-----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, CYpNXlZ8mQiNgZTHmRyJFGkUE2YHyNRSi7a6LwOq3Z0VscR9Qkq3rKYNwtU1ccN9 KfXf6GM0yKpTuc55chCuVA== 0000950134-00-002719.txt : 20000331 0000950134-00-002719.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950134-00-002719 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLEGIANCE TELECOM INC CENTRAL INDEX KEY: 0001058703 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 752721491 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-24509 FILM NUMBER: 584780 BUSINESS ADDRESS: STREET 1: 1950 STEMMONS FRWY STREET 2: STE 3026 CITY: DALLAS STATE: TX ZIP: 75207 BUSINESS PHONE: 2148537100 MAIL ADDRESS: STREET 1: 1950 STEMMONS FRWY STREET 2: STE 3026 CITY: DALLAS STATE: TX ZIP: 75207 10-K405 1 FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 1999 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . COMMISSION FILE NUMBER: 0-24509 ALLEGIANCE TELECOM, INC. (Exact name of registrant as specified in its charter) DELAWARE 75-2721491 (State of Incorporation) (IRS Employer Identification No.) 1950 STEMMONS FREEWAY SUITE 3026 75207 DALLAS, TEXAS (Zip Code) (Address of Principal Executive Offices)
(Registrant's Telephone Number, Including Area Code)(214) 261-7100 Securities Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.01, QUOTED ON THE NASDAQ NATIONAL MARKET Indicate by check mark whether Allegiance (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that it was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Allegiance's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Based on the average of the bid and asked prices on the Nasdaq National Market on March 24, 2000 of $87.281, the aggregate market value of our voting stock held by non-affiliates on such date was approximately $7,131,158,383. Shares of common stock held by directors and certain executive officers and by each person who owns or may be deemed to own 10% or more of our outstanding common stock have been excluded, since such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of March 24, 2000, Allegiance Telecom, Inc. had 108,100,404 shares of common stock issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE - - Portions of Allegiance's annual report to stockholders for fiscal year ended December 31, 1999 are incorporated by reference into Parts II and IV of this report. This annual report shall be deemed "filed" with the SEC only with respect to those portions specifically incorporated by reference in this report. - - Portions of Allegiance's definitive proxy statement for the annual meeting of stockholders for the fiscal year ended December 31, 1999, which will be filed with the SEC within 120 days after the end of the fiscal year to which this annual report relates, are incorporated by reference into Part III of this report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS TO ALLEGIANCE TELECOM, INC.'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDING DECEMBER 31, 1999
PAGE ---- RECENT DEVELOPMENTS..................................................... 1 PART I.................................................................. 1 Item 1. Business.................................................... 1 Item 2. Properties.................................................. 25 Item 3. Legal Proceedings........................................... 25 Item 4. Submission of Matters to a Vote of Security Holders......... 25 Item 4A. Executive Officers of Allegiance............................ 26 PART II................................................................. 29 Item 5. Market for Allegiance's Common Stock and Related Stockholder Matters..................................................... 29 Item 6. Selected Financial Data..................................... 29 Item 7. Management's Discussion & Analysis of Financial Condition & Results of Operations....................................... 29 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................................ 29 Item 8. Consolidated Financial Statements and Supplementary Data.... 30 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 30 PART III................................................................ 30 Item 10. Directors and Executive Officers of Allegiance.............. 30 Item 11. Executive Compensation...................................... 30 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 30 Item 13. Certain Relationships and Related Transactions.............. 30 PART IV................................................................. 30 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................... 30 Index to Exhibits....................................................... E-1
i 3 RECENT DEVELOPMENTS Allegiance declared a 3-for-2 stock split, in the form of a 50% stock dividend, to record holders as of February 18, 2000. The payment date of this stock dividend was February 28, 2000. The share numbers and stock price numbers in this annual report on Form 10-K have been adjusted to reflect this stock split. Allegiance sold 9,900,000 shares of common stock in an underwritten offering at a price of $70 per share on January 27, 2000. On that date, certain of Allegiance's stockholders sold an additional 5,100,000 shares of common stock in the offering at a price of $70 per share. On February 29, 2000, the underwriters exercised their option to purchase an additional 803,109 shares of common stock, at a price of $70 per share. Goldman, Sachs & Co., Salomon Smith Barney Inc., and Bear, Stearns & Co. Inc., were representatives of the several underwriters in this transaction. Allegiance closed its senior secured credit facilities with a syndicate of lenders led by Goldman Sachs Credit Partners L.P., Toronto Dominion (Texas) Inc., BankBoston, N.A. and Morgan Stanley Senior Funding, Inc. on February 15, 2000. The banks have committed $500 million under these facilities, subject to the satisfaction of certain terms and conditions, for general corporate purposes including working capital financing and to provide purchase money financing for the cost of design, development, acquisition, construction, installation, improvement, transportation or integration of equipment, inventory and network assets. The credit facilities consist of a seven-year $350 million revolving credit facility and a $150 million delayed draw term loan facility, which $150 million must be drawn within 24 months of closing. These facilities will mature on December 31, 2006. The borrower under the new credit facilities is Allegiance Telecom Company Worldwide, a wholly-owned subsidiary of Allegiance Telecom, Inc. The lenders are secured by a first priority security interest in substantially all of the assets of Allegiance's subsidiaries, including the capital stock and assets of the borrower and all of its subsidiaries. Drawn pricing on the new credit facilities will be tied to leverage and is initially expected to be London Interbank Offered Rate + 3.25%. The commitment fee on the unused portion will be 1.50% and will step down based on utilization. PART I ITEM 1. BUSINESS OVERVIEW Allegiance is a leading competitive provider of telecommunications services to small and medium-sized business, government and other institutional users in major metropolitan areas across the United States. We offer an integrated set of telecommunications services including local exchange, local access, domestic and international long distance, enhanced voice, data and a full suite of Internet services. We were operating in the following 19 markets as of December 31, 1999: Atlanta, Baltimore, Boston, Chicago, Dallas, Detroit, Fort Worth, Houston, Long Island, Los Angeles, New York, Northern New Jersey, Oakland, Orange County, Philadelphia, San Diego, San Francisco, San Jose and Washington, D.C. Allegiance was founded in April 1997 by a management team led by Royce J. Holland, the former President, Chief Operating Officer and co-founder of MFS Communications, and Thomas M. Lord, a former Managing Director of Bear, Stearns & Co. Inc., where he specialized in the telecommunications, information services and technology industries. Allegiance believes that the Telecommunications Act, by opening the local exchange market to competition, has created an attractive opportunity for facilities-based competitive local exchange carriers like Allegiance that were created after the enactment of this legislation and specifically designed to take advantage of the opportunity it created. Most importantly, the Telecommunications Act stated that competitive local exchange carriers, known as CLECs, should be able to lease the various elements of the incumbent local exchange carrier's ("ILEC") networks, which are necessary for the cost-effective provision of service. This aspect of the Telecommunications Act, which is referred to as "unbundling" the ILEC networks, has enabled Allegiance to deploy digital switches with local and long distance capability, and lease copper wires and fiber optic lines from the ILECs, other CLECs, and other telecommunications companies, so that Allegiance can 1 4 directly serve its customers. Once traffic volume growth justifies further capital investment, Allegiance leases dark fiber or otherwise acquires its own fiber network. Allegiance has developed procedures, together with its back office systems vendors, including MetaSolv, DSET and Lucent, that it believes will provide it with a competitive advantage in terms of reducing costs, processing large order volumes and providing customer service. Back office systems enable a phone company to enter, schedule and track a customer's order from the point of sale to the installation and testing of service. These systems also include or interface with trouble management, inventory, billing, collection and customer service systems. Allegiance is determined to achieve electronic bonding, the on-line and real-time connection of Allegiance's operations support systems with those of the ILECs, with each of the incumbent telecommunications companies in most of its markets by the end of 2000. Allegiance has electronically bonded with Bell Atlantic in New York City, Boston and Long Island and with Southwestern Bell in Dallas, Fort Worth and Houston. Testing with SBC Communications and Pacific Bell in California was completed during the third quarter 1999 on the electronic data interface which is now in use there. Local service requests for Allegiance's Texas and California markets are now processed electronically with SBC Communications. We have recently completed electronic bonding testing with Ameritech, and currently we are processing data for local service requests electronically with Ameritech. This electronic interface allows Allegiance to create service requests on-line, leading to faster installations of customer orders through a reduction in errors associated with multiple manual inputs. Allegiance expects electronic bonding to improve productivity by decreasing the period between the time of sale and the time a customer's line is installed in the Allegiance network. In addition, Allegiance expects that the simplified process will reduce selling, general and administrative costs. Allegiance intends to continue network deployment of its 36 target markets. With a strategy focusing on the central business districts and suburban commercial districts in these areas, Allegiance plans to address a majority of the non-residential access lines in most of its targeted markets. ALLEGIANCE'S TELECOMMUNICATIONS SERVICES Allegiance tailors its service offerings to meet the specific needs of the business, government, and other institutional customers in its target markets. Management believes that Allegiance's close contact with customers from its direct sales force and customer care personnel enable Allegiance to tailor its service offerings to meet customers' needs and to creatively package its services to provide "one-stop shopping" solutions for those customers. Local Exchange Services. Allegiance offers local telephone services, including local dial tone as well as other features such as: - call forwarding; - call waiting; - caller number identification and/or calling name identification; - call transfer; - distinctive ringing; - station-to-station four-digit dialing without a private branch exchange; and - voice mail. By offering dial tone service, Allegiance also receives originating and terminating access charges for interexchange calls placed or received by its subscribers. Allegiance offers local voice services over unbundled local loops as well as high capacity lines such as T-1 connections. Allegiance also combines voice and data offerings over T-1 and digital subscriber line connections. Allegiance believes that digital subscriber line technology offers an attractive opportunity for offering local voice services at lower costs and higher gross profit margins. 2 5 High Speed Data Services and Other Internet Services. Allegiance offers high speed data transmission services, such as: - wide area network interconnection, which are remote computer communications systems that allow file sharing among geographically distributed workgroups; wide area networks typically use links provided by local telephone companies; and - broadband Internet access, also known as "wideband," which allows large quantities of data to be transmitted simultaneously. These services may be provided via frame relay and dedicated point-to-point connections. In order to provide these services, Allegiance leases high capacity connections, such as multiple DS-1, DS-3, T1 or T3 connections, to medium- and large-sized business, government and other institutional customers. In 1999, Allegiance rolled out digital subscriber line ("DSL") services to its customers. DSL allows high-speed digital connectivity over traditional copper telephone lines and thereby provides an economic alternative to high-speed cable, T1 and integrated service digital networks. Allegiance is now offering symmetric (equal download and upload speeds) DSL service, facilitating the convergence of the customer's voice, high-speed data and Internet traffic on one unbundled loop. Allegiance has deployed DSL equipment to over 100 total collocations in central offices throughout its operational markets. Allegiance has also deployed asymmetric DSL equipment to collocations in Chicago, New York, Philadelphia and Washington, D.C. Also, during the third quarter of 1999, Allegiance deployed what we believe to be the industry's first commercial HDSL2 circuit, a new standard of high-bit-rate digital subscriber line. HDSL2 allows the equivalent of 1.544 megabits T1 service over a single copper wire pair rather than the two unbundled loops required under older high-bit rate digital subscriber line standards. Many of Allegiance's current and future target small and medium-sized business customers do not use data or Internet access services in their businesses. It is expected that small and medium-sized businesses will increasingly find the need to use these services as e-commerce and other Internet-based products develop. To facilitate this expected trend and to assist its customers in taking advantage of the opportunities offered by e-commerce and related Internet developments, on December 16, 1999, Allegiance formally announced an alliance with Go2Net, Inc. to jointly develop a customized Internet portal and a customized small business resource center for Allegiance customers. The customized Internet portal is designed to offer Allegiance customers communications (calendar, e-mail, contacts, instant messenger), general resources (search, weather/maps, yellow pages, knowledge links), community access (forums, discussion database), current information (news, stock portfolio) and customer care (link to Allegiance's customer support). The Allegiance customized small business resource center, which will be made available through the customized portal, will allow Allegiance customers to gain direct access to many resources that serve this segment of the business market, including office supplies, information about incorporating, trademark registration, chambers of commerce, communications services, financial services and government agencies. The Allegiance customized small business resource center will also connect customers to transaction services, such as real-time credit card processing, on-line payroll and on-line educational courses. Allegiance is independently working on expanding its Internet-based service offering to include a web-based platform for software applications hosting. Allegiance expects this aspect of its Internet initiative to provide its typical small and medium-sized business customer with software applications at a more affordable price. Interexchange/Long Distance Services. Allegiance offers a full range of domestic and international long distance services. These services include "1+" outbound calling, inbound toll free service and such complementary services as calling cards, operator assistance and conference calling. Web Hosting Services. During 1999, Allegiance started offering Web site hosting on its own computer servers to provide customers with a complete, easy to use turnkey solution that gives them a presence on the World Wide Web. 3 6 Wholesale Services to Internet Service Providers. Allegiance believes that with the recent growth in demand for Internet services, numerous Internet service providers are unable to obtain network capacity rapidly enough to meet customer demand and eliminate network congestion problems. Allegiance supplements its core customer product offerings by providing a full array of local services to Internet service providers, including telephone numbers, managed modem switch ports and switched and dedicated access to the Internet. SALES AND CUSTOMER SUPPORT Allegiance offers an integrated package of local exchange, local access, domestic and international long distance, enhanced voice, data, and a full suite of Internet services to small and medium-sized businesses. Unlike large corporate, government, or other institutional users, small and medium-sized businesses often have no in-house telecommunications manager. Based on management's previous experience, Allegiance believes that a direct sales and customer care program focusing on complete, "one-stop shopping" solutions will have a competitive advantage in capturing this type of customer's total telecommunications traffic. Although the vast majority of Allegiance's sales force is focused primarily on the small and medium-sized business segment, Allegiance also provides services to, and receives a material portion of its revenue from, large business, government, and other institutional users, as well as Internet service providers. Therefore, Allegiance has organized its sales and customer care organizations to serve each of these three market segments. Sales and marketing approaches in the telecommunications market are market-segment specific, and Allegiance believes the following are the most effective approaches with respect to its three targeted market segments: - Small and medium-sized businesses -- Allegiance uses direct sales with sales forces based locally in each target market and plans to offer its customized Internet portal and small business resource center to facilitate Internet access sales to this market; - National accounts, government, and other institutional users -- Allegiance uses account teams, established business relationships and applications sales; and - Wholesale carriers, primarily Internet service providers -- Allegiance uses direct sales, established business relationships, competitive pricing and integrated services. Allegiance organizes account executives into teams of eight persons with a team manager and a sales support specialist for each market. These teams utilize telemarketing to "qualify" leads and set up initial appointments. Allegiance closely manages the number of sales calls that account executives make per week, with the goal of eventually calling on every prospective business customer in an account executive's sales territory. Allegiance uses commission plans and incentive programs to reward and retain the top performers and encourage strong customer relationships. The sales team managers for each market report to a city sales vice president who in turn reports to a regional vice president. Allegiance's national account teams focus on multi-location, national companies. Through consultative selling, Allegiance is able to offer these companies one-stop shopping by leveraging the Allegiance nationwide network footprint. Allegiance's national account managers report to national account directors, who in turn report to national account division vice presidents. Allegiance's wholesale sales to Internet service providers are performed by regional sales managers reporting to the director of wholesale accounts, who in turn reports to the vice president of wholesale accounts. The vice president of wholesale accounts also has responsibility for government and other institutional accounts. Unlike the small and medium-sized business segment, the wholesale account program is being built by recruiting experienced account managers. The wholesale account program is supported by pre-sales engineers, program managers and service coordinators, who proactively manage the account before and after the sale. Allegiance has focused its efforts on developing a personalized customer care program. Allegiance's customer service representatives are available seven days a week, 24 hours a day. In addition, Allegiance has 4 7 separate customer care specialists to support its national accounts. Allegiance monitors and seeks to continuously reduce the time to answer each call into its customer care department. All customer service issues are tracked and escalated to appropriate network personnel through software interfaces as well as personal management of each issue by an Allegiance customer care representative. INFORMATION SYSTEMS AND ORDER PROVISIONING Allegiance is continuing to develop its customized information systems and procedures for operations support and other back office systems that it believes will provide a significant competitive advantage in terms of cost, processing large order volumes and customer service. Allegiance believes that the ability to successfully manage the process of converting customers from ILEC and other networks to the Allegiance network, especially with respect to local loops leased from ILECs, is one of the key functions required to succeed as a competitive local exchange carrier. As a result, Allegiance has devoted significant resources to this aspect of its operations and continues to develop its information systems to facilitate this function. These systems are required to enter, schedule, provision, and track a customer's order from the point of sale to the installation and testing of service and also include or interface with trouble management, inventory, billing, collection and customer service systems. The existing systems currently employed by most ILECs, CLECs and long distance carriers, which were developed prior to the passage of the Telecommunications Act, generally require multiple entries of customer information to accomplish order management, provisioning, switch administration and billing. This process is not only labor intensive, but it creates numerous opportunities for errors in provisioning service and billing, delays in installing orders, service interruptions, poor customer service, increased customer turnover, and significant added expenses due to duplicated efforts and decreased customer satisfaction. Allegiance believes that the practical problems and costs of upgrading existing systems are often prohibitive for companies whose existing systems support a large number of customers with ongoing service. Because Allegiance does not have systems designed prior to the expanded interaction between CLECs and ILECs introduced by the Telecommunications Act, Allegiance's team of engineering and information technology professionals experienced in the CLEC industry is free to develop operations support and other back office systems designed to facilitate a smooth, efficient order management, provisioning, trouble management, billing and collection and customer care process. Order Management. Allegiance has used MetaSolv's order management software to develop processes that allow the sales team not only to enter customer orders onsite, via computer and/or over the Internet, but also to monitor the status of an order as it progresses through the service initiation process. Provisioning Management. The licensed order management software, together with the proprietary processes developed by Allegiance to optimize the usefulness of this software, supports the design and management of the process by which Allegiance converts a customer to the Allegiance network from the local exchange network of an ILEC or other carrier, including circuit design and work flow management. The system has been designed to permit programming into the system of a standard schedule of tasks that must be accomplished to initiate service to a customer, as well as the standard time intervals during which each such task must be completed. This way, when a standard order is selected in the system, each required task in the service initiation process can be efficiently managed to its assigned time interval. External Interfaces. Several external interfaces are required to initiate service for a customer. While some of these are automated via gateways from the order management software, the most important interfaces, those to the ILEC, have generally been accomplished via fax or e-mail. In an effort to make this process more efficient, Allegiance and Bell Atlantic announced on January 8, 1999, the first implementation of electronic bonding between the operations support system of a facilities-based CLEC and an ILEC. Without electronic bonding, confirmation of receipt and installation of orders has taken from two business days to one month. Electronic bonding is expected to improve productivity by decreasing the period between the time of sale and the time a customer's line is installed. Allegiance has electronically bonded with Bell Atlantic in New York City, Boston and Long Island and with Southwestern Bell in Dallas, Fort Worth and Houston. Testing with SBC Communications and Pacific Bell in California was completed during the third quarter 1999 5 8 on the electronic data interface which is now in use there. Local service requests for Allegiance's Texas and California markets are now processed electronically with SBC Communications. We have recently completed electronic bonding testing with Ameritech, and currently we are processing data for local service requests electronically with Ameritech. In all of these markets, we are also working towards the electronic bonding of that portion of the billing process in which we gather customer specific information, including their current service options, and the process of identifying and resolving customer service problems. Electronic bonding allows Allegiance to access data from the ILEC, submit service requests electronically, and more quickly attend to errors in the local service request form because an order is bounced back immediately if the ILEC determines that there is a mistake. As a result, Allegiance expects to be able to eventually reduce the time frame required to switch service to Allegiance from approximately 25 business days to as low as five business days, as compared to three days currently required to switch to a new long distance carrier. Electronic bonding should also enable Allegiance to improve its ability to provide better customer care since Allegiance will more readily be able to pinpoint where any problems may have occurred with a customer's order. Network Element Administration. Allegiance has automated each element of its network. Allegiance continues to develop an interface between its order management system and the network element manager to integrate data integrity and eliminate redundant data entry. Customer Billing. Allegiance has selected a billing service provider that credits the collections made from Allegiance's lock-box. Customer information is electronically interfaced with this provider from Allegiance's order management system via a gateway, thereby integrating all repositories of information. We are continuing to develop other enhancements to the gateway. Billing Records. Local and intraLATA billing records are generated by our Lucent Series 5ESS(R)-2000 switches to record customer calling activity. The long distance carrier with whom Allegiance has a resale agreement generates InterLATA billing records for Allegiance so that it can record customer calling activity. The billing service provider will automatically process these records in order to calculate and produce bills in a customer-specified billing format. NETWORK DEPLOYMENT AND TRAFFIC MANAGEMENT As of December 31, 1999, we were operating in 19 markets: Atlanta, Baltimore, Boston, Chicago, Dallas, Detroit, Fort Worth, Houston, Long Island, Los Angeles, New York, Northern New Jersey, Oakland, Orange County, Philadelphia, San Diego, San Francisco, San Jose and Washington, D.C. The following table sets forth the markets targeted by Allegiance and the current buildout schedule. The order and timing of network deployment may vary and will depend on a number of factors, including recruiting city management, the regulatory environment, Allegiance's results of operations and the existence of specific market opportunities, such as acquisitions. Allegiance may also elect not to deploy networks in each such market. Those markets designated for deployment in 2001 are preliminary and one or more of these may be replaced by other comparable markets.
