be ("Constituent Person") or an Affiliate of a Constituent Person to such transaction, (ii) made no election with respect thereto and (iii) was treated alike with the plurality of non-electing holders. If the Company merges or consolidates with, or sells all or substantially all the property and assets of the Company to, another Person and, in connection therewith, consideration to the holders of Junior Shares in exchange for their shares is payable solely in cash, or in the event of the dissolution, liquidation or winding-up of the Company, then the holder of each Contingent -18- Warrant, if then exercisable, will be entitled to receive distributions on an equal basis with the holders of Junior Shares or other securities issuable upon exercise of such Contingent Warrant, as if such Contingent Warrant had been exercised immediately prior to such event, less the Exercise Price therefor. Upon receipt of such payment, if any, the Contingent Warrants will expire and the rights of the holders thereof will cease. In case of any such merger, consolidation or sale of assets, the surviving or acquiring person and, in the event of any dissolution, liquidation or winding-up of the Company, the Company shall deposit promptly with the Warrant Agent the funds, if any, to pay to the holders of the Contingent Warrants. After such funds and, in the case of Certificated Warrants, the surrendered Warrant Certificates are received, the Warrant Agent shall make payment by delivering a check in such amount as is appropriate (or, in the case of consideration other than cash, such other consideration as is appropriate) to such person or persons as it may be directed in writing by the holders surrendering such Contingent Warrants. Concurrently with the consummation of such transaction, the entity formed by or surviving any such consolidation or merger if other than the Company, or the person to which such sale or conveyance shall have been made, shall enter into a supplemental Warrant Agreement so providing and further providing for adjustments in the future which shall be nearly equivalent as may be practicable to the adjustments provided for in this Section 12. If the issuer of securities deliverable upon exercise of Contingent Warrants under the supplemental Warrant Agreement is an affiliate of the formed, surviving, transferee or lessee corporation, that issuer shall join in the supplemental Warrant Agreement. If this subsection (i) applies with respect to a transaction, subsections (a) through (e) of this Section 12 shall not apply with respect to such transaction. (j) The Warrant Agent shall have no duty to determine when an adjustment under this Section 12 should be made, how it should be made or what it should be. The Warrant Agent shall have no duty to determine whether any provisions of a supplemental Warrant Agreement executed pursuant to subsection (i) of this Section 12 are correct. The Warrant Agent makes no representation or warranty as to the validity or value of any securities or assets issued upon exercise of Contingent Warrants or pursuant to any adjustment. The Warrant Agent shall not be responsible for the Company's failure to comply with this Section 12. (k) In any case in which this Section 12 shall require that an adjustment in the Exercise Rate with respect to a class of Junior Shares be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event (i) issuing to the holder of any Contingent Warrant exercised after such record date the Warrant Shares and other Capital Stock of the Company, if any, issuable upon such exercise over and above the Warrant Shares and other Capital Stock of the Company, if any, issuable upon such exercise on the basis of such Exercise Rate and (ii) paying to such holder any amount in lieu of a fractional share pursuant to Section 14 hereof; provided, however, that the Company shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional Warrant Shares, other capital stock and cash upon the occurrence of the event requiring such adjustment. -19- SECTION 13. No Dilution or Impairment. If any event shall occur as to which the provisions of Section 12 hereof are not strictly applicable but the failure to make any adjustment would adversely affect the purchase rights represented by the Contingent Warrants in a way that is contrary to the manifest and essential intent and principles of Section 12 hereof, then, in each such case, the Company shall appoint an investment banking firm of recognized national standing, or any other financial expert that does not (or whose directors, officers, employees, affiliates or stockholders do not) have a direct or indirect material financial interest in the Company, who has not been, and, at the time it is called upon to give independent financial advice to the Company, is not (and none of its directors, officers, employees, affiliates or stockholders are) a promoter, director or officer of the Company, which shall give their opinion upon the adjustment, if any, on a basis consistent with the manifest and essential intent and principles established in Section 12 hereof, necessary to preserve, without dilution, the purchase rights, represented by the Contingent Warrants. Upon receipt of such opinion, the Company will promptly mail a copy thereof to the Warrant Agent and the Contingent Warrant holders and shall make the adjustments described therein. The Company shall at all times in good faith assist in the carrying out of the terms of this Agreement. SECTION 14. Fractional Interests. The Company shall not be required to issue fractional Warrant Shares on the exercise of Contingent Warrants, although it may do so in its sole discretion. If more than one Contingent Warrant shall be presented for exercise in full at the same time by the same holder, the number of full Warrant Shares which shall be issuable upon the exercise thereof shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of the Contingent Warrants so presented. If any fraction of a Warrant Share would, except for the provisions of this Section 14, be issuable upon the exercise of any such Contingent Warrants (or specified portion thereof), the Company shall notify the Warrant Agent in writing of the amount to be paid in lieu of the fraction of a Warrant Share and concurrently pay or provide to the Warrant Agent for payment to the Contingent Warrant holder an amount in cash equal to the Current Market Value per Warrant Share of the relevant class or classes of Junior Shares, as determined on the day immediately preceding the date the Contingent Warrant is presented for exercise, multiplied by such fraction, computed to the nearest whole cent. SECTION 15. Notices to Contingent Warrant Holders; Rights of Contingent Warrant Holders. Upon any adjustment of the Exercise Rate with respect to a class of Junior Shares pursuant to Section 12 hereof, the Company shall promptly thereafter (i) cause to be filed with the Warrant Agent a certificate of a firm of independent public accountants of recognized standing selected by the Board of Directors (which may be the regular auditors of the Company setting forth the Exercise Rate with respect to such class after such adjustments and setting forth in reasonable detail the method of calculation and the facts upon which such calculations are based and setting forth the number of Warrant Shares (or portion thereof) issuable after such adjustment of such Exercise Rate upon exercise of a Contingent Warrant and the corresponding Exercise Price and (ii) cause to be given to each of the registered holders of the Warrant Certificates at his or her address appearing on the Warrant register written notice of such adjustments by first-class mail, postage prepaid. Where appropriate, -20- such notice may be given in advance and included as a part of the notice required to be mailed under the other provisions of this Section 15. In case: (a) the Company shall authorize the issuance to all holders of shares of a class of Junior Shares of rights, options or warrants to subscribe for or purchase shares of such class or of any other subscription rights or warrants; or (b) the Company shall authorize the distribution to all holders of shares of a class of Junior Shares of evidences of its indebtedness or assets (other than cash dividends or cash distributions payable out of consolidated earnings or earned surplus or dividends payable in shares of such class or distributions referred to in of Section 12(a) hereof); or (c) of any consolidation or merger to which the Company is a party and for which approval of any shareholders of the Company is required, or of the conveyance or transfer of the properties and assets of the Company substantially as an entirety, or of any reclassification or change of Junior Shares issuable upon exercise of the Contingent Warrants (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); or (d) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; or (e) the Company or any subsidiary shall commence a tender offer for all or a portion of the outstanding shares of a class of Junior Shares (or shall amend any such tender offer); or (f) the Company proposes to take any other action (other than actions of the character described in Section 12(a) hereof) which would require an adjustment of the Exercise Rate with respect to a class of Junior Shares pursuant to Section 12 hereof; then the Company shall cause to be filed with the Warrant Agent and, if such event occurs after the date on which the Contingent Warrants first become exercisable, shall cause to be given to each of the Contingent Warrant holders at the address appearing on the Warrant register, at least 20 days (or 10 days in any case specified in clauses (a) or (b) above) prior to the applicable record date hereinafter specified, or promptly in the case of events for which there is no record date, by first-class mail, postage prepaid, a written notice stating (i) the date as of which the holders of record of shares of such class to be entitled to receive any such rights, options, warrants or distributions are to be determined, or (ii) the date on which the right to make tenders set forth in any tender offer expires, or (iii) the date on which any such consolidation, merger, conveyance, transfer, reclassification, dissolution, liquidation or winding up is expected to become effective or consummated, and the date as of which it is expected that holders of record of shares of such class shall be entitled to exchange such shares for securities or other property, if any, deliverable upon such consolidation, merger, -21- conveyance, transfer, reclassification, dissolution, liquidation or winding up. The failure to give the notice required by this Section 15 or any defect therein shall not affect the legality or validity of any issuance, right, option, warrant, distribution, tender offer, exchange offer, consolidation, merger, conveyance, transfer, reclassification, dissolution, liquidation or winding up, or the vote upon any action. Nothing contained in this Agreement or in any of the Warrant Certificates shall be construed as conferring upon the holders thereof the right to vote or to consent or to receive notice of meetings of shareholders or the election of directors of the Company or any other matter, or any other rights of shareholders of the Company, including any right to receive dividends. SECTION 16. Warrant Agent. The Warrant Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company and the Contingent Warrant holders, by their acceptance thereof, shall be bound: (a) The statements contained herein and in the Warrant Certificates shall be taken as statements of the Company, and the Warrant Agent assumes no responsibility for the correctness of any of the same except for the countersignature by it. The Warrant Agent assumes no responsibility with respect to the distribution of the Warrant Certificates except as otherwise provided herein. (b) The Warrant Agent shall not be responsible for any failure of the Company to comply with any of the covenants contained in this Agreement or in the Warrant Certificates. (c) The Warrant Agent may consult at any time with counsel satisfactory to it (who may be counsel for the Company), and the Warrant Agent shall incur no liability or responsibility to the Company or to any holder of any Warrant Certificate in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with the opinion or the advice of such counsel. (d) The Warrant Agent shall incur no liability or responsibility to the Company or to any Contingent Warrant holder for any action taken in reliance on any Warrant Certificate, certificate of shares, notice, resolution, waiver, consent, order, certificate, or other paper, document or instrument believed by it to be genuine and to have been signed, sent or presented by the proper party or parties. (e) The Company agrees to pay to the Warrant Agent compensation as agreed between the Company and the Warrant Agent for all services rendered by the Warrant Agent in the execution, performance and observance of this Agreement, to reimburse the Warrant Agent for all expenses, taxes and governmental charges and other charges of any kind and nature incurred by the Warrant Agent in the execution, performance and observance of this Agreement and to indemnify the Warrant Agent and save it harmless against any and all liabilities, including judgments, costs and counsel fees, for anything done or omitted by the -22- Warrant Agent in the execution, performance or observance of this Agreement, except as a result of the Warrant Agent's gross negligence or willful misconduct. (f) The Warrant Agent shall be under no obligation to institute any action, suit or legal proceeding or to take any other action likely to involve expenses or liability unless the Company or one or more registered Contingent Warrant holders shall furnish the Warrant Agent with reasonable security and indemnity satisfactory to the Warrant Agent for any liabilities, costs and expenses which may be incurred. However, this provision shall not affect the power of the Warrant Agent to take such action as it may consider proper, whether with or without any such security or indemnity. All rights of action under this Agreement or under any of the Contingent Warrants may be enforced by the Warrant Agent without the possession of any of the Warrant Certificates or the production thereof at any trial or other proceeding relative thereto, and any such action, suit or proceeding instituted by the Warrant Agent shall be brought in its name as Warrant Agent and any recovery of judgment shall be for the ratable benefit of the Contingent Warrant holders, as their respective rights or interests may appear. (g) The Warrant Agent, and any stockholder, director, officer or employee of it, may buy, sell or deal in any of the Contingent Warrants or other securities of the Company or become pecuniarily interest in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Warrant Agent under this Agreement. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. (h) The Warrant Agent shall act hereunder solely as agent for the Company, and its duties shall be determined solely by the provisions hereof (and no implied duties shall be read into this Agreement against the Warrant Agent beyond those duties expressly set forth herein). The Warrant Agent shall not be liable for anything which it may do or refrain from doing in connection with this Agreement, except for action or inaction resulting from its own gross negligence or willful misconduct. The Warrant Agent shall have no liability for the actions or omissions of the Company. (i) The Warrant Agent shall not at any time be under any duty or responsibility to any Contingent Warrant holder to make or cause to be made any adjustment of the Exercise Rate with respect to a class of Junior Shares or number of the Warrant Shares or other securities or property deliverable as provided in this Agreement, or to determine whether any facts exist which may require any of such adjustments, or with respect to the nature or extent of any such adjustments, when made, or with respect to the method employed in making the same. The Warrant Agent shall not be accountable with respect to the validity or value or the kind or amount of any Warrant Shares or of any securities or property which may at any time be issued or delivered upon the exercise of any Contingent Warrant or with respect to whether any such Warrant Shares or other securities will when issued be validly issued and fully paid and nonassessable, and makes no representation with respect thereto. -23- (j) The Warrant Agent shall not be deemed to have notice of any matter unless actually known to an officer working in its corporate trust and agency group, or unless written notice thereof is received in its corporate trust and agency group. SECTION 17. Merger, Consolidation, or Change of Name of Warrant Agent. Any entity into which the Warrant Agent may be merged or with which it may be consolidated, or any entity resulting from any merger or consolidation to which the Warrant Agent shall be a party, or any entity succeeding to the business of the Warrant Agent, shall be the successor to the Warrant Agent hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided that such entity would be eligible for appointment as a successor warrant agent under the provisions of Section 18 hereof. In case at the time such successor to the Warrant Agent shall succeed to the agency created by this Agreement and any of the Certificated Warrants shall have been countersigned but not delivered, any such successor to the Warrant Agent may adopt the countersignature of the original Warrant Agent. If at that time any of the Warrant Certificates shall not have been countersigned, any successor to the Warrant Agent may countersign such Warrant Certificates either in the name of the predecessor Warrant Agent or in the name of the successor to the Warrant Agent. In either of the foregoing instances, such Warrant Certificates shall have the full force and effect provided in the Warrant Certificates and in this Agreement. In case at any time the name of the Warrant Agent shall be changed and at such time any of the Certificated Warrants shall have been countersigned but not delivered, the Warrant Agent whose name has been changed may adopt the countersignature under its prior name, and in case at that time any of the Warrant Certificates shall not have been countersigned, the Warrant Agent may countersign such Warrant Certificates either in its prior name or in its changed name. In either of the foregoing instances, such Warrant Certificates shall have the full force and effect provided for in the Warrant Certificates and in this Agreement. The surviving Warrant Agent (if not the original Warrant Agent) or the original Warrant Agent (in the event of a name change) shall, promptly cause to be mailed (by first class mail, postage prepaid) to each then outstanding Contingent Warrant holder at such holder's last address as shown on the register of the Company maintained by the original Warrant Agent, notices of its succession or name change, as the case may be. SECTION 18. Resignation and Removal of Warrant Agent; Appointment of Successor. No resignation or removal of the Warrant Agent and no appointment of a successor warrant agent shall become effective until the acceptance of appointment by the successor warrant agent as provided herein. The Warrant Agent may assign its duties and be discharged from all further duties and liability hereunder (except liability arising as a result of the Warrant Agent's own gross negligence or willful misconduct) after giving written notice to the Company. The Company may remove the Warrant Agent upon written notice, and the Warrant Agent shall thereupon in like manner be discharged from all further duties and liabilities hereunder, except as aforesaid. The Warrant Agent shall, at the Company's expense, cause to be mailed (by first class mail, postage prepaid) to each Contingent Warrant holder at his last address as shown on the register of the Company maintained by the Warrant Agent, a copy of said notice of resignation or notice of removal, as the case may be. Upon -24- such resignation or removal by the Company, the Company shall appoint in writing a new warrant agent. If the Company shall fail to make such appointment within a period of 60 days after it has been notified in writing of such resignation by the resigning Warrant Agent or after such removal, then the Company shall become Warrant Agent until a successor Warrant Agent has been appointed, and the holder of any Contingent Warrant may apply to any court of competent jurisdiction for the appointment of a new warrant agent. The provisions of Section 16 shall survive only such resignation or removal for the protection of the Warrant Agent so removed or resigned, to the extent applicable, with respect to its actions or omissions prior to such resignation or removal. Any new warrant agent, whether appointed by the Company, a court or the holders of a majority of the then outstanding Warrants, shall (i) be a corporation doing business under the laws of the United States, any state thereof or the District of Columbia, (ii) be in good standing and (iii) have a combined capital and surplus of not less than $50,000,000. The combined capital and surplus of any such new warrant agent shall be deemed to be the combined capital and surplus as set forth in the most recent annual report of its condition published by such warrant agent prior to its appointment, provided that such reports are published at least annually pursuant to law or to the requirements of a federal or state supervising or examining authority. After acceptance in writing of such appointment by the new warrant agent, it shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named herein as the Warrant Agent, without any further assurance, conveyance, act or deed; but if for any reason it shall be necessary or expedient to execute and deliver any further assurance, conveyance, act or deed, the same shall be done at the expense of the Company and shall be legally and validly