ESTIMATED TOTAL % OF TOTAL U.S. NON-RESIDENTIAL NON-RESIDENTIAL INITIAL FACILITIES BASED MARKET ACCESS LINES(1) ACCESS LINES(2) SERVICE DATE(3) - ------ --------------- --------------- ------------------------ (IN THOUSANDS) New York City........................ 3,298(4) 6.7%(4) March 1998 Dallas, TX........................... 867(5) 1.8%(5) April 1998 Atlanta, GA.......................... 612 1.2% April 1998 Fort Worth, TX....................... --(5) --(5) July 1998 Chicago, IL.......................... 1,951 4.0% September 1998 Los Angeles, CA...................... 3,430(6) 7.0%(6) October 1998 San Francisco, CA.................... 2,148(7) 4.4%(7) November 1998 Boston, MA........................... 649 1.3% December 1998 Oakland, CA.......................... --(7) --(7) December 1998
6 9
ESTIMATED TOTAL % OF TOTAL U.S. NON-RESIDENTIAL NON-RESIDENTIAL INITIAL FACILITIES BASED MARKET ACCESS LINES(1) ACCESS LINES(2) SERVICE DATE(3) - ------ --------------- --------------- ------------------------ (IN THOUSANDS) Philadelphia, PA..................... 1,754 3.6% February 1999 Washington, D.C...................... 871 1.8% March 1999 San Jose, CA......................... --(7) --(7) March 1999 Houston, TX.......................... 765 1.6% April 1999 Northern New Jersey.................. --(4) --(4) May 1999 San Diego, CA........................ 790 1.6% July 1999 Long Island, NY...................... --(4) --(4) August 1999 Orange County, CA.................... --(6) --(6) September 1999 Baltimore, MD........................ 639 1.3% October 1999 Detroit, MI.......................... 821 1.7% November 1999 Denver, CO........................... 632 1.3% February 2000 St. Louis, MO........................ 449 0.9% March 2000 Seattle, WA.......................... 779 1.6% May 2000 Cleveland, OH........................ 654 1.3% May 2000 Miami, FL............................ 769 1.6% First Half 2000 Phoenix, AZ.......................... 466 1.0% Second Half 2000 Minneapolis/St. Paul, MN............. 562 1.1% Second Half 2000 Tampa/St. Petersburg, FL............. 435 0.9% Second Half 2000 Pittsburgh, PA(8).................... 512 1.0% 2001 Sacramento, CA(8).................... 449 0.9% 2001 Portland, OR(8)...................... 408 0.8% 2001 Cincinnati, OH(8).................... 381 0.8% 2001 Orlando, FL(8)....................... 367 0.7% 2001 Milwaukee, WI(8)..................... 355 0.7% 2001 Charlotte/Gastonia, NC(8)............ 327 0.7% 2001 Indianapolis, IN(8).................. 292 0.6% 2001 San Antonio, TX(8)................... 272 0.6% 2001 ------ ---- Total...................... 26,704 54.5% ====== ====
- --------------- (1) Data as of December 31, 1996. (2) Based on an estimated 49.0 million U.S. non-residential access lines as of December 31, 1996. (3) Refers to the first month during which Allegiance could offer facilities-based service or the year during which Allegiance expects to be able to offer facilities-based service based on its expanded business plan. (4) Data for New York City also includes Northern New Jersey and Long Island, NY. (5) Data for Dallas, TX also includes Fort Worth, TX. (6) Data for Los Angeles, CA also includes Orange County, CA. (7) Data for San Francisco, CA also includes San Jose, CA and Oakland, CA. (8) Represents markets currently under evaluation for 2001. There can be no assurance that we will actually initiate services in these markets; we may select alternative markets. In the majority of its targeted markets, Allegiance initially deploys switches and collocates transmission equipment in ILEC central offices with heavy concentrations of non-residential access lines. Over time, Allegiance plans to expand its networks throughout the metropolitan areas to address the majority of the business market in each area. In some markets, such as Northern New Jersey, Allegiance does not initially deploy its own switch, but deploys transmission equipment in major central offices and routes traffic to an existing Allegiance switch until traffic growth warrants the addition of a switch to service that market. Given 7 10 current traffic growth, Allegiance plans to deploy additional switches in 2000 in the following existing Allegiance markets: Northern New Jersey, Orange County and San Jose. After the initial implementation activities are completed in a market, Allegiance follows an ongoing capacity management plan to ensure that adequate quantities of network facilities, such as interconnection trunks are in place, and a contingency plan must be devised to address spikes in demand caused by events such as a larger-than-expected customer sale in a relatively small geographic area. NETWORK ARCHITECTURE An important element of Allegiance's smart build strategy is the installation of Lucent Series 5ESS(R)-2000 digital switches and related equipment at a central location in each market. As of December 31, 1999, Allegiance had deployed 15 switches to serve nineteen markets. The switches are located in: Dallas (two switches), New York City (two switches), Atlanta, Baltimore, Boston, Chicago, Detroit, Houston, Los Angeles, Philadelphia, San Diego, San Francisco and Washington, D.C. The Allegiance nationwide network is controlled and monitored by a state of the art network operations control center located in Dallas. Locally based switch engineers and technicians also manage each switch. Allegiance generally leases local network trunking facilities from the ILEC and/or one or more CLECs in order to connect Allegiance's switch to major ILEC central offices serving the central business district and outlying areas of business concentrations in each market. The switch is also connected to ILEC tandem switches and certain interexchange carrier points-of-presence, the equivalent of a local phone company's central office. To access the largest number of customers possible without having to lay fiber to each of their premises, Allegiance locates access equipment such as integrated digital loop carriers and related equipment in each of the ILEC central offices in which it is connected. As each customer is signed up, service is provided by leasing unbundled loops from the ILEC to connect Allegiance's integrated digital loop carriers located in the serving central office to the customer premise equipment. For large business, government, or other institutional customers or for numerous customers located in large buildings, it can be more cost-effective for Allegiance to use leased ILEC or CLEC capacity in the 1.5 to 150 megabit range, or a wireless local loop leased from one of the emerging wireless CLECs, to connect the customer(s) to the Allegiance network. In this case, Allegiance will locate its integrated digital loop carriers or other equipment in the customer's building. Although Allegiance initially leases its local network transmission facilities from other carriers, Allegiance replaces leased capacity with fiber optic facilities, such as dark fiber, as and when it experiences sufficient traffic volume growth between its switch and specific ILEC central offices or as other factors make these arrangements more attractive. Allegiance has already implemented this next phase by operating on fiber rings obtained under long-term leases from Metropolitan Fiber Networks, Inc. in Dallas, Houston and New York. On January 3, 2000, Allegiance announced that it had entered into commitments to obtain similar fiber rings in 16 additional markets. These fiber rings are expected to provide Allegiance with a reliable diverse connection to most of its central office collocations throughout a market. IMPLEMENTATION OF SERVICES To offer services in a market, Allegiance generally must secure certification from the state regulator and typically must file tariffs or price lists for the services that it will offer. The certification process varies from state to state; however, the fundamental requirements are largely the same. State regulators require new entrants to demonstrate that they have secured adequate financial resources to establish and maintain good customer service. New entrants must also show that they possess the knowledge and ability required to establish and operate a telecommunications network. Allegiance has made such demonstrations in California, Colorado, Florida, Georgia, Illinois, Maryland, Massachusetts, Michigan, Missouri, New Jersey, New York, Pennsylvania, Texas, Virginia, Washington, D.C., and Washington where Allegiance has obtained certificates to provide local exchange and intrastate toll services. Allegiance has similar applications pending in Arizona and Ohio. 8 11 Before providing local service, a new entrant must negotiate and execute an interconnection agreement with the ILEC. While such agreements can be voluminous and may take months to negotiate, most of the key interconnection issues have now been thoroughly addressed and commissions in most states have ruled on arbitrations between the ILECs and new entrants. However, interconnection rates and conditions may be subject to change as the result of future commission actions or other changes in the regulatory environment. Under a United States Supreme Court ruling, new entrants may adopt either all or portions of an interconnection agreement already entered into by the ILEC and another carrier. Such an approach is selectively adopted by Allegiance to enable it to enter markets quickly while at the same time preserving its right to replace the adopted agreement with a customized interconnection agreement that can be negotiated once service has already been established. While such interconnection agreements include key terms and prices for interconnection, a significant joint implementation effort must be made with the ILEC in order to establish operationally efficient and reliable traffic interchange arrangements. Such interchange arrangements must include those between the new entrant's network and the facilities of other service providers as well as public service agencies. For example, Allegiance worked closely with Southwestern Bell to devise and implement an efficient 911 call routing plan that will meet the requirements of each individual 911 service bureau in Southwestern Bell areas that Allegiance will serve using its own switches. Allegiance meets with key personnel from 911 service bureaus to obtain their acceptance and to establish dates for circuit establishment and joint testing. Other examples of traffic interchange and interconnection arrangements utilizing the ILEC's network include connectivity to its out-of-band signaling facilities, interconnectivity to the ILEC's operator services and directory assistance personnel, and access through the ILEC to the networks of wireless companies and interexchange carriers. Allegiance has entered into interconnection agreements with the ILECs in each of the states in which its current geographic markets are located. In Maryland, New Jersey, New York, Pennsylvania, Virginia and Washington, D.C., however, the original interconnection agreements have expired. Allegiance is operating under the terms of these agreements while negotiating new interconnection agreements. REGULATION Allegiance's telecommunications services business is subject to federal, state and local regulation. Federal Regulation The FCC regulates interstate and international telecommunications services, including the use of local telephone facilities to originate and terminate interstate and international calls. Allegiance provides such services on a common carrier basis. The FCC imposes certain regulations on common carriers such as the ILECs that have some degree of market power. The FCC imposes less regulation on common carriers without market power including, to date, CLECs like Allegiance. The FCC requires common carriers to receive an authorization to construct and operate telecommunications facilities, and to provide or resell telecommunications services, between the United States and international points. Under the Telecommunications Act, any entity, including cable television companies and electric and gas utilities, may enter any telecommunications market, subject to reasonable state regulation of safety, quality and consumer protection. Because implementation of the Telecommunications Act is subject to numerous federal and state policy rulemaking proceedings and judicial review there is still uncertainty as to what impact such legislation will have on Allegiance. The Telecommunications Act is intended to increase competition. The Act opens the local services market by requiring ILECs to permit interconnection to their networks and establishing ILEC obligations with respect to: Reciprocal Compensation. Requires all local exchange carriers to complete calls originated by competing local exchange carriers under reciprocal arrangements at prices based on tariffs or negotiated prices. 9 12 Resale. Requires all ILECs and CLECs to permit resale of their telecommunications services without unreasonable restrictions or conditions. In addition, ILECs are required to offer wholesale versions of all retail services to other telecommunications carriers for resale at discounted rates, based on the costs avoided by the ILEC in the wholesale offering. Interconnection. Requires all ILECs and CLECs to permit their competitors to interconnect with their facilities. Requires all ILECs to permit interconnection at any technically feasible point within their networks, on nondiscriminatory terms, at prices based on cost, which may include a reasonable profit. At the option of the carrier seeking interconnection, collocation of the requesting carrier's equipment in the ILECs' premises must be offered, except where an ILEC can demonstrate space limitations or other technical impediments to collocation. Unbundled Access. Requires all ILECs to provide nondiscriminatory access to unbundled network elements including, network facilities, equipment, features, functions, and capabilities, at any technically feasible point within their networks, on nondiscriminatory terms, at prices based on cost, which may include a reasonable profit. Number Portability. Requires all ILECs and CLECs to permit users of telecommunications services to retain existing telephone numbers without impairment of quality, reliability or convenience when switching from one telecommunications carrier to another. Dialing Parity. Requires all ILECs and CLECs to provide "1+" equal access to competing providers of telephone exchange service and toll service, and to provide nondiscriminatory access to telephone numbers, operator services, directory assistance, and directory listing, with no unreasonable dialing delays. Access to Rights-of-Way. Requires all ILECs and CLECs to permit competing carriers access to poles, ducts, conduits and rights-of-way at regulated prices. ILECs are required to negotiate in good faith with carriers requesting any or all of the above arrangements. If the negotiating carriers cannot reach agreement within a prescribed time, either carrier may request binding arbitration of the disputed issues by the state regulatory commission. Where an agreement has not been reached, ILECs remain subject to interconnection obligations established by the FCC and state telecommunication regulatory commissions. In August 1996, the FCC released a decision establishing rules implementing the ILEC interconnection obligations described above. On July 18, 1997, the Eighth Circuit vacated certain portions of this decision and narrowly interpreted the FCC's power to prescribe and enforce rules implementing the Telecommunications Act. On January 25, 1999, the United States Supreme Court reversed the Eighth Circuit decision and reaffirmed the FCC's broad authority to issue rules implementing the Telecommunications Act, although it did vacate a rule determining which network elements the incumbent local exchange carriers must provide to competitors on an unbundled basis. On November 5, 1999, the FCC issued revised rules that largely reaffirmed, and in some respects expanded, the duty of incumbent carriers to offer unbundled network elements. These rules may be subject to further court appeals, and we cannot predict the outcome of such proceedings. Allegiance, however, leases only the basic unbundled network elements from the ILEC and therefore does not expect reconsideration of the unbundling rules to have an adverse effect on its smart build strategy. On December 9, 1999, the FCC released an order requiring the incumbent carriers to offer "line sharing" arrangements that will permit competitors like Allegiance to offer DSL service over the same copper wires used by the incumbent to provide voice service. The specific prices and terms of these arrangements will be determined by future decisions of state utility commissions, and cannot be predicted at this time. The FCC's ruling may also be challenged in court. Allegiance expects, however, that this order, if implemented, will allow Allegiance to offer DSL services at a lower cost than is now possible. On March 17, 2000, the U.S. Court of Appeals for the District of Columbia Circuit vacated certain FCC rules relating to collocation of competitors' equipment in ILEC central offices. This decision requires the FCC 10 13 to limit collocation to equipment that is "necessary" for interconnection with the ILEC or access to the ILEC's unbundled network elements. Allegiance believes that all of the equipment it currently places in collocation arrangements is necessary for these purposes, and therefore its collocation arrangements should not be adversely affected by the court decision. However, any disputes over the "necessary" status of particular items of equipment may have to be resolved by the FCC or by state commissions, and such disputes could adversely affect Allegiance's collocation plans. While these court and FCC proceedings were pending, Allegiance entered into interconnection agreements with a number of ILECs through negotiations or, in some cases, adoption of another CLEC's approved agreement. These agreements remain in effect, although in some cases one or both parties may be entitled to demand renegotiation of particular provisions based on intervening changes in the law. However, it is uncertain whether Allegiance will be able to obtain renewal of these agreements on favorable terms when they expire. The Telecommunications Act codifies the ILECs' equal access and nondiscrimination obligations and preempts inconsistent state regulation. The Telecommunications Act also contains special provisions that replace prior antitrust restrictions that prohibited the regional Bell operating companies from providing long distance services and engaging in telecommunications equipment manufacturing. The Telecommunications Act permits the regional Bell operating companies to enter the out-of-region long distance market immediately upon its enactment. Further, provisions of the Telecommunications Act permit a regional Bell operating company to enter the long distance market in its in-region states if it satisfies several procedural and substantive requirements, including: - obtaining FCC approval upon a showing that the regional Bell operating company has entered into interconnection agreements or, under some circumstances, has offered to enter into such agreements in those states in which it seeks long distance relief; - the interconnection agreements satisfy a 14-point "checklist" of competitive requirements; and - the FCC is satisfied that the regional Bell operating company's entry into long distance markets is in the public interest. The FCC recently granted approval to Bell Atlantic to provide in-region long distance service in New York. In addition, SBC Communications has filed a petition to offer such service in Texas. It is possible that other regional Bell operating companies may petition and receive approval to offer long distance services in one or more states. This may have an unfavorable effect on Allegiance's business. Allegiance is legally able to offer its customers both long distance and local exchange services, which the regional Bell operating companies, other than Bell Atlantic in New York, currently may not do. This ability to offer "one-stop shopping" gives Allegiance a marketing advantage that it would no longer enjoy. See "-- Competition". On May 8, 1997, the FCC released an order establishing a significantly expanded federal universal service subsidy regime. For example, the FCC established new subsidies for telecommunications and information services provided to qualifying schools and libraries with an annual cap of $2.25 billion and for services provided to rural health care providers with an annual cap of $400 million, and expanded the federal subsidies for local exchange telephone services provided to low-income consumers. The FCC more recently adopted rules for subsidizing service provided to consumers in high cost areas, which may result in further substantial increases in the overall cost of the subsidy program. Providers of interstate telecommunications service, such as Allegiance must pay for a portion of these programs. Allegiance's share of these federal subsidy funds will be based on its share of certain defined interstate telecommunications end user gross revenues. Currently, the FCC is assessing such payments on the basis of a provider's revenue for the previous year. Under authority granted by the FCC, Allegiance will resell the international telecommunications services of other common carriers between the United States and international points. In connection with such authority, Allegiance's subsidiary, Allegiance Telecom International, Inc., has filed tariffs with the FCC stating the rates, terms and conditions for its international services. 11 14 With respect to its domestic service offerings, various subsidiaries of Allegiance have filed tariffs with the FCC stating the rates, terms and conditions for their interstate services. Allegiance's tariffs are generally not subject to pre-effective review by the FCC, and can be amended on one day's notice. However, the FCC does have jurisdiction to require changes in these tariffs. See "Risk Factors -- The Regulation of Access Charges Involves Uncertainties, and the Resolution of These Uncertainties Could Adversely Affect Our Business". Allegiance's interstate services are provided in competition with interexchange carriers and, with respect to access services, the ILECs. With limited exceptions, the current policy of the FCC for most interstate access services dictates that ILECs charge all customers the same price for the same service. Thus, the ILECs generally cannot lower prices to those customers likely to contract for their services without also lowering charges for the same service to all customers in the same geographic area, including those whose telecommunications requirements would not justify the use of such lower prices. The FCC has, however, adopted rules that significantly lessen the regulation of ILECs that are subject to competition in their service areas and provide such ILECs with additional flexibility in pricing some interstate switched and special access services on a central office specific or customer specific basis. ILECs around the country have been contesting whether the obligation to pay reciprocal compensation to competitive local exchange carriers should apply to local telephone calls from an ILEC's customers to Internet service providers served by competitive local exchange carriers. The ILECs claim that this traffic is interstate in nature and therefore should be exempt from compensation arrangements applicable to local, intrastate calls. Competitive local exchange carriers have contended that the interconnection agreements provide no exception for local calls to Internet service providers and reciprocal compensation is therefore applicable. Currently, over 30 state commissions and several federal and state courts have ruled that reciprocal compensation arrangements do apply to calls to Internet service providers, while four jurisdictions have ruled to the contrary. A number of these rulings are subject to appeal. Additional disputes over the appropriate treatment of Internet service provider traffic are pending in other states. On February 26, 1999, the FCC released a Declaratory Ruling determining that Internet service provider traffic is interstate for jurisdictional purposes, but that its current rules neither require nor prohibit the payment of reciprocal compensation for such calls. In the absence of a federal rule, the FCC determined that state commissions have authority to interpret and enforce the reciprocal compensation provisions of existing interconnection agreements, and to determine the appropriate treatment of Internet service provider traffic in arbitrating new agreements. The FCC also requested comment on alternative federal rules to govern compensation for such calls in the future. In response to the FCC ruling, some regional Bell operating companies have asked state commissions to reopen previous decisions requiring the payment of reciprocal compensation on Internet service provider calls. Some Bell companies have also appealed the FCC's Declaratory Ruling to the United States Court of Appeals for the District of Columbia Circuit, which issued a decision on March 24, 2000, vacating the Ruling. The court held that the FCC had not adequately explained its conclusion that calls to Internet service providers should not be treated as "local" traffic. Allegiance views this decision as favorable, but the court's direction to the FCC to re-examine the issue will likely result in further delay in the resolution of pending compensation disputes, and there can be no assurance as to the ultimate outcome of these proceedings or as to the timing of such outcome. Internet service providers are among Allegiance's target customers, and adverse decisions in state proceedings could limit its ability to service this group of customers profitably. Given the uncertainty as to whether reciprocal compensation should be payable in connection with calls to Internet service providers, Allegiance recognizes such revenue only when realization of it is certain, which in most cases will be upon receipt of cash. See "Risk Factors -- We Could Lose Revenue if Calls to Internet Service Providers Are Treated As Long Distance Interstate Calls". State Regulation The Telecommunications Act is intended to increase competition in the telecommunications industry, especially in the local exchange market. With respect to local services, ILECs are required to allow interconnection to their networks and to provide unbundled access to network facilities, as well as a number of other pro-competitive measures. Because the implementation of the Telecommunications Act is subject to 12 15 numerous state rulemaking proceedings on these issues, it is currently difficult to predict how quickly full competition for local services, including local dial tone, will be introduced. State regulatory agencies have regulatory jurisdiction when Allegiance facilities and services are used to provide intrastate services. A portion of Allegiance's current traffic may be classified as intrastate and therefore subject to state regulation. Allegiance expects that it will offer more intrastate services, including intrastate switched services, as its business and product lines expand and state regulations are modified to allow increased local services competition. To provide intrastate services, Allegiance generally must obtain a certificate of public convenience and necessity from the state regulatory agency and comply with state requirements for telecommunications utilities, including state tariffing requirements. State agencies, like the FCC, require Allegiance to file periodic reports, pay various fees and assessments, and comply with rules governing quality of service, consumer protection, and similar issues. Although the specific requirements vary from state to state, they tend to be more detailed than the FCC's regulation because of the strong public interest in the quality of basic local exchange service. Allegiance intends to comply with all applicable state regulations, and as a general matter does not expect that these requirements of industry-wide applicability will have a material adverse effect on its business. However, no assurance can be given that the imposition of new regulatory burdens in a particular state will not affect the profitability of Allegiance's services in that state. Local Regulation Allegiance's networks are subject to numerous local regulations such as building codes and licensing. Such regulations vary on a city by city and county by county basis. If Allegiance decides in the future to install its own fiber optic transmission facilities, it will need to obtain rights-of-way over private and publicly owned land. There can be no assurance that such rights-of-way will be available to Allegiance on economically reasonable or advantageous terms. COMPETITION The telecommunications industry is highly competitive. Allegiance believes that the principal competitive factors affecting its business are pricing levels and clear pricing policies, customer service, accurate billing and, to a lesser extent, variety of services. The ability of Allegiance to compete effectively depends upon its continued ability to maintain high quality, market-driven services at prices generally equal to or below those charged by its competitors. To maintain its competitive posture, Allegiance believes that it must be in a position to reduce its prices in order to meet reductions in rates, if any, by others. Any such reductions could materially adversely affect Allegiance. Many of Allegiance's current and potential competitors have financial, personnel and other resources, including brand name recognition, substantially greater than those of Allegiance, as well as other competitive advantages over Allegiance. Local Exchange Carriers. In each of the markets targeted by Allegiance, Allegiance will compete principally with the ILEC serving that area, such as Ameritech, BellSouth, Southwestern Bell, Bell Atlantic or US WEST. Allegiance believes that one of the objectives of the regional Bell operating companies is to be able to offer long distance service in their service territories. The independent telephone companies have already achieved this goal with good early returns. Many experts expect the regional Bell operating companies to be successful in entering the long distance market in a few states sometime in 2000. On December 23, 1999, Bell Atlantic was granted permission by the FCC to provide in-region long distance service in New York. Allegiance believes the regional Bell operating companies expect to offset share losses in their local markets by capturing a significant percentage of the in-region long distance market, especially in the residential segment where the regional Bell operating companies' strong regional brand names and extensive advertising campaigns may be very successful. As a recent entrant in the integrated telecommunications services industry, Allegiance has not achieved and does not expect to achieve a significant market share for any of its services. In particular, the ILECs have long-standing relationships with their customers, have financial, technical and marketing resources substantially greater than those of Allegiance, have the potential to subsidize competitive services with revenues from 13 16 a variety of businesses and currently benefit from certain existing regulations that favor the ILECs over Allegiance in certain respects. While recent regulatory initiatives, which allow CLECs such as Allegiance to interconnect with ILEC facilities, provide increased business opportunities for Allegiance, such interconnection opportunities have been and likely will continue to be accompanied by increased pricing flexibility for and relaxation of regulatory oversight of the ILECs. ILECs 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 Allegiance, they also provide the ILECs with increased pricing flexibility for their private line and special access and switched access services. In addition, with respect to competitive access services as opposed to switched access services, the FCC recently adopted 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 their networks, the income of competitors to the ILECs, including Allegiance, 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 Allegiance. Competitive Access Carriers/Competitive Local Exchange Carriers/Interexchange Carriers/Other Market Entrants. Allegiance also faces, and expects to continue to face, competition from other current and potential market entrants, including long distance carriers such as AT&T, MCI WorldCom and Sprint seeking to enter, reenter or expand entry into the local exchange market and from other CLECs, resellers of local exchange services, competitive access providers, 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 consolidation of telecommunications companies and the formation of strategic alliances within the telecommunications industry, as well as the development of new technologies, could give rise to significant new competitors to Allegiance. For example, WorldCom acquired MFS Communications in December 1996, acquired another CLEC, Brooks Fiber Properties, Inc. in 1997, merged with MCI and has agreed to merge with Sprint. AT&T acquired Teleport Communications Group Inc., a CLEC, and TeleCommunications, Inc., a cable, telecommunications and high-speed Internet services provider. Ameritech Corporation has merged with SBC Communications. Bell Atlantic has agreed to merge with GTE Corporation. These types of consolidations and strategic alliances could put Allegiance at a competitive disadvantage. The Telecommunications Act includes provisions that impose certain regulatory requirements on all local exchange carriers, including competitors such as Allegiance, 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 Telecommunications Act are implemented and enforced could have a material adverse effect on Allegiance's ability to successfully compete against ILECs and other telecommunications service providers. Allegiance also competes with equipment vendors and installers, and telecommunications management companies with respect to certain portions of its business. The changes in the Telecommunications Act radically altered the market opportunity for traditional competitive access providers and CLECs. Due to the fact that many existing competitive access providers and CLECs initially entered the market providing dedicated access in the pre-1996 era, these companies had to build a fiber infrastructure before offering services. Most competitive access providers and CLECs added switches in the last year to take advantage of the opening of the local market. With the Telecommunications Act requiring unbundling of the local exchange carrier networks, competitive access providers and CLECs are now be able to more rapidly enter the market by installing switches and leasing trunk and loop capacity until traffic volume justifies building facilities. New CLECs do not have to replicate existing facilities and can be more opportunistic in designing and implementing networks. A number of CLECs have entered or announced their intention to enter into one or more of the same markets as Allegiance. Allegiance believes that not all CLECs however, are pursuing the same target customers as Allegiance. Demographically, business customers are commonly divided into three segments: 14 17 small, medium and large. Targeted cities are commonly divided into three segments by population: Tier 1, Tier 2 and Tier 3. As would be expected, each CLEC may focus on different combinations of primary and secondary target customers. Allegiance has chosen to focus primarily on small and medium-sized business customers in large "Tier 1" markets and selected "Tier 2" markets. To help distinguish it from other competitors who have adopted a similar strategy, Allegiance uses a direct sales approach to offer potential customers "one-stop shopping" services through a single point of contact. In addition, Allegiance is actively pursuing collocations throughout all of its target markets which, in combination with its smart build strategy, is expected to allow Allegiance to access its markets and provide a greater array of services more quickly than if it were able to use a traditional build approach. Allegiance believes the major interexchange carriers, such as AT&T, MCI WorldCom and Sprint, have a two pronged strategy: - keep the regional Bell operating companies out of in-region long distance as long as possible; and - develop facilities-based and unbundled local service, an approach already being pursued by MCI WorldCom with the acquisition of MFS Communications, and by AT&T with its acquisitions of Teleport Communications and TeleCommunications, Inc. Competition for Provision of Long Distance Services. The long distance telecommunications industry has numerous entities competing for the same customers and a high average turnover rate, as customers frequently change long distance providers in response to the offering of lower rates or promotional incentives by competitors. Prices in the long distance market have declined significantly in recent years and are expected to continue to decline. Allegiance expects to increasingly face competition from companies offering long distance data and voice services over the Internet. Such companies could enjoy a significant cost advantage because they do not currently pay carrier access charges or universal service fees. The FCC has recently granted approval to Bell Atlantic to provide in-region long distance service in New York and other regional Bell operating companies may petition and be granted such approval in the future. Data/Internet Service Providers. The Internet services market is highly competitive and there are limited barriers to entry. Allegiance expects that competition will continue to intensify. Allegiance's competitors in this market will include Internet service providers, other telecommunications companies, online service providers and Internet software providers. Most of the regional Bell operating companies and GTE Corporation operating units have announced plans to rapidly roll out DSL services. Some of these entities, including SBC Communications, US West and Bell Atlantic, have already commenced deployment of DSL services in selected markets and may in the future deploy DSL services on a widespread basis. Many of these competitors have greater financial, technological and marketing resources than those available to Allegiance. Competition from International Telecommunications Providers. Under the recent World Trade Organization agreement on basic telecommunications services, the United States and 72 other members of the World Trade Organization committed themselves to opening their respective telecommunications markets and/or foreign ownership and/or to adopting regulatory measures to protect competitors against anticompetitive behavior by dominant telecommunications companies, effective in some cases as of January 1998. Although Allegiance believes that this agreement could provide Allegiance with significant opportunities to compete in markets that were not previously accessible and to provide more reliable services at lower costs than Allegiance could have provided prior to implementation of this agreement, it could also provide similar opportunities to Allegiance's competitors and facilitate entry by foreign carriers into the U.S. market. There can be no assurance that the pro-competitive effects of the World Trade Organization agreement will not have a material adverse effect on Allegiance's business, financial condition and results of operations or that members of the World Trade Organization will implement the terms of this agreement. 15 18 EMPLOYEES As of December 31, 1999, Allegiance had 1,784 full-time employees. Allegiance believes that its future success will depend on its continued ability to attract and retain highly skilled and qualified employees. None of Allegiance's employees is currently represented by a collective bargaining agreement. Allegiance believes that it enjoys good relationships with its employees. RISK FACTORS Our Forward-Looking Statements May Materially Differ from Actual Events or Results This annual report on Form 10-K contains "forward-looking statements," within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and Allegiance intends that such forward-looking statements be subject to the safe harbors created by this law. You generally can identify these statements by our use of forward-looking words such as "plans," "estimates," "believes," "expects," "may," "will," "should" or "anticipates" or the negative or other variations of such terms or comparable terminology, or by discussion of strategy that involve risks and uncertainties. We often use these types of statements when discussing our plans and strategies, our anticipation of revenues from designated markets, and statements regarding the development of our businesses, the markets for our services and products, our anticipated capital expenditures, operations support systems or changes in regulatory requirements and other statements contained in this report regarding matters that are not historical facts. We caution you that these forward-looking statements are only predictions and estimates regarding future events and circumstances. We cannot assure you that we will achieve the future results reflected in these statements. The risks we face that could cause us not to achieve these results include, but are not limited to, our ability to do the following in a timely manner, at reasonable costs and on satisfactory terms and conditions: - successfully market our services to current and new customers; - interconnect with and develop cooperative working relationships with ILECs; - develop efficient operations support systems and other back office systems; - successfully and efficiently transfer new customers to our networks and access new geographic markets; - identify, finance and complete suitable acquisitions; - borrow under our credit facilities or borrow under alternative financing sources; - install new switching facilities and other network equipment; - electronically bond with ILECs; and - obtain leased fiber optic line capacity, rights-of-way, building access rights and any required governmental authorizations, franchises and permits. Regulatory, legislative and judicial developments could also cause actual results to differ materially from the future results reflected in such forward-looking statements. You should consider all of our subsequent written and oral forward-looking statements only in light of such cautionary statements. You should not place undue reliance on these forward-looking statements and you should understand that they represent management's view only as of the dates we make them. Our Limited History of Operations May Not Be a Reliable Basis for Evaluating Our Prospects Because of our short operating history, you have limited operating and financial data that you can use to evaluate our performance and determine whether you should invest in our common stock. 16 19 If We Do Not Effectively Manage Rapid Expansion of Our Business, Our Financial Condition Will Suffer We are rapidly expanding our operations and providing bundled telecommunications services on a widespread basis. This continued rapid expansion may place a significant strain on our management, financial and other resources. If we fail to manage our growth effectively, we may not be able to expand our customer base and service offerings as we have planned. Our Success Depends on Our Key Personnel and We May Not Be Able to Replace Key Executives Who Leave We are managed by a small number of key executive officers, most notably Royce J. Holland, our Chairman and Chief Executive Officer. The loss of services of one or more of these key individuals, particularly Mr. Holland, could materially and adversely affect our business and our prospects. Most of our executive officers do not have employment agreements, and we do not maintain key person life insurance for any of our executive officers. The competition for qualified personnel in the telecommunications industry is intense. For this reason, we cannot assure you that we will be able to hire or retain necessary personnel in the future. We Are Dependent on Effective Billing, Customer Service and Information Systems and We May Have Difficulties in Developing These Systems Sophisticated back office information and processing systems are vital to our growth and our ability to monitor costs, bill customers, initiate, implement and track customer orders and achieve operating efficiencies. We cannot assure you that these systems will be successfully implemented on a timely basis or at all or will perform as expected because: - we have and will likely continue to have difficulties in getting products and services from our vendors delivered in a timely and effective manner, at acceptable costs and at the service and performance level required; - we may fail to adequately identify all of our information and processing needs; - our processing or information systems may fail or be inadequate; - we may not be able to effectively integrate such products or services; - we may fail to upgrade systems as necessary; and - third party vendors may cancel or fail to renew license agreements that relate to these systems. Under Certain Circumstances We May Need Additional Capital to Expand Our Business and Increase Revenue We may need additional capital to fund capital expenditures, working capital, debt service and cash flow deficits during the period in which we are expanding and developing our business and deploying our networks, services and systems. We believe that the borrowings expected to be available under our credit facilities, together with our cash on hand, will be sufficient to pre-fund our expanded business plan. However, we will only be able to borrow under these credit facilities if we are in compliance with the financial covenants and other conditions. In the event we cannot borrow under these credit facilities, we may need to access alternative sources of capital. If we are unable to do so we may not be able to expand as we expect, which may have an adverse effect on us. The actual amount and timing of our future capital requirements may differ materially from our estimates as a result of financial, business and other factors, many of which are beyond our control, as well as prevailing economic conditions. 17 20 Our Substantial Indebtedness Could Make Us Unable to Service Indebtedness and Meet Our Other Requirements and Could Adversely Affect Our Financial Health We have a significant amount of debt outstanding and plan to access additional debt financing to fund our expanded business plan, including under our credit facilities that closed in February 2000. On December 31, 1999, we had $514.4 million of outstanding indebtedness and $443.6 million of stockholders' equity. This level of debt could: - impair our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes; - require us to dedicate a substantial portion of our cash flow from operations to the payment of principal and interest on our indebtedness, thereby reducing the funds available for the growth of our networks; - place us at a competitive disadvantage with those of our competitors who do not have as much debt as we do; - impair our ability to adjust rapidly to changing market conditions; and - make us more vulnerable if there is a downturn in general economic conditions or in our business. We cannot assure you that we will be able to meet our working capital, capital expenditure and debt service requirements. Limitations Imposed by Restrictive Covenants Could Limit How We Conduct Business and a Default Under Our Indentures and Financing Agreements Could Significantly Impact Our Ability to Repay Our Indebtedness Our indentures and our credit facilities contain covenants that restrict our ability to: - incur additional indebtedness; - pay dividends and make other distributions; - prepay subordinated indebtedness; - make investments and other restricted payments; - enter into sale and leaseback transactions; - create liens; - sell assets; and - engage in certain transactions with affiliates. Our current and future financing arrangements contain and will continue to contain similar or more restrictive covenants, as well as other covenants that will require us to maintain specified financial ratios and satisfy financial tests. As a result of these restrictions, we are limited in how we conduct business and we may be unable to raise additional debt or equity financing to operate during general economic or business downturns, to compete effectively or to take advantage of new business opportunities. This may affect our ability to generate revenues and make profits. Without sufficient revenues and cash, we may not be able to pay interest and principal on our indebtedness. Our failure to comply with the covenants and restrictions contained in our indentures and other financing agreements could lead to a default under the terms of these agreements. If such a default occurs, the other parties to such agreements could declare all amounts borrowed and all amounts due under other instruments that contain provisions for cross-acceleration or cross-default due and payable. In addition, lenders under our current and future financing arrangements could terminate their commitments to lend to us. If that occurs, we cannot assure you that we would be able to make payments on our indebtedness, meet our working capital or 18 21 meet our capital expenditure requirements, or that we would be able to find additional alternative financing. Even if we could obtain additional alternative financing, we cannot assure you that it would be on terms that are favorable or acceptable to us. We May Not Have the Funds Necessary to Finance the Change of Control Offer Which May Be Required By Our Financing Agreements Our indentures provide that upon a change of control, each note holder will have the right to require us to purchase all or a portion of such holder's notes. We would be required to purchase the notes at a purchase price of 101% of the accreted value of the 11 3/4% notes and 101% of the principal amount of the 12 7/8% notes, plus any accrued and unpaid interest to the date of repurchase. Our credit facilities provides that upon a change of control, we may be required to repay all of our obligations under these credit facilities. It is possible that we will not have sufficient funds at that time to repurchase our notes or repay any debt outstanding under our credit facilities. If We Do Not Interconnect with Our Primary Competitors, the Incumbent Local Exchange Carriers, Our Business Will Be Adversely Affected Many new carriers, including Allegiance, have experienced difficulties in working with the incumbent local exchange carriers with respect to initiating, interconnecting, and implementing the systems used by these new carriers to order and receive unbundled network elements and wholesale services and locating the new carriers' equipment in the offices of the incumbent local exchange carriers. As a new carrier, we must coordinate with incumbent local exchange carriers so that we can provide local service to customers on a timely and competitive basis. The Telecommunications Act created incentives for regional Bell operating companies to cooperate with new carriers and permit access to their facilities by denying such companies the ability to provide in-region long distance services until they have satisfied statutory conditions designed to open their local markets to competition. The FCC recently granted approval to Bell Atlantic to provide in-region long distance service in New York. In addition, SBC Communications has filed a petition to offer such service in Texas. Other regional Bell operating companies in our markets may petition and receive approval from the FCC to offer long distance services. These companies may not be accommodating to us once they are permitted to offer long distance service. If we cannot obtain the cooperation of a regional Bell operating company in a region, whether or not it has been authorized to offer long distance service, our ability to offer local services in such region on a timely and cost-effective basis will be adversely affected. If We Do Not Obtain Peering Arrangements with Internet Service Providers, the Profitability of Our Internet Access Services Will Suffer The profitability of our Internet access services, and related services such as Web site hosting, may be adversely affected if we are unable to obtain "peering" arrangements with Internet service providers. In the past, major Internet service providers routinely exchanged traffic with other Internet service providers that met technical criteria on a "peering" basis, meaning that each Internet service provider accepted traffic routed to Internet addresses on their system from their "peers" on a reciprocal basis, without payment of compensation. However, since 1997 UUNET Technologies, Inc., the largest Internet service provider, has been greatly restricting the use of peering arrangements with other providers and has been imposing charges for accepting traffic from providers other than its "peers". Other major Internet service providers have adopted similar policies. We do not currently have any peering arrangements and cannot assure you that we will be able to negotiate "peer" status with any of the major nationwide Internet service providers in the future, or that we will be able to terminate traffic on Internet service providers' networks at favorable prices. Our Offering of Long Distance Services Is Affected By Our Ability to Establish Effective Resale Agreements We offer long distance services as part of our "one-stop shopping" offering of bundled telecommunications services to our customers. We have relied and will continue to rely on other carriers to provide transmission and termination services for all of our long distance traffic. We will continue to enter into resale agreements with long distance carriers to provide us with transmission services. Such agreements typically 19 22 provide for the resale of long distance services on a per-minute basis and may contain minimum volume commitments. Negotiation of these agreements involves estimates of future supply and demand for transmission capacity as well as estimates of the calling pattern and traffic levels of our future customers. If we fail to meet our minimum volume commitments, we may be obligated to pay underutilization charges and if we underestimate our need for transmission capacity, we may be required to obtain capacity through more expensive means. Our Principal Competitors for Local Services, the Incumbent Local Exchange Carriers, and Potential Additional Competitors, Have Advantages that May Adversely Affect Our Ability to Compete with Them The telecommunications industry is highly competitive. Many of our current and potential competitors in the local market have financial, technical, marketing, personnel and other resources, including brand name recognition, substantially greater than ours, as well as other competitive advantages over us. In each of the markets targeted by us, we will compete principally with the ILEC serving that area. These ILECs enjoy advantages that may adversely affect our ability to compete with them. Incumbent local exchange carriers are established providers of local telephone services to all or virtually all telephone subscribers within their respective service areas. Incumbent local exchange carriers also have long-standing relationships with federal and state regulatory authorities. FCC and state administrative decisions and initiatives provide the incumbent local exchange carriers with pricing flexibility for their: - private lines, which are private, dedicated telecommunications connections between customers; - special access services, which are dedicated lines from a customer to a long distance company provided by the local phone company; and - switched access services, which refers to the call connection provided by the local phone company's switch between a customer's phone and the long distance company's switch. In addition, with respect to competitive access services, such as special access services as opposed to switched access services, the FCC recently approved incumbent local exchange carriers increased pricing flexibility and deregulation for such access services after certain competitive levels are reached. If the incumbent local exchange carriers 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 their networks, competitors such as us could be materially adversely affected. If future regulatory decisions afford the incumbent local exchange carriers increased pricing flexibility or other regulatory relief, such decisions could also have a material adverse effect on competitors such as us. We also face, and expect to continue to face, competition in the local market from other current and potential market entrants, including long distance carriers seeking to enter, reenter or expand entry into the local exchange marketplace such as AT&T, MCI WorldCom and Sprint, and from other CLECs, resellers, competitive access providers, cable television companies, electric utilities, microwave carriers, wireless telephone system operators and private networks built by large end users. In addition, the development of new technologies could give rise to significant new competitors in the local market. Significant Competition in Providing Long Distance and Internet Services Could Reduce the Demand for and Profitability of Our Services We also face significant competition in providing long distance and Internet services. Many of these competitors have greater financial, technological, marketing, personnel and other resources than those available to us. The long distance telecommunications market has numerous entities competing for the same customers and a high average turnover rate, as customers frequently change long distance providers in response to the offering of lower rates or promotional incentives. Prices in the long distance market have declined significantly in recent years and are expected to continue to decline. We face competition from large carriers such as 20 23 AT&T, MCI WorldCom and Sprint and many smaller long distance carriers. Other competitors are likely to include regional Bell operating companies providing long distance services outside of their local service area and, with the removal of regulatory barriers, long distance services within such local service areas, other competitive local exchange carriers, microwave and satellite carriers and private networks owned by large end users. The FCC has recently granted approval to Bell Atlantic to provide in-region long distance service in New York and other regional Bell operating companies may petition and be granted such approval in the future. We may also increasingly face competition from companies offering local and long distance data and voice services over the Internet. Such companies could enjoy a significant cost advantage because they do not currently pay many of the charges or fees that we have to pay. The Internet services market is highly competitive and there are limited barriers to entry. We expect that competition will continue to intensify. Our competitors in this market include Internet service providers, other telecommunications companies, online service providers and Internet software providers. Most of the regional Bell operating companies and GTE Corporation operating units have announced plans to rapidly roll out DSL services. Some of these entities, including SBC Communications, US West and Bell Atlantic, have already commenced deployment of DSL services in selected markets and may in the future deploy DSL services on a widespread basis. Our Need to Comply with Extensive Government Regulation Can Increase Our Costs and Slow Our Growth Our networks and the provision of telecommunications services are subject to significant regulation at the federal, state and local levels. Delays in receiving required regulatory approvals or the enactment of new adverse regulation or regulatory requirements may slow our growth and have a material adverse effect upon us. The FCC exercises jurisdiction over us with respect to interstate and international services. We must obtain, and have obtained through our subsidiary, Allegiance Telecom International, Inc., prior FCC authorization for installation and operation of international facilities and the provision, including by resale, of international long distance services. Additionally, we file publicly available tariffs detailing our services and pricing with the FCC for both international and domestic long-distance services. State regulatory commissions exercise jurisdiction over us because we provide intrastate services. We are required to obtain regulatory authorization and/or file tariffs at state agencies in most of the states in which we operate. If and when we seek to build our own network segments, local authorities regulate our access to municipal rights-of-way. Constructing a network is also subject to numerous local regulations such as building codes and licensing. Such regulations vary on a city by city and county by county basis. Regulators at both the federal and state level require us to pay various fees and assessments, file periodic reports, and comply with various rules regarding the contents of our bills, protection of subscriber privacy, and similar matters on an ongoing basis. We cannot assure you that the FCC or state commissions will grant required authority or refrain from taking action against us if we are found to have provided services without obtaining the necessary authorizations, or to have violated other requirements of their rules and orders. Regulators or others could challenge our compliance with applicable rules and orders. Such challenges could cause us to incur substantial legal and administrative expenses. Deregulation of the Telecommunications Industry Involves Uncertainties, and the Resolution of These Uncertainties Could Adversely Affect Our Business The Telecommunications Act provides for a significant deregulation of the domestic telecommunications industry, including the local exchange, long distance and cable television industries. The Telecommunications Act remains subject to judicial review and additional FCC rulemaking, and thus it is difficult to predict what effect the legislation will have on us and our operations. There are currently many regulatory actions underway and being contemplated by federal and state authorities regarding interconnection pricing and other issues that could result in significant changes to the business conditions in the telecommunications industry. We cannot assure you that these changes will not have a material adverse effect upon us. 21 24 The Regulation of Interconnection with Incumbent Local Exchange Carriers Involves Uncertainties, and the Resolution of These Uncertainties Could Adversely Affect Our Business Although the incumbent local exchange carriers are required under the Telecommunications Act to unbundle and make available elements of their network and permit us to purchase only the origination and termination services that we need, thereby decreasing our operating expenses, such unbundling may not be done as quickly as we require and may be priced higher than we expect. This is important because we rely on the facilities of these other carriers to connect to our high capacity digital switches so that we can provide services to our customers. Our ability to obtain these interconnection agreements on favorable terms, and the time and expense involved in negotiating them, can be adversely affected by legal developments. A recent Supreme Court decision vacated a FCC rule determining which network elements the incumbent local exchange carriers must provide to competitors on an unbundled basis. On November 5, 1999, the FCC released an order revising its unbundled network element rules to conform to the Supreme Court's interpretation of the law, and reaffirmed the availability of the basic network elements, such as loops and dedicated transport, used by Allegiance. It is likely that this order may be subject to further agency reconsideration and/or court review. While these court and FCC proceedings were pending, Allegiance entered into interconnection agreements with a number of ILECs through negotiations or, in some cases, adoption of another CLEC's approved agreement. These agreements remain in effect, although in some cases one or both parties may be entitled to demand renegotiation of particular provisions based on intervening changes in the law. However, it is uncertain whether any of these agreements will be so renegotiated or whether Allegiance will be able to obtain renewal of these agreements on favorable terms when they expire. We Could Lose Revenue if Calls to Internet Service Providers Are Treated As Long Distance Interstate Calls We believe that other local exchange carriers should have to compensate us when their customers place calls to Internet service providers who are our customers. Most incumbent local exchange carriers disagree. Reciprocal compensation represents a material portion of our revenues. A majority of these revenues are from calls to Internet service providers. Decisions providing that other carriers do not have to compensate us for these calls could limit our ability to service this group of customers profitably. For all other local calls, it is clear that the telecommunications company whose customer calls a customer of a second telecommunications company must compensate the second company. This is known as reciprocal compensation. This rule does not apply to long distance interstate calls and the FCC in its Declaratory Ruling of February 26, 1999, determined that Internet service provider traffic is interstate for jurisdictional purposes, but that its current rules neither require nor prohibit the payment of reciprocal compensation for such calls. In the absence of a federal rule, the FCC determined that state commissions have authority to interpret and enforce the reciprocal compensation provisions of existing interconnection agreements and to determine the appropriate treatment of Internet service provider traffic in arbitrating new agreements. The Court of Appeals for the District of Columbia Circuit issued a decision on March 24, 2000, vacating the Declaratory Ruling. The court held that the FCC had not adequately explained its conclusion that calls to Internet service providers should not be treated as "local" traffic. Allegiance views this decision as favorable, but the court's direction to the FCC to re-examine the issue will likely result in further delay in the resolution of pending compensation disputes, and there can be no assurance as to the ultimate outcome of these proceedings or as to the timing of such outcome. Currently, over 30 state commissions and several federal and state courts have ruled that reciprocal compensation arrangements do apply to calls to Internet service providers, while four jurisdictions have ruled to the contrary. A number of these rulings are subject to appeal. Additional disputes over the appropriate treatments of Internet service provider traffic are pending in other states. In addition, we anticipate that the per minute reciprocal compensation rate we receive from ILECs under our new interconnection agreements will be lower than it was under our previous agreements. These reductions in reciprocal compensation will have a material adverse effect on us if we are unable to offset them with other revenues. 