executed and delivered by the resigning or removed Warrant Agent. The former Warrant Agent shall deliver and transfer to the successor Warrant Agent any property at the time held by it hereunder and execute and deliver any further assurance, conveyance, act or deed necessary for that purpose. Not later than the effective date of any such appointment, the Company shall give notice thereof to the resigning or removed Warrant Agent. Failure to give any notice provided for in this Section 18, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Warrant Agent or the appointment of a new warrant agent, as the case may be. SECTION 19. Notices to the Company and Warrant Agent. Any notice or demand authorized by this Agreement to be given or made by the Warrant Agent or by the any Contingent Warrant holder to the Company shall be sufficiently given or made when deposited in the mail, first class or registered, postage prepaid, addressed (until another address is filed in writing by the Company with the Warrant Agent), as follows: NEXTLINK Communications, Inc. 155 108th Avenue NE Bellevue, Washington 98004 Attention: General Counsel Any notice pursuant to this Agreement to be given by the Company or by any Contingent Warrant holder to the Warrant Agent shall be sufficiently given when deposited in -25- the mail, first-class or registered, postage prepaid, addressed (until another address is filed in writing by the Warrant Agent with the Company) to the Warrant Agent as follows: Continental Stock Transfer & Trust Company 2 Broadway New York, New York 10004 Attention: Compliance Department SECTION 20. Supplements and Amendments. The Company and the Warrant Agent may from time to time supplement or amend this Agreement without the approval of any Contingent Warrant holders in order (i) to cure any ambiguity or to correct or supplement any provision contained herein which may be defective or inconsistent with any other provision herein, (ii) to modify the restrictions on, and procedures for, resale and other transfers of the Contingent Warrants to the extent required by any change in applicable law or regulation (or the interpretation thereof) of the United States of America or in practices relating to the resale or transfer of restricted securities (as defined in Rule 144) generally, (iii) to add to or modify the certification requirements for transfers of Certificated Warrants prior to the Resale Restriction Termination Date in the event of the issuance of Certificated Warrants in exchange for Global Warrants as provided herein, (iv) to make any other provisions in regard to matters or questions arising hereunder which the Company and the Warrant Agent may deem necessary or desirable or (v) to evidence the succession of another Person to the Company and the assumption by such successor of this Agreement as provided herein; provided that any such supplement or amendment made pursuant to any of clauses (i) through (iv) above shall not in any way adversely affect the rights of any Contingent Warrant holder. Any amendment or supplement to this Agreement that has an adverse effect on the interests of holders of Warrant Certificates shall require the written consent of registered holders of two-thirds of the then outstanding Contingent Warrants. The consent of each holder of a Contingent Warrant affected shall be required for any amendment pursuant to which the Exercise Rate with respect to any class of Junior Shares would be decreased or the Exercise Price with respect to any class of Junior Shares would be increased (other than pursuant to the adjustments provided herein). SECTION 21. Reports. For so long as any Contingent Warrants remain outstanding and not expired by their terms, the Company shall furnish to the holders of the Contingent Warrants and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. In addition, the Company shall file with the Warrant Agent within 15 days after it files them with the Commission copies of its SEC Reports. In the event the Company shall cease to be required to file SEC Reports pursuant to the Exchange Act, the Company shall nevertheless continue to file such reports with the Commission (unless the Commission will not accept such filings) and the Warrant Agent. The Company shall furnish copies of the SEC Report to the holders of Contingent Warrants promptly after the Company files the same with the Warrant Agent. SECTION 22. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Warrant Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. -26- SECTION 23. Termination. This Agreement shall terminate on the 30th day after the Expiration Date. Notwithstanding the foregoing, this Agreement will terminate on any earlier date if all Contingent Warrants have been exercised. The provisions of Section 16 hereof shall survive any such termination. SECTION 24. Governing Law. This Agreement and each Warrant Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be governed by and construed in accordance with the laws of such State. SECTION 25. Benefits of This Agreement. Nothing in this Agreement shall be construed to give to any person or entity other than the Company, the Warrant Agent and the holders of Warrant Certificates any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Warrant Agent (including its successors in such capacity) and the holders of the Warrant Certificates. SECTION 26. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but on and the same instrument. -27- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written. NEXTLINK COMMUNICATIONS, INC. By: /s/ R. Bruce Easter, Jr. ------------------------------ Name: R. Bruce Easter, Jr. Title: Vice President, General Counsel and Secretary CONTINENTAL STOCK TRANSFER & TRUST COMPANY, as Warrant Agent By:______________________________ Name: Title: -28- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written. NEXTLINK COMMUNICATIONS, INC. By:______________________________ Name: Title: CONTINENTAL STOCK TRANSFER & TRUST COMPANY, as Warrant Agent By: /s/ William F. Seegraber ------------------------------ Name: William F. Seegraber Title: Vice President -28- EXHIBIT A Form of Contingent Warrant Certificate [Face] [If applicable, inset the following Securities Act legend-- THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT), OR ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION AND SUBJECT TO COMPLIANCE WITH OTHER APPLICABLE LAWS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE WHICH IS THREE YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF THIS SECURITY) (THE "RESALE RESTRICTION TERMINATION DATE"), ONLY (A) TO THE COMPANY; (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THESE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144, (E) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT OR (F) IN THE CASE OF EITHER ANY INITIAL INVESTOR THAT IS A QUALIFIED INSTITUTIONAL BUYER OR ANY SUBSEQUENT INVESTOR, TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (a)(1), (2), (3) or (7) OR RULE 501 UNDER THE SECURITIES ACT PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT (IF AVAILABLE), AND OTHERWISE IN COMPLIANCE WITH OTHER APPLICABLE LAWS, SUBJECT TO THE COMPANY'S AND THE WARRANT AGENT'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (C), (D), (E) OR (F) TO REQUIRE THE DELIVERY OF A TRANSFER CERTIFICATE AND, IN THE CASE OF CLAUSE (F), AN OPINION OF COUNSEL OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM. THE LEGEND WILL BE REMOVED UPON THE REQUEST OF A HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE.] UNTIL THE EARLIEST TO OCCUR OF: (I) AUGUST 1, 1997, (II) THE EFFECTIVE DATE OF THE EXCHANGE OFFER REGISTRATION STATEMENT, OR (III) A CHANGE OF CONTROL, THE CONTINGENT WARRANTS EVIDENCED HEREBY MAY NOT BE SOLD, ASSIGNED OR OTHERWISE TRANSFERRED TO ANY PERSON UNLESS, FOR EACH TRANSFER OF A CONTINGENT WARRANT, SIMULTANEOUSLY WITH SUCH TRANSFER, THE HOLDER HEREOF TRANSFERS TO THE SAME TRANSFEREE ONE SHARE OF 14% SENIOR EXCHANGEABLE REDEEMABLE PREFERRED SHARES OF NEXTLINK COMMUNICATIONS, INC. A-1 [IF THE WARRANT CERTIFICATE IS TO BE A GLOBAL WARRANT INSERT--This Warrant Certificate is a Global Warrant Certificate within the meaning of the Warrant Agreement hereinafter referred to and is registered in the name of The Depository Trust Company (the "Depository") or a nominee of the Depository. This Warrant Certificate is exchangeable for Warrant Certificates registered in the name of a person other than the Depository or its nominee only in the limited circumstances described in the Warrant Agreement and no transfer of this Warrant Certificate (other than a transfer of this Warrant Certificate as a whole by the Depository to a nominee of the Depository or by a nominee of the Depository to the Depository or another nominee of the Depository) may be registered except in limited circumstances. Unless this Warrant Certificate is presented by an authorized representative of The Depository Trust Company (55 Water Street, New York) to NEXTLINK Communications, Inc. or its agent for registration of transfer, exchange or payment, and any issued is registered in the name of Cede & Co. or such other name as requested by an authorized representative of The Depository Trust Company and any payment hereon is made to Cede & Co., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY A PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein. ] No. ___ ___ Contingent Warrants Contingent Warrant Certificate NEXTLINK COMMUNICATIONS, INC. This Warrant Certificate certifies that ____________________________ ____________________________________________________________________________, or registered assigns, is the registered holder of ______________ Contingent Warrants (the "Contingent Warrants") expiring 5:00 P.M., New York City Time, on February 1, 2009 or, if a Qualifying Event has occurred on or prior to February 1, 1998, the date of such Qualifying Event (the "Expiration Date"). Each Contingent Warrant entitles the holder upon exercise to purchase from NEXTLINK Communications Inc., a Washington corporation (the "Company"), on any Business Day after February 1, 1998 if a Qualifying Event has not occurred on or prior to February 1, 1998 and prior to the Expiration Date a number of fully paid and nonassessable shares of each class of Junior Shares outstanding as of February 1, 1998 equal to 1/5,700,000 of the aggregate Contingent Warrant Shares Amount ("Warrant Shares") upon surrender of this Warrant Certificate and payment in full of the Exercise Price of $.01 for each Warrant Share purchased (subject to adjustment) at the office or agency of the Warrant Agent, subject to the conditions set forth herein and in the Warrant Agreement referred to on the reverse hereof. The number of Warrants Shares purchasable upon exercise hereof and the Exercise Price are subject to adjustment upon the occurrence of certain events set forth in the Warrant Agreement. No Warrant may be exercised after the Expiration Date, and to the extent not exercised by such time, such Warrants shall become void. A-2 Reference is hereby made to the further provisions of this Warrant Certificate set forth on the reverse hereof, which provisions shall for all purposes have the same effect as though fully set forth at this place. This Warrant Certificate shall not be valid unless countersigned by of the Warrant Agent, as such term is used in the Warrant Agreement. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed. Dated: NEXTLINK COMMUNICATIONS, INC. By: _______________________________ Attest: __________________________________ Warrant Agent's Countersignature Countersigned Continental Stock Transfer & Trust Company, Warrant Agent By: ___________________________________ Authorized Officer A-3 [Reverse] The Contingent Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Contingent Warrants issued and to be issued pursuant to a Warrant Agreement, dated as of January 31, 1997 (the "Warrant Agreement"), between the Company and Continental Stock Transfer & Trust Company, as warrant agent (herein called the "Warrant Agent", which term includes any successor warrant agent under the Warrant Agreement), which Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to for a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Warrant Agent, the Company and the holders (the words "holders" or "holder" meaning the registered holders or registered holder) of the Contingent Warrants. All terms not otherwise defined herein shall have the meanings set forth in the Warrant Agreement. A copy of the Warrant Agreement may be obtained by the holder hereof upon written request to the Company. Contingent Warrants may be exercised at any time on any business day after February 1, 1998 if a Qualifying Event has not occurred on or prior to February 1, 1998 and prior to the Expiration Date. The holder of Contingent Warrants evidenced by this Warrant Certificate may exercise such Contingent Warrants by (i) surrendering this Warrant Certificate, with the form of Election to Exercise set forth hereon duly completed and executed and (ii) to the extent such exercise is not being effected through a Cashless Exercise, by paying in full the Exercise Price for each such Contingent Warrant exercised and any other amounts required to be paid pursuant to the Warrant Agreement. No adjustment shall be made for any dividends on any Junior Shares issuable upon exercise of this Contingent Warrant. The Company will not be required to issue fractional Warrant Shares on the exercise of Contingent Warrants, although it may do so in its sole discretion. If fractional shares are not issued, the Company will pay the cash value of such fractional shares as determined in accordance with the provisions of the Warrant Agreement. In the event that upon any exercise of Contingent Warrants evidenced hereby the number of Contingent Warrants exercised shall be less than the total number of Contingent Warrants evidenced hereby, there shall be issued to the holder hereof or his assignee a new Warrant Certificate evidencing the number of Contingent Warrants not exercised. The Warrant Agreement provides that upon the occurrence of certain events the Exercise Rate with respect to a class of Junior Shares and the corresponding Exercise Price may, subject to certain conditions, be adjusted. Warrant Certificates, when surrendered at any office or agency maintained by the Company for that purpose by the registered holder thereof in person or by legal representative or attorney duly authorized in writing, may be exchanged for a new Warrant Certificate or new Warrant Certificates evidencing in the aggregate a like number of Contingent Warrants, in the manner and subject to the limitations provided in the Warrant Agreement, without charge except for any tax or other governmental charge imposed in connection therewith. A-4 Upon due presentation for registration of transfer of this Warrant Certificate at the office of the Warrant Agent, a new Warrant Certificate or Warrant Certificates evidencing in the aggregate a like number of Contingent Warrants shall be issued to the transferee(s) in exchange for this Warrant Certificate, subject to the limitations provided in the Warrant Agreement, without charge except for any tax or other governmental charge imposed in connection therewith. The Company and the Warrant Agent may deem and treat the registered holder(s) thereof as the absolute owner(s) of this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone), for the purpose of any exercise hereof, of any distribution to the holder(s) hereof, and for all other purposes, and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary. Neither the Contingent Warrants nor this Warrant Certificate entitles any holder hereof to any rights of a shareholder of the Company. This Warrant Certificate shall be governed and construed in accordance with the laws of the State of New York. A-5 Form of Election to Exercise (To Be Executed Upon Exercise of Contingent Warrant) The undersigned hereby irrevocably elects to exercise ____ of the Contingent Warrants represented by this Warrant Certificate and purchase the number of Warrant Shares issuable upon the exercise of such Contingent Warrants and herewith tenders payment for such Warrant Shares as follows: (Check One) [ ] $__________ in cash or by certified or official bank check; or [ ] by surrender of Contingent Warrants pursuant to a Cashless Exercise (as defined in the Warrant Agreement) at the current Cashless Exercise Ratio. The undersigned requests that a certificate representing such Warrant Shares be registered in the name of __________________________________________________________ whose address is _______________________________________________________________ and that such Warrant Shares be delivered to ___________________________________ whose address is ______________________________________________________________. Any cash payments to be paid in lieu of a fractional Warrant Share should be made to ________________________________________________________________________ whose address is _______________________________________________________________ and the check representing payment thereof should be delivered to ______________ whose address is ______________________________________________________________. Dated _____________________, ____ Name of holder of Warrant Certificate: ___________________________ (Please Print) Tax Identification or Social Security Number: ________________________________________________________ Address: _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ Signature: _____________________________________________________________________ Note: The above signature must correspond with the name as written upon the face of this Warrant Certificate in every particular, without alteration or enlargement or any change whatever and if the certificate representing the Warrant Shares or any Warrant Certificate representing Contingent Warrants not exercised is to be registered in a name other than that in which this Warrant Certificate is registered or if any cash payment to be paid in lieu of a fractional Warrant Share is to be made to a A-6 person other than the registered holder of this Warrant Certificate, the signature of the holder hereof must be guaranteed as provided in the Warrant Agreement. Signature Guaranteed: ______________________________ [FORM OF ASSIGNMENT] For value received _______________________________________ hereby sells, assigns and transfers unto _______________________________________ the within Warrant Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint _______________________________________ attorney, to transfer said Warrant Certificate on the books of the within-named Company, with full power of substitution in the premises. Dated ________________, _____ Signature: ___________________________________________ Note: The above signature must correspond with the name as written upon the face of this Warrant Certificate in every particular, without alteration or enlargement or any change whatever. Signature Guaranteed: _________________________________ A-7 EXHIBIT B Form of Certificate for Transfers of Certificated Warrants Continental Stock Transfer & Trust Company 2 Broadway New York, New York 10004 Attention: Compliance Department Re: Contingent Warrants of NEXTLINK Communications, Inc. (the "Warrants") Reference is made to the Warrant Agreement, dated as of January 31, 1997 (the "Warrant Agreement"), between NEXTLINK Communications, Inc. (the "Company") and Continental Stock Transfer & Trust Company, as Warrant Agent. Terms used herein and defined in the Warrant Agreement or in Regulation S, Rule 144A or Rule 144 under the Securities Act of 1933 (the "Securities Act") are used herein as so defined. This certificate relates to _______ Contingent Warrants, which are evidenced by the following certificate(s) (the "Specified Warrants"): CUSIP No. _______________________________ CERTIFICATE No(s). _____________________ The person in whose name this certificate is executed below (the "Undersigned") hereby certifies that either (i) it is the sole beneficial owner of the Specified Warrants or (ii) it is acting on behalf of all the beneficial owners of the Specified Warrants and is duly authorized by them to do so. Such beneficial owner or owners are referred to herein collectively as the "Owner". The Specified Warrants are registered in the name of the Undersigned, as or on behalf of the Owner. The Owner has requested that the Specified Warrants be transferred to a person (the "Transferee") who will take delivery in the form of an interest in the Global Warrant. In connection with such transfer, the Owner hereby certifies that such transfer is being effected in accordance with (a) either: (Check one) |_| Rule 144A, |_| Rule 904, or |_| Rule 144 under the Securities Act and (b) all applicable securities laws of the states of the United States and other jurisdictions. Accordingly, the Owner hereby further certifies as follows with respect to the type of transfer indicated herein: (1) Rule 144A Transfers. If the transfer is being effected in accordance with Rule 144A: B-1 (A) the Specified Warrants are being transferred to a person that the Owner and any person acting on its behalf reasonably believe is a "qualified institutional buyer" within the meaning of Rule 144A, acquiring for its own account or for the account of a qualified institutional buyer; and (B) the Owner and any person acting on its behalf have taken reasonable steps to ensure that the Transferee is aware that the Owner may be relying on Rule 144A in connection with the transfer; and (2) Rule 904 Transfers. If the transfer is being effected in accordance with Rule 904: (A) the Owner is not a distributor of the Securities, an affiliate of the Company or any such distributor or a person acting on behalf of any of the foregoing; (B) the offer of the Specified Warrants was not made to a person in the United States; (C) either; (i) at the time the buy order was originated, the Transferee was outside the United States or the Owner and any person acting on its behalf reasonably believed that the Transferee was outside the United States, or (ii) the transaction is being executed in, on or through the facilities of the Eurobond market, as regulated by the Association of International Bond Dealers, or another designated offshore securities market and neither the Owner nor any person acting on its behalf knows that the transaction has been prearranged with a buyer in the United States; (D) no directed selling efforts have been made in the United States by or on behalf of the Owner or any affiliate thereof; and (E) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act. (3) Rule 144 Transfers. If the transfer is being effected pursuant to Rule 144: (A) the transfer is occurring after a holding period of at least two years (computed in accordance with paragraph (d) of Rule 144) has elapsed since the date the Specified Warrants were acquired from the Company or from an affiliate (as such term is defined in Rule 144) of the Company, whichever is later, and is being effected in accordance with the applicable amount, manner of sale and notice requirements of paragraphs (e), (f) and (h) of Rule 144; or (B) the transfer is occurring after a holding period of at least three years has elapsed since the date the Specified Warrants were acquired from the Company or from an affiliate (as such term is defined in Rule 144) of the Company, whichever is later, and the B-2 Owner is not, and during the preceding three months has not been, an affiliate of the Company. This certificate and the statements contained herein are made for your benefit and the benefit of the Company, the Warrant Agent and the Initial Purchasers. Dated: ___________, ____ __________________________________________________ (Print the name of the Undersigned, as such term is defined in the second paragraph of this certificate.) By:_______________________________________________ Name: Title: (If the Undersigned is a corporation, partnership or fiduciary, the title of the person signing on behalf of the Undersigned must be stated.) B-3 EX-10.4 10 REGISTRATION RIGHTS AGREEMENT EXHIBIT 10.4 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT, dated as of January 15, 1997, is between NEXTLINK COMMUNICATIONS, INC., a Washington corporation (the "Company") and the parties that are signatories to this Agreement that are holders of Class B Common Stock of the Company or of options to purchase Class B Common Stock (the "Holders"). WHEREAS, the Holders have made capital contributions to NEXTLINK Communications, L.L.C., a Washington limited liability company ("LLC"), the predecessor in interest to the Company, and currently own all of the issued and outstanding shares of Class B common stock, $.01 par value, of the Company, or options to purchase the Class B Common stock, (the "Class B Common Stock"); and WHEREAS, in connection with the incorporation of the Company, the Company wishes to grant to the Holders certain registration rights with respect to the shares of Class A common stock, par value $.01 per share of the Company (the "Class A Common Stock") for which the shares of Class B Common Stock are convertible that the Holders currently own or may acquire in the future, as provided further herein. NOW THEREFORE, in consideration of the capital contributions made by the Holders to LLC and of the promises herein contained, the parties hereto agree as follows: 1. DEFINITIONS. As used in this Agreement: (i) the terms "register," "registered" and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Act (and any post-effective amendments filed or required to be filed) and the declaration or ordering of effectiveness of such registration statement; (ii) the term "Registrable Securities" means (A) all shares of Class A Common Stock owned by the Holders as of the date hereof, (B) any shares of Class A Common Stock acquired by the Holders through conversion of Class B Common Stock or otherwise and (C) any capital stock of the Company issued as a dividend or other distribution with respect to, or in exchange for or in replacement of, the shares of Class A Common Stock referred to in clause (A) or (B) above; (iii) the term "Holder" shall mean solely those parties that are a signatory to this Agreement; (iv) the term "Initiating Holders" shall mean any Holder or Holders who in the aggregate are Holders of more than 4% of the then outstanding Registrable Securities; (v) "Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Act; (vi) "Qualifying IPO" shall mean a public offering of Class A Common Stock of the Company that results in net proceeds to the Company of not less than Seventy Five Million Dollars ($75,000,000) or such lesser amount as the Directors of the Company may, in their discretion, determine to be adequate to commence the rights of the Holders hereunder; (vii) "Registration Expenses" shall mean all third-party expenses incurred by the Company in compliance with Sections 2 and 3 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Company and the underwriters, if any, blue sky fees and expenses and the third-party expenses of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company, which shall be paid in any event by the Company); (viii) "Selling Expenses" shall mean all underwriting discounts and selling commissions applicable to the sale of Registrable Securities and all fees and disbursements of counsel for each of the Holders; (ix) "Act" shall mean the Securities Act of 1933, as amended; and (x) "Exchange Act" shall mean the Securities Exchange Act of 1934. 2. REQUESTED REGISTRATION. (i) REQUEST FOR REGISTRATION. If the Company shall receive from an Initiating Holder, at any time after a Qualifying IPO, a written request that the Company effect any registration with respect to all or a part of the Registrable Securities, the Company will: (A) promptly give written notice of the proposed registration, qualification or compliance to all other Holders; and (B) as soon as practicable, use its diligent best efforts to effect such registration (including, without limitation, the execution of an undertaking to file post-effective amendments, appropriate qualification under applicable blue sky or other 2 state securities laws and appropriate compliance with applicable regulations issued under the Act) as may be so requested and as would permit or facilitate the sale and distribution as soon as is practicable of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request received by the Company within twenty (20) business days after written notice from the Company is given under Section 2(i)(A) above; PROVIDED that the Company shall not be obligated to effect, or take any action to effect, any such registration pursuant to this Section 2: (a) In any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance, unless the Company is already subject to service in such jurisdiction and except as may be required by the Act or applicable rules or regulations thereunder; (b) After the Company has effected a total of two (2) such registrations pursuant to this Section 2 and such registrations have been declared or ordered effective and the sales of such Registrable Securities shall have closed; or (c) If the Registrable Securities requested by all Holders to be registered pursuant to such request do not have an anticipated aggregate public offering price (before any underwriting discounts and commissions) of not less than $10,000,000. The registration statement filed pursuant to the request of the Initiating Holders may, subject to the provisions of Section 2(ii) below, include other securities of the Company which are held by officers or directors of the Company, or which are held by persons who, by virtue of agreements with the Company, are entitled to include their securities in any such registration, but the Company shall have no absolute right to include any of its securities in any such registration. The registration rights set forth in this Section 2 are personal to the Holders and shall not be assignable, by operation of law or otherwise. (ii) UNDERWRITING. If the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to Section 2. If officers or directors of the Company holding other securities of the Company shall request inclusion in any registration pursuant to Section 2, or if holders of securities of the Company other than Registrable Securities who are entitled, by contract with the Company 3 or otherwise, to have securities included in such a registration (the "Other Stockholders") request such inclusion, the Holders shall offer to include the securities of such officers, directors and Other Stockholders in the underwriting and may condition such offer on their acceptance of the further applicable provisions of this Section 2. The Holders whose shares are to be included in such registration and the Company shall (together with all officers, directors and Other Stockholders proposing to distribute their securities through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected for such underwriting by the Initiating Holders and reasonably acceptable to the Company. Notwithstanding any other provision of this Section 2, if the representative advises the Holders that marketing factors require a limitation on the number of shares to be underwritten, the securities of the Company held by officers or directors of the Company and the securities held by Other Stockholders shall be excluded from such registration to the extent so required by such limitation. If, after the exclusion of such shares, further reductions are still required, the number of shares included in the registration by each Holder shall be reduced on a pro rata basis (based on the number of shares proposed to be sold by such Holder), by such minimum number of shares as is necessary to comply with such request. No Registrable Securities or any other securities excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. If any officer, director or Other Stockholder who has requested inclusion in such registration as provided above disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the underwriter and the Initiating Holders. The securities so withdrawn shall also be withdrawn from registration. If the underwriter has not limited the number of Registrable Securities or other securities to be underwritten, the Company may include its securities for its own account in such registration if the representative so agrees and if the number of Registrable Securities and other securities which would otherwise have been included in such registration and underwriting will not thereby be limited. (iii) Notwithstanding the foregoing, if the Company shall furnish to Holders requesting the filing of a registration statement pursuant to Section 2(i), a certificate signed by the President or Chief Executive Officer of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such registration statement to be filed and it is therefore essential to defer the filing of such registration statement, then the Company shall have the right to defer such filing for a period of not more than 120 days after receipt of the request of the Initiating Holders; PROVIDED, HOWEVER, that the Company may not utilize this right more than once in any twelve (12) month period. 3. COMPANY REGISTRATION. (i) If, at any time after a Qualifying IPO, the Company shall determine to register any of its equity securities either for its own account or for the account of a security 4 holder or holders exercising their respective demand registration rights, other than a registration relating solely to employee benefit plans, or a registration relating solely to a Commission Rule 145 transaction, or a registration on any registration form which does not permit secondary sales or does not include substantially the same information as would be required to be included in a registration statement covering the sale of Registrable Securities, the Company will: (A) promptly give to each of the Holders a written notice thereof (which shall include a list of the jurisdictions in which the Company intends to attempt to qualify such securities under the applicable blue sky or other state securities laws); and (B) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made by the Holders within twenty (20) days after receipt of the written notice from the Company described in clause (i) above, except as set forth in Section 3(ii) below. Such written request may specify all or a part of the Holders' Registrable Securities. (ii) UNDERWRITING. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise each of the Holders as a part of the written notice given pursuant to Section 3(i)(A). In such event, the right of each of the Holders to registration pursuant to this Section 3 shall be conditioned upon such Holders' participation in such underwriting and the inclusion of such Holders' Registrable Securities in the underwriting to the extent provided herein. The Holders whose shares are to be included in such registration shall (together with the Company and the Other Stockholders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected for underwriting by the Company. Notwithstanding any other provision of this Section 3, if the representative determines that marketing factors require a limitation on the number of shares to be underwritten, the representative may (subject to the allocation priority set forth below) limit the number of Registrable Securities to be included in the registration and underwriting. The Company shall so advise all holders of securities requesting registration, and the number of shares of securities that are entitled to be included in the registration and underwriting shall be allocated in the following manner: The securities of the Company held by officers, directors and Other Stockholders of the Company (other than securities held by holders who by contractual right initiated the demand for such registration ("Demanding Holders")) shall be excluded from such registration and underwriting to the extent required by such limitation, and, if a limitation on the number of shares is still required, the number of shares that may be included in the registration and underwriting by each of the Holders and Demanding Holders shall be reduced, on a pro rata basis (based on the number of shares proposed to be sold by such Holder or Demanding Holder), by such minimum number of shares as is necessary to comply with such limitation. If any of the Holders or Demanding Holders 5 or any officer, director or Other Stockholder disapproves of the terms of any such underwriting, he may elect to withdraw therefrom by written notice to the Company and the underwriter. Any Registrable Securities or other securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. (iii) NUMBER AND TRANSFERABILITY. Each of the Holders shall be entitled to have its shares included in an unlimited number of registrations pursuant to this Section 3. The registration rights granted pursuant to this Section 3 are personal to the Holders and shall not be assignable, by operation of law or otherwise. 4. EXPENSES OF REGISTRATION. All Registration Expenses and Selling Expenses incurred in connection with any registration, qualification or compliance pursuant to Section 2 of this Agreement shall be borne by the holders of the securities so registered pro rata on the basis of the number of shares so registered. Without limiting the generality of the foregoing, in the event the Company includes shares in any registration, qualification or compliance pursuant to Section 2 of this Agreement, the Company shall pay the Registration Expenses in proportion to the Company's share of the total number of shares included in such registration. All Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to Section 3 of this Agreement shall be borne by the Company (or the Demanding Holders if so provided in the applicable contract), and all Selling Expenses incurred in connection with any such registration, qualification or compliance shall be borne by the Holders of securities so registered pro rata on the basis of the number of shares so registered. 5. REGISTRATION PROCEDURES. In the case of each registration effected by the Company pursuant to this Agreement, the Company will keep the Holders, as applicable, advised in writing as to the initiation of each registration and as to the completion thereof. The Company will: (i) Keep such registration effective for a period of one hundred eighty (180) days or until the Holders, as applicable, have completed the distribution described in the registration statement relating thereto, whichever first occurs; provided, however, that (A) such 180-day period shall be extended for a period of time equal to the period during which the Holders, as applicable, refrain from selling any securities included in such registration in accordance with provisions in Section 9 hereof; and (B) in the case of any registration of Registrable Securities on Form S-3 which are intended to be offered on a continuous or delayed basis, such 180-day period shall be extended until all such Registrable Securities are sold, provided that Rule 415, or any successor rule under the Act, permits an offering on a continuous or delayed basis, and provided further that applicable rules under the Act governing the obligation to file a post-effective amendment permit, in lieu of filing a post-effective amendment which (1) includes any prospectus required by Section 10(a) of the Act or (2) reflects facts or 6 events representing a material or fundamental change in the information set forth in the registration statement, the incorporation by reference of information required to be included in (1) and (2) above to be contained in periodic reports filed pursuant to Section 12 or 15(d) of the Exchange Act in the registration statement. (ii) Furnish such number of prospectuses and other documents incident thereto as each of the Holders, as applicable, from time to time may reasonably request; PROVIDED, HOWEVER, that the Holders, pro rata on the basis of the number of their shares so included in such registration, reimburse the Company for expenses incurred in performing its obligations under this Section 5. (iii) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (iv) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (v) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (vii) Furnish, at the request of any Holder requesting registration of Registrable Securities pursuant to this Agreement, on the date that such Registrable Securities are delivered to the underwriters for sale in connection with a registration pursuant to this Agreement, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (A) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities and (B) a letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in 7 an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities. 6. INDEMNIFICATION. (i) The Company will indemnify each of the Holders, as applicable, each of its officers, directors and partners, and each person controlling each of the Holders, with respect to each registration which has been effected pursuant to this Agreement, and each underwriter, if any, and each person who controls any underwriter, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of the Act or any rule or regulation thereunder applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and will reimburse each of the Holders, each of its officers, directors and partners, and each person controlling each of the Holders, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating and defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by the Holders or underwriter and stated to be specifically for use therein. (ii) Each of the Holders will, if Registrable Securities held by it are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers and each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of the Act and the rules and regulations thereunder, each Other Stockholder and each of their officers, directors, and partners, and each person controlling such Other Stockholder against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document made by such Holder, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements by such Holder therein not misleading, and will reimburse the Company and such Other Stockholders, directors, officers, partners, persons, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or 8 omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by such Holder and stated to be specifically for use therein; provided, however, that the obligations of each of the Holders hereunder shall be limited to an amount equal to the net proceeds to such Holder of securities sold as contemplated herein. (iii) Each party entitled to indemnification under this Section 6 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom; provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld) and the Indemnified Party may participate in such defense at such party's expense (unless the Indemnified Party shall have reasonably concluded that there may be a conflict of interest between the Indemnifying Party and the Indemnified Party in such action, in which case the fees and expenses of counsel shall be at the expense of the Indemnifying Party), and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 6 unless the Indemnifying Party is materially prejudiced thereby. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. Each Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection with the defense of such claim and litigation resulting therefrom. (iv) If the indemnification provided for in this Section 6 is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, claim, damage or expense referred to herein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, liability, claim, damage or expense in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other in connection with the statements or omissions which resulted in such loss, liability, claim, damage or expense, as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and of the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. 9 (v) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with any underwritten public offering contemplated by this Agreement are in conflict with the foregoing provisions, the provisions in such underwriting agreement shall be controlling. (vi) The foregoing indemnity agreement of the Company and Holders is subject to the condition that, insofar as they relate to any loss, claim, liability or damage made in a preliminary prospectus but eliminated or remedied in the amended prospectus on file with the Commission at the time the registration statement in question becomes effective or the amended prospectus filed with the Commission pursuant to Commission Rule 424(b) (the "Final Prospectus"), such indemnity agreement shall not inure to the benefit of any underwriter if a copy of the Final Prospectus was furnished to the underwriter and was not furnished to the person asserting the loss, liability, claim or damage at or prior to the time such action is required by the Act. 7. INFORMATION BY THE HOLDERS. Each of the Holders and each Other Stockholder holding securities included in any registration, shall furnish to the Company such information regarding such Holder or Other Stockholder and the distribution proposed by such Holder or Other Stockholder as the Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in this Agreement. 8. RULE 144 REPORTING. With a view to making available the benefits of certain rules and regulations of the Commission which may permit the sale of restricted securities to the public without registration, the Company agrees to: (i) make and keep public information available as those terms are understood and defined in Rule 144, at all times from and after ninety (90) days following the effective date of the first registration under the Act filed by the Company for an offering of its securities to the general public; (ii) use its best efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Act and the Exchange Act at any time after it has become subject to such reporting requirements; and (iii) so long as the Holder owns any Registrable Securities, furnish to the Holder upon request, a written statement by the Company as to its compliance with the reporting requirements of Rule 144 (at any time from and after ninety (90) days 10 following the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed as the Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing the Holder to sell any such securities without registration. 9. "MARKET STAND-OFF" AGREEMENT. Each Holder agrees, if requested by the Company and an underwriter of Common Stock (or other securities) of the Company, not to sell or otherwise transfer or dispose of any Class A Common Stock (or other securities) of the Company held by such Holder during the 180 day period following the effective date of the initial registration statement of the Company relating to any such securities filed under the Act and during the 90 day period following any subsequent registration statement filed under the Act. If requested by the underwriters, the Holders shall execute a separate agreement to the foregoing effect. The Company may impose stop-transfer instructions with respect to the shares (or securities) subject to the foregoing restriction until the end of such period. 10. TERMINATION. The registration rights set forth in this Agreement shall not be available to any Holder if, in the opinion of counsel to the Company, all of the Registrable Securities then owned by such Holder could be sold in any 90-day period pursuant to Rule 144 under the Act (without giving effect to the provisions of Rule 144(k)). In addition, the registration rights set forth in this Agreement shall terminate upon the transfer or assignment of the Registrable Securities or the Class B Stock that is convertible to the Class A Stock. 11. NOTICES. All communications provided for hereunder shall be sent by first-class mail or facsimile and (a) if addressed to a Holder, addressed to the Holder at the address or fax number contained on Schedule A to this Agreement, or at such other address or fax number as such party shall have furnished to the Company in writing or (b) if addressed to the Company, at 155 108th Avenue NE, 8th Floor, Bellevue, Washington 98004, Attention: General Counsel, or fax number (206) 519-8910 or at such other address or fax number, or to the attention of such other officer, as the Company shall have furnished to each Holder of Registrable Securities at the time outstanding. Notices sent by first-class mail shall be deemed received three days after the date of deposit of such notice in the United States mail. Notices sent by facsimile shall be deemed received upon receipt by the notified party's facsimile machine. 12. NO ASSIGNMENT. This Agreement is personal to the Holders and shall not be assignable, by operation of law or otherwise. 11 13. DESCRIPTIVE HEADINGS. The descriptive headings of the several sections and paragraphs of this Agreement are inserted for reference only and shall not limit or otherwise affect the meaning hereof. 14. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of Washington. 15. COUNTERPARTS. This Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed an original, but all such counterparts shall together constitute one and the same instrument. IN WITNESS WHEREOF, the parties have caused this agreement to be executed and delivered by their respective officers thereunto duly authorized as of the date first above written. EAGLE RIVER INVESTMENTS, L.L.C. By: /s/ C. James Judson ---------------------------------- Name: C. James Judson --------------------------- Title: Manager --------------------------- NEXTLINK, INC. By: /s/ R. Bruce Easter, Jr. ---------------------------------- Name: R. Bruce Easter, Jr. ---------------------------- Title: Vice President ---------------------------- BWP, INC. By: /s/ Doug Bean ---------------------------------- Name: Doug Bean ---------------------------- Title: President ---------------------------- ROWENA FAMILY LIMITED LIABILITY COMPANY By: /s/ Scot B. Jarvis ---------------------------------- Name: Scot B. Jarvis ---------------------------- Title: Member ---------------------------- 12 PENNS LIGHT COMMUNICATIONS, INC. By: /s/ Gary A. Rawding ---------------------------------- Name: Gary A. Rawding ---------------------------- Title: President & CEO ---------------------------- PROBE VENTURES CORP. By: /s/ Victor Schnee ---------------------------------- Name: Victor Schnee ---------------------------- Title: President ---------------------------- CITY SIGNAL, INC. By: /s/ R. Postma ---------------------------------- Name: R. Postma ---------------------------- Title: Secretary & General Counsel ----------------------------- U.S. NETWORK CORPORATION By: ---------------------------------- Name: ---------------------------- Title: ---------------------------- --------------------------------------- G. ANDREW BARFUSS --------------------------------------- J. MERRILL BEAN --------------------------------------- JOAN BEAN 13 NEXTLINK COMMUNICATIONS, INC. By: /s/ R. Bruce Easter, Jr. ---------------------------------- Name: R. Bruce Easter, Jr. ---------------------------- Title: Vice President ---------------------------- /s/ Scot B. Jarvis --------------------------------------- SCOT JARVIS 14 SCHEDULE A HOLDERS' ADDRESSES FOR NOTICES EAGLE RIVER INVESTMENTS, L.L.C. c/o C. James Judson 2300 Carillon Point Kirkland, WA 98033 Fax: (206)828-8060 NEXTLINK, INC. c/o R. Bruce Easter, Jr. 155 108th Avenue N.E., Suite 810 Bellevue, WA 98004 Fax: (206)519-8910 BWP, INC. c/o Robert Kingery 700 S.W. Washington, 8th Floor Portland, OR 97205 Fax: (503)727-6821 ROWENA FAMILY LIMITED LIABILITY COMPANY c/o Scot Jarvis 4153 Issaquah Pine Lake Road Issaquah, WA 98029 Fax: (206)392-9944 PENNS LIGHT COMMUNICATIONS, INC. c/o Gary Rawding 925 Berkshire Blvd. Wyomissing, PA 91610 Fax: (610)288-5666 PROBE VENTURES CORP. c/o Victor Schnee Three Wing Drive, Suite 240 Cedar Knolls, NJ 07927-1000 Fax: (201)285-1519 15 CITY SIGNAL, INC. c/o Richard Postma Miller, Johnson, Snell & Cummiskey 800 Calder Plaza Building Grand Rapids, MI 49503 Fax: (616)459-6708 U.S. NETWORK CORPORATION c/o Ron Gavillet 10 South Riverside Plaza, Suite 401 Chicago, IL 60606-3709 Fax: (312)906-3636 G. ANDREW BARFUSS 1499 North Cherry Blossom Drive Farmington, UT 84025-3900 Fax: (801)451-9708 J. MERRILL BEAN 1972 North 2600 East Layton, UT 84040 Fax: (801)451-9708 JOAN BEAN 1972 North 2600 East Layton, UT 84040 Fax: (801)451-9708 SCOT JARVIS 4153 Issaquah Pine Lake Road Issaquah, Washington 98029 Fax: (206) 392-9944 16 EX-10.5 11 PREFERRED EXCHANGE AND REGISTRATION RIGHTS Exhibit 10.5 PREFERRED EXCHANGE AND REGISTRATION RIGHTS AGREEMENT PREFERRED EXCHANGE AND REGISTRATION RIGHTS AGREEMENT, dated as of January 31, 1997, by and between NEXTLINK Communications, Inc., a corporation organized under the laws of the State of Washington (the "Company"), and Merrill Lynch, Pierce, Fenner & Smith Incorporated and Toronto Dominion Securities (USA) Inc. (collectively, the "Initial Purchasers") of the Company's 14% Senior Exchangeable Redeemable Preferred Shares ("Preferred Shares"). 1. CERTAIN DEFINITIONS. For purposes of this Agreement, the following terms shall have the following respective meanings: (a) "CERTIFICATE OF DESIGNATIONS" means the Certificate of Designation of the Powers, Preferences and Relative, Participating, Optional and Other Special Rights of the Preferred Shares and Qualifications, Limitations and Restrictions Thereof. (b) "CLOSING DATE" shall mean the date on which the Preferred Shares are initially issued. (c) "COMMISSION" shall mean the Securities and Exchange Commission, or any other federal agency at the time administering the Exchange Act or the Securities Act, whichever is the relevant statute for the particular purpose. (d) "EFFECTIVE TIME", in the case of (i) an Exchange Offer, shall mean the date on which the Commission declares the Exchange Offer registration statement effective or on which such registration statement otherwise becomes effective and (ii) a Shelf Registration, shall mean the date on which the Commission declares the Shelf Registration effective or on which the Shelf Registration otherwise becomes effective. (e) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934. (f) "EXCHANGE OFFER" shall have the meaning assigned thereto in Section 2(a). (g) "EXCHANGE SECURITIES" shall have the meaning assigned thereto in Section 2(a). (h) The term "HOLDER" shall mean each of the Initial Purchasers for so long as it owns any Registrable Securities, and such of its respective successors and assigns who acquire Registrable Securities, directly or indirectly, from such person or from any successor or assign of such person, in each case for so long as such person owns any Registrable Securities. (i) "INDENTURE" shall mean the Indenture, relating to the Notes to be entered into between the Company and United States Trust Company of New York, as Trustee. (j) "NOTES" means the Company's 14% Senior Subordinated Notes due February 1, 2009, that may be issued at the election of the Company in exchange for the Preferred Shares. (k) The term "PERSON" shall mean a corporation, association, partnership, organization, business, individual, government or political subdivision thereof or governmental agency. (l) "PURCHASE AGREEMENT" shall mean the Purchase Agreement dated January 21, 1997 among the Company, NEXTLINK Communications, L.L.C. and the Initial Purchasers. (m) "REGISTRABLE SECURITIES" shall mean the Securities; PROVIDED, HOWEVER, that such Securities shall cease to be Registrable Securities when (i) except if prior to the consummation of the Exchange Offer existing Commission interpretations are changed such that the Exchange Securities received by holders in the Exchange Offer for Registrable Securities are not or would not be, upon receipt, transferable by each such holder (other than a Restricted Holder) without restriction under the Securities Act in the circumstances contemplated by Section 2(a), the Exchange Offer is conducted as contemplated in Section 2(a); PROVIDED, HOWEVER, that any such Securities that, pursuant to the last two sentences of Section 2(a), are included in a prospectus for use in connection with resales by broker-dealers shall be deemed to be Registrable Securities with respect to Sections 5, 6 and 9 until resale of such Exchange Securities has been effected within the 90-day period referred to in Section 2(a); (ii) in the circumstances contemplated by Section 2(b), a registration statement registering such Securities under the Securities Act has been declared or becomes effective and such Securities have been sold or otherwise transferred by the holder thereof pursuant to such effective registration statement; (iii) such Securities are sold pursuant to Rule 144 (or any successor provision) promulgated under the Securities Act under circumstances in which any legend borne by such Securities relating to restrictions on transferability thereof, under the Securities Act or otherwise, is removed by the Company or pursuant to the Indenture or such Securities are eligible to be sold pursuant to paragraph (k) of Rule 144; or (iv) such Securities shall cease to be outstanding. (n) "REGISTRATION DEFAULT" shall have the meaning assigned thereto in Section 2(c) hereof. (o) "REGISTRATION EXPENSES" shall have the meaning assigned thereto in Section 4 hereof. (p) "RESTRICTED HOLDER" shall mean (i) a holder that is an affiliate of the Company within the meaning of Rule 405 under the Securities Act, (ii) a holder who acquires Exchange Securities outside the ordinary course of such holder's business or (iii) a holder who has arrangements or understandings with any person to participate in the Exchange Offer for the purpose of distributing Exchange Securities. (q) "RULE 144", "RULE 405" AND "RULE 415" shall mean, in each case, such rule promulgated under the Securities Act. (r) "SECURITIES" shall mean, collectively, the Preferred Shares and the Notes. (s) "SECURITIES ACT" shall mean the Securities Act of 1933. (t) "SHELF REGISTRATION" shall have the meaning assigned thereto in Section 2(b) hereof. (u) "SPECIAL DIVIDENDS" shall have the meaning assigned thereto in Section 2(c) hereof. (v) "SPECIAL INTEREST" shall have the meaning assigned thereto in Section 2(c) hereof. (w) "TRUST INDENTURE ACT" shall mean the Trust Indenture Act of 1939. -2- Unless the context otherwise requires, any reference herein to a "Section" or "clause" refers to a Section or clause, as the case may be, of this Agreement, and the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Section or other subdivision. Unless the context otherwise requires, any reference to a statute, rule or regulation refers to the same (including any successor statute, rule or regulation thereto) as it may be amended from time to time. 2. REGISTRATION UNDER THE SECURITIES ACT. (a) Except as set forth in Section 2(b) below, the Company agrees to use its reasonable best efforts to file under the Securities Act no later than 45 days after the Closing Date, a registration statement relating to an offer to exchange (the "Exchange Offer") any and all of the Registrable Securities for a like aggregate liquidation preference and amount of preferred shares of the Company and debt securities of the Company which are substantially identical to the Preferred Shares and the Notes, respectively, (and, in the case of the debt securities, which are entitled to the benefits of a trust indenture which is substantially identical to the Indenture or is the Indenture and which has been qualified under the Trust Indenture Act) except that they have been registered pursuant to an effective registration statement under the Securities Act and such new preferred shares and debt securities will not contain provisions for additional dividends and additional interest, respectively, contemplated in Section 2(c) below or provisions restricting transfer in the absence of registration under the Securities Act (such new preferred shares and debt securities hereinafter called "Exchange Securities"). The Company agrees to use its reasonable best efforts to cause such registration statement to become effective under the Securities Act as soon as practicable thereafter. The Exchange Offer will be registered under the Securities Act on the appropriate form and will comply in all material respects with all applicable tender offer rules and regulations under the Exchange Act. The Company further agrees to commence the Exchange Offer promptly after such registration statement has become effective, hold the Exchange Offer open for at least 30 days and Exchange Securities for all Registrable Securities that have been tendered and not withdrawn on or prior to the expiration of the Exchange Offer. The Exchange Offer will be deemed to have been completed only if the Exchange Securities received by holders other than Restricted Holders in the Exchange Offer for Registrable Securities are, upon receipt, transferable by each such holder without restriction under the Securities Act and without material restrictions under the blue sky or securities laws of a substantial majority of the States of the United States of America, it being understood that broker-dealers receiving Exchange Securities will be subject to certain prospectus delivery requirements with respect to resale of the Exchange Securities. The Exchange Offer shall be deemed to have been completed upon the earlier to occur of (i) the Company having exchanged the Exchange Securities for all outstanding Registrable Securities pursuant to the Exchange Offer and (ii) the Company having exchanged, pursuant to the Exchange Offer, Exchange Securities for all Registrable Securities that have been tendered and not withdrawn before the expiration of the Exchange Offer, which shall be on a date that is at least 30 days following the commencement of the Exchange Offer. The Company agrees (i) to include in the registration statement a prospectus for use in connection with any resales by any holder of Exchange Securities that is a broker-dealer and (ii) to keep such registration statement effective for a period ending on the earlier of the 90th day after the Exchange Offer has been completed or such time as such broker-dealers no longer own any Registrable Securities. With respect to such registration statement the Company and any such holder shall have the benefit of, and shall each provide to the other, the rights of indemnification and contribution set forth in Section 6 hereof. -3- (b) If on or prior to the consummation of the Exchange Offer existing Commission interpretations are changed such that the Exchange Securities received by holders other than Restricted Holders in the Exchange Offer for Registrable Securities are not or would not be, upon receipt, transferable by each such holder without restriction under the Securities Act, in lieu of conducting the Exchange Offer contemplated by Section 2(a) the Company shall file under the Securities Act a "shelf" registration statement providing for the registration of, and the sale on a continuous or delayed basis by the holders of, all of the Registrable Securities, pursuant to Rule 415 under the Securities Act and/or any similar rule that may be adopted by the Commission (the "Shelf Registration"). The Company agrees to use its reasonable best efforts to cause the Shelf Registration to become or be declared effective and to keep such Shelf Registration continuously effective for a period ending on the earlier of the third anniversary of the Closing Date or such time as there are no longer any Registrable Securities outstanding. The Company further agrees to supplement or make amendments to the Shelf Registration, as and when required by the rules, regulations or instructions applicable to the registration form used by the Company for such Shelf Registration or by the Securities Act or rules and regulations thereunder for shelf registration, and the Company agrees to furnish to the holders of the Registrable Securities copies of any such supplement or amendment prior to its being used and/or filed with the Commission. (c) In the event that (i) the Company has not filed the registration statement relating to the Exchange Offer (or, if applicable, the Shelf Registration) on or before the 45th day after the Closing Date, or (ii) such registration statement (or, if applicable, the Shelf Registration) has not become effective or been declared effective by the Commission on or before the 120th day after the Closing Date, or (iii) the Exchange Offer has not been completed within 30 business days after the initial effective date of the registration statement (if the Exchange Offer is then required to be made) or (iv) any registration statement required by Section 2(a) or 2(b) is filed and declared effective but shall thereafter cease to be effective (except as specifically permitted herein) without being succeeded promptly by an additional registration statement filed and declared effective (each such event referred to in clauses (i) through (iv), a "Registration Default"), then, as applicable, either (i) dividends will accumulate (in addition to the stated dividends on the Preferred Shares) at the rate of 0.25% per annum on the liquidation preference of the Preferred Shares or (ii) interest will accrue (in addition to the stated interest on the Notes) at the rate of 0.25% per annum on the principal amount of the Notes, in each case for the period from and including the occurrence of the Registration Default until such time as no Registration Default is in effect. Such additional dividends (the "Special Dividends") will be payable quarterly in arrears on February 1, May 1, August 1 and November 1 in accordance with the Certificate of Designations, and such additional interest (the "Special Interest") will be payable semi-annually in arrears on each February 1 and August 1 in accordance with the Indenture. For each 90-day period that the Registration Default continues, the per annum rate of Special Dividends or Special Interest, as applicable, shall increase by an additional 0.25%, provided that such rate shall in no event exceed 1.0% per annum in the aggregate. Special Dividends or Special Interest, if any, will be computed on the basis of a 365 or 366 day year, as the case may be, and the number of days actually elapsed. (d) Notwithstanding any other provisions of this Agreement, in the event that the Notes are issued in exchange for the Preferred Shares prior to the time when there are no outstanding Registrable Securities, then from the time of such exchange (i) all references in this Section 2 and Section 3 to Securities, Registrable Securities and Exchange Securities shall not include the Preferred Shares or the preferred shares to be issued in exchange therefor in the Exchange Offer, as applicable, and (ii) all requirements for action to be taken by the Company in or pursuant to this Section 2 and Section 3 shall -4- apply only to the Notes and the debt securities to be issued in exchange therefor in the Exchange Offer; PROVIDED, HOWEVER, that if the Preferred Shares are accumulating Special Dividends at the time of such exchange of Preferred Shares for Notes, the Notes shall upon their issuance accrue Special Interest at the same per annum rate as the per annum rate of the Special Dividends at such time. 3. REGISTRATION PROCEDURES. If the Company files a registration statement pursuant to Section 2(a) or Section 2(b), the following provisions shall apply: (a) At or before the Effective Time of the Exchange Offer or the Shelf Registration, as the case may be, the Company shall qualify the Indenture under the Trust Indenture Act. (b) In the event that such qualification would require the appointment of a new trustee under the Indenture, the Company shall appoint a new trustee thereunder pursuant to the applicable provisions of the Indenture. (c) In connection with the Company's obligations with respect to the Shelf Registration, if applicable, the Company shall use its reasonable best efforts to effect or cause the Shelf Registration to permit the sale of the Registrable Securities by the holders thereof in accordance with the intended method or methods of distribution thereof described in the Shelf Registration. In connection therewith, the Company shall: (i) prepare and file with the Commission a registration statement with respect to the Shelf Registration on any form which may be utilized by the Company and which shall permit the disposition of the Registrable Securities in accordance with the intended method or methods thereof, as specified in writing to the Company by the holders of the Registrable Securities; (ii) as soon as reasonably possible, prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus included therein as may be necessary to effect and maintain the effectiveness of such registration statement for the period specified in Section 2(b) hereof and as may be required by the applicable rules and regulations of the Commission and the instructions applicable to the form of such registration statement; (iii) as soon as reasonably possible, comply with the provisions of the Securities Act applicable to the Company in connection with the disposition of all of the Registrable Securities covered by such registration statement in accordance with the intended methods of disposition by the holders thereof, set forth in such registration statement; (iv) provide (A) the holders of the Registrable Securities to be included in such registration statement and not more than one counsel for all the holders of such Registrable Securities, (B) the underwriters (which term, for purposes of this Agreement, shall include a person deemed to be an underwriter within the meaning of Section 2(11) of the Securities Act), if any, thereof, (C) the sales or placement agent, if any, therefor, and (D) one counsel for such underwriters or agents, if any, reasonable opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the Commission, and each amendment or supplement thereto; -5- (v) for a reasonable period prior to the filing of such registration statement, and throughout the period specified in Section 2(b), make available at reasonable times at the Company's principal place of business or such other reasonable place for inspection by the persons referred to in Section 3(c)(iv) who shall certify to the Company that they have a current intention to sell the Registrable Securities pursuant to the Shelf Registration such financial and other information and books and records of the Company, and cause the officers, employees, counsel and independent certified public accountants of the Company to respond to such inquiries, as shall be reasonably necessary, in the judgment of the respective counsel referred to in such Section, to conduct a reasonable investigation within the meaning of Section 11 of the Securities Act; PROVIDED, HOWEVER, that each such party shall be required to maintain in confidence and not to disclose to any other person any information or records reasonably designated by the Company as being confidential, until such time as (A) such information becomes a matter of public record (whether by virtue of its inclusion in such registration statement or otherwise, except by disclosure by such party in breach of this Agreement), or (B) such person shall be required so to disclose such information pursuant to the subpoena or order of any court or other governmental agency or body having jurisdiction over the matter (subject to, and only to the extent required by, the requirements of such order, and only after such person shall have given the Company prompt prior written notice of such requirement), or (C) such information is required to be set forth in such registration statement or the prospectus included therein or in an amendment to such registration statement or an amendment or supplement to such prospectus in order that such registration statement, prospectus, amendment or supplement, as the case may be, does not contain an untrue statement of a material fact or omit to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; (vi) promptly notify the selling holders of Registrable Securities, the sales or placement agent, if any, therefor and the managing underwriter or underwriters, if any, thereof and confirm such advice in writing, (A) when such registration statement or the prospectus included therein or any prospectus amendment or supplement or post-effective amendment has been filed, and, with respect to such registration statement or any post-effective amendment, when the same has become effective, (B) of any comments by the Commission and by the Blue Sky or securities commissioner or regulator of any state with respect thereto or any request by the Commission for amendments or supplements to such registration statement or prospectus or for additional information, (C) of the issuance by the Commission of any stop order suspending the effectiveness of such registration statement or the initiation or threatening of any proceedings for that purpose, (D) if at any time the representations and warranties of the Company contemplated by Section 3(c)(xv) or Section 5 cease to be true and correct in all material respects, (E) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose, or (F) at any time when a prospectus is required to be delivered under the Securities Act, that such registration statement, prospectus, prospectus amendment or supplement or post-effective amendment, or any document incorporated by reference in any of the foregoing, contains an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; (vii) use its reasonable best efforts to obtain the withdrawal of any order suspending the effectiveness of such registration statement or any post-effective amendment thereto at the earliest practicable date; -6- (viii) if requested in writing by any managing underwriter or underwriters, any placement or sales agent or counsel for the holders of Registrable Securities, promptly incorporate in a prospectus supplement or post-effective amendment such information as is required by the applicable rules and regulations of the Commission and as such managing underwriter or underwriters, such agent or such holder specifies should be included therein relating to the terms of the sale of such Registrable Securities, including, without limitation, information with respect to the amount of Registrable Securities being sold by any holder or agent or to any underwriters, the name and description of such holder, agent or underwriter, the offering price of such Registrable Securities and any discount, commission or other compensation payable in respect thereof, the purchase price being paid therefor by such underwriters and with respect to any other terms of the offering of the Registrable Securities, to be sold by such holder or agent or to such underwriters; and make all required filings of such prospectus supplement or post-effective amendment promptly after notification of the matters to be incorporated in such prospectus supplement or post-effective amendment; (ix) furnish to each holder of Registrable Securities, each placement or sales agent, if any, therefor, each underwriter, if any, thereof and the respective counsel referred to in Section 3(c)(iv) an executed copy of such registration statement, each such amendment and supplement thereto (in each case including all exhibits thereto and documents incorporated by reference therein) and such number of copies of such registration statement (excluding exhibits thereto and documents incorporated by reference therein unless specifically so requested by such holder, agent or underwriter, as the case may be) and of the prospectus included in such registration statement (including each preliminary prospectus and any summary prospectus), in conformity with the requirements of the Securities Act, and such other documents, as such holder, agent, if any, and underwriter, if any, may reasonably request in order to facilitate the offering and disposition of the Registrable Securities owned by such holder, offered or sold by such agent or underwritten by such underwriter and to permit such holder, agent and underwriter to satisfy the prospectus delivery requirements of the Securities Act; and the Company hereby consents to the use of such prospectus (including such preliminary and summary prospectus) and any amendment or supplement thereto by each such holder and by any such agent and underwriter, in each case in the form most recently provided to such party by the Company, in connection with the offering and sale of the Registrable Securities covered by the prospectus (including such preliminary and summary prospectus) or any supplement or amendment thereto; (x) use its reasonable best efforts to (A) register or qualify the Registrable Securities to be included in such registration statement under such securities laws or blue sky laws of such jurisdictions as any holder of such Registrable Securities and each placement or sales agent, if any, therefor and underwriter, if any, thereof shall reasonably request, (B) keep such registrations or qualifications in effect and comply with such laws so as to permit the continuance of offers, sales and dealings therein in such jurisdictions during the period the Shelf Registration is required to remain effective under Section 2(b) above and for so long as may be necessary to enable any such holder, agent or underwriter to complete its distribution of Securities pursuant to such registration statement and (C) take any and all other actions as may be reasonably necessary or advisable to enable each such holder, agent, if any, and underwriter, if any, to consummate the disposition in such jurisdictions of Registrable Securities; PROVIDED, HOWEVER, that the Company shall not be required for any such purpose to (1) qualify as a corporation in any jurisdiction wherein it would not otherwise be required to qualify but for the requirements of this Section 3(c)(x), (2) consent to general service of process in any such jurisdiction, (3) subject itself to taxation in any jurisdiction where the -7- Company is not already subject to taxation or (4) make any changes to the Company's articles of incorporation or by-laws or any other agreement between it and its shareholders; (xi) use its reasonable best efforts to obtain the consent or approval of each governmental agency or authority, whether federal, state or local, which may be required to effect the Shelf Registration or the offering or sale in connection therewith or to enable the selling holder or holders to offer, or to consummate the disposition of, their Registrable Securities; (xii) cooperate with the holders of the Registrable Securities and the managing underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold, which certificates shall be printed, lithographed or engraved, or produced by any combination of such methods, and which shall not bear any restrictive legends; and, in the case of an underwritten offering, enable such Registrable Securities to be in such denominations and registered in such names as the managing underwriters may request at least two business days prior to any sale of the Registrable Securities; (xiii) provide a CUSIP number for all Registrable Securities, not later than the effective date of the Shelf Registration; (xiv) enter into one or more underwriting agreements, engagement letters, agency agreements or similar agreements, as appropriate, including (without limitation) provisions relating to indemnification and contribution substantially the same as those set forth in Section 6 hereof, and take such other actions in connection therewith as any holders of Registrable Securities aggregating at least 25% of the Registrable Securities included in such Shelf Registration shall request in order to expedite or facilitate the disposition of such Registrable Securities; provided, that the Company shall not be required to enter into any such agreement more than once with respect to all of the Registrable Securities and may delay entering into such agreement until the consummation of any underwritten public offering which the Company shall have then undertaken; (xv) whether or not an agreement of the type referred to in Section (3)(c)(xiv) hereof is entered into and whether or not any portion of the offering contemplated by such registration statement is an underwritten offering or is made through a placement or sales agent or any other entity, (A) make such representations and warranties to the holders of such Registrable Securities and the placement or sales agent, if any, therefor and the underwriters, if any, thereof substantially the same as those set forth in Section 1 of the Purchase Agreement and such other representations and warranties as are customarily made with respect to the offering of debt securities pursuant to a shelf registration statement on the applicable form under the Act; (B) obtain an opinion or opinions of counsel to the Company substantially the same as the opinions provided for in Section 5 of the Purchase Agreement, addressed to such holder or holders and the placement or sales agent, if any, therefor and the underwriters, if any, thereof and dated the effective date of such registration statement (and if such registration statement contemplates an underwritten offering of a part or all of the Registrable Securities, dated the date of the closing under the underwriting agreement relating thereto) (it being agreed that the matters to be covered by such opinion shall also include, without limitation, the due incorporation of the Company and its subsidiaries; the qualification of the Company and its subsidiaries to transact business as foreign corporations, limited liability companies or limited partnerships, as the case may be; the due authorization, execution and delivery of the relevant agreement of the type referred to in Section (3)(c)(xiv) hereof, the due authorization, execution, -8- authentication and issuance, and the validity and enforceability, of the Securities; the absence of material legal or governmental proceedings involving the Company; the absence of a breach by the Company or any of its subsidiaries of, or a default under, material agreements binding upon the Company or any subsidiary of the Company; the absence of governmental approvals required to be obtained in connection with the Shelf Registration, the offering and sale of the Registrable Securities, this Agreement or any agreement of the type referred to in Section (3)(c)(xiv) hereof, except such approvals as may be required under state securities or blue sky laws; and the compliance as to form of such registration statement and any documents incorporated by reference therein and of the Indenture with the requirements of the Securities Act and the Trust Indenture Act, respectively; and, such opinion shall also state that such counsel has no reason to believe that, as of the date of the opinion and of the registration statement or most recent post-effective amendment thereto, as the case may be, such registration statement and the prospectus included therein, as then amended or supplemented, and the documents incorporated by reference therein (in each case other than the financial statements and other financial information contained therein) contains or contained an untrue statement of a material fact or omits or omitted to state therein a material fact necessary to make the statements therein not misleading (in the case of such documents, in the light of the circumstances existing at the time that such documents were filed with the Commission under the Exchange Act)); (C) obtain a "cold comfort" letter or letters from the independent certified public accountants of the Company addressed to the selling holders of Registrable Securities, the placement or sales agent, if any, therefor and the underwriters, if any, thereof, dated (i) the effective date of such registration statement and (ii) the effective date of any prospectus supplement to the prospectus included in such registration statement or post-effective amendment to such registration statement which includes unaudited or audited financial statements as of a date or for a period subsequent to that of the latest such statements included in such prospectus (and, if such registration statement contemplates an underwritten offering pursuant to any prospectus supplement to the prospectus included in such registration statement or post-effective amendment to such registration statement which includes unaudited or audited financial statements as of a date or for a period subsequent to that of the latest such statements included in such prospectus, dated the date of the closing under the underwriting agreement relating thereto), such letter or letters to be in customary form and covering such matters of the type customarily covered by letters of such type; (D) deliver such other documents and certificates, including officers' certificates, as may be reasonably requested by any holders of at least 25% of the Registrable Securities included in such Shelf Registration or the placement or sales agent, if any, therefor and the managing underwriters, if any, thereof to evidence the accuracy of the representations and warranties made pursuant to clause (A) above or those contained in Section 5(a) hereof and the compliance with or satisfaction of any agreements or conditions contained in the underwriting agreement or other agreement entered into by the Company; and (E) undertake such obligations relating to expense reimbursement, indemnification and contribution as are provided in Section 6 hereof; (xvi) notify in writing each holder of Registrable Securities of any proposal by the Company to amend or waive any provision of this Agreement pursuant to Section 9(h) hereof and of any amendment or waiver effected pursuant thereto, each of which notices shall contain the text of the amendment or waiver proposed or effected, as the case may be; (xvii) in the event that any broker-dealer registered under the Exchange Act shall underwrite any Registrable Securities or participate as a member of an underwriting syndicate or selling group or "assist in the distribution" (within the meaning of the Rules of Conduct of the National Association -9- of Securities Dealers, Inc. ("NASD") or any successor thereto, as amended from time to time) thereof, whether as a holder of such Registrable Securities or as an underwriter, a placement or sales agent or a broker or dealer in respect thereof, or otherwise, assist such broker-dealer in complying with the requirements of such Rules of Conduct, including, without limitation, by (A) if such Rules of Conduct shall so require, engaging a "qualified independent underwriter" (as defined in such Rules of Conduct) to participate in the preparation of the registration statement relating to such Registrable Securities, to exercise usual standards of due diligence in respect thereto and, if any portion of the offering contemplated by such registration statement is an underwritten offering or is made through a placement or sales agent, to recommend the yield of such Registrable Securities, (B) indemnifying any such qualified independent underwriter to the extent of the indemnification of underwriters provided in Section 6 hereof, and (C) providing such information to such broker-dealer as may be required in order for such broker-dealer to comply with the requirements of the Rules of Conduct of the NASD; and (xviii)comply with all applicable rules and regulations of the Commission, and make generally available to its security holders as soon as practicable but in any event not later than eighteen months after the effective date of such registration statement, an earning statement of the Company and its subsidiaries complying with Section 11(a) of the Securities Act (including, at the option of the Company, Rule 158 thereunder). (d) In the event that the Company would be required, pursuant to Section 3(c)(vi)(F) above, to notify the selling holders of Registrable Securities, the placement or sales agent, if any, therefor and the managing underwriters, if any, thereof, the Company shall without delay prepare and furnish to each such holder, to each placement or sales agent, if any, and to each underwriter, if any, a reasonable number of copies of a prospectus supplemented or amended so that, as thereafter delivered to purchasers of Registrable Securities, such prospectus shall not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing. Each holder of Registrable Securities agrees that upon receipt of any notice from the Company pursuant to Section 3(c)(vi)(F) hereof, such holder shall forthwith discontinue the disposition of Registrable Securities, pursuant to the registration statement applicable to such Registrable Securities until such holder shall have received copies of such amended or supplemented prospectus, and if so directed by the Company, such holder shall deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in such holder's possession of the prospectus covering such Registrable Securities at the time of receipt of such notice. (e) The Company may require each holder of Registrable Securities as to which any registration is being effected to furnish in writing to the Company such information regarding such holder and such holder's intended method of distribution of such Registrable Securities as the Company may from time to time reasonably request in writing, but only to the extent that such information is required in order to comply with the Securities Act. Each such holder agrees to notify the Company as promptly as practicable of any inaccuracy or change in information previously furnished by such holder to the Company or of the occurrence of any event in either case as a result of which any prospectus relating to such registration contains or would contain an untrue statement of a material fact regarding such holder or such holder's intended method of distribution of such Registrable Securities or omits to state any material fact regarding such holder or such holder's intended method of distribution of such Registrable Securities required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, and promptly to furnish to the Company any additional information required to correct and -10- update any previously furnished information or required so that such prospectus shall not contain, with respect to such holder or the distribution of such Registrable Securities, an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing. Each such holder shall comply with the provisions of the Securities Act applicable to such holder with respect to the disposition by such holder of Registrable Securities covered by such registration statement in accordance with the intended methods of disposition by such holder set forth in such registration statement. (f) Until three years after the Closing Date, the Company will not, and will not permit any of its "affiliates" (as defined in Rule 144) to, resell any of the Securities which constitute "restricted securities" under Rule 144 that have been reacquired by any of them except pursuant to an effective registration statement under the Securities Act or any exemption therefrom; PROVIDED, HOWEVER, that, for purposes of this paragraph, "affiliates" shall not include the Initial Purchasers or any of their affiliates other than the Company and its subsidiaries, officers, managers and directors. 4. REGISTRATION EXPENSES. If the Company files a registration statement pursuant to Section 2(a) or Section 2(b), the following provisions shall apply: The Company agrees to bear and to pay or cause to be paid all expenses incident to the Company's performance of or compliance with this Agreement, including, without limitation, (a) all Commission and any NASD registration and filing fees and expenses, (b) all fees and expenses in connection with the qualification of Registrable Securities for offering and sale under the State securities and blue sky laws referred to in Section 3(c)(x) hereof, including reasonable fees and disbursements of counsel for the placement or sales agent, if any, or underwriters, if any, in connection with such qualifications, (c) all expenses relating to the preparation, printing, distribution and reproduction of each registration statement required to be filed hereunder, each prospectus included therein or prepared for distribution pursuant hereto, each amendment or supplement to the foregoing, and the certificates representing the Exchange Securities, (d) messenger and delivery expenses, (e) fees and expenses of the registrar and transfer agent for the Preferred Shares, the Trustee under the Indenture and any escrow agent or custodian, (f) internal expenses (including, without limitation, all salaries and expenses of the Company's officers and employees performing legal or accounting duties), (g) fees, disbursements and expenses of counsel and independent certified public accountants of the Company (including the expenses of any opinions or "cold comfort" letters required by or incident to such performance and compliance), (h) fees, disbursements and expenses of any "qualified independent underwriter" engaged pursuant to Section 3(c)(xvii) hereof, (i) fees, disbursements and expenses of one counsel for the holders of Registrable Securities retained in connection with a Shelf Registration, as selected by the holders of at least a majority of the Registrable Securities being registered, and fees, expenses and disbursements of any other persons, including special experts, retained by the Company in connection with such registration (collectively, the "Registration Expenses"). To the extent that any Registration Expenses are incurred, assumed or paid by any holder of Registrable Securities or any placement or sales agent therefor or underwriter thereof, the Company shall reimburse such person for the full amount of the Registration Expenses so incurred, assumed or paid promptly after receipt of a written request therefor. Notwithstanding the foregoing, the holders of the Registrable Securities being registered shall pay all agency or brokerage fees and commissions and underwriting discounts and commissions attributable to the sale of such Registrable Securities and the fees and disbursements of any counsel or other advisors or experts retained by such holders (severally or jointly), -11- other than the counsel and experts specifically referred to above, transfer taxes on resale of any of the Registrable Securities by such holders and any advertising expenses incurred by or on behalf of such holders in connection with any offers they may make. 5. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants to, and agrees with, each Initial Purchaser and each of the holders from time to time of Registrable Securities that: (a) Each registration statement covering Registrable Securities and each prospectus (including any preliminary or summary prospectus) contained therein or furnished pursuant to Section 3(c)(ix) hereof and any further amendments or supplements to any such registration statement or prospectus, when it becomes effective or is filed with the Commission, as the case may be, and, in the case of an underwritten offering of Registrable Securities, at the time of the closing under the underwriting agreement relating thereto, will conform in all material respects to the requirements of the Securities Act and the Trust Indenture Act and any such registration statement and any amendment thereto will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and any such prospectus or any amendment or supplement thereto will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; and at all times subsequent to the Effective Time of any such registration statement when a prospectus would be required to be delivered under the Securities Act, other than from (i) such time as a notice has been given to holders of Registrable Securities pursuant to Section 3(c)(vi)(F) hereof until (ii) such time as the Company furnishes an amended or supplemented prospectus pursuant to Section 3(d) hereof, each such registration statement, and each prospectus (including any summary prospectus) contained therein or furnished pursuant to Section 3(c)(ix) hereof, as then amended or supplemented, will conform in all material respects to the requirements of the Securities Act and the Trust Indenture Act and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; PROVIDED, HOWEVER, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by a holder of Registrable Securities or any placement or sales agent therefor or underwriter thereof expressly for use therein. (b) Any documents incorporated by reference in any prospectus referred to in Section 5(a) hereof, when they become or became effective or are or were filed with the Commission, as the case may be, will conform or conformed in all material respects to the requirements of the Securities Act or the Exchange Act, as applicable, and none of such documents will contain or contained an untrue statement of a material fact or will omit or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading; PROVIDED, HOWEVER, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by a holder of Registrable Securities expressly for use therein. (c) The compliance by the Company with all of the provisions of this Agreement and the consummation of the transactions herein contemplated will not conflict with or result in a breach of -12- any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any subsidiary of the Company is a party or by which the Company or any subsidiary of the Company is bound or to which any of the property or assets of the Company or any subsidiary of the Company is subject, nor will such action result in any violation of the provisions of the articles of incorporation or by-laws of the Company, in each case, as in effect at the applicable time, or any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any subsidiary of the Company or any of their properties; and no consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or body is required for the consummation by the Company of the transactions contemplated by this Agreement, except the registration under the Securities Act of the Registrable Securities, qualification of the Indenture under the Trust Indenture Act and such consents, approvals, authorizations, registrations or qualifications as may be required under State securities or blue sky laws in connection with the offering and distribution of the Registrable Securities and the Exchange Securities. (d) This Agreement has been duly authorized, executed and delivered by the Company. 6. INDEMNIFICATION. (a) INDEMNIFICATION BY THE COMPANY. Upon the registration of the Registrable Securities pursuant to Section 2 hereof, and in consideration of the agreements of the Initial Purchasers contained herein, and as an inducement to the Initial Purchasers to purchase the Securities, the Company shall, and hereby agrees to, (i) indemnify and hold harmless each of the holders of Registrable Securities to be included in such registration, and each person who participates as a placement or sales agent or as an underwriter in any offering or sale of such Registrable Securities against any losses, claims, damages or liabilities, joint or several, to which such holder, agent or underwriter may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any registration statement under which such Registrable Securities were registered under the Securities Act, or any preliminary, final or summary prospectus contained therein or furnished by the Company to any such holder, agent or underwriter, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) reimburse such holder, such agent and such underwriter for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such action or claim as such expenses are incurred; PROVIDED, HOWEVER, that the Company shall not be liable to any such person in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any such registration statement, or preliminary, final or summary prospectus, or amendment or supplement thereto, in reliance upon and in conformity with written information furnished to the Company by any holders of Registrable Securities or any placement or sales agent thereof or underwriter thereof expressly for use therein; (b) INDEMNIFICATION BY THE HOLDERS AND ANY AGENTS AND UNDERWRITERS. The Company may require, as a condition to including any Registrable Securities in any registration statement filed pursuant to Section 2 hereof and to entering into any placement or underwriting agreement with respect thereto, that the Company shall have received an undertaking reasonably satisfactory to them from the holder of such Registrable Securities and from each placement agent or underwriter named in any such placement -13- agreement or underwriting agreement, severally and not jointly, to (i) indemnify and hold harmless the Company, and all other holders of Registrable Securities, against any losses, claims, damages or liabilities to which the Company or such other holders of Registrable Securities may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in such registration statement, or any preliminary, final or summary prospectus contained therein or furnished by the Company to any such holder, agent or underwriter, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such holder, agent or underwriter expressly for use therein, and (ii) reimburse the Company for any legal or other expenses reasonably incurred by the Company in connection with investigating or defending any such action or claim as such expenses are incurred; PROVIDED, HOWEVER, that no such holder shall be required to undertake liability to any person under this Section 6(b) for any amounts in excess of the dollar amount of the proceeds to be received by such holder from the sale of such holder's Registrable Securities pursuant to such registration. (c) NOTICES OF CLAIMS, ETC. Promptly after receipt by an indemnified party under subsection (a) or (b) above of written notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party pursuant to the indemnification provisions of or contemplated by this Section 6, notify such indemnifying party in writing of the commencement of such action; but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party other than under the indemnification provisions of or contemplated by Section 6(a) or 6(b) hereof. In case any such action shall be brought against any indemnified party and it shall notify an indemnifying party of the commencement thereof, such indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, such indemnifying party shall not be liable to such indemnified party for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the written consent of the indemnified party, effect the settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened action or claim in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or claim) unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability arising out of such action or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. No indemnifying party shall be liable for the cost of any settlement effected by an indemnified party without the written consent of such indemnifying party, which consent shall not be unreasonably withheld. In no event shall any indemnifying party be liable for the fees and expenses of more than one firm or counsel (except to the extent that local counsel, in addition to such firm or counsel, is required for effective representation) to represent all indemnified parties with respect to a single action or separate but substantially similar actions in the same jurisdiction arising out of the same general allegations. -14- (d) CONTRIBUTION. If for any reason the indemnification provisions contemplated by Section 6(a) or Section 6(b) are unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect not only (i) the relative benefits received by the holders of the Registrable Securities, on the one hand, and any agents or underwriters, on the other, from any offering or sale of the Registrable Securities, but also (ii) the relative fault of the indemnifying party and the indemnified party in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the holders of the Registrable Securities on the one hand and any agents or underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from any offering or sale thereof (before deducting expenses) received by such holders bear to the total discounts and commissions received by any such agents or underwriters with respect to such offer or sale. The relative fault of such indemnifying party and indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by such indemnifying party or by such indemnified party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The parties hereto agree that it would not be just and equitable if contributions pursuant to this Section 6(d) were determined by pro rata allocation (even if the holders or any agents or underwriters or all of them were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 6(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages, or liabilities (or actions in respect thereof) referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 6(d), no holder shall be required to contribute any amount in excess of the amount by which the dollar amount of the proceeds received by such holder from the sale of any Registrable Securities (after deducting any fees, discounts and commissions applicable thereto) exceeds the amount of any damages which such holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission, and no underwriter or agent shall be required to contribute any amount in excess of the amount by which the total price at which the Registrable Securities placed or underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such underwriter or agent has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The holders' and any underwriters' or agent's obligations in this Section 6(d) to contribute shall be several in proportion to the amount of Registrable Securities registered, underwritten or placed, as the case may be, by them and not joint. (e) The obligations of the Company under this Section 6 shall be in addition to any liability which the Company may otherwise have and shall extend, upon the same terms and conditions, to each officer, director and partner of each holder, agent and underwriter and each person, if any, who controls any holder, agent or underwriter within the meaning of the Securities Act; and the obligations of the holders and any agents or underwriters contemplated by this Section 6 shall be in addition to any liability which the respective holder, agent or underwriter may otherwise have and shall extend, upon the same terms and conditions, to each officer and director of the Company (including any person who, with his consent, -15- is named in any registration statement as about to become a director of the Company) and to each person, if any, who controls the Company within the meaning of the Securities Act. 7. UNDERWRITTEN OFFERINGS. (a) SELECTION OF UNDERWRITERS. If any of the Registrable Securities covered by the Shelf Registration are to be sold pursuant to an underwritten offering, the managing underwriter or underwriters thereof shall be designated by the holders of at least a majority of the Registrable Securities to be included in such offering, provided that such designated managing underwriter or underwriters is or are reasonably acceptable to the Company. (b) PARTICIPATION BY HOLDERS. Each holder of Registrable Securities hereby agrees with each other such holder that no such holder may participate in any underwritten offering hereunder unless such holder (i) agrees to sell such holder's Registrable Securities on the basis provided in any underwriting arrangements approved by the persons entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements. (c) CONSOLIDATED EARNING STATEMENTS. In the event of an underwritten offering, the Company agrees to make generally available to its securityholders as soon as practicable, but in any event not later than eighteen months after the effective date of the applicable registration statement (as defined in Rule 158(c) under the Act), a consolidated earning statement of the Company (which need not be audited) complying with Section 11(a) of the Act and the rules and regulations of the Commission thereunder (including, at the option of the Company, Rule 158 under the Act). 8. RULE 144. The Company covenants to the holders of Registrable Securities that to the extent it shall be required to do so under the Exchange Act, the Company shall timely file the reports required to be filed by it under the Exchange Act or the Securities Act (including, but not limited to, the reports under Section 13 and 15(d) of the Exchange Act referred to in subparagraph (c)(1) of Rule 144 adopted by the Commission under the Securities Act) and the rules and regulations adopted by the Commission thereunder, and shall take such further action as any holder of Registrable Securities may reasonably request, all to the extent required from time to time to make Rule 144 available to such holder for the sale of Registrable Securities without registration under the Securities Act within the limitations of the exemption provided by Rule 144 under the Securities Act, as such Rule may be amended from time to time, or any similar or successor rule or regulation hereafter adopted by the Commission. Upon the request of any holder of Registrable Securities in connection with that holder's sale pursuant to Rule 144, the Company shall deliver to such holder a written statement as to whether they have complied with such requirements. Notwithstanding the foregoing, nothing in this Section 8 shall be deemed to require the Company to register any of its securities under the Exchange Act. 9. MISCELLANEOUS. (a) NO INCONSISTENT AGREEMENTS. The Company represents, warrants, covenants and agrees that it has not granted, and, until either the consummation of the Exchange Offer or, with respect to the Shelf Registration, the period referred to in Section 2(b), as applicable, will not grant, registration rights with -16- respect to Registrable Securities or any other securities that would limit or interfere with the exercise of the rights granted, or the obligations of the Company under, this Agreement. (b) SPECIFIC PERFORMANCE. The parties hereto acknowledge that there would be no adequate remedy at law if any party fails to perform any of its obligations hereunder and that each party may be irreparably harmed by any such failure, and accordingly agree that each party, in addition to any other remedy to which it may be entitled at law or in equity, shall be entitled to compel specific performance of the obligations of any other party under this Agreement in accordance with the terms and conditions of this Agreement, in any court of the United States or any State thereof having jurisdiction. (c) NOTICES. All notices, requests, claims, demands, waivers and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered by hand, if delivered personally or by courier, or three days after being deposited in the mail (registered or certified mail, postage prepaid, return receipt requested) as follows: If to the Company, at 155 108th Avenue N.E., Bellevue, Washington 98004, Attention: Secretary, and if to a holder, to the address of such holder set forth in the security register or other records of the Company, or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. (d) PARTIES IN INTEREST. All the terms and provisions of this Agreement shall be binding upon, shall inure to the benefit of and shall be enforceable by the respective successors and assigns of the parties hereto. In the event that any transferee of any holder of Registrable Securities shall become a holder of Registrable Securities, in any manner, whether by gift, bequest, purchase, operation of law or otherwise, such transferee shall, without any further writing or action of any kind, be deemed a party hereto for all purposes and such Registrable Securities shall be held subject to all of the terms of this Agreement, and by taking and holding such Registrable Securities such transferee shall be entitled to receive the benefits of and be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement. If the Company shall so request, any such successor, assign or transferee shall agree in writing to acquire and hold the Registrable Securities subject to all of the terms hereof. (e) SURVIVAL. The respective indemnities, agreements, representations, warranties and each other provision set forth in this Agreement or made pursuant hereto shall remain in full force and effect regardless of any investigation (or statement as to the results thereof) made by or on behalf of any holder of Registrable Securities, any director, officer or partner of such holder, any agent or underwriter or any director, officer or partner thereof, or any controlling person of any of the foregoing, and shall survive delivery of and payment for the Registrable Securities pursuant to the Purchase Agreement and the transfer and registration of Registrable Securities by such holder and the consummation of an Exchange Offer. (f) LAW GOVERNING. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. (g) HEADINGS. The descriptive headings of the several Sections and paragraphs of this Agreement are inserted for convenience only, do not constitute a part of this Agreement and shall not affect in any way the meaning or interpretation of this Agreement. -17- (h) ENTIRE AGREEMENT; AMENDMENTS. This Agreement and the other writings referred to herein (including the Certificate of Designations, the Indenture and the forms of Securities) or delivered pursuant hereto which form a part hereof contain the entire understanding of the parties with respect to its subject matter. This Agreement supersedes all prior agreements and understandings between the parties with respect to its subject matter. This Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only by a written instrument duly executed by the Company and the holders of at least 66-2/3 percent of the Registrable Securities at the time outstanding. Each holder of any Registrable Securities at the time or thereafter outstanding shall be bound by any amendment or waiver effected pursuant to this Section 9(h), whether or not any notice, writing or marking indicating such amendment or waiver appears on such Registrable Securities or is delivered to such holder. (i) INSPECTION. For so long as this Agreement shall be in effect, this Agreement and a complete list of the names and addresses of all the holders of Registrable Securities shall be made available for inspection and copying on any business day by any holder of Registrable Securities at the offices of the Company at the address thereof set forth in Section 9(c) above or at the office of the Trustee under the Indenture. (j) COUNTERPARTS. This agreement may be executed by the parties in counterparts, each of which shall be deemed to be an original, but all such respective counterparts shall together constitute one and the same instrument. -18- Agreed to and accepted as of the date referred to above. NEXTLINK COMMUNICATIONS, INC. By: /s/ R. Bruce Easter, Jr. ---------------------------- Name: R. Bruce Easter, Jr. Title: Vice President, General Counsel and Secretary MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: /s/ Marcy Becker ---------------------------- Name: Marcy Becker Title: Vice President TORONTO DOMINION SECURITIES (USA) INC. By: /s/ Gordon Paris ---------------------------- Name: Gordon Paris Title: Managing Director EX-12 12 COMPUTATION OF RATIO EARNINGS TO FIXED CHARGES EXHIBIT 12 NEXTLINK Communications, L.L.C. and Subsidiaries Statement Regarding Computation of Ratio of Earnings to Fixed Charges ($ in thousands)
Year ended December 31, ------------------------------------------------- 1996 1995 1994 ------------------------------------------------- Income (loss) $ (71,101) $(12,731) $ (349) Add: Interest $ 31,729 $ 499 $ - Portion of rents representative of the interest factor 742 194 6 ------------------------------------------------- Income (loss) as adjusted $ (38,630) $(12,038) $ (343) ------------------------------------------------- Fixed Charges: Interest $ 31,729 $ 499 $ - Portion of rents representative of the interest factor 742 194 6 ------------------------------------------------- Fixed Charges $ 32,471 $ 693 $ 6 Earnings are Earnings are Earnings are Inadequate Inadequate Inadequate ------------------------------------------------- Ratio of earnings to fixed charges Deficiency of: $ 71,101 $ 12,731 $ 349 -------------------------------------------------
EX-21 13 SUBSIDIARIES OF THE COMPANY Exhibit 21 SUBSIDIARIES OF THE REGISTRANT NEXTLINK Communications, Inc. Jurisdiction of Organization - ----------------------------- ---------------------------- NEXTLINK Capital, Inc. Washington NEXTLINK Interactive, L.L.C. Washington NEXTLINK Leasing of Utah, L.L.C. Washington NEXTLINK Management Services, L.L.C. Washington NEXTLINK Mindshare, L.L.C. Washington NEXTLINK Pennsylvania, L.P. Washington d/b/a Penns Light Communications NEXTLINK Ohio, L.L.C. Washington NEXTLINK Solutions, L.L.C. Washington NEXTLINK Tennessee, L.L.C. Washington NEXTLINK Utah, L.L.C. Washington NEXTLINK Washington, L.L.C. Washington Telecommunications of Nevada, L.L.C. Washington EX-23.1 14 CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23.1 ARTHUR ANDERSEN LLP CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports described below (and to all references to our Firm) included in or made a part of this registration statement. Company Audit Report Date - ------- ----------------- NEXTLINK Communications, L.L.C. February 10, 1997 Sound Response Corporation March 22, 1996 Tel-West Central Services, Inc. May 9, 1996 City Signal, Inc., Tennessee Operations June 28, 1996 /s/ Arthur Andersen LLP Seattle, Washington March 13, 1997 EX-23.2 15 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of NEXTLINK Communications, Inc. on Form S-4 of our report dated January 24, 1997, except for Note 7 as to which the date is February 4, 1997, related to the financial statements of Linkatel Pacific, L.P. (a California limited partnership)(a development stage entity) as of December 31, 1996 and 1995, and for the years ended December 31, 1996, 1995 and 1994 and the cumulative period from July 21, 1993 (date of inception) to December 31, 1996, and to the reference to us under the heading "Experts" in the Prospectus, which is part of this Registration Statement. /s/ Deloitte & Touche LLP Costa Mesa, California March 13, 1997 EX-99.1 16 LETTER OF TRANSMITTAL THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., EASTERN STANDARD TIME, ON , 1997, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS MAY BE WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. NEXTLINK COMMUNICATIONS, INC. 155 108th Avenue N.E., 8th Floor Bellevue, Washington 98004 LETTER OF TRANSMITTAL For 14% Senior Exchangeable Redeemable Preferred Shares EXCHANGE AGENT: CONTINENTAL STOCK TRANSFER & TRUST COMPANY 2 Broadway New York, New York 10004 Attention: Reorganization Department Phone: (212) 509-4000 x535 Fax: (212) 509-5150 DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY. The undersigned acknowledges receipt of the Prospectus dated , 1997 (the "Prospectus") of NEXTLINK Communications, Inc., a Washington corporation (the "Company"), and this Letter of Transmittal for 14% Senior Exchangeable Redeemable Preferred Shares, which may be amended from time to time (this "Letter"), which together constitute the Company's offer to exchange (the "Exchange Offer"), for each outstanding 14% Senior Exchangeable Redeemable Preferred Share issued in reliance upon an exemption from registration under the Securities Act of 1933, as amended (collectively, the "Old Preferred Shares"), one 14% Senior Exchangeable Redeemable Preferred Share (collectively, the "New Preferred Shares"). The undersigned has completed, executed and delivered this Letter to indicate the action he or she desires to take with respect to the Exchange Offer. All holders of Old Preferred Shares who wish to tender their Old Preferred Shares must, prior to the Expiration Date: (1) complete, sign, date and mail or otherwise deliver this Letter to the Exchange Agent, in person or to the address set forth above; and (2) tender his or her Old Preferred Shares or, if a tender of Old Preferred Shares is to be made by book-entry transfer to the account maintained by the Exchange Agent at The Depository Trust Company (the "Book-Entry Transfer Facility"), confirm such book-entry transfer (a "Book-Entry Confirmation"), in each case in accordance with the procedures for tendering described in the Instructions to this Letter. Holders of Old Preferred Shares whose certificates are not immediately available, or who are unable to deliver their certificates or Book-Entry Confirmation and all other documents required by this Letter to be delivered to the Exchange Agent on or prior to the Expiration Date, must tender their Old Preferred Shares according to the guaranteed delivery procedures set forth under the caption "The Exchange Offer--How to Tender" in the Prospectus. (See Instruction 1). The Instructions included with this Letter must be followed in their entirety. Questions and requests for assistance or for additional copies of the Prospectus or this Letter may be directed to the Exchange Agent, at the address listed above, or R. Bruce Easter, Jr., Esq., General Counsel and Secretary of the Company, at (206) 519-8900, 155 108th Avenue N.E., 8th Floor, Bellevue, Washington 98004. PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL, INCLUDING THE INSTRUCTIONS TO THIS LETTER, CAREFULLY BEFORE CHECKING ANY BOX BELOW Capitalized terms used in this Letter and not defined herein shall have the respective meanings ascribed to them in the Prospectus. List in Box 1 below the Old Preferred Shares of which you are the holder. If the space provided in Box 1 is inadequate, list the certificate numbers and number of Old Preferred Shares on a separate signed schedule and affix that schedule to this Letter. BOX 1 TO BE COMPLETED BY ALL TENDERING HOLDERS
NUMBER OF NUMBER OLD OF OLD PREFERRED NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) CERTIFICATE PREFERRED SHARES (PLEASE FILL IN IF BLANK) NUMBER(S)(1) SHARES TENDERED(2) TOTALS:
(1) Need not be completed if Old Preferred Shares are being tendered by book-entry transfer. (2) Unless otherwise indicated, the total number of Old Preferred Shares represented by a certificate or Book-Entry Confirmation delivered to the Exchange Agent will be deemed to have been tendered. Ladies and Gentlemen: Upon the terms and subject to the conditions of the Exchange Offer, the undersigned tenders to the Company the number of Old Preferred Shares indicated above. Subject to, and effective upon, the acceptance for exchange of the Old Preferred Shares tendered with this Letter, the undersigned exchanges, assigns and transfers to, or upon the order of, the Company all right, title and interest in and to the Old Preferred Shares tendered. The undersigned constitutes and appoints the Exchange Agent as his or her agent and attorney-in-fact (with full knowledge that the Exchange Agent also acts as the agent of the Company) with respect to the tendered Old Preferred Shares, with full power of substitution, to: (a) deliver certificates for such Old Preferred Shares; (b) deliver Old Preferred Shares and all accompanying evidence of transfer and authenticity to or upon the order of the Company upon receipt by the Exchange Agent, as the undersigned's agent, of the New Preferred Shares to which the undersigned is entitled upon the acceptance by the Company of the Old Preferred Shares tendered under the Exchange Offer; and (c) receive all benefits and otherwise exercise all rights of beneficial ownership of the Old Preferred Shares, all in accordance with the terms of the Exchange Offer. The power of attorney granted in this paragraph shall be deemed irrevocable and coupled with an interest. The undersigned hereby represents and warrants that he or she has full power and authority to tender, exchange, assign and transfer the Old Preferred Shares tendered hereby and that the Company will acquire good and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim. The undersigned will, upon request, execute and deliver any additional documents deemed by the Company to be necessary or desirable to complete the assignment and transfer of the Old Preferred Shares tendered. The undersigned agrees that acceptance of any tendered Old Preferred Shares by the Company and the issuance of New Preferred Shares in exchange therefor shall constitute performance in full by the Company of its obligations under the Preferred Registration Rights Agreement (as defined in the Prospectus) and that, upon the issuance of the New Preferred Shares, the Company will have no further obligations or liabilities thereunder (except in certain limited circumstances). 2 By tendering Old Preferred Shares, the undersigned certifies (a) that it is not an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act, that it is not a broker-dealer that owns Old Preferred Shares acquired directly from the Company or an affiliate of the Company, that it is acquiring the New Preferred Shares in the ordinary course of the undersigned's business and that the undersigned has no arrangement with any person to participate in the distribution of the New Preferred Shares or (b) that it is an "affiliate" (as so defined) of the Company or of the initial purchasers in the original offering of the Old Preferred Shares, and that it will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable to it. The undersigned acknowledges that, if it is a broker-dealer that will receive New Preferred Shares for its own account, it will deliver a prospectus in connection with any resale of such New Preferred Shares. By so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The undersigned understands that the Company may accept the undersigned's tender by delivering written notice of acceptance to the Exchange Agent, at which time the undersigned's right to withdraw such tender will terminate. All authority conferred or agreed to be conferred by this Letter shall survive the death or incapacity of the undersigned, and every obligation of the undersigned under this Letter shall be binding upon the undersigned's heirs, legal representatives, successors, assigns, executors and administrators. Tenders may be withdrawn only in accordance with the procedures set forth in the Instructions contained in this Letter. Unless otherwise indicated under "Special Delivery Instructions" below, the Exchange Agent will deliver New Preferred Shares (and, if applicable, a certificate for any Old Preferred Shares not tendered but represented by a certificate also encompassing Old Preferred Shares which are tendered) to the undersigned at the address set forth in Box 1. The undersigned acknowledges that the Exchange Offer is subject to the more detailed terms set forth in the Prospectus and, in case of any conflict between the terms of the Prospectus and this Letter, the Prospectus shall prevail. / / CHECK HERE IF TENDERED OLD PREFERRED SHARES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING: Name of Tendering Institution: _____________________________________________ Account Number: ____________________________________________________________ Transaction Code Number: ___________________________________________________ / / CHECK HERE IF TENDERED OLD PREFERRED SHARES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING: Name(s) of Registered Owner(s): ____________________________________________ Date of Execution of Notice of Guaranteed Delivery: ________________________ Window Ticket Number (if available): _______________________________________ Name of Institution which Guaranteed Delivery: _____________________________ PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY BOX 2 PLEASE SIGN HERE WHETHER OR NOT OLD PREFERRED SHARES ARE BEING PHYSICALLY TENDERED HEREBY X SIGNATURE(S) OF OWNER(S) DATE OR AUTHORIZED SIGNATORY
Area Code and Telephone Number:_______________________________________________ This box must be signed by registered holder(s) of Old Preferred Shares as their name(s) appear(s) on certificate(s) for Old Preferred Shares, or by person(s) authorized to become registered holder(s) by endorsement and documents transmitted with this Letter. If signature is by a trustee, executor, administrator, guardian, officer or other person acting in a fiduciary or representative capacity, such person must set forth his or her full title below. (See Instruction 3) Name(s)_______________________________________________________________________ ______________________________________________________________________________ (PLEASE PRINT) Capacity______________________________________________________________________ Address_______________________________________________________________________ ______________________________________________________________________________ (INCLUDE ZIP CODE) Signature(s) Guaranteed by an Eligible (AUTHORIZED SIGNATURE) Institution: (If required by Instruction 3) (TITLE) (NAME OF FIRM)
BOX 3 TO BE COMPLETED BY ALL TENDERING HOLDERS PAYOR'S NAME: NEXTLINK COMMUNICATIONS, INC. Part 1--PLEASE PROVIDE YOUR TIN IN THE BOX AT RIGHT AND CERTIFY BY SIGNING AND DATING BELOW. SOCIAL SECURITY NUMBER OR EMPLOYER IDENTIFICATION NUMBER PART 2--CHECK THE BOX IF YOU ARE NOT SUBJECT TO BACK-UP WITHHOLDING UNDER THE PROVISIONS OF SECTION 2406(A)(1)(C) OF THE INTERNAL REVENUE CODE BECAUSE (1) YOU HAVE NOT BEEN NOTIFIED THAT YOU ARE SUBJECT TO BACK-UP WITHHOLDING AS A RESULT OF FAILURE TO REPORT ALL INTEREST OR SUBSTITUTE DIVIDENDS OR (2) THE INTERNAL REVENUE SERVICE HAS NOTIFIED YOU THAT YOU ARE NO FORM W-9 DEPARTMENT OF THE TREASURY INTERNAL LONGER REVENUE SERVICEPAYOR'S SUBJECT TO BACK-UP WITHHOLDING. / / REQUEST FOR TAXPAYER IDENTIFICATION NUMBER (TIN) CERTIFICATION UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT THE PART 3 INFORMATION PROVIDED ON THIS FORM IS TRUE, CORRECT AND COMPLETE. CHECK IF AWAITING TIN SIGNATURE ^ DATE ^ / /
BOX 4 SPECIAL ISSUANCE INSTRUCTIONS (SEE INSTRUCTIONS 3 AND 4) To be completed ONLY if certificates for a number of Old Preferred Shares not exchanged, or New Preferred Shares, are to be issued in the name of someone other than the person whose signature appears in Box 2, or if Old Preferred Shares delivered by book-entry transfer which are not accepted for exchange are to be returned by credit to an account maintained at the Book-Entry Transfer Facility other than the account indicated above. ISSUE AND DELIVER: (check appropriate boxes) / / Old Preferred Shares not tendered / / New Preferred Shares, to: Name ___________________________________________________________________________ (Please Print) Address ________________________________________________________________________ ________________________________________________________________________________ Please complete the Substitute Form W-9 at Box 3 Tax I.D. or Social Security Number: ____________________________________________ BOX 5 SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 3 AND 4) To be completed ONLY if certificates for a number of Old Preferred Shares not exchanged, or New Preferred Shares, are to be sent to someone other than the person whose signature appears in Box 2 or to an address other than that shown in Box 1. DELIVER: (check appropriate boxes) / / Old Preferred Shares not tendered / / New Preferred Shares, to: Name ___________________________________________________________________________ (Please Print) Address ________________________________________________________________________ ________________________________________________________________________________ INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER 1. DELIVERY OF THIS LETTER AND CERTIFICATES. Certificates for Old Preferred Shares or a Book-Entry Confirmation, as the case may be, as well as a properly completed and duly executed copy of this Letter and any other documents required by this Letter, must be received by the Exchange Agent at one of its addresses set forth herein on or before the Expiration Date. The method of delivery of this Letter, certificates for Old Preferred Shares or a Book-Entry Confirmation, as the case may be, and any other required documents is at the election and risk of the tendering holder, but except as otherwise provided below, the delivery will be deemed made when actually received by the Exchange Agent. If delivery is by mail, the use of registered mail with return receipt requested, properly insured, is suggested. Holders whose Old Preferred Shares are not immediately available or who cannot deliver their Old Preferred Shares or a Book-Entry Confirmation, as the case may be, and all other required documents to the Exchange Agent on or before the Expiration Date may tender their Old Preferred Shares pursuant to the guaranteed delivery procedures set forth in the Prospectus. Pursuant to such procedure: (i) tender must be made by or through an Eligible Institution (as defined in the Prospectus under the caption "The Exchange Offer"); (ii) prior to the Expiration Date, the Exchange Agent must have received from the Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by telegram, telex, facsimile transmission, mail or hand delivery) (x) setting forth the name and address of the holder, the description of the Old Preferred Shares and the number of Old Preferred Shares tendered, (y) stating that the tender is being made thereby and (z) guaranteeing that, within five New York Stock Exchange trading days after the date of execution of such Notice of Guaranteed Delivery, this Letter together with the certificates representing the Old Preferred Shares or a Book-Entry Confirmation, as the case may be, and any other documents required by this Letter will be deposited by the Eligible Institution with the Exchange Agent; and (iii) the certificates for all tendered Old Preferred Shares or a Book-Entry Confirmation, as the case may be, as well as all other documents required by this Letter, must be received by the Exchange Agent within five New York Stock Exchange trading days after the date of execution of such Notice of Guaranteed Delivery, all as provided in the Prospectus under the caption "The Exchange Offer--How to Tender." All questions as to the validity, form, eligibility (including time of receipt), acceptance and withdrawal of tendered Old Preferred Shares will be determined by the Company, whose determination will be final and binding. The Company reserves the absolute right to reject any or all tenders that are not in proper form or the acceptance of which, in the opinion of the Company's counsel, would be unlawful. The Company also reserves the right to waive any irregularities or conditions of tender as to particular Old Preferred Shares. All tendering holders, by execution of this Letter, waive any right to receive notice of acceptance of their Old Preferred Shares. Neither the Company, the Exchange Agent nor any other person shall be obligated to give notice of defects or irregularities in any tender, nor shall any of them incur any liability for failure to give any such notice. 2. PARTIAL TENDERS; WITHDRAWALS. If less than the total number of any Old Preferred Shares evidenced by a submitted certificate or by a Book-Entry Confirmation is tendered, the tendering holder must fill in the number tendered in the fourth column of Box 1 above. All of the Old Preferred Shares represented by a certificate or by a Book-Entry Confirmation delivered to the Exchange Agent will be deemed to have been tendered unless otherwise indicated. A certificate for Old Preferred Shares not tendered will be sent to the holder, unless otherwise provided in Box 5, as soon as practicable after the Expiration Date, in the event that less thanthe total number of the Old Preferred Shares represented by a submitted certificate is tendered (or, in the case of Old Preferred Shares tendered by book-entry transfer, such non-exchanged Old Preferred Shares will be credited to an account maintained by the holder with the Book-Entry Transfer Facility). If not yet accepted, a tender pursuant to the Exchange Offer may be withdrawn prior to the Expiration Date. To be effective with respect to the tender of Old Preferred Shares, a notice of withdrawal must: (i) be received by the Exchange Agent before the Company notify the Exchange Agent that they have accepted the tender of Old Preferred Shares pursuant to the Exchange Offer; (ii) specify the name of the person who tendered the Old Preferred Shares; (iii) contain a description of the Old Preferred Shares to be withdrawn, the certificate numbers shown on the particular certificates evidencing such Old Preferred Shares and the number of Old Preferred Shares represented by such certificates; and (iv) be signed by the holder in the same manner as the original signature on this Letter (including any required signature guarantee). 3. SIGNATURES ON THIS LETTER; ASSIGNMENTS; GUARANTEE OF SIGNATURES. If this Letter is signed by the holder(s) of Old Preferred Shares tendered hereby, the signature must correspond with the name(s) as written on the face of the certificate(s) for such Old Preferred Shares, without alteration, enlargement or any change whatsoever. If any of the Old Preferred Shares tendered hereby are owned by two or more joint owners, all owners must sign this Letter. If any tendered Old Preferred Shares are held in different names on several certificates, it will be necessary to complete, sign and submit as many separate copies of this Letter as there are names in which certificates are held. If this Letter is signed by the holder of record and (i) all of the holder's Old Preferred Shares are tendered; and/ or (ii) untendered Old Preferred Shares, if any, are to be issued to the holder of record, then the holder of record need not endorse any certificates for tendered Old Preferred Shares, nor provide a separate bond power. If any other case, the holder of record must transmit a separate bond power with this Letter. If this Letter or any certificate or assignment is signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing and proper evidence satisfactory to the Company of their authority to so act must be submitted, unless waived by the Company. Signatures on this Letter must be guaranteed by an Eligible Institution, unless Old Preferred Shares are tendered: (i) by a holder who has not completed the Box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on this Letter; or (ii) for the account of an Eligible Institution. In the event that the signatures in this Letter or a notice of withdrawal, as the case may be, are required to be guaranteed, such guarantees must be by an eligible guarantor institution which is a member of The Securities Transfer Agents Medallion Program (STAMP), The New York Stock Exchanges Medallion Signature Program (MSP) or The Stock Exchanges Medallion Program (SEMP) (collectively, "Eligible Institutions"). If Old Preferred Shares are registered in the name of a person other than the signer of this Letter, the Old Preferred Shares surrendered for exchange must be endorsed by, or be accompanied by a written instrument or instruments of transfer or exchange, in satisfactory form as determined by the Company, in its sole discretion, duly executed by the registered holder with the signature thereon guaranteed by an Eligible Institution. 4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. Tendering holders should indicate, in Box 4 or 5, as applicable, the name and address to which the New Preferred Shares or certificates for Old Preferred Shares not exchanged are to be issued or sent, if different from the name and address of the person signing this Letter. In the case of issuance in a different name, the tax identification number of the person named must also be indicated. Holders tendering Old Preferred Shares by book-entry transfer may request that Old Preferred Shares not exchanged be credited to such account maintained at the Book-Entry Transfer Facility as such holder may designate. 5. TAX IDENTIFICATION NUMBER. Federal income tax law requires that a holder whose tendered Old Preferred Shares are accepted for exchange must provide the Exchange Agent (as payor) with his or her correct taxpayer identification number ("TIN"), which, in the case of a holder who is an individual, is his or her social security number. If the Exchange Agent is not provided with the correct TIN, the holder may be subject to a $50 penalty imposed by the Internal Revenue Service. In addition, delivery to the holder of the New Preferred Shares pursuant to the Exchange Offer may be subject to back-up withholding. (If withholding results in overpayment of taxes, a refund may be obtained.) Exempt holders (including, among others, all corporations and certain foreign individuals) are not subject to these back-up withholding and reporting requirements. See the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional instructions. Under federal income tax laws, payments that may be made by the Company on account of New Preferred Shares issued pursuant to the Exchange Offer may be subject to back-up withholding at a rate of 31%. In order to prevent back-up withholding, each tendering holder must provide his or her correct TIN by completing the "Substitute Form W-9" referred to above, certifying that the TIN provided is correct (or that the holder is awaiting a TIN) and that: (i) the holder has not been notified by the Internal Revenue Service that he or she is subject to back-up withholding as a result of failure to report all interest or dividends; or (ii) the Internal Revenue Service has notified the holder that he or she is no longer subject to back-up withholding; or (iii) certify in accordance with the Guidelines that such holder is exempt from back-up withholding. If the Old Preferred Shares are in more than one name or are not in the name of the actual owner, consult the enclosed Guidelines for information on which TIN to report. 6. TRANSFER TAXES. The Company will pay all transfer taxes, if any, applicable to the transfer of Old Preferred Shares to its order pursuant to the Exchange Offer. If, however, the New Preferred Shares or certificates for Old Preferred Shares not exchanged are to be delivered to, or are to be issued in the name of, any person other than the record holder, or if tendered certificates are recorded in the name of any person other than the person signing this Letter, or if a transfer tax is imposed by any reason other than the transfer of Old Preferred Shares to the Company or its order pursuant to the Exchange Offer, then the amount of such transfer taxes (whether imposed on the record holder or any other person) will be payable by the tendering holder. If satisfactory evidence of payment of taxes or exemption from taxes is not submitted with this Letter, the amount of transfer taxes will be billed directly to the tendering holder. Except as provided in this Instruction 6, it will not be necessary for transfer tax stamps to be affixed to the certificates listed in this Letter. 7. WAIVER OF CONDITIONS. The Company reserve the absolute right to amend or waive any of the specified conditions in the Exchange Offer in the case of any Old Preferred Shares tendered. 8. MUTILATED, LOST, STOLEN OR DESTROYED CERTIFICATES. Any holder whose certificates for Old Preferred Shares have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at the address indicated above, for further instructions. 9. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the procedure for tendering, as well as requests for additional copies of the Prospectus or this Letter, may be directed to the Exchange Agent. IMPORTANT: This Letter (together with certificates representing tendered Old Preferred Shares or a Book-Entry Confirmation and all other required documents) must be received by the Exchange Agent on or before the Expiration Date (as defined in the Prospectus). EX-99.2 17 NOTICE OF GARANTEED DELIVERY NEXTLINK COMMUNICATIONS, INC. EXCHANGE OFFER TO HOLDERS OF 14% SENIOR EXCHANGEABLE REDEEMABLE PREFERRED SHARES NOTICE OF GUARANTEED DELIVERY As set forth in the Prospectus dated , 1997 (the "Prospectus") of NEXTLINK Communications, Inc. (the "Company") under "The Exchange Offer--How to Tender" and in the Letter of Transmittal for 14% Senior Exchangeable Redeemable Preferred Shares (the "Letter of Transmittal"), this form or one substantially equivalent hereto must be used to accept the Exchange Offer (as defined below) of the Company if: (i) certificates for the above-referenced Notes (the "Old Preferred Shares") are not immediately available; or (ii) time will not permit all required documents to reach the Exchange Agent (as defined below) on or prior to the Expiration Date (as defined in the Prospectus) of the Exchange Offer. Such form may be delivered by hand or transmitted by telegram, telex, facsimile transmission or letter to the Exchange Agent. TO: CONTINENTAL STOCK TRANSFER & TRUST COMPANY (the "Exchange Agent") 2 Broadway New York, New York 10004 Attention: Reorganization Department Phone: (212) 509-4000 x535 Fax: (212) 509-5150 DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMITTAL OF THIS INSTRUMENT TO A FACSIMILE OR TELEX NUMBER OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY. Ladies and Gentlemen: The undersigned hereby tenders to the Company, upon the terms and conditions set forth in the Prospectus and the Letter of Transmittal (which together constitute the "Exchange Offer"), receipt of which are hereby acknowledged, the number of Old Preferred Shares set forth below pursuant to the guaranteed delivery procedure described in the Prospectus and the Letter of Transmittal. Sign Here Number of Old Signature(s) Preferred Shares Certificate Nos. Please Print the Following Information (if available) Name(s) Total Number Represented by Old Preferred Address Shares Certificate(s) Area Code and Tel. No(s). Account Number Dated: , 1997
GUARANTEE The undersigned, a member of a recognized signature guarantee medallion program within the meaning of Rule 17A(d)-15 under the Securities Exchange Act of 1934, hereby guarantees that the above-named person(s) own(s) the above-described securities tendered hereby and that delivery to the Exchange Agent of certificates tendered hereby, in proper form for transfer, or delivery of such certificates pursuant to the procedure for book-entry transfer, in either case with delivery of a properly completed and duly executed Letter of Transmittal (or facsimile thereof) and any other required documents, is being made within five trading days after the date of execution of a Notice of Guaranteed Delivery of the above-named person. ------------------------------------------- Name of Firm ------------------------------------------- Authorized Signature ------------------------------------------- Number and Street or P.O. Box ------------------------------------------- City State Zip Code ------------------------------------------- Area Code and Tel. No. Dated: , 1997
EX-99.3 18 LETTER TO CLIENTS NEXTLINK COMMUNICATIONS, INC. OFFER TO EXCHANGE ALL OUTSTANDING 14% SENIOR EXCHANGEABLE REDEEMABLE PREFERRED SHARES ISSUED IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR 14% SENIOR EXCHANGEABLE REDEEMABLE PREFERRED SHARES To Our Clients: Enclosed for your consideration is a Prospectus dated , 1997 (as the same may be amended or supplemented from time to time, the "Prospectus") and a form of Letter of Transmittal (the "Letter of Transmittal") relating to the offer (the "Exchange Offer") by NEXTLINK Communications, Inc. (the "Company") to exchange each outstanding 14% Senior Exchangeable Redeemable Preferred Share issued and sold in reliance upon an exemption from registration under the Securities Act of 1933, as amended (collectively, the "Old Preferred Shares"), for one 14% Senior Exchangeable Redeemable Preferred Share (collectively, the "New Preferred Shares"). The material is being forwarded to you as the beneficial owner of Old Preferred Shares carried by us for your account or benefit but not registered in your name. A tender of any Old Preferred Shares may be made only by us as the registered holder and pursuant to your instructions. Therefore, the Company urge beneficial owners of Old Preferred Shares registered in the name of a broker, dealer, commercial bank, trust company or other nominee to contact such registered holder promptly if they wish to tender Old Preferred Shares in the Exchange Offer. Accordingly, we request instructions as to whether you wish us to tender any or all Old Preferred Shares, pursuant to the terms and conditions set forth in the Prospectus and Letter of Transmittal. We urge you to read carefully the Prospectus and Letter of Transmittal before instructing us to tender your Old Preferred Shares. YOUR INSTRUCTIONS TO US SHOULD BE FORWARDED AS PROMPTLY AS POSSIBLE IN ORDER TO PERMIT US TO TENDER OLD PREFERRED SHARES ON YOUR BEHALF IN ACCORDANCE WITH THE PROVISIONS OF THE EXCHANGE OFFER. The Exchange Offer will expire at 5:00 p.m., New York City Time, on , 1997, unless extended (the "Expiration Date"). Old Preferred Shares tendered pursuant to the Exchange Offer may be withdrawn, subject to the procedures described in the Prospectus, at any time prior to the Expiration Date. If you wish to have us tender any or all of your Old Preferred Shares held by us for your account or benefit, please so instruct us by completing, executing and returning to us the instruction form that appears below. The accompanying Letter of Transmittal is furnished to you for informational purposes only and may not be used by you to tender Old Preferred Shares held by us and registered in our name for your account or benefit. INSTRUCTIONS The undersigned acknowledge(s) receipt of your letter and the enclosed material referred to therein relating to the Exchange Offer of NEXTLINK Communications, Inc. THIS WILL INSTRUCT YOU TO TENDER THE PRINCIPAL AMOUNT OF OLD PREFERRED SHARES INDICATED BELOW HELD BY YOU FOR THE ACCOUNT OR BENEFIT OF THE UNDERSIGNED PURSUANT TO THE TERMS OF AND CONDITIONS SET FORTH IN THE PROSPECTUS AND THE LETTER OF TRANSMITTAL. Box 1 / / Please tender my Old Preferred Shares held by you for my account or benefit. I have identified on a signed schedule attached hereto the number of Old Preferred Shares to be tendered if I wish to tender less than all of my Old Preferred Shares. Box 2 / / Please do not tender any Old Preferred Shares held by you for my account or benefit. Date: , 1997
------------------------------------ ------------------------------------ Signature(s) ------------------------------------ ------------------------------------ Please print name(s) here - ------------------------ Unless a specific contrary instruction is given in a signed Schedule attached hereto, your signature(s) hereon shall constitute an instruction to us to tender all your Old Preferred Shares. EX-99.4 19 LETTER TO NOMINEES NEXTLINK COMMUNICATIONS, INC. OFFER TO EXCHANGE ALL OUTSTANDING 14% SENIOR EXCHANGEABLE REDEEMABLE PREFERRED SHARES ISSUED IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR 14% SENIOR EXCHANGEABLE REDEEMABLE PREFERRED SHARES To Securities Dealers, Commercial Banks Trust Companies and Other Nominees: Enclosed for your consideration is a Prospectus dated , 1997 (as the same may be amended or supplemented from time to time, the "Prospectus") and a form of Letter of Transmittal (the "Letter of Transmittal") relating to the offer (the "Exchange Offer") by NEXTLINK Communications, Inc. (the "Company") to exchange each outstanding 14% Senior Exchangeable Redeemable Preferred Share issued and sold in reliance upon an exemption from registration under the Securities Act of 1933, as amended (collectively, the "Old Preferred Share"), for one 14% Senior Exchangeable Redeemable Preferred Share (collectively, the "New Preferred Shares"). We are asking you to contact your clients for whom you hold Old Preferred Shares registered in your name or in the name of your nominee. In addition, we ask you to contact your clients who, to your knowledge, hold Old Preferred Shares registered in their own name. The Company will not pay any fees or commissions to any broker, dealer or other person in connection with the solicitation of tenders pursuant to the Exchange Offer. You will, however, be reimbursed by the Company for customary mailing and handling expenses incurred by you in forwarding any of the enclosed materials to your clients. The Company will pay all transfer taxes, if any, applicable to the tender of Old Preferred Shares to it or its order, except as otherwise provided in the Prospectus and the Letter of Transmittal. Enclosed are copies of the following documents: 1. The Prospectus; 2. A Letter of Transmittal for your use in connection with the tender of Old Preferred Shares and for the information of your clients; 3. A form of letter that may be sent to your clients for whose accounts you hold Old Preferred Shares registered in your name or the name of your nominee, with space provided for obtaining the clients' instructions with regard to the Exchange Offer; 4. A form of Notice of Guaranteed Delivery; and 5. Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9. Your prompt action is requested. The Exchange Offer will expire at 5:00 p.m., New York City Time, on , 1997, unless extended (the "Expiration Date"). Old Preferred Shares tendered pursuant to the Exchange Offer may be withdrawn, subject to the procedures described in the Prospectus, at any time prior to the Expiration Date. To tender Old Preferred Shares, certificates for Old Preferred Shares or a Book-Entry Confirmation, a duly executed and properly completed Letter of Transmittal or a facsimile thereof, and any other required documents, must be received by the Exchange Agent as provided in the Prospectus and the Letter of Transmittal. Additional copies of the enclosed material may be obtained from the Exchange Agent, Continental Stock Transfer & Trust Company, by calling (212) 509-4000. NOTHING HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY PERSON AS AN AGENT OF THE COMPANY OR THE EXCHANGE AGENT, OR AUTHORIZE YOU OR ANY OTHER PERSON TO MAKE ANY STATEMENTS ON BEHALF OF ANY OF THEM WITH RESPECT TO THE EXCHANGE OFFER, EXCEPT FOR STATEMENTS EXPRESSLY MADE IN THE PROSPECTUS AND THE LETTER OF TRANSMITTAL. -----END PRIVACY-ENHANCED MESSAGE-----