22 25 The Regulation of Access Charges Involves Uncertainties, and the Resolution of These Uncertainties Could Adversely Affect Our Business To the extent we provide long-distance, often referred to as "interexchange," telecommunications service, we are required to pay access charges to other local exchange carriers when we use the facilities of those companies to originate or terminate interexchange calls. As a competitive local exchange carrier, we also provide access services to other long distance service providers. The interstate access charges of incumbent local exchange carriers are subject to extensive regulation by the FCC, while those of competitive local exchange carriers are subject to a lesser degree of FCC regulation, but remain subject to the requirement that all charges be just, reasonable, and not unreasonably discriminatory. Disputes have arisen regarding the regulation of access charges and these may be resolved adversely to us. Some interexchange carriers, including AT&T and Sprint, have challenged the switched access rates of Allegiance and other CLECs and have withheld some or all payments for the switched access services that they continue to receive. Although no formal complaints have been filed against us, AT&T and other interexchange carriers have asserted that they have not ordered switched access service from us and/or that our charges for switched access services are higher than those of the ILEC serving the same territory and are therefore unjust and unreasonable. AT&T has refused to pay us any originating access charges at our tariffed rates and other carriers are paying us less than our tariffed rates. On July 5, 1999, the FCC issued a ruling to address this issue in the context of a complaint case filed by MGC Communications, Inc., a CLEC that had not been receiving payments from AT&T. In that ruling, the FCC stated that "AT&T is liable to MGC, at MGC's tariffed rate, for the originating access service that it received . . ." The FCC indicated that AT&T had no obligation to purchase access from MGC based on the arguments that MGC had made, but the FCC also made clear that there may be other requirements that could limit AT&T's ability to not purchase such access from a CLEC. In response to that FCC decision, AT&T filed a Petition for Review with the FCC, which was denied on December 28, 1999. The FCC is also reviewing the switched access rate level issue and related matters in its Access Charge Reform docket. In this docket, the FCC has requested comment as to whether interexchange carriers may refuse to purchase switched access services from particular carriers. Allegiance is an active participant in that proceeding. Several states, including Colorado, Missouri, New York, Texas and Virginia, have proposed or required that CLEC access charges be limited to those charged by ILECs operating in the same area as the CLEC with respect to calls originating or terminating in such area, except where the CLEC in question can establish that its costs justify a higher access rate through a formal cost proceeding. We believe that it is possible that other states will enact similar requirements. We also believe, however, that it is more likely that many states will use the same approach for intrastate long distance as the FCC ultimately decides to use for interstate long distance. In light of the FCC's decision in the MGC/AT&T proceeding and the support ILECs, including the large ILECs, have generally given to the principle that interexchange carriers should not be permitted to refuse to purchase switched access services from particular carriers, we believe that we will ultimately receive payment owed to us from AT&T, Sprint and any other interexchange carrier that withholds payment for switched access services that we provide. We cannot provide any assurance, however, as to the amount of payments that we will ultimately receive, the actual outcome of the FCC proceedings or the positions various states will take on the similar issue of intrastate switched access rates. Our switched access rates will have to be adjusted to comport with future decisions of the FCC or state commissions and these adjustments could have a material adverse effect on Allegiance. If We Do Not Continually Adapt to Technological Change, We Could Lose Customers and Market Share The telecommunications industry is subject to rapid and significant changes in technology, and we rely on outside vendors for the development of and access to new technology. The effect of technological changes on our business cannot be predicted. We believe our future success will depend, in part, on our ability to anticipate or adapt to such changes and to offer, on a timely basis, services that meet customer demands. We 23 26 cannot assure you that we will obtain access to new technology on a timely basis or on satisfactory terms. Any failure by us to obtain new technology could cause us to lose customers and market share. We Face Potential Conflicts of Interest Caused by Fund Investor Control Which Could Be Detrimental to Holders of Our Securities You should be aware that the investment funds that provided our initial equity hold a majority of our board seats and a significant amount of our common stock and that as a result, our direction and future operations may be controlled by these funds. In addition, Vulcan Ventures recently purchased six million shares (as adjusted for our 3-for-2 stock split effected on February 28, 2000) of our common stock from existing stockholders and in connection with that transaction, Allegiance agreed to nominate two Vulcan Ventures designated directors to Allegiance's board. As a result of these relationships, decisions concerning our operations or financial structure may present conflicts of interest between these investors and our management and other holders of our securities, including our notes. In addition to their investments in us, these investors or their affiliates currently have significant investments in other telecommunications companies and may in the future invest in other entities engaged in the telecommunications business or in related businesses, including entities that compete with us. Conflicts may also arise in the negotiation or enforcement of arrangements entered into by us and entities in which these investors have an interest. Future Sales of Our Stock by Existing Stockholders May Adversely Affect Our Stock Price We currently have approximately 108,100,404 million shares of common stock outstanding. Many of these shares are "restricted securities" under the federal securities laws, and such shares are or will be eligible for sale subject to restrictions as to timing, manner, volume, notice and the availability of current public information regarding Allegiance. Sales of substantial amounts of stock in the public market, or the perception that sales could occur, could depress the prevailing market price for our stock. Sales may also make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price that we deem appropriate. Anti-Takeover Provisions in Allegiance's Charter and Bylaws Could Limit Our Share Price and Delay a Change of Management Our certificate of incorporation and by-laws contain provisions that could make it more difficult or even prevent a third party from acquiring Allegiance without the approval of our incumbent board of directors. If We Become Subject to the Investment Company Act, It Could Adversely Affect Our Financing Activities and Financial Results Allegiance currently has substantial short-term investments, pending the deployment of our capital in the pursuit of building our business and these will increase if we borrow funds under our credit facilities. This may result in Allegiance being treated as an "investment company" under the Investment Company Act of 1940. This statute requires the registration of, and imposes various substantive restrictions on, certain companies that are, or hold themselves out as being, engaged primarily, or propose to engage primarily in, the business of investing, reinvesting or trading in securities, or that fail certain statistical tests regarding composition of assets and sources of income and are not primarily engaged in businesses other than investing, reinvesting, owning, holding or trading securities. Allegiance believes that it is primarily engaged in a business other than investing, reinvesting, owning, holding or trading securities and, therefore, is not an investment company within the meaning of this statute. While we believe this means we are not an investment company within the meaning of the law, we are currently relying on an exemption from these Investment Company Act requirements. This exemption remains in effect until June 8, 2000. If we were required to register as an investment company under the 1940 Act, we would become subject to substantial regulation with respect to our capital structure, management, operations, transactions with affiliated persons and other matters. To avoid having to register as an investment company, we may have to 24 27 seek an extension of the effectiveness of our exemption from the SEC or we may have to invest a portion of our liquid assets in cash and demand deposits instead of securities. The extent to which we will have to do so will depend on the composition and value of our total assets on June 8, 2000. Having to register as an investment company or having to invest a material portion of our liquid assets in cash and demand deposits to avoid such registration could have a material adverse effect on our business, financial condition and results of operations. We May Be Adversely Impacted By Year 2000 Issues The "year 2000" issue generally describes the various problems that may result from the improper processing of dates and date-sensitive transactions by computers and other equipment as a result of computer hardware and software using two digits to identify the year in a date. Although as of the date hereof no material problems have arisen, if any year 2000 issues are not adequately resolved, there could be a material adverse effect on our business, financial condition or results of operations. ITEM 2. PROPERTIES Allegiance owns or leases, in its operating territories, telecommunications property which includes: - owning switches; - leasing high capacity digital lines that interconnect Allegiance's network with ILEC networks; - leasing high capacity digital lines that connect Allegiance's switching equipment to Allegiance transmission equipment located in ILEC central offices; - leasing local loop lines which connect Allegiance's customers to Allegiance's network; and - leasing space in ILEC central offices for collocating Allegiance transmission equipment. Allegiance is headquartered in Dallas, Texas and leases offices and space in a number of locations, primarily for sales offices and network equipment installations. Allegiance believes that its leased facilities are adequate to meet its current needs in the markets in which it has begun to deploy networks, and that additional facilities are available to meet its development and expansion needs in existing and projected target markets for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS Allegiance is not party to any legal proceeding that Allegiance believes would, individually or in the aggregate, have a material adverse effect on Allegiance's financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Allegiance did not submit any matter to a vote of its stockholders during the fourth quarter of 1999. 25 28 ITEM 4A. EXECUTIVE OFFICERS OF ALLEGIANCE The following sets forth certain information regarding Allegiance's executive officers. Allegiance's executive officers are elected annually by the board of directors at its first meeting held after each annual meeting of stockholders or as soon thereafter as convenient.
NAME AGE POSITION(S) - ---- --- ----------- Royce J. Holland...................... 51 Chairman of the Board and Chief Executive Officer C. Daniel Yost........................ 51 President and Chief Operating Officer and Director Thomas M. Lord........................ 43 Executive Vice President of Corporate Development, Chief Financial Officer and Director Dana A. Crowne........................ 39 Senior Vice President and Chief Technology Officer Ted Gilmore........................... 48 Senior Vice President of Marketing Curtis Gray........................... 51 Senior Vice President of Operations and Engineering Stephen N. Holland.................... 48 Senior Vice President of Research Patricia E. Koide..................... 51 Senior Vice President of Human Resources, Real Estate, Facilities and Administration Gregg A. Long......................... 46 Senior Vice President of Quality and Audit G. Clay Myers......................... 40 Senior Vice President, Finance and Accounting Anthony J. Parella.................... 40 Senior Vice President of Field Sales and Customer Care and Director Jerrold Sklar......................... 40 Senior Vice President of Operational Support Systems and Customer Implementation Mark B. Tresnowski.................... 40 Senior Vice President, General Counsel and Secretary
Royce J. Holland, Allegiance's Chairman of the Board and Chief Executive Officer, has more than 25 years of experience in the telecommunications, independent power and engineering/construction industries. Prior to founding Allegiance in April 1997, Mr. Holland was one of several co-founders of MFS Communications, where he served as President and Chief Operating Officer from April 1990 until September 1996 and as Vice Chairman from September 1996 to February 1997. In January 1993, Mr. Holland was appointed by President George Bush to the National Security Telecommunications Advisory Committee. In December 1998, Mr. Holland served as the Chairman of the Association for Local Telecommunications Services, the industry trade organization for the competitive local telephone sector from December 1998 to January 2000. In November 1999, Mr. Holland was appointed by Texas Governor George W. Bush to the Texas (Electronic) E-Government Task Force. Mr. Holland also presently serves on the board of directors of CSG Systems, a publicly held billing services company and ChoiceOne Communications Inc., a publicly held CLEC that may compete with Allegiance. Mr. Holland's brother, Stephen N. Holland, is employed as Allegiance's Senior Vice President of Research. C. Daniel Yost, who joined Allegiance as President and Chief Operating Officer in February 1998, was elected to Allegiance's board of directors in March 1998. Mr. Yost has more than 26 years of experience in the telecommunications industry. From July 1997 until he joined Allegiance, Mr. Yost was the President and Chief Operating Officer for U.S. Operations of Netcom On-Line Communications Services, Inc., a leading Internet service provider. Mr. Yost served as the President, Southwest Region of AT&T Wireless Services, Inc. from June 1994 to July 1997. Prior to that, from July 1991 to June 1994, Mr. Yost was the 26 29 President, Southwest Region of McCaw Cellular Communications/LIN Broadcasting. Mr. Yost presently serves on the board of directors of ADC Telecommunications Inc., a publicly traded global supplier of transmission and networking systems for telecommunications, cable television, broadcast, wireless and enterprise networks, Ace Cash Express Inc., a publicly traded provider of retail financial services and DSET Corporation, a publicly traded provider of operational support systems gateway products for the global telecommunications industry. Thomas M. Lord, a co-founder and director of Allegiance and its Executive Vice President of Corporate Development and Chief Financial Officer, is responsible for overseeing Allegiance's mergers and acquisitions, corporate finance and investor relations functions. Mr. Lord is an 18-year veteran in investment banking, securities research and portfolio management, including serving as a managing director of Bear, Stearns & Co. Inc. from January 1986 to December 1996. In the five-year period ending December 1996, Mr. Lord oversaw 43 different transactions valued in excess of $6.2 billion for the telecommunications, information services and technology industries. Dana A. Crowne, Allegiance's Senior Vice President and Chief Technology Officer, joined Allegiance in August 1997 as its Senior Vice President and Chief Engineer. Prior to joining Allegiance, Mr. Crowne held various management positions at MFS Communications from the time of its founding in 1988, where his responsibilities included providing engineering support and overseeing budgets for the construction of MFS Communications' networks. Mr. Crowne ultimately became Vice President, Network Optimization for MFS Communications from January 1996 to May 1997 and managed the company's network expenses and planning and its domestic engineering functions. Prior to joining MFS Communications, Mr. Crowne designed and installed fiber optic transmission systems for Morrison-Knudsen and served as a consultant on the construction of private telecommunications networks with JW Reed and Associates. Ted Gilmore joined Allegiance as its Senior Vice President of Marketing in January 2000. Prior to joining Allegiance, Mr. Gilmore was Vice President Sales for Allied Riser Communications overseeing sales, distribution strategies and market implementation for the company's Internet/data services. Mr. Gilmore previously served in a number of senior management positions with GTE from September 1987 to November 1998, including Vice President and General Manager, Ethnic and International Sales and Marketing for GTE Communications Corp; Vice President and General Manager of GTE Professional Services Incorporated; Director Distribution Channels and Manager Market Strategy for GTE Telephone Operations. Mr. Gilmore held sales and marketing management positions with IBM/Rolm Corporation from 1983 to 1987, and Burroughs Corporation from 1973 to 1983. Curtis Gray joined Allegiance as its Senior Vice President of Network Operations and Engineering in January 2000. Prior to joining Allegiance, from January 1994 to December 1999, Mr. Gray served as Vice President, Enhanced Data Services, at MCI WorldCom. Mr. Gray was responsible for operations and technical support of MCI WorldCom's Commercial Global Data Networks, Customer Collocation, Customer Engineering/Project Management and various Internet service provider and competitive local exchange carrier initiatives. From November 1991 to January 1994, Mr. Gray was with WilTel (subsequently purchased by LDDS which became the WorldCom entity) where he had responsibilities for Customer Engineering Support, ATM Commercialization, Data Laboratory Services, Customer Collocation and specific focus on service and support for Internet service providers. He has previously served in executive roles in engineering and consulting companies focusing on communication network performance analysis, design, implementation and operation. Stephen N. Holland, Allegiance's Senior Vice President of Research, joined Allegiance in September 1997 as its Senior Vice President and Chief Information Officer. Prior to that time, Mr. Holland held several senior level positions involving management of or consulting on information systems, accounting, taxation and finance. Mr. Holland's experience includes serving as Practice Manager and Information Technology Consultant for Oracle Corporation from June 1995 to September 1997, as Chief Financial Officer of Petrosurance Casualty Co. from September 1992 to June 1995, as Manager of Business Development for Electronic Data Systems, and as a partner of Price Waterhouse. Mr. Holland's brother, Royce J. Holland, presently serves as Allegiance's Chairman of the Board and Chief Executive Officer. 27 30 Patricia E. Koide has been Allegiance's Senior Vice President of Human Resources, Real Estate, Facilities and Administration since August 1997. Before then, Ms. Koide was Vice President of Corporate Services, Facilities and Administration for WorldCom from March 1997 to August 1997. Ms. Koide also held various management positions within MFS Communications and its subsidiaries since 1989, including Senior Vice President of Facilities, Administration and Purchasing for MFS Communications North America from 1996 to 1997, Senior Vice President of Human Resources, Facilities and Administration for MFS Communications Telecom from 1994 to 1996, and Vice President of Human Resources and Administration for MFS Communications North America from 1989 to 1993. Prior to MFS Communications, Ms. Koide was with Sprint for eight years where she managed the company's human resources, real estate and facilities for the Midwest. Gregg A. Long, Allegiance's Senior Vice President of Quality and Audit, joined Allegiance in September 1997 as its Senior Vice President of Regulatory and Development. Mr. Long spent 11 years at Destec Energy, Inc. as Project Development Manager -- Partnership Vice President and Director. In that position, he was responsible for the development of gas-fired power plants from conceptual stages through project financing. Prior to joining Destec, Mr. Long was Manager of Project Finance at Morrison-Knudsen, where he was responsible for analyzing and arranging finance packages for various industrial, mining and civil projects and also served as financial consultant and analyst. G. Clay Myers joined Allegiance as its Senior Vice President, Finance and Accounting in December 1999. Prior to joining Allegiance, Mr. Myers was the Vice President, Finance, Chief Financial Officer and Treasurer of PageMart Wireless, Inc. Prior to joining PageMart, Mr. Myers was Senior Operations Manager for Dell Computer Corporation from 1991 to 1993 and was with Ernst & Young, LLP from 1982 to 1991. Mr. Myers is a certified public accountant. Anthony J. Parella, Allegiance's Senior Vice President of Field Sales and Customer Care since October 1999, joined Allegiance as its Regional Vice President -- Central Division in August 1997 and later became its National Vice President of Field Sales in August 1998. Mr. Parella has more than 10 years of experience in the telecommunications industry. Mr. Parella became a member of the board of directors in December 1999. Prior to joining Allegiance, Mr. Parella was Vice President and General Manager for MFS Intelenet, Inc., an operating unit of MFS Communications, from February 1994 to January 1997, where he was responsible for the company's sales and operations in Texas. Mr. Parella also served as Director of Commercial Sales for Sprint from 1991 to January 1994. Jerrold Sklar, Allegiance's Senior Vice President of Operation Support Systems and Customer Implementation, joined Allegiance in January of 1998 as its Vice President of Marketing, and has more than 17 years of experience in the telecommunications industry. Prior to joining Allegiance, Mr. Sklar served as Director of Strategic Sales and Director of Field Support for the Managed Services Division of Octel Communications Corporation (now Lucent Technologies) from October 1992 to December 1997. Prior to that time, Mr. Sklar managed the OEM sales channel for VMX, Inc. from October 1989 to October 1992. Additionally Mr. Sklar held various Sales and Sales Management positions with long distance carrier, Sprint from July 1982 to September 1989. Mark B. Tresnowski became Allegiance's Senior Vice President and General Counsel in February 1999. Mr. Tresnowski has been Allegiance's Secretary since September 1997. Mr. Tresnowski practiced law at Kirkland & Ellis for 13 years and was a partner of that firm from October 1992 to January 1999. In private practice, Mr. Tresnowski specialized in private and public financings, mergers and acquisitions and securities law. 28 31 PART II ITEM 5. MARKET FOR ALLEGIANCE'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION Allegiance's common stock is listed on the Nasdaq National Market. Allegiance's ticker symbol is "ALGX." Allegiance completed the initial public offering of its common stock in July 1998. Prior to July 1, 1998, no established public trading market for the common stock existed. The following table sets forth on a per share basis, the high and low sale prices per share for our common stock as reported on the Nasdaq National Market for the periods indicated:
HIGH LOW ------- ------ Year ended December 31, 1998: Third quarter............................................. $ 10.46 $ 4.17 Fourth quarter............................................ 8.92 3.33 Year ended December 31, 1999: First quarter............................................. 20.67 7.71 Second quarter............................................ 39.00 16.92 Third quarter............................................. 43.50 26.67 Fourth quarter............................................ 61.75 35.04
The prices above have been restated to reflect Allegiance's 3-for-2 stock split, in the form of a 50% stock dividend, to stockholders of record on February 18, 2000. STOCKHOLDERS There were approximately 146 owners of record of Allegiance common stock as of March 24, 2000. This number excludes stockholders whose stock is held in nominee or street name by brokers and Allegiance believes that it has a significantly larger number of beneficial holders of common stock. A recent reported last sale price of our common stock on the Nasdaq National Market is set forth on the front cover of this report. DIVIDENDS We do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will be dependent upon then existing conditions, including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects, and other factors our board of directors deems relevant. In addition, our current financing arrangements effectively prohibit us from paying cash dividends for the foreseeable future. ITEM 6. SELECTED FINANCIAL DATA The information required by this Item 6 is incorporated in this report by reference from the section titled "Selected Financial Data" of our annual report to stockholders for the fiscal year ended December 31, 1999 (the "annual report"). ITEM 7. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS The information required by this Item 7 is incorporated in this report by reference from the section titled "Management's Discussion & Analysis of Financial Condition & Results of Operations" of our annual report. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this Item 7A is incorporated in this report by reference from the section titled "Management's Discussion & Analysis of Financial Condition & Results of Operations" of our annual report. 29 32 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item 8 is incorporated in this report by reference from the financial statements contained in our annual report, except for the financial statement schedules which are included in Item 14 of this report. For a list of financial statements filed as part of this report, see Item 14 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF ALLEGIANCE The information required by this Item 10 regarding Allegiance's directors is incorporated in this report by reference from certain sections of our definitive proxy statement for the annual meeting of stockholders for the fiscal year ended December 31, 1999, which will be filed with the SEC no later than April 30, 1999 (the "proxy statement"). You will find our response to this Item 10 in the sections titled "Who Are Allegiance's Directors and Officers?" and "About the Board of Directors and its Committees" of our proxy statement. Information required by this Item 10 regarding the executive officers of Allegiance is included in Item 4A of Part I of this report as permitted by Instruction 3 to Item 401(b) of Regulation S-K. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 is incorporated in this report by reference from the sections titled "Compensation of Executive Officers," "Compensation Committee Interlocks and Insider Participation" and "Executive Agreements" of our proxy statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item 12 is incorporated in this report by reference from the section titled "Security Ownership of Certain Beneficial Owners and Management" of our proxy statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item 13 is incorporated in this report by reference from the section titled "Certain Relationships and Related Transactions" of our proxy statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Financial Statements (the following financial information from our annual report is incorporated by reference into Part II of this report): Report of Independent Public Accountants Consolidated Balance Sheets as of December 31, 1999 and 1998 Consolidated Statements of Operations for the years ended December 31, 1999 and 1998 and for the Period from Inception (April 22, 1997) to December 31, 1997 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1999 and 1998 and for the Period from Inception (April 22, 1997) to December 31, 1997 Consolidated Statements of Cash Flows for the years ended December 31, 1999, and 1998 and for the Period from Inception (April 22, 1997) to December 31, 1997 30 33 Notes to Consolidated Financial Statements (a)(2) Financial Statement Schedules: S-I Report of Independent Public Accountants on Financial Statement Schedule S-II Valuation and Qualifying Accounts for the years ended December 31, 1999 and 1998 and for the Period from Inception (April 22, 1997) to December 31, 1997 (a)(3) The exhibits filed in response to Item 601 of Regulation S-K are listed in the Exhibit Index starting on page E-1 of this report. (b) Reports on Form 8-K There were no reports filed during the three months ended December 31, 1999. 31 34 SIGNATURES According to the requirements of the Securities Exchange act of 1934, Allegiance Telecom, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 29, 2000. ALLEGIANCE TELECOM, INC. By /s/ ROYCE J. HOLLAND ----------------------------------- Royce J. Holland, Chairman of the Board and Chief Executive Officer According to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities indicated on March 29, 2000.
SIGNATURE CAPACITY --------- -------- /s/ ROYCE J. HOLLAND Chairman of the Board and Chief Executive - ----------------------------------------------------- Officer (Principal Executive Officer) Royce J. Holland /s/ C. DANIEL YOST President, Chief Operating Officer and - ----------------------------------------------------- Director C. Daniel Yost /s/ THOMAS M. LORD Executive Vice President, Chief Financial - ----------------------------------------------------- Officer and Director (Principal Financial Thomas M. Lord Officer) /s/ G. CLAY MYERS Senior Vice President of Finance and - ----------------------------------------------------- Accounting (Principal Accounting Officer) G. Clay Myers /s/ ANTHONY J. PARELLA Senior Vice President of Field Sales and - ----------------------------------------------------- Customer Care and Director Anthony J. Parella /s/ JAMES E. CRAWFORD, III Director - ----------------------------------------------------- James E. Crawford, III /s/ JOHN B. EHRENKRANZ Director - ----------------------------------------------------- John B. Ehrenkranz /s/ PAUL J. FINNEGAN Director - ----------------------------------------------------- Paul J. Finnegan /s/ RICHARD D. FRISBIE Director - ----------------------------------------------------- Richard D. Frisbie /s/ REED E. HUNDT Director - ----------------------------------------------------- Reed E. Hundt /s/ ALAN E. GOLDBERG Director - ----------------------------------------------------- Alan E. Goldberg
32 35
SIGNATURE CAPACITY --------- -------- /s/ JAMES N. PERRY, JR. Director - ----------------------------------------------------- James N. Perry, Jr. /s/ DINO VENDETTI Director - ----------------------------------------------------- Dino Vendetti
33 36 SCHEDULE I -- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Stockholders of Allegiance Telecom, Inc.: We have audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheets of Allegiance Telecom, Inc. and subsidiaries (the "Company") as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the years ended December 31, 1999, 1998 and for the period from inception (April 22, 1997), to December 31, 1997, incorporated by reference in this Form 10-K and have issued our report thereon dated January 26, 2000 except with respect to the matters discussed in Note 12, as to which the date is March 1, 2000. These consolidated financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. Schedule II -- Valuation and Qualifying Accounts is not a required part of the basic consolidated financial statements but is supplementary information required by the Securities and Exchange Commission. This information has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Dallas, Texas March 1, 2000 S-I 37 ALLEGIANCE TELECOM, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 AND FOR THE PERIOD FROM INCEPTION (APRIL 22, 1997) TO DECEMBER 31, 1997 (DOLLARS IN THOUSANDS)
ADDITIONS --------------------- BALANCE AT CHARGED TO CHARGED BEGINNING OF COSTS AND TO OTHER BALANCE AT DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD - ----------- ------------ ---------- -------- ---------- ------------- ALLOWANCE FOR DOUBTFUL ACCOUNTS Year Ended December 31, 1999........ $577 $7,397 $222 $(396) $7,800 Year Ended December 31, 1998........ $ -- $ 650 $ -- $ (73) $ 577 For the period from inception (April 22, 1997) to December 31, 1997... $ -- $ -- $ -- $ -- $ --
S-II 38 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ------- ----------- 1.1 Form of Underwriting Agreement (Exhibit 1.1 to Allegiance's Registration Statement on Form S-1, as amended, Registration No. 333-53479 (the "Form S-1 Registration Statement")). 3.1 Amended and Restated Certificate of Incorporation (Exhibit 3.1 to Allegiance's Form 10-Q for the period ended June 30, 1998). 3.2 Certificate of Correction to Amended and Restated Certificate of Incorporation (Exhibit 3.2 to Allegiance's Form 10-K for the period ended December 31, 1998). 3.3 Amended and Restated By-Laws (Exhibit 3.2 to Allegiance's Form 10-Q for the period ended June 30, 1998). 4.1 Indenture, dated as of July 7, 1998, by and between Allegiance and The Bank of New York, as trustee (including the Form of Notes) (Exhibit 4.1 to Allegiance's Registration Statement on Form S-1, as amended, Registration No. 333-69543). 4.2 Indenture, dated as of February 3, 1998, by and between Allegiance and The Bank of New York, as trustee (Exhibit 4.2 to Allegiance's Registration Statement on Form S-4, as amended, Registration No. 333-49013 (the "Form S-4 Registration Statement")). 4.3 Form of 11 3/4% Senior Discount Notes (Exhibit 4.3 to the Form S-4 Registration Statement). 4.4 Collateral Pledge and Security Agreement, dated as of July 7, 1998, by and between Allegiance and The Bank of New York, as trustee (Exhibit 4.4 to Allegiance's Registration Statement on Form S-1, as amended, Registration No. 333-69543). 10.1 Stock Purchase Agreement, dated August 13, 1997, between Allegiance LLC and Allegiance (Exhibit 10.1 to the Form S-4 Registration Statement). 10.2 Securityholders Agreement, dated August 13, 1997, among Allegiance LLC, the Fund Investors, the Management Investors and Allegiance (Exhibit 10.2 to the Form S-4 Registration Statement). 10.3 Amended and Restated Registration Agreement, dated September 13, 1999, among certain stockholders and Allegiance (Exhibit 99.4 to Allegiance's Form 8-K filed with the SEC on September 22, 1999). 10.4 Warrant Registration Rights Agreement, dated as of January 29, 1998, by and among Allegiance and Morgan Stanley & Co. Incorporated, Salomon Brothers Inc, Bear, Stearns & Co. Inc. and Donaldson, Lufkin & Jenrette Securities Corporation, as initial purchasers of the 11 3/4% Senior Discount Notes (Exhibit 10.11 to the Form S-4 Registration Statement). +10.5 Allegiance Telecom, Inc. 1997 Nonqualified Stock Option Plan (Exhibit 10.4 to the Form S-4 Registration Statement). +10.6 Allegiance Telecom, Inc. 1998 Stock Incentive Plan (Exhibit 10.6 to the Form S-1 Registration Statement). +10.7 First Amendment to the Allegiance Telecom, Inc. 1998 Stock Incentive Plan (Exhibit 10.7 to Allegiance's Form 10-K for the period ended December 31, 1998). *+10.8 Second Amendment to the Allegiance Telecom, Inc. 1998 Stock Incentive Plan. *+10.9 Amended and Restated Executive Purchase Agreement, dated December 13, 1999, between Allegiance and Royce J. Holland.
E-1 39
EXHIBIT NO. DESCRIPTION ------- ----------- *+10.10 Amended and Restated Executive Purchase Agreement, dated December 13, 1999, between Allegiance and Thomas M. Lord. *+10.11 Amended and Restated Executive Purchase Agreement, dated December 13, 1999, between Allegiance and C. Daniel Yost. +10.12 Form of Executive Purchase Agreement among Allegiance LLC, Allegiance and each of the other Management Investors (Exhibit 10.8 to the Form S-4 Registration Statement). 10.13 Warrant Agreement, dated February 3, 1998, by and between Allegiance and The Bank of New York, as Warrant Agent (including the form of the Warrant Certificate) (Exhibit 10.9 to the Form S-4 Registration Statement). 10.14 General Agreement, dated October 16, 1997, as amended, between Allegiance and Lucent Technologies Inc. (Exhibit 10.10 to the Form S-4 Registration Statement). 10.15 Form of Indemnification Agreement by and between Allegiance and its directors and officers (Exhibit 10.13 to the Form S-1 Registration Statement). *10.16 Credit and Guaranty Agreement, dated February 15, 2000, among Allegiance Telecom, Inc., Allegiance Telecom Company Worldwide (as successor to Allegiance Finance Company, Inc.), certain subsidiaries of Allegiance Telecom, Inc., various lenders, Goldman Sachs Credit Partners L.P., a Syndication Agent and Sole Lead Arranger, Toronto Dominion (Texas), Inc., as Administrative Agent, and BankBoston, N.A. and Morgan Stanley Senior Funding, Inc., as Co-Documentation Agents. *11.1 Statement Regarding Computation of Per Share Earnings (Loss) for the year ended December 31, 1999. *11.2 Statement Regarding Computation of Per Share Earnings (Loss) for the year ended December 31, 1998. *11.3 Statement Regarding Computation of Per Share Earnings (Loss) for the period from inception (April 22, 1997) through December 31, 1997. *13.1 Portions of Allegiance's Annual Report to Stockholders for the year ended December 31, 1999. *21.1 Subsidiaries of Allegiance. *23.1 Consent of Arthur Andersen LLP. *27.1 Financial Data Schedule for the year ended December 31, 1999.
- --------------- * Filed as part of this report. + Management contract or compensatory plan or arrangement filed as an exhibit to this report pursuant to Items 14(a) and 14(c) of Form 10-K. E-2 EX-10.8 2 2ND AMENDMENT TO 1998 STOCK INCENTIVE PLAN 1 EXHIBIT 10.8 SECOND AMENDMENT TO THE ALLEGIANCE TELECOM, INC. 1998 STOCK INCENTIVE PLAN WHEREAS, the Allegiance Telecom, Inc. 1998 Stock Incentive Plan was initially adopted by the board of directors and stockholders of Allegiance Telecom, Inc. ("Allegiance"). WHEREAS, Allegiance's board of directors is amending the Allegiance Telecom, Inc. 1998 Stock Incentive Plan in accordance with Section 16 of such plan. RESOLVED, that the number of shares of common stock available under the Allegiance Telecom, Inc. 1998 Stock Incentive Plan be increased by substituting the number "10,155,778" for the number "6,155,778" in Section 4 of this plan. Such amendment was approved by the board of directors on December 8, 1999. FURTHER RESOLVED, that as a result of the 3-for-2 stock split, in the form of a 50% stock dividend, the "10,155,778" number shall be replaced by "15,233,667", which shall be the aggregate number of shares available under the 1998 Stock Incentive Plan. FURTHER RESOLVED, that the officers of Allegiance be, and hereby are, authorized to take whatever actions are necessary to carry out the intent and purpose of the foregoing amendment. EX-10.9 3 AMEND/RESTATED EXECUTIVE PURCHASE AGREEMENT 1 EXHIBIT 10.9 AMENDED AND RESTATED EXECUTIVE PURCHASE AGREEMENT THIS AMENDED AND RESTATED EXECUTIVE PURCHASE AGREEMENT (this "Agreement") is made as of December 13, 1999, by and between Allegiance Telecom, Inc., a Delaware corporation (the "Company") and Royce J. Holland ("Executive"), and the Royce J. Holland Family Limited Partnership (the "Partnership," and collectively with Executive, the "Executive Purchasers"). This Agreement amends and restates the Executive Purchase Agreement dated as of August 13, 1997 (the "Original Agreement") by and between the Executive Purchasers and Transcend Telecom, L.L.C., a Delaware limited liability company (the "LLC") and the Company (then known as "Transcend Telecom, Inc."). Capitalized terms used but not otherwise defined herein have the meanings ascribed to such terms in paragraph 6 hereof. NOW, THEREFORE, in consideration of the mutual promises made herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: 1. PURCHASE AND SALE OF EXECUTIVE SECURITIES. (a) Initial Capital Contribution and Issuance of Executive Securities. Executive purchased the Executive Securities as provided for in the Original Agreement. (b) Acknowledgment of At-Will Employment. Each of the Executive Purchasers acknowledges and agrees that no agreement or arrangement between the Executive Purchasers and the Company (including, without limitation, the issuance of the Executive Securities to the Executive Purchasers and the execution and delivery of this Agreement) shall entitle Executive to remain in the employment of the Company and its Subsidiaries or affect the right of the Company or its Subsidiaries to terminate Executive's employment at any time and for any reason. 2. VESTING OF EXECUTIVE SECURITIES. (a) Vesting Schedule. Except as otherwise provided herein, an amount of Unvested Securities (as defined below) shall vest in accordance with the following schedule:
Cumulative Percentage of Executive Date Securities Vested on Such Date ---- ---------------------------------- August 13, 1997 20% August 13, 1998 60% August 13, 1999 80% August 13, 2000 100%
-1- 2 Notwithstanding the foregoing sentence, and except as otherwise provided herein, the above vesting schedule shall cease and no Unvested Securities (as defined below) shall vest after the date on which Executive's employment with the Company and its Subsidiaries terminates for any reason; provided that if Executive's employment is terminated by the Company without Cause, the Executive Securities shall thereafter continue to vest in accordance with the above schedule so long as Executive has not committed a Vesting Termination Breach (upon which breach the vesting schedule shall cease, and no Unvested Securities (as defined below) shall vest on or after the date of the first such breach). In the event the Company has alleged that Executive has committed a Vesting Termination Breach, Executive disputes such allegation, and the matter is subject to the dispute resolution provisions set forth in paragraph 5, vesting shall be tolled upon the date of the allegation of such breach; provided that (i) if it is ultimately resolved under paragraph 5 that Executive has committed a Vesting Termination Breach, the tolling shall become a permanent cessation such that vesting shall have forever ceased upon the date of such allegation, and (ii) if it is ultimately resolved under paragraph 5 that Executive did not commit a Vesting Termination Breach, a number of Unvested Securities shall vest giving retroactive effect to such vesting schedule such that there shall exist a number of Vested Securities as if the vesting schedule had not been tolled as a result of such allegations. Executive Securities which have become vested pursuant to this Agreement are referred to herein as "Vested Securities," and all other Executive Securities are referred to herein as "Unvested Securities." (b) Acceleration upon a Qualified Sale of the Company. All Unvested Securities shall become Vested Securities upon the consummation of a Qualified Sale of the Company (as defined below) so long as Executive is employed by the Company or any of its Subsidiaries on the date of such sale (or, if Executive's employment was terminated by the Company without Cause, so long as Executive has not committed a Vesting Termination Breach). A "Qualified Sale of the Company" means either (i) the sale, lease, transfer, conveyance or other disposition, in one or a series of related transactions, of all or substantially all of the assets of the Company and its Subsidiaries, taken as a whole, or (ii) a transaction or series of transactions (including by way of merger, consolidation, or sale of stock, but not including a Public Offering) the result of which is that the holders of the Company's outstanding voting stock immediately prior to such transaction are after giving effect to such transaction no longer, in the aggregate, the "beneficial owners" (as such term is defined in Rule 13d-3 and Rule 13d-5 promulgated under the Securities Exchange Act), directly or indirectly through one or more intermediaries, of more than 50% of the voting power of the outstanding voting stock of the Company, in each case where the consideration for such assets or stock in such sale or transfer consists of cash and/or publicly traded equity securities for at least 50% of the outstanding stock of the Company (e.g., 100% of such consideration would have to consist of cash and/or publicly traded equity securities if only 50.01% of such stock were sold in such transaction). (c) Acceleration upon a Public Offering. The vesting schedule set forth in (a) above gives effect to the fact that the Company consummated its initial Public Offering on July 7, 1998 and Executive was employed by the Company or any of its Subsidiaries on the closing date of such offering. -2- 3 (d) Acceleration upon Death or Disability. All Unvested Shares shall become Vested Shares if Executive's employment with the Company or any of its Subsidiaries terminates by reason of Executive's death or Disability. (e) Other Acceleration. Subject to paragraph 3(h) hereof, any Unvested Securities which the Company (or its assignees) has not elected to repurchase in the Repurchase Notice (as defined below) (including Unvested Securities originally included in the Repurchase Notice, but for which the election to repurchase was rescinded, pursuant to the terms of paragraph 3, by all of the Company and/or its assignees having made such election) shall thereafter be deemed Vested Securities. 3. REPURCHASE OPTION. (a) The Repurchase Option. Upon (i) the termination of Executive's employment with the Company and its Subsidiaries for any reason other than a termination by the Company without Cause, or (ii) if Executive's employment is terminated by the Company without Cause, upon Executive's commission of a Vesting Termination Breach (the occurrence of either (i) or (ii), a "Repurchase Event"), the Unvested Securities then in existence (whether held by an Executive Purchaser or one or more of the Executive Purchasers' transferees) will be subject to repurchase by the Company at the Company's election pursuant to the terms and conditions set forth in this paragraph 3 (the "Repurchase Option"). In the event that the Company has alleged that Executive has committed a Vesting Termination Breach, Executive disputes such allegation, and the matter is subject to the dispute resolution provisions set forth in paragraph 6, the closing of the repurchase under this paragraph 3 shall not occur unless and until it is ultimately determined that Executive committed a Vesting Termination Breach; provided that during the pendency of such proceeding, the Executive Securities specified in the Repurchase Notice (as defined below) shall not be transferred by any holder thereof to any Person. (b) Repurchase Price. The repurchase price (the "Repurchase Price") of any Unvested Securities to be repurchased shall be the lesser of (x) the Fair Market Value of such Securities, and (y) the Original Cost of such Securities (with securities having the lowest Original Cost subject to repurchase prior to securities with a higher Original Cost). (c) Exercise of Repurchase Option. The Company may elect to purchase all or any portion of the Executive Securities by delivering written notice (the "Repurchase Notice") to the holder or holders of the Executive Securities within 30 days after the Repurchase Event. The Repurchase Notice shall set forth the amount, type, and class of Executive Securities to be acquired from each such holder. The Executive Securities to be repurchased by the Company shall first be satisfied to the extent possible from the Executive Securities held by Executive at the time of delivery of the Repurchase Notice. If the amount of Executive Securities then held by Executive is less than the total amount of Executive Securities that the Company has elected to purchase, the Company shall Purchase the remaining securities elected to be purchased from the other holder(s) of Executive Securities, pro rata according to the amount of Executive Securities held of record by each such other holder at the time of delivery of the Repurchase Notice. The amount of Unvested Securities to be repurchased hereunder shall be deemed to be allocated among Executive and the -3- 4 other holders of repurchased Executive Securities (if any) pro rata according to the amount of Executive Securities to be purchased from such persons. (d) Assignment by the Company. The Company, by action of the Board, will have the right to assign all or any portion of its repurchase rights hereunder to any holder of Investor Equity and/or to any executive employee of the Company or any of its Subsidiaries. (e) Fair Market Value of Repurchased Shares. (i) The "Fair Market Value" of Executive Securities subject to repurchase hereunder shall be determined in accordance with this paragraph (e). (ii) The Company and the holders of a majority of the Executive Securities to be repurchased shall attempt in good faith to agree on the Fair Market Value of the Executive Securities. Any agreement reached by such Persons shall be final and binding on all parties hereto. (iii) If such Persons are unable to reach such agreement within 20 days after the giving of Repurchase Notice, the Fair Market Value of any Executive Securities that are publicly traded shall be the average, over a period of 21 days consisting of the date of the Repurchase Event and the 20 consecutive business days prior to that date, of the average of the closing prices of the sales of such securities on all securities exchanges on which such securities may at that time be listed, or, if there have been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day such securities are not so listed, the average of the representative bid and asked prices quoted in the Nasdaq System as of 4:00 P.M., New York time, or, if on any day such securities are not quoted in the Nasdaq System, the average of the highest bid and lowest asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau Incorporated, or any similar successor organization. (iv) If such Persons are unable to reach agreement pursuant to subparagraph (ii) within 20 days after the giving of Repurchase Notice, and to the extent any Executive Securities are not publicly traded: (A) The Company and the holders of a majority of the Executive Securities shall each, within 10 days thereafter, choose one investment banker or other appraiser with experience in analyzing and making determinations concerning matters in the telecommunications industry and in valuing entities like the Company, and the two investment bankers/appraisers so selected shall together select a third investment banker/appraiser similarly qualified. (B) The three investment bankers/appraisers shall first appraise the fair market value of the Company (based on the assumption of an orderly, arm's length sale to a willing unaffiliated buyer). The three investment bankers/appraisers shall then -4- 5 appraise the fair market value of such non-publicly-traded Executive Securities as follows: the fair market value of each share of Common Stock shall be equal to the fair market value of the Company divided by the total number of shares of Common Stock outstanding on the date of the Repurchase Event (determined on a fully diluted basis (x) with respect to all outstanding securities convertible into the Company's Common Stock, assuming the conversion of such convertible securities (without regard to any conditions or other restrictions on such conversion), and (y) with respect to all outstanding options, warrants and other rights or securities exercisable or exchangeable for shares of the Company's Common Stock, in accordance with the Treasury Stock Method under generally accepted accounting principles for determination of fully diluted earnings per share). The three investment bankers/appraisers shall, within thirty days of their retention, provide the written results of such appraisals to the Company and/or its assignees and to each of the holders of Executive Securities. (C) The "Fair Market Value" of the non-publicly-traded Executive Securities to be repurchased shall be the average of the two appraisals closest to each other, and such amount shall be final and binding on all parties hereto; provided that the Company (and/or any assignee) may at any time within five days after receiving written notice of such determination rescind its prior exercise of the Repurchase Option by giving written notice of such revocation to the holder or holders of the Executive Securities to be repurchased, and upon such revocation the revoking party will be treated as if it had never exercised such Repurchase Option (it being understood that such revoking parties shall thereafter have no right to re-exercise such Repurchase Option). (D) The costs of such appraisal shall be allocated between the parties based on the percentage which the portion of the contested amount not awarded to each party bears to the amount actually contested by such party; provided that if any parties revoke their exercise of the Repurchase Option pursuant to paragraph (C) above, such revoking parties shall bear (pro rata among such revoking parties based on the number of Executive Securities with respect to which each such revoking party had initially exercised its Repurchase Option) any appraisal costs that would be allocated to the holder(s) of Executive Securities under this paragraph (D). (f) Closing of the Repurchase. Within 10 business days after the Repurchase Price for the Executive Securities to be repurchased has been determined, the Company shall send a notice to each holder of Executive Securities setting forth the consideration to be paid for such shares and the time and place for the closing of the transaction, which date shall not be more than 30 days nor less than five days after the delivery of such notice. At such closing, the holders of Executive Securities shall deliver all certificates (if any exist) evidencing the Executive Securities to be repurchased to the Company (and/or any assignees of the Company's repurchase right), and the Company (and/or any assignees) shall pay for the Executive Securities to be purchased pursuant to the Repurchase Option by delivery of a check or wire transfer of immediately available funds in the aggregate amount of the Repurchase Price for such securities; provided that in the event the Board determines in its good faith discretion that the Company is not in a position to pay in cash any -5- 6 or all of the Repurchase Price for Executive Securities to be repurchased by it. The Company may pay, in the form of a promissory note, a portion of the Repurchase Price for such securities equal to (x) the aggregate Repurchase Price for the Executive Securities to be repurchased minus (y) the Original Cost of such securities. Such a promissory note shall be subordinated to all of the Company's senior debt obligations either then or thereafter incurred, shall earn simple annual interest at the Base Rate, shall have all principal and accrued interest due and payable upon maturity, and shall mature upon the earliest to occur of a Qualified Sale of the Company or the fifth anniversary of the issuance of such promissory note. The purchasers of Executive Securities hereunder shall be entitled to receive customary representations and warranties from the sellers regarding good title to such shares, free and clear of any liens or encumbrances. (g) Restrictions. Notwithstanding anything to the contrary contained in this Agreement, all repurchases of Executive Securities by the Company shall be subject to applicable restrictions contained in the Delaware General Corporation Law and in the Company's and its Subsidiaries' debt and equity financing agreements. If any such restrictions prohibit the repurchase of Executive Securities hereunder which the Company is otherwise entitled or required to make, the time periods provided in this paragraph 3 shall be suspended, and the Company may make such repurchases as soon as it is permitted to do so under such restrictions, unless by such time such Repurchase Option has terminated pursuant to paragraph 3(h); provided that notwithstanding the foregoing, in no event shall the time periods provided in this paragraph 3 be suspended for more than 6 months. (h) Termination of Repurchase Option. All rights under this paragraph 3 of the Company and/or its assignees to repurchase Executive Securities shall terminate upon a Qualified Sale of the Company. 4. RESTRICTIONS ON TRANSFER. (a) Opinion of Valid Transfer. In addition to any other restrictions on transfer imposed by this Agreement, or the Securityholders Agreement, no holder of Executive Securities may sell, transfer or dispose of any Executive Securities (except pursuant to an effective registration statement under the Securities Act) without first delivering to the Company an opinion of counsel (reasonably acceptable in form and substance to the Company) that neither registration nor qualification under the Securities Act and applicable state securities laws is required in connection with such transfer. (b) Restrictive Legend. The certificates representing Executive Securities shall bear the following legend: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED ON AUGUST 13, 1997, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE, AND SUCH -6- 7 SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN EXEMPTION FROM REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER AND REPURCHASE OPTIONS SET FORTH IN AN EXECUTIVE PURCHASE AGREEMENT BETWEEN THE ISSUER OF SUCH SECURITIES (THE "ISSUER") AND THE INITIAL HOLDER OF SUCH SECURITIES (THE "INITIAL HOLDER"). A COPY OF SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT THE ISSUER'S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE." The legend set forth above shall be removed from the certificates evidencing any shares which cease to be Executive Securities. (c) Retention of Executive Stock. (i) No Executive Purchaser shall sell, transfer, assign, pledge or otherwise dispose of (whether with or without consideration and whether voluntarily or involuntarily or by operation of law) any interest in any Unvested Securities (a "Transfer"), except pursuant to (A) the repurchase provisions of paragraph 3 hereof or of the LLC Agreement, (B) the "Participation Rights" or "Put" provisions set forth in the Securityholders Agreement, or (C) a Sale of the Company (as defined in the Securityholders Agreement) (each of (A), (B), and (C), an "Exempt Transfer"). (ii) The restrictions contained in this paragraph (c) shall not apply with respect to transfers of Unvested Securities (A) pursuant to applicable laws of descent and distribution or (B) among Executive's Family Group; provided that the restrictions contained in this paragraph shall continue to be applicable to the Unvested Securities after any such Transfer, the transferees of such Unvested Securities shall have agreed in writing to be bound by the provisions of this Agreement with respect to the Unvested Securities so transferred, and (prior to the death of Executive) each such transferee of Unvested Securities shall have entered into proxies and other agreements satisfactory to the holders of a majority of the Investor Equity pursuant to which Executive shall have the sole right to vote such Unvested Securities for all purposes. For purposes of this Agreement, "Family Group" means Executive's spouse and descendants (whether natural or adopted), any trust which at the time of such Transfer and at all times thereafter is and remains solely for the benefit of Executive and/or Executive's spouse and/or descendants and any family partnership the partners of which consist solely of Executive, such spouse, such descendants or such trusts. 5. CONFIDENTIALITY, NONCOMPETE, AND NONSOLICITATION. (a) Nondisclosure and Nonuse of Confidential Information. Executive shall not disclose or use at any time, either during his employment with the Company or thereafter, any Confidential Information (as defined below) of which Executive is or becomes aware, whether or not such information is developed by him, except to the extent that such disclosure or use is directly -7- 8 related to and required by Executive's performance of duties assigned to Executive or the Company, or to the extent such disclosure is permissible under the confidentiality provisions set forth in the Stock Purchase Agreement. Executive shall take all appropriate steps to safeguard Confidential Information and to protect it against disclosure, misuse, espionage, loss and theft. As used in this Agreement, the term "Confidential Information" means information that is not generally known to the public and that is used, developed or obtained by the Company, or its Subsidiaries in connection with their business, including but not limited to (i) products or services, (ii) fees, costs and pricing structures, (iii) designs, (iv) analysis, (v) drawings, photographs and reports, (vi) computer software, including operating systems, applications and program listings, (vii) flow charts, manuals and documentation, (viii) data bases, (ix) accounting and business methods, (x) inventions, devices, new developments, methods and processes, whether patentable or unpatentable and whether or not reduced to practice, (xi) customers and clients and customer or client lists, (xii) copyrightable works, (xiv) all technology and trade secrets, (xv) business plans and financial models, and (xvi) all similar and related information in whatever form. Confidential Information shall not include any information that has been published in a form generally available to the public prior to the date Executive proposes to disclose or use such information. Information shall not be deemed to have been published merely because individual portions of the information have been separately published, but only if all material features constituting such information have been published in combination. Notwithstanding the foregoing, "Confidential Information" shall not include any information of which (a) Executive became aware prior to his affiliation with the Company, (b) Executive learns from sources other than the Company or its Subsidiaries, whether prior to or after such information is actually disclosed by the Company or its Subsidiaries or (c) is disclosed in a prospectus or other documents for dissemination to the public. (b) The Company's Ownership of Intellectual Property. (i) Acknowledgment of Company Ownership. In the event that Executive as part of his activities on behalf of the Company generates, authors or contributes to any invention, design, new development, device, product, method or process (whether or not patentable or reduced to practice or constituting Confidential Information), any copyrightable work (whether or not constituting Confidential Information) or any other form of Confidential Information relating directly or indirectly to the Company's business as now or hereafter conducted (collectively, "Intellectual Property"), Executive acknowledges that such Intellectual Property is the exclusive property of the Company and hereby assigns all right, title and interest in and to such Intellectual Property to the Company. Any copyrightable work prepared in whole or in part by Executive will be deemed "a work made for hire" under Section 201(b) of the 1976 Copyright Act, and the Company shall own all of the rights comprised by the copyright therein. Executive shall promptly and fully disclose all Intellectual Property to the Company and shall cooperate with the Company to protect the Company's interests in and rights to such Intellectual Property (including, without limitation, providing reasonable assistance in securing patent protection and copyright registrations and executing all documents as reasonably requested by the Company, whether such requests occur prior to or after termination of Executive's employment with the Company). -8- 9 (ii) Executive Invention. Executive understands that paragraph (b)(i) of this Agreement regarding the Company's ownership of Intellectual Property does not apply to any invention for which no equipment, supplies, facilities or trade secret information of the Company were used and which was developed entirely on Executive's own time, unless (i) the invention relates to the business of the Company or to the Company's actual or demonstrably anticipated research or development or (ii) the invention results from any work performed by Executive for the Company. (c) Delivery of Materials upon Termination of Employment. As requested by the Company from time to time and upon the termination of Executive's employment with the Company for any reason, Executive shall promptly deliver to the Company all copies and embodiments, in whatever form, of all Confidential Information and Intellectual Property in Executive's possession or within his control (including, but not limited to, written records, notes, photographs, manuals, notebooks, documentation, program listings, flow charts, magnetic media, disks, diskettes, tapes and all other materials containing any Confidential Information or Intellectual Property) irrespective of the location or form of such material and, if requested by the Company, shall provide the Company with written confirmation that all such materials have been delivered to the Company. (d) Noncompete. Executive acknowledges and agrees with the Company that in the course of his employment with the Company he shall become familiar with the Company's trade secrets and with other Confidential Information concerning the Company, that Executive's services to the Company are unique in nature and of an extraordinary value to the Company, and that the Company would be irreparably damaged if Executive were to provide similar services to any person or entity competing directly with the Company. In connection with the issuance to Executive of the Executive Securities hereunder, in consideration of and as an inducement to the Company's entering into this Agreement, Executive accordingly covenants and agrees with the Company that during the Noncompete Period (as defined below), Executive shall not, directly or indirectly, either for himself or for or through any other individual, corporation, partnership, joint venture or other entity, participate in any business or enterprise conducting business in any Covered MSA which engages or proposes to engage in the provision of competitive local exchange telecommunications services. For purposes of this Agreement, (i) the term "participate in" shall include, without limitation, having any direct or indirect interest in any corporation, partnership, joint venture or other entity, whether as a sole proprietor, owner, stockholder, partner, joint venturer, creditor or otherwise, or rendering any direct or indirect service or assistance to any individual, corporation, partnership, joint venture and other business entity (whether as a director, officer, manager, supervisor, employee, agent, consultant or otherwise), other than ownership of up to 2% of the outstanding stock of any company (public or private) wherein Executive has no material involvement in the management (other than as an independent director for which Executive receives no or only nominal cash compensation), (ii) the term "MSA" means metropolitan statistical area and (iii) the term "Covered MSA" means (1) any MSA in which the Company is engaged in business or has at any time had an Approved Business Plan (as defined in the Stock Purchase Agreement) to engage in business. Executive agrees that this covenant is reasonable with respect to its duration, geographical area and scope. (e) Nonsolicitation. During the Noncompete Period, Executive shall not (i) induce or attempt to induce any employee of the Company or any Subsidiary to leave the employ of -9- 10 the Company or any Subsidiary, or in any way interfere with the relationship between the Company or any Subsidiary and any employee thereof, (ii) hire directly or through another entity any person who was an employee of the Company or any Subsidiary at any time during the six months prior to the date such person is to be so hired, or (iii) induce or attempt to induce any customer, supplier, licensee or other business relation of the Company or any Subsidiary to cease doing business with the Company or any Subsidiary, or in any way interfere with the relationship between any such customer, supplier, licensee or business relation of the Company and its Subsidiaries (including, without limitation, making any negative statements or communications concerning the Company or any Subsidiary). (f) Noncompete Period. The "Noncompete Period" shall commence on the date hereof and shall continue until the first anniversary of the termination of Executive's employment with the Company and its Subsidiaries for any reason; provided that the Noncompete Period shall terminate immediately upon a Qualified Sale of the Company. (g) Judicial Modification. If the final judgment of a court of competent jurisdiction, or any final non-appealable decision of an arbitrator in connection with a mandatory arbitration, declares that any term or provision of this paragraph is invalid or unenforceable, the parties agree that the court making the determination of invalidity or unenforceability shall have the power to reduce the scope, duration, or geographic area of the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified after the expiration of the time within which the judgment or decision may be appealed. (h) Dispute Resolution. (i) Arbitration. All claims, disputes, controversies and other matters in question arising out of or relating to this paragraph 5, or to the alleged breach hereof, shall be settled by preliminary negotiation between the Company or other Person bringing such allegation and the Executive (the "parties") or, if such preliminary negotiation is unsuccessful for any reason (but in any event not later than 10 days after commencement of such negotiation), by binding arbitration in accordance with the procedures set forth in this paragraph (h). Without limiting the mandatory arbitration provision set forth in this paragraph (h), each of the parties hereto (A) waives the right to bring an action in any court of competent jurisdiction with respect to any such claims, controversies and disputes (other than any such action to enforce the award or other remedy resulting from any arbitration pursuant to this paragraph (h) or to prevent any arbitrator from exceeding the authority granted to the arbitrators hereunder) and (B) waives the right to trial by jury in any suit, action or other proceeding brought on, with respect to or in connection with this Agreement. (ii) Binding Arbitration. Upon filing of a notice of demand for binding arbitration by any party hereto, arbitration shall be commenced and conducted as follows: -10- 11 (A) Arbitrators. All claims, disputes, controversies and other matters (collectively "matters") in question shall be referred to and decided and settled by a panel of three arbitrators with experience in analyzing, understanding, and making determinations concerning matters in the telecommunications industry, one selected by each of the parties and the third by the two arbitrators so selected. (B) Cost of Arbitration. The cost of each arbitration proceeding, including without limitation the arbitrators' compensation and expenses, hearing room charges, court reporter transcript charges, etc., shall be allocated among the parties based upon the percentage which the portion of the contested amount not awarded to each party bears to the amount actually contested by such party. The arbitrators shall also award the party that prevails substantially in its pre-hearing position its reasonable attorneys' fees and costs incurred in connection with the arbitration. The arbitrators are specifically instructed to award attorneys' fees for instances of abuse of the discovery process. (C) Situs of Proceedings. The situs of the arbitration shall be in New York, New York, or such other place as is mutually agreeable to the parties. (iii) Pre-hearing Discovery. The parties shall have the right to conduct and enforce pre-hearing discovery in accordance with the then current Federal Rules of Civil Procedure, subject to the following limitations: (A) each party may serve no more than one set of interrogatories which set shall ask no more than twenty questions; (B) each party may depose the other party's expert witnesses who will be called to testify at the hearing, plus up to six fact witnesses without regard to whether they will be called to testify (each party will be entitled to a total of not more than 24 hours of depositions of the other party's witnesses, and not more than 6 hours with respect to any single witness); and (C) document discovery and other discovery shall be under the control of and enforceable by the arbitrators, and all disputes relating thereto shall be decided by the arbitrators. Notwithstanding any contrary foregoing provisions, the arbitrators shall have the power and authority to, and to the fullest extent practicable shall, abbreviate arbitration discovery in a manner which is fair to all parties in order to expedite the conclusion of each alternative dispute resolution proceeding. (iv) Pre-hearing Conference. Within thirty (30) days after filing of notice of demand for binding arbitration, the arbitrators shall hold a pre-hearing conference to establish schedules for completion of discovery, for exchange of exhibit and witness lists, for arbitration briefs, for the hearing, and to decide procedural matters and all other questions that may be presented. (v) Hearing Procedures. The hearing shall be conducted to preserve its privacy and to allow reasonable procedural due process. Rules of evidence need not be strictly followed, and the hearing shall be streamlined as follows: (A) documents shall be self-authenticating, subject to valid objection by the opposing party; (B) expert reports, witness biographies, depositions and affidavits may be utilized, subject to the opponent's right of a live cross-examination of the witness in person; (C) charts, graphs and summaries shall be utilized to present voluminous data, provided (1) that the underlying data was made -11- 12 available to the opposing party thirty (30) days prior to the hearing, and (2) that the preparer of each chart, graph or summary is available for explanation and live cross-examination in person; (D) the hearing should be held on consecutive business days without interruption to the maximum extent practicable; and (E) the arbitrators shall establish all other procedural rules for the conduct of the arbitration in accordance with the rules of arbitration of the American Arbitration Association. (vi) Governing Law. This arbitration provision shall be governed by, and all rights and obligations specifically enforceable under and pursuant to, the Federal Arbitration Act (9 U.S.C. Section 1, et seq.). (vii) Consolidation. No arbitration shall include, by consolidation, joinder or in any other manner, any additional person not a party to this Agreement (other than affiliates of any such party, which affiliates may be included in the arbitration), except by written consent of the parties hereto containing a specific reference to this Agreement. (viii) Award; Time Limit. The arbitrators are empowered to render an award of general compensatory damages and equitable relief (including, without limitation, injunctive relief), but is not empowered to award punitive damages. The award rendered by the arbitrators (A) shall be final; (B) shall not constitute a basis for collateral estoppel as to any issue; and (C) shall not be subject to vacation or modification. The arbitrators shall render any award or otherwise conclude the arbitration no later than 120 days after the date notice is given pursuant to this paragraph (h). (ix) Confidentiality. The Parties hereto will maintain the substance of any proceedings hereunder in confidence and the arbitrators, prior to any proceedings hereunder, will sign an agreement whereby the arbitrator agrees to keep the substance of any proceedings hereunder in confidence. 6. DEFINITIONS. "Approved Business Plan" has the meaning ascribed to such term in the Stock Purchase Agreement. "Board" means the board of directors of the Company. "Cause" means (A) Executive's theft or embezzlement, or attempted theft or embezzlement, of money or property of the Company, Executive's perpetration or attempted perpetration of fraud, or Executive's participation in a fraud or attempted fraud, on the Company, or Executive's unauthorized appropriation of, or attempt to misappropriate, any tangible or intangible assets or property of the Company, (B) any act or acts of disloyalty, misconduct or moral turpitude by Executive injurious to the interest, property, operations, business or reputation of the Company, or Executive's conviction of a crime the commission of which results in injury to the Company or (C) Executive's repeated refusal or failure (other than by reason of Disability) to carry out reasonable instructions by his superiors or the Board or the Company's board of directors. -12- 13 "Common Stock" means the Company's Common Stock, par value $.01 per share. "Disability" means (i) any permanent physical or mental incapacity or disability rendering the Executive unable or unfit to perform effectively the duties and obligations of his employment or to participate effectively and actively in the management of the Company, or (ii) any illness, accident, injury, physical or mental incapacity or other disability, where such condition has rendered the Executive unable or unfit to perform effectively the duties and obligations of his employment or to participate effectively and actively in the management of the Company for a period of at least 90 days (in either case, as determined in the good faith judgment of the Company's board of directors). "Executive Securities" means (i) the Common Stock issued to the Executive Purchasers under the Original Agreement, and (ii) any securities issued directly or indirectly with respect to the foregoing securities by way of a stock split, stock dividend, or other division of securities, or in connection with a combination of securities, recapitalization, merger, consolidation, or other reorganization, or upon conversion or exercise of any of the foregoing securities. As to any particular securities constituting Executive Securities, such securities shall cease to be Executive Securities when they have been (a) effectively registered under the Securities Act and disposed of in accordance with the registration statement covering them, or (b) distributed to the public through a broker, dealer or market maker pursuant to Rule 144 under the Securities Act (or any similar provision then in force). "Investor Equity" means (i) the securities distributed in respect of the securities purchased under the Investors Purchase Agreement and (ii) any securities issued directly or indirectly with respect to the foregoing securities by way of a stock split, stock dividend, or other division of securities, or in connection with a combination of securities, recapitalization, merger, consolidation, or other reorganization, or upon conversion or exercise of the foregoing. As to any particular securities constituting Investor Equity, such securities shall cease to be Investor Equity when they have been (a) effectively registered under the Securities Act and disposed of in accordance with the registration statement covering them, (b) distributed to the public through a broker, dealer or market maker pursuant to Rule 144 under the Securities Act (or any similar provision then in force) or (c) repurchased by the Company or any Subsidiary thereof. "LLC Agreement" means the limited liability company agreement of even date herewith, entered into by and among the members of the LLC, as amended from time to time in accordance with its terms. "MSA" means a metropolitan statistical area. "Original Cost" means, at any given time, (i) with respect to any Common Stock issued upon conversion of Preferred Stock, the Original Cost of such Preferred Stock, and (ii) with respect to any other securities, the original price paid upon issuance of such securities. -13- 14 "Person" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. "Public Offering" means any underwritten sale of the Company's common stock pursuant to an effective registration statement under the Securities Act filed with the Securities and Exchange Commission on Form S-1 (or a successor form adopted by the Securities and Exchange Commission); provided that the following shall not be considered a Public Offering: (i) any issuance of common stock as consideration or financing for a merger or acquisition, and (ii) any issuance of common stock or rights to acquire common stock to employees of the Company or its Subsidiaries as part of an incentive or compensation plan. "Securities Act" means the Securities Act of 1933, as amended, or any similar federal law then in force. "Securityholders Agreement" means the securityholders agreement entered into by and among the Company, the LLC, and the holders of interests in the LLC, as amended from time to time in accordance with its terms. "Stock Purchase Agreement" means the stock purchase agreement of even date herewith, entered into by and between the Company and the LLC, as amended from time to time in accordance with the terms thereof. "Subsidiary" means, with respect to any Person, any corporation, limited liability company, partnership, association or other business entity of which (i) if a corporation, a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof, or (ii) if a limited liability company, partnership, association or other business entity, a majority of the partnership or other similar ownership interest thereof is at the time owned or controlled, directly or indirectly, by any Person or one or more Subsidiaries of that Person or a combination thereof. For purposes hereof, a Person or Persons shall be deemed to have a majority ownership interest in a limited liability company, partnership, association or other business entity if such Person or Persons shall be allocated a majority of limited liability company, partnership, association or other business entity gains or losses or shall be or control any managing director or general partner of such limited liability company, partnership, association or other business entity. "Vesting Termination Breach" means (i) any breach of paragraph 5(d) or clause (ii) of paragraph 5(e) and (ii) any breach of any other provision of paragraph 5 which is material or is intentionally and knowingly committed by Executive. -14- 15 7. MISCELLANEOUS PROVISIONS. (a) Further Assurances; Voting Proxy. As a condition to the Company's entering into this Agreement and the issuance of Executive Securities to the Executive Purchasers, and as further consideration therefor: (i) Executive hereby unconditionally guarantees the full and prompt performance of each Executive Purchaser's obligations under this Agreement and under each of the agreements contemplated hereby to which such Executive Purchaser is a party, and Executive agrees that he will take all necessary or desirable actions to ensure such performance as are reasonably requested by the Company. Executive further agrees that he will not provide any directions to an Executive Purchaser that are contrary to any obligation imposed on such Executive Purchaser under this Agreement or under such other agreements, and that Executive will not fail to provide any directions to an Executive Purchaser if such failure would cause an Executive Purchaser not to satisfy its obligations hereunder or thereunder. This guarantee shall be irrevocable with respect to each Executive Security held by an Executive Purchaser (and shall survive any transfer thereof, or the death, disability, incompetency, or bankruptcy of such Executive Purchaser) until such time as such Executive Security is transferred in accordance with the terms hereof to a Person other than a member of Executive's Family Group, at which time this guarantee shall be deemed revoked with respect to such security (but not with respect to any other Executive Securities). No invalidity, irregularity or unenforceability of this Agreement or such other agreements by reason of an Executive Purchaser's incapacity, minor status, incompetency, bankruptcy, insolvency, or otherwise shall impair, affect or be a defense to the obligations of Executive under this guarantee. (ii) Each Executive Purchaser (other than Executive) hereby appoints Executive as his true and lawful proxy and attorney-in-fact, with full power of substitution, to vote all of such Executive Purchaser's Executive Securities on all matters to be voted on by the holders of such securities (whether as a member vote, a shareholder vote, an approval right under this Agreement or the other agreements contemplated hereby, or otherwise). These proxies and powers granted by each Executive Purchaser pursuant to this paragraph are coupled with an interest, and are given to secure such Executive Purchasers' obligations under this Agreement and the other agreements contemplated hereby to which the Executive Purchasers are parties. Such proxies and powers shall be irrevocable with respect to each Executive Security held by an Executive Purchaser (and shall survive any transfer thereof, or the death, disability, incompetency, or bankruptcy of such Executive Purchaser) until such time as such Executive Security is transferred in accordance with the terms hereof to a Person other than a member of Executive's Family Group, at which time such proxy shall be deemed revoked with respect to such security (but not with respect to any other Executive Securities). (b) Transfers in Violation of Agreement. Any Transfer or attempted Transfer of any Executive Securities in violation of any provision of this Agreement shall be void, and none of -15- 16 the Company, or any Subsidiary thereof shall record such purported Transfer on its books or treat any purported transferee of such Executive Securities as the owner of such securities for any purpose. (c) Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. (d) Complete Agreement. This Agreement, those documents expressly referred to herein and other documents of even date herewith embody the complete agreement and understanding among the parties and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way, including without limitation the Original Agreement. (e) Counterparts. This Agreement may be executed in separate counterparts, none of which need contain the signature of more than one party hereto but each of which shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (f) Successors and Assigns. Except as otherwise provided herein, this Agreement shall bind the parties hereto and their respective successors and assigns and shall inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns whether so expressed or not. (g) CHOICE OF LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT AND THE EXHIBITS HERETO SHALL BE GOVERNED BY THE INTERNAL LAW, AND NOT THE LAW OF CONFLICTS, OF THE STATE OF DELAWARE. (h) Remedies. Each of the parties to this Agreement (including any holder of Investor Equity or employee of the Company to which the Company assigns any of its repurchase rights under paragraph 3 hereof) shall be entitled to enforce its rights under this Agreement specifically, to recover damages and costs (including reasonable attorney's fees) caused by any breach of any provision of this Agreement and to exercise all other rights existing in its favor. The parties hereto agree and acknowledge that money damages would not be an adequate remedy for any breach of the provisions of this Agreement and that any party may in its sole discretion apply to any court of law or equity of competent jurisdiction (without posting any bond or deposit) for specific performance and/or other injunctive relief in order to enforce or prevent any violations of the provisions of this Agreement. (i) Amendment, Modification, or Waiver. The provisions of this Agreement may be amended, modified, or waived only with the prior written consent of the Company and the Executive. -16- 17 (j) Third-Party Beneficiaries. The parties hereto acknowledge and agree that certain provisions of this Agreement are intended for the benefit of certain holders of Investor Equity or employees of the Company to which the Company assigns any of its repurchase rights under paragraph 3 hereof, that such Persons are third-party beneficiaries of this Agreement and that provisions of this Agreement shall be enforceable by such Persons as provided herein. (k) Business Days. If any time period for giving notice or taking action hereunder expires on a day which is a Saturday, Sunday or legal holiday in the State of Illinois, the time period shall be automatically extended to the business day immediately following such Saturday, Sunday or holiday. (l) Descriptive Headings; Interpretation; No Strict Construction. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a substantive part of this Agreement. Whenever required by the context, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular forms of nouns, pronouns, and verbs shall include the plural and vice versa. Reference to any agreement, document, or instrument means such agreement, document, or instrument as amended or otherwise modified from time to time in accordance with the terms thereof, and if applicable hereof. The use of the words "include" or "including" in this Agreement shall be by way of example rather than by limitation. The use of the words "or," "either" or "any" shall not be exclusive. The parties hereto have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. (m) Notices. All notices, demands or other communications to be given or delivered under or by reason of the provisions of this Agreement shall be in writing and shall be deemed to have been given when (a) delivered personally to the recipient, (b) telecopied to the recipient (with hard copy sent to the recipient by reputable overnight courier service (charges prepaid) that same day) if telecopied before 5:00 p.m. Chicago, Illinois time on a business day, and otherwise on the next business day, or (c) one business day after being sent to the recipient by reputable overnight courier service (charges prepaid). Such notices, demands and other communications shall be sent to the following Persons at the following addresses: To the Company: 1950 N. Stemmons Freeway Suite 3026 Dallas, Texas 75207 Attention: Royce J. Holland Telephone: (214) 261-7105 Telecopy: (214) 261-7107 -17- 18 To an Executive Purchaser: at the address set forth in the Company's records. or to such other address or to the attention of such other person as the recipient party has specified by prior written notice to the sending party. (n) Delivery by Facsimile. This Agreement, the agreements referred to herein, and each other agreement or instrument entered into in connection herewith or therewith or contemplated hereby or thereby, and any amendments hereto or thereto, to the extent signed and delivered by means of a facsimile machine, shall be treated in all manner and respects as an original agreement or instrument and shall be considered to have the same binding legal effect as if it were the original signed version thereof delivered in person. At the request of any party hereto or to any such agreement or instrument, each other party hereto or thereto shall reexecute original forms thereof and deliver them to all other parties. No party hereto or to any such agreement or instrument shall raise the use of a facsimile machine to deliver a signature or the fact that any signature or agreement or instrument was transmitted or communicated through the use of a facsimile machine as a defense to the formation or enforceability of a contract and each such party forever waives any such defense. (o) Excise Tax. If either (a) it is determined by the Internal Revenue Service or any other applicable governmental agency that any payment or distribution of any type to or for the benefit of Executive pursuant to this Agreement by the Company, any Person who acquires ownership or effective control of the Company, or ownership of a substantial portion of the assets of the Company (within the meaning of section 280G of the Code and the regulations thereunder) or any affiliate of such Person (the "Total Payments") would be subject to the excise tax imposed by section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are collectively referred to as the "Excise Tax"), or (b) the Company or any such Person withholds any portion of such payment or distribution or otherwise seeks to reduce the benefits to Executive under this Agreement on account of the Excise Tax, then the Company and such Person shall be jointly and severally obligated to pay to Executive an additional payment (a "Gross-Up Payment") in an amount such that, after payment by Executive of all federal, state and local taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Total Payments. The Company and such Person shall be obligated to pay all costs of Executive (including attorney fees and expenses) incurred in enforcing their obligations under this Section 5(o). -18- 19 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first written above. ALLEGIANCE TELECOM, INC. By: /s/ MARK B. TRESNOWSKI --------------------------------------- Its: Secretary --------------------------------------- EXECUTIVE PURCHASERS /s/ ROYCE J. HOLLAND --------------------------------------------- Royce J. Holland Royce J. Holland Family Limited Partnership By: /s/ ROYCE J. HOLLAND ----------------------------------------- Royce J. Holland, its general partner -19- EX-10.10 4 AMEND/RESTATED EXECUTIVE PURCHASE AGREEMENT 1 EXHIBIT 10.10 AMENDED AND RESTATED EXECUTIVE PURCHASE AGREEMENT THIS AMENDED AND RESTATED EXECUTIVE PURCHASE AGREEMENT (this "Agreement") is made as of December 13, 1999, by and between Allegiance Telecom, Inc., a Delaware corporation (the "Company") and Thomas M. Lord ("Executive"), Victoria M. Lord ("Victoria"), Brian T. Lord ("Brian"), and Colin J. Lord ("Colin," and collectively with Executive, Victoria, and Brian, the "Executive Purchasers"). This Agreement amends and restates the Executive Purchase Agreement dated as of August 13, 1997 (the "Original Agreement") by and between the Executive Purchasers and Transcend Telecom, L.L.C., a Delaware limited liability company (the "LLC") and the Company (then known as "Transcend Telecom, Inc."). Capitalized terms used but not otherwise defined herein have the meanings ascribed to such terms in paragraph 6 hereof. NOW, THEREFORE, in consideration of the mutual promises made herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: 1. PURCHASE AND SALE OF EXECUTIVE SECURITIES. (a) Initial Capital Contribution and Issuance of Executive Securities. Executive purchased the Executive Securities as provided for in the Original Agreement. (b) Acknowledgment of At-Will Employment. Each of the Executive Purchasers acknowledges and agrees that no agreement or arrangement between the Executive Purchasers and the Company (including, without limitation, the issuance of the Executive Securities to the Executive Purchasers and the execution and delivery of this Agreement) shall entitle Executive to remain in the employment of the Company and its Subsidiaries or affect the right of the Company or its Subsidiaries to terminate Executive's employment at any time and for any reason. 2. VESTING OF EXECUTIVE SECURITIES. (a) Vesting Schedule. Except as otherwise provided herein, an amount of Unvested Securities (as defined below) shall vest in accordance with the following schedule:
Cumulative Percentage of Executive Date Securities Vested on Such Date ---- ---------------------------------- August 13, 1997 20% August 13, 1998 60% August 13, 1999 80% August 13, 2000 100%
-1- 2 Notwithstanding the foregoing sentence, and except as otherwise provided herein, the above vesting schedule shall cease and no Unvested Securities (as defined below) shall vest after the date on which Executive's employment with the Company and its Subsidiaries terminates for any reason; provided that if Executive's employment is terminated by the Company without Cause, the Executive Securities shall thereafter continue to vest in accordance with the above schedule so long as Executive has not committed a Vesting Termination Breach (upon which breach the vesting schedule shall cease, and no Unvested Securities (as defined below) shall vest on or after the date of the first such breach). In the event the Company has alleged that Executive has committed a Vesting Termination Breach, Executive disputes such allegation, and the matter is subject to the dispute resolution provisions set forth in paragraph 5, vesting shall be tolled upon the date of the allegation of such breach; provided that (i) if it is ultimately resolved under paragraph 5 that Executive has committed a Vesting Termination Breach, the tolling shall become a permanent cessation such that vesting shall have forever ceased upon the date of such allegation, and (ii) if it is ultimately resolved under paragraph 5 that Executive did not commit a Vesting Termination Breach, a number of Unvested Securities shall vest giving retroactive effect to such vesting schedule such that there shall exist a number of Vested Securities as if the vesting schedule had not been tolled as a result of such allegations. Executive Securities which have become vested pursuant to this Agreement are referred to herein as "Vested Securities," and all other Executive Securities are referred to herein as "Unvested Securities." (b) Acceleration upon a Qualified Sale of the Company. All Unvested Securities shall become Vested Securities upon the consummation of a Qualified Sale of the Company (as defined below) so long as Executive is employed by the Company or any of its Subsidiaries on the date of such sale (or, if Executive's employment was terminated by the Company without Cause, so long as Executive has not committed a Vesting Termination Breach). A "Qualified Sale of the Company" means either (i) the sale, lease, transfer, conveyance or other disposition, in one or a series of related transactions, of all or substantially all of the assets of the Company and its Subsidiaries, taken as a whole, or (ii) a transaction or series of transactions (including by way of merger, consolidation, or sale of stock, but not including a Public Offering) the result of which is that the holders of the Company's outstanding voting stock immediately prior to such transaction are after giving effect to such transaction no longer, in the aggregate, the "beneficial owners" (as such term is defined in Rule 13d-3 and Rule 13d-5 promulgated under the Securities Exchange Act), directly or indirectly through one or more intermediaries, of more than 50% of the voting power of the outstanding voting stock of the Company, in each case where the consideration for such assets or stock in such sale or transfer consists of cash and/or publicly traded equity securities for at least 50% of the outstanding stock of the Company (e.g., 100% of such consideration would have to consist of cash and/or publicly traded equity securities if only 50.01% of such stock were sold in such transaction). (c) Acceleration upon a Public Offering. The vesting schedule set forth in (a) above gives effect to the fact that the Company consummated its initial Public Offering on July 7, 1998 and Executive was employed by the Company or any of its Subsidiaries on the closing date of such offering. -2- 3 (d) Acceleration upon Death or Disability. All Unvested Shares shall become Vested Shares if Executive's employment with the Company or any of its Subsidiaries terminates by reason of Executive's death or Disability. (e) Other Acceleration. Subject to paragraph 3(h) hereof, any Unvested Securities which the Company (or its assignees) has not elected to repurchase in the Repurchase Notice (as defined below) (including Unvested Securities originally included in the Repurchase Notice, but for which the election to repurchase was rescinded, pursuant to the terms of paragraph 3, by all of the Company and/or its assignees having made such election) shall thereafter be deemed Vested Securities. 3. REPURCHASE OPTION. (a) The Repurchase Option. Upon (i) the termination of Executive's employment with the Company and its Subsidiaries for any reason other than a termination by the Company without Cause, or (ii) if Executive's employment is terminated by the Company without Cause, upon Executive's commission of a Vesting Termination Breach (the occurrence of either (i) or (ii), a "Repurchase Event"), the Unvested Securities then in existence (whether held by an Executive Purchaser or one or more of the Executive Purchasers' transferees) will be subject to repurchase by the Company at the Company's election pursuant to the terms and conditions set forth in this paragraph 3 (the "Repurchase Option"). In the event that the Company has alleged that Executive has committed a Vesting Termination Breach, Executive disputes such allegation, and the matter is subject to the dispute resolution provisions set forth in paragraph 6, the closing of the repurchase under this paragraph 3 shall not occur unless and until it is ultimately determined that Executive committed a Vesting Termination Breach; provided that during the pendency of such proceeding, the Executive Securities specified in the Repurchase Notice (as defined below) shall not be transferred by any holder thereof to any Person. (b) Repurchase Price. The repurchase price (the "Repurchase Price") of any Unvested Securities to be repurchased shall be the lesser of (x) the Fair Market Value of such Securities, and (y) the Original Cost of such Securities (with securities having the lowest Original Cost subject to repurchase prior to securities with a higher Original Cost). (c) Exercise of Repurchase Option. The Company may elect to purchase all or any portion of the Executive Securities by delivering written notice (the "Repurchase Notice") to the holder or holders of the Executive Securities within 30 days after the Repurchase Event. The Repurchase Notice shall set forth the amount, type, and class of Executive Securities to be acquired from each such holder. The Executive Securities to be repurchased by the Company shall first be satisfied to the extent possible from the Executive Securities held by Executive at the time of delivery of the Repurchase Notice. If the amount of Executive Securities then held by Executive is less than the total amount of Executive Securities that the Company has elected to purchase, the Company shall Purchase the remaining securities elected to be purchased from the other holder(s) of Executive Securities, pro rata according to the amount of Executive Securities held of record by each such other holder at the time of delivery of the Repurchase Notice. The amount of Unvested -3- 4 Securities to be repurchased hereunder shall be deemed to be allocated among Executive and the other holders of repurchased Executive Securities (if any) pro rata according to the amount of Executive Securities to be purchased from such persons. (d) Assignment by the Company. The Company, by action of the Board, will have the right to assign all or any portion of its repurchase rights hereunder to any holder of Investor Equity and/or to any executive employee of the Company or any of its Subsidiaries. (e) Fair Market Value of Repurchased Shares. (i) The "Fair Market Value" of Executive Securities subject to repurchase hereunder shall be determined in accordance with this paragraph (e). (ii) The Company and the holders of a majority of the Executive Securities to be repurchased shall attempt in good faith to agree on the Fair Market Value of the Executive Securities. Any agreement reached by such Persons shall be final and binding on all parties hereto. (iii) If such Persons are unable to reach such agreement within 20 days after the giving of Repurchase Notice, the Fair Market Value of any Executive Securities that are publicly traded shall be the average, over a period of 21 days consisting of the date of the Repurchase Event and the 20 consecutive business days prior to that date, of the average of the closing prices of the sales of such securities on all securities exchanges on which such securities may at that time be listed, or, if there have been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day such securities are not so listed, the average of the representative bid and asked prices quoted in the Nasdaq System as of 4:00 P.M., New York time, or, if on any day such securities are not quoted in the Nasdaq System, the average of the highest bid and lowest asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau Incorporated, or any similar successor organization. (iv) If such Persons are unable to reach agreement pursuant to subparagraph (ii) within 20 days after the giving of Repurchase Notice, and to the extent any Executive Securities are not publicly traded: (A) The Company and the holders of a majority of the Executive Securities shall each, within 10 days thereafter, choose one investment banker or other appraiser with experience in analyzing and making determinations concerning matters in the telecommunications industry and in valuing entities like the Company, and the two investment bankers/appraisers so selected shall together select a third investment banker/appraiser similarly qualified. (B) The three investment bankers/appraisers shall first appraise the fair market value of the Company (based on the assumption of an orderly, arm's length -4- 5 sale to a willing unaffiliated buyer). The three investment bankers/appraisers shall then appraise the fair market value of such non-publicly-traded Executive Securities as follows: the fair market value of each share of Common Stock shall be equal to the fair market value of the Company divided by the total number of shares of Common Stock outstanding on the date of the Repurchase Event (determined on a fully diluted basis (x) with respect to all outstanding securities convertible into the Company's Common Stock, assuming the conversion of such convertible securities (without regard to any conditions or other restrictions on such conversion), and (y) with respect to all outstanding options, warrants and other rights or securities exercisable or exchangeable for shares of the Company's Common Stock, in accordance with the Treasury Stock Method under generally accepted accounting principles for determination of fully diluted earnings per share). The three investment bankers/appraisers shall, within thirty days of their retention, provide the written results of such appraisals to the Company and/or its assignees and to each of the holders of Executive Securities. (C) The "Fair Market Value" of the non-publicly-traded Executive Securities to be repurchased shall be the average of the two appraisals closest to each other, and such amount shall be final and binding on all parties hereto; provided that the Company (and/or any assignee) may at any time within five days after receiving written notice of such determination rescind its prior exercise of the Repurchase Option by giving written notice of such revocation to the holder or holders of the Executive Securities to be repurchased, and upon such revocation the revoking party will be treated as if it had never exercised such Repurchase Option (it being understood that such revoking parties shall thereafter have no right to re-exercise such Repurchase Option). (D) The costs of such appraisal shall be allocated between the parties based on the percentage which the portion of the contested amount not awarded to each party bears to the amount actually contested by such party; provided that if any parties revoke their exercise of the Repurchase Option pursuant to paragraph (C) above, such revoking parties shall bear (pro rata among such revoking parties based on the number of Executive Securities with respect to which each such revoking party had initially exercised its Repurchase Option) any appraisal costs that would be allocated to the holder(s) of Executive Securities under this paragraph (D). (f) Closing of the Repurchase. Within 10 business days after the Repurchase Price for the Executive Securities to be repurchased has been determined, the Company shall send a notice to each holder of Executive Securities setting forth the consideration to be paid for such shares and the time and place for the closing of the transaction, which date shall not be more than 30 days nor less than five days after the delivery of such notice. At such closing, the holders of Executive Securities shall deliver all certificates (if any exist) evidencing the Executive Securities to be repurchased to the Company (and/or any assignees of the Company's repurchase right), and the Company (and/or any assignees) shall pay for the Executive Securities to be purchased pursuant to the Repurchase Option by delivery of a check or wire transfer of immediately available funds in the aggregate amount of the Repurchase Price for such securities; provided that in the event the -5- 6 Board determines in its good faith discretion that the Company is not in a position to pay in cash any or all of the Repurchase Price for Executive Securities to be repurchased by it. The Company may pay, in the form of a promissory note, a portion of the Repurchase Price for such securities equal to (x) the aggregate Repurchase Price for the Executive Securities to be repurchased minus (y) the Original Cost of such securities. Such a promissory note shall be subordinated to all of the Company's senior debt obligations either then or thereafter incurred, shall earn simple annual interest at the Base Rate, shall have all principal and accrued interest due and payable upon maturity, and shall mature upon the earliest to occur of a Qualified Sale of the Company or the fifth anniversary of the issuance of such promissory note. The purchasers of Executive Securities hereunder shall be entitled to receive customary representations and warranties from the sellers regarding good title to such shares, free and clear of any liens or encumbrances. (g) Restrictions. Notwithstanding anything to the contrary contained in this Agreement, all repurchases of Executive Securities by the Company shall be subject to applicable restrictions contained in the Delaware General Corporation Law and in the Company's and its Subsidiaries' debt and equity financing agreements. If any such restrictions prohibit the repurchase of Executive Securities hereunder which the Company is otherwise entitled or required to make, the time periods provided in this paragraph 3 shall be suspended, and the Company may make such repurchases as soon as it is permitted to do so under such restrictions, unless by such time such Repurchase Option has terminated pursuant to paragraph 3(h); provided that notwithstanding the foregoing, in no event shall the time periods provided in this paragraph 3 be suspended for more than 6 months. (h) Termination of Repurchase Option. All rights under this paragraph 3 of the Company and/or its assignees to repurchase Executive Securities shall terminate upon a Qualified Sale of the Company. 4. RESTRICTIONS ON TRANSFER. (a) Opinion of Valid Transfer. In addition to any other restrictions on transfer imposed by this Agreement, or the Securityholders Agreement, no holder of Executive Securities may sell, transfer or dispose of any Executive Securities (except pursuant to an effective registration statement under the Securities Act) without first delivering to the Company an opinion of counsel (reasonably acceptable in form and substance to the Company) that neither registration nor qualification under the Securities Act and applicable state securities laws is required in connection with such transfer. (b) Restrictive Legend. The certificates representing Executive Securities shall bear the following legend: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED ON AUGUST 13, 1997, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE -6- 7 "ACT"), OR THE SECURITIES LAWS OF ANY STATE, AND SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN EXEMPTION FROM REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER AND REPURCHASE OPTIONS SET FORTH IN AN EXECUTIVE PURCHASE AGREEMENT BETWEEN THE ISSUER OF SUCH SECURITIES (THE "ISSUER") AND THE INITIAL HOLDER OF SUCH SECURITIES (THE "INITIAL HOLDER"). A COPY OF SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT THE ISSUER'S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE." The legend set forth above shall be removed from the certificates evidencing any shares which cease to be Executive Securities. (c) Retention of Executive Stock. (i) No Executive Purchaser shall sell, transfer, assign, pledge or otherwise dispose of (whether with or without consideration and whether voluntarily or involuntarily or by operation of law) any interest in any Unvested Securities (a "Transfer"), except pursuant to (A) the repurchase provisions of paragraph 3 hereof or of the LLC Agreement, (B) the "Participation Rights" or "Put" provisions set forth in the Securityholders Agreement, or (C) a Sale of the Company (as defined in the Securityholders Agreement) (each of (A), (B), and (C), an "Exempt Transfer"). (ii) The restrictions contained in this paragraph (c) shall not apply with respect to transfers of Unvested Securities (A) pursuant to applicable laws of descent and distribution or (B) among Executive's Family Group; provided that the restrictions contained in this paragraph shall continue to be applicable to the Unvested Securities after any such Transfer, the transferees of such Unvested Securities shall have agreed in writing to be bound by the provisions of this Agreement with respect to the Unvested Securities so transferred, and (prior to the death of Executive) each such transferee of Unvested Securities shall have entered into proxies and other agreements satisfactory to the holders of a majority of the Investor Equity pursuant to which Executive shall have the sole right to vote such Unvested Securities for all purposes. For purposes of this Agreement, "Family Group" means Executive's spouse and descendants (whether natural or adopted), any trust which at the time of such Transfer and at all times thereafter is and remains solely for the benefit of Executive and/or Executive's spouse and/or descendants and any family partnership the partners of which consist solely of Executive, such spouse, such descendants or such trusts. 5. CONFIDENTIALITY, NONCOMPETE, AND NONSOLICITATION. (a) Nondisclosure and Nonuse of Confidential Information. Executive shall not disclose or use at any time, either during his employment with the Company or thereafter, any Confidential Information (as defined below) of which Executive is or becomes aware, whether or -7- 8 not such information is developed by him, except to the extent that such disclosure or use is directly related to and required by Executive's performance of duties assigned to Executive or the Company, or to the extent such disclosure is permissible under the confidentiality provisions set forth in the Stock Purchase Agreement. Executive shall take all appropriate steps to safeguard Confidential Information and to protect it against disclosure, misuse, espionage, loss and theft. As used in this Agreement, the term "Confidential Information" means information that is not generally known to the public and that is used, developed or obtained by the Company, or its Subsidiaries in connection with their business, including but not limited to (i) products or services, (ii) fees, costs and pricing structures, (iii) designs, (iv) analysis, (v) drawings, photographs and reports, (vi) computer software, including operating systems, applications and program listings, (vii) flow charts, manuals and documentation, (viii) data bases, (ix) accounting and business methods, (x) inventions, devices, new developments, methods and processes, whether patentable or unpatentable and whether or not reduced to practice, (xi) customers and clients and customer or client lists, (xii) copyrightable works, (xiv) all technology and trade secrets, (xv) business plans and financial models, and (xvi) all similar and related information in whatever form. Confidential Information shall not include any information that has been published in a form generally available to the public prior to the date Executive proposes to disclose or use such information. Information shall not be deemed to have been published merely because individual portions of the information have been separately published, but only if all material features constituting such information have been published in combination. Notwithstanding the foregoing, "Confidential Information" shall not include any information of which (a) Executive became aware prior to his affiliation with the Company, (b) Executive learns from sources other than the Company or its Subsidiaries, whether prior to or after such information is actually disclosed by the Company or its Subsidiaries or (c) is disclosed in a prospectus or other documents for dissemination to the public. (b) The Company's Ownership of Intellectual Property. (i) Acknowledgment of Company Ownership. In the event that Executive as part of his activities on behalf of the Company generates, authors or contributes to any invention, design, new development, device, product, method or process (whether or not patentable or reduced to practice or constituting Confidential Information), any copyrightable work (whether or not constituting Confidential Information) or any other form of Confidential Information relating directly or indirectly to the Company's business as now or hereafter conducted (collectively, "Intellectual Property"), Executive acknowledges that such Intellectual Property is the exclusive property of the Company and hereby assigns all right, title and interest in and to such Intellectual Property to the Company. Any copyrightable work prepared in whole or in part by Executive will be deemed "a work made for hire" under Section 201(b) of the 1976 Copyright Act, and the Company shall own all of the rights comprised by the copyright therein. Executive shall promptly and fully disclose all Intellectual Property to the Company and shall cooperate with the Company to protect the Company's interests in and rights to such Intellectual Property (including, without limitation, providing reasonable assistance in securing patent protection and copyright registrations and executing all documents as reasonably requested by the Company, whether such requests occur prior to or after termination of Executive's employment with the Company). -8- 9 (ii) Executive Invention. Executive understands that paragraph (b)(i) of this Agreement regarding the Company's ownership of Intellectual Property does not apply to any invention for which no equipment, supplies, facilities or trade secret information of the Company were used and which was developed entirely on Executive's own time, unless (i) the invention relates to the business of the Company or to the Company's actual or demonstrably anticipated research or development or (ii) the invention results from any work performed by Executive for the Company. (c) Delivery of Materials upon Termination of Employment. As requested by the Company from time to time and upon the termination of Executive's employment with the Company for any reason, Executive shall promptly deliver to the Company all copies and embodiments, in whatever form, of all Confidential Information and Intellectual Property in Executive's possession or within his control (including, but not limited to, written records, notes, photographs, manuals, notebooks, documentation, program listings, flow charts, magnetic media, disks, diskettes, tapes and all other materials containing any Confidential Information or Intellectual Property) irrespective of the location or form of such material and, if requested by the Company, shall provide the Company with written confirmation that all such materials have been delivered to the Company. (d) Noncompete. Executive acknowledges and agrees with the Company that in the course of his employment with the Company he shall become familiar with the Company's trade secrets and with other Confidential Information concerning the Company, that Executive's services to the Company are unique in nature and of an extraordinary value to the Company, and that the Company would be irreparably damaged if Executive were to provide similar services to any person or entity competing directly with the Company. In connection with the issuance to Executive of the Executive Securities hereunder, in consideration of and as an inducement to the Company's entering into this Agreement, Executive accordingly covenants and agrees with the Company that during the Noncompete Period (as defined below), Executive shall not, directly or indirectly, either for himself or for or through any other individual, corporation, partnership, joint venture or other entity, participate in any business or enterprise conducting business in any Covered MSA which engages or proposes to engage in the provision of competitive local exchange telecommunications services. For purposes of this Agreement, (i) the term "participate in" shall include, without limitation, having any direct or indirect interest in any corporation, partnership, joint venture or other entity, whether as a sole proprietor, owner, stockholder, partner, joint venturer, creditor or otherwise, or rendering any direct or indirect service or assistance to any individual, corporation, partnership, joint venture and other business entity (whether as a director, officer, manager, supervisor, employee, agent, consultant or otherwise), other than ownership of up to 2% of the outstanding stock of any company (public or private) wherein Executive has no material involvement in the management (other than as an independent director for which Executive receives no or only nominal cash compensation), (ii) the term "MSA" means metropolitan statistical area and (iii) the term "Covered MSA" means (1) any MSA in which the Company is engaged in business or has at any time had an Approved Business Plan (as defined in the Stock Purchase Agreement) to engage in business. Executive agrees that this covenant is reasonable with respect to its duration, geographical area and scope. (e) Nonsolicitation. During the Noncompete Period, Executive shall not (i) induce or attempt to induce any employee of the Company or any Subsidiary to leave the employ of -9- 10 the Company or any Subsidiary, or in any way interfere with the relationship between the Company or any Subsidiary and any employee thereof, (ii) hire directly or through another entity any person who was an employee of the Company or any Subsidiary at any time during the six months prior to the date such person is to be so hired, or (iii) induce or attempt to induce any customer, supplier, licensee or other business relation of the Company or any Subsidiary to cease doing business with the Company or any Subsidiary, or in any way interfere with the relationship between any such customer, supplier, licensee or business relation of the Company and its Subsidiaries (including, without limitation, making any negative statements or communications concerning the Company or any Subsidiary). (f) Noncompete Period. The "Noncompete Period" shall commence on the date hereof and shall continue until the first anniversary of the termination of Executive's employment with the Company and its Subsidiaries for any reason; provided that the Noncompete Period shall terminate immediately upon a Qualified Sale of the Company. (g) Judicial Modification. If the final judgment of a court of competent jurisdiction, or any final non-appealable decision of an arbitrator in connection with a mandatory arbitration, declares that any term or provision of this paragraph is invalid or unenforceable, the parties agree that the court making the determination of invalidity or unenforceability shall have the power to reduce the scope, duration, or geographic area of the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified after the expiration of the time within which the judgment or decision may be appealed. (h) Dispute Resolution. (i) Arbitration. All claims, disputes, controversies and other matters in question arising out of or relating to this paragraph 5, or to the alleged breach hereof, shall be settled by preliminary negotiation between the Company or other Person bringing such allegation and the Executive (the "parties") or, if such preliminary negotiation is unsuccessful for any reason (but in any event not later than 10 days after commencement of such negotiation), by binding arbitration in accordance with the procedures set forth in this paragraph (h). Without limiting the mandatory arbitration provision set forth in this paragraph (h), each of the parties hereto (A) waives the right to bring an action in any court of competent jurisdiction with respect to any such claims, controversies and disputes (other than any such action to enforce the award or other remedy resulting from any arbitration pursuant to this paragraph (h) or to prevent any arbitrator from exceeding the authority granted to the arbitrators hereunder) and (B) waives the right to trial by jury in any suit, action or other proceeding brought on, with respect to or in connection with this Agreement. (ii) Binding Arbitration. Upon filing of a notice of demand for binding arbitration by any party hereto, arbitration shall be commenced and conducted as follows: -10- 11 (A) Arbitrators. All claims, disputes, controversies and other matters (collectively "matters") in question shall be referred to and decided and settled by a panel of three arbitrators with experience in analyzing, understanding, and making determinations concerning matters in the telecommunications industry, one selected by each of the parties and the third by the two arbitrators so selected. (B) Cost of Arbitration. The cost of each arbitration proceeding, including without limitation the arbitrators' compensation and expenses, hearing room charges, court reporter transcript charges, etc., shall be allocated among the parties based upon the percentage which the portion of the contested amount not awarded to each party bears to the amount actually contested by such party. The arbitrators shall also award the party that prevails substantially in its pre-hearing position its reasonable attorneys' fees and costs incurred in connection with the arbitration. The arbitrators are specifically instructed to award attorneys' fees for instances of abuse of the discovery process. (C) Situs of Proceedings. The situs of the arbitration shall be in New York, New York, or such other place as is mutually agreeable to the parties. (iii) Pre-hearing Discovery. The parties shall have the right to conduct and enforce pre-hearing discovery in accordance with the then current Federal Rules of Civil Procedure, subject to the following limitations: (A) each party may serve no more than one set of interrogatories which set shall ask no more than twenty questions; (B) each party may depose the other party's expert witnesses who will be called to testify at the hearing, plus up to six fact witnesses without regard to whether they will be called to testify (each party will be entitled to a total of not more than 24 hours of depositions of the other party's witnesses, and not more than 6 hours with respect to any single witness); and (C) document discovery and other discovery shall be under the control of and enforceable by the arbitrators, and all disputes relating thereto shall be decided by the arbitrators. Notwithstanding any contrary foregoing provisions, the arbitrators shall have the power and authority to, and to the fullest extent practicable shall, abbreviate arbitration discovery in a manner which is fair to all parties in order to expedite the conclusion of each alternative dispute resolution proceeding. (iv) Pre-hearing Conference. Within thirty (30) days after filing of notice of demand for binding arbitration, the arbitrators shall hold a pre-hearing conference to establish schedules for completion of discovery, for exchange of exhibit and witness lists, for arbitration briefs, for the hearing, and to decide procedural matters and all other questions that may be presented. (v) Hearing Procedures. The hearing shall be conducted to preserve its privacy and to allow reasonable procedural due process. Rules of evidence need not be strictly followed, and the hearing shall be streamlined as follows: (A) documents shall be self-authenticating, subject to valid objection by the opposing party; (B) expert reports, witness biographies, depositions and affidavits may be utilized, subject to the opponent's right of a live cross-examination of the witness in person; (C) charts, graphs and summaries shall be utilized to present voluminous data, provided (1) that the underlying data was made -11- 12 available to the opposing party thirty (30) days prior to the hearing, and (2) that the preparer of each chart, graph or summary is available for explanation and live cross-examination in person; (D) the hearing should be held on consecutive business days without interruption to the maximum extent practicable; and (E) the arbitrators shall establish all other procedural rules for the conduct of the arbitration in accordance with the rules of arbitration of the American Arbitration Association. (vi) Governing Law. This arbitration provision shall be governed by, and all rights and obligations specifically enforceable under and pursuant to, the Federal Arbitration Act (9 U.S.C. Section 1, et seq.). (vii) Consolidation. No arbitration shall include, by consolidation, joinder or in any other manner, any additional person not a party to this Agreement (other than affiliates of any such party, which affiliates may be included in the arbitration), except by written consent of the parties hereto containing a specific reference to this Agreement. (viii) Award; Time Limit. The arbitrators are empowered to render an award of general compensatory damages and equitable relief (including, without limitation, injunctive relief), but is not empowered to award punitive damages. The award rendered by the arbitrators (A) shall be final; (B) shall not constitute a basis for collateral estoppel as to any issue; and (C) shall not be subject to vacation or modification. The arbitrators shall render any award or otherwise conclude the arbitration no later than 120 days after the date notice is given pursuant to this paragraph (h). (ix) Confidentiality. The Parties hereto will maintain the substance of any proceedings hereunder in confidence and the arbitrators, prior to any proceedings hereunder, will sign an agreement whereby the arbitrator agrees to keep the substance of any proceedings hereunder in confidence. 6. DEFINITIONS. "Approved Business Plan" has the meaning ascribed to such term in the Stock Purchase Agreement. "Board" means the board of directors of the Company. "Cause" means (A) Executive's theft or embezzlement, or attempted theft or embezzlement, of money or property of the Company, Executive's perpetration or attempted perpetration of fraud, or Executive's participation in a fraud or attempted fraud, on the Company, or Executive's unauthorized appropriation of, or attempt to misappropriate, any tangible or intangible assets or property of the Company, (B) any act or acts of disloyalty, misconduct or moral turpitude by Executive injurious to the interest, property, operations, business or reputation of the Company, or Executive's conviction of a crime the commission of which results in injury to the Company or (C) Executive's repeated refusal or failure (other than by reason of Disability) to carry out reasonable instructions by his superiors or the Board or the Company's board of directors. -12- 13 "Common Stock" means the Company's Common Stock, par value $.01 per share. "Disability" means (i) any permanent physical or mental incapacity or disability rendering the Executive unable or unfit to perform effectively the duties and obligations of his employment or to participate effectively and actively in the management of the Company, or (ii) any illness, accident, injury, physical or mental incapacity or other disability, where such condition has rendered the Executive unable or unfit to perform effectively the duties and obligations of his employment or to participate effectively and actively in the management of the Company for a period of at least 90 days (in either case, as determined in the good faith judgment of the Company's board of directors). "Executive Securities" means (i) the Common Stock issued to the Executive Purchasers under the Original Agreement, and (ii) any securities issued directly or indirectly with respect to the foregoing securities by way of a stock split, stock dividend, or other division of securities, or in connection with a combination of securities, recapitalization, merger, consolidation, or other reorganization, or upon conversion or exercise of any of the foregoing securities. As to any particular securities constituting Executive Securities, such securities shall cease to be Executive Securities when they have been (a) effectively registered under the Securities Act and disposed of in accordance with the registration statement covering them, or (b) distributed to the public through a broker, dealer or market maker pursuant to Rule 144 under the Securities Act (or any similar provision then in force). "Investor Equity" means (i) the securities distributed in respect of the securities purchased under the Investors Purchase Agreement and (ii) any securities issued directly or indirectly with respect to the foregoing securities by way of a stock split, stock dividend, or other division of securities, or in connection with a combination of securities, recapitalization, merger, consolidation, or other reorganization, or upon conversion or exercise of the foregoing. As to any particular securities constituting Investor Equity, such securities shall cease to be Investor Equity when they have been (a) effectively registered under the Securities Act and disposed of in accordance with the registration statement covering them, (b) distributed to the public through a broker, dealer or market maker pursuant to Rule 144 under the Securities Act (or any similar provision then in force) or (c) repurchased by the Company or any Subsidiary thereof. "LLC Agreement" means the limited liability company agreement of even date herewith, entered into by and among the members of the LLC, as amended from time to time in accordance with its terms. "MSA" means a metropolitan statistical area. "Original Cost" means, at any given time, (i) with respect to any Common Stock issued upon conversion of Preferred Stock, the Original Cost of such Preferred Stock, and (ii) with respect to any other securities, the original price paid upon issuance of such securities. -13- 14 "Person" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. "Public Offering" means any underwritten sale of the Company's common stock pursuant to an effective registration statement under the Securities Act filed with the Securities and Exchange Commission on Form S-1 (or a successor form adopted by the Securities and Exchange Commission); provided that the following shall not be considered a Public Offering: (i) any issuance of common stock as consideration or financing for a merger or acquisition, and (ii) any issuance of common stock or rights to acquire common stock to employees of the Company or its Subsidiaries as part of an incentive or compensation plan. "Securities Act" means the Securities Act of 1933, as amended, or any similar federal law then in force. "Securityholders Agreement" means the securityholders agreement entered into by and among the Company, the LLC, and the holders of interests in the LLC, as amended from time to time in accordance with its terms. "Stock Purchase Agreement" means the stock purchase agreement of even date herewith, entered into by and between the Company and the LLC, as amended from time to time in accordance with the terms thereof. "Subsidiary" means, with respect to any Person, any corporation, limited liability company, partnership, association or other business entity of which (i) if a corporation, a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof, or (ii) if a limited liability company, partnership, association or other business entity, a majority of the partnership or other similar ownership interest thereof is at the time owned or controlled, directly or indirectly, by any Person or one or more Subsidiaries of that Person or a combination thereof. For purposes hereof, a Person or Persons shall be deemed to have a majority ownership interest in a limited liability company, partnership, association or other business entity if such Person or Persons shall be allocated a majority of limited liability company, partnership, association or other business entity gains or losses or shall be or control any managing director or general partner of such limited liability company, partnership, association or other business entity. "Vesting Termination Breach" means (i) any breach of paragraph 5(d) or clause (ii) of paragraph 5(e) and (ii) any breach of any other provision of paragraph 5 which is material or is intentionally and knowingly committed by Executive. -14- 15 7. MISCELLANEOUS PROVISIONS. (a) Further Assurances; Voting Proxy. As a condition to the Company's entering into this Agreement and the issuance of Executive Securities to the Executive Purchasers, and as further consideration therefor: (i) Executive hereby unconditionally guarantees the full and prompt performance of each Executive Purchaser's obligations under this Agreement and under each of the agreements contemplated hereby to which such Executive Purchaser is a party, and Executive agrees that he will take all necessary or desirable actions to ensure such performance as are reasonably requested by the Company. Executive further agrees that he will not provide any directions to an Executive Purchaser that are contrary to any obligation imposed on such Executive Purchaser under this Agreement or under such other agreements, and that Executive will not fail to provide any directions to an Executive Purchaser if such failure would cause an Executive Purchaser not to satisfy its obligations hereunder or thereunder. This guarantee shall be irrevocable with respect to each Executive Security held by an Executive Purchaser (and shall survive any transfer thereof, or the death, disability, incompetency, or bankruptcy of such Executive Purchaser) until such time as such Executive Security is transferred in accordance with the terms hereof to a Person other than a member of Executive's Family Group, at which time this guarantee shall be deemed revoked with respect to such security (but not with respect to any other Executive Securities). No invalidity, irregularity or unenforceability of this Agreement or such other agreements by reason of an Executive Purchaser's incapacity, minor status, incompetency, bankruptcy, insolvency, or otherwise shall impair, affect or be a defense to the obligations of Executive under this guarantee. (ii) Each Executive Purchaser (other than Executive) hereby appoints Executive as his true and lawful proxy and attorney-in-fact, with full power of substitution, to vote all of such Executive Purchaser's Executive Securities on all matters to be voted on by the holders of such securities (whether as a member vote, a shareholder vote, an approval right under this Agreement or the other agreements contemplated hereby, or otherwise). These proxies and powers granted by each Executive Purchaser pursuant to this paragraph are coupled with an interest, and are given to secure such Executive Purchasers' obligations under this Agreement and the other agreements contemplated hereby to which the Executive Purchasers are parties. Such proxies and powers shall be irrevocable with respect to each Executive Security held by an Executive Purchaser (and shall survive any transfer thereof, or the death, disability, incompetency, or bankruptcy of such Executive Purchaser) until such time as such Executive Security is transferred in accordance with the terms hereof to a Person other than a member of Executive's Family Group, at which time such proxy shall be deemed revoked with respect to such security (but not with respect to any other Executive Securities). (b) Transfers in Violation of Agreement. Any Transfer or attempted Transfer of any Executive Securities in violation of any provision of this Agreement shall be void, and none of -15- 16 the Company, or any Subsidiary thereof shall record such purported Transfer on its books or treat any purported transferee of such Executive Securities as the owner of such securities for any purpose. (c) Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. (d) Complete Agreement. This Agreement, those documents expressly referred to herein and other documents of even date herewith embody the complete agreement and understanding among the parties and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way, including without limitation the Original Agreement. (e) Counterparts. This Agreement may be executed in separate counterparts, none of which need contain the signature of more than one party hereto but each of which shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (f) Successors and Assigns. Except as otherwise provided herein, this Agreement shall bind the parties hereto and their respective successors and assigns and shall inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns whether so expressed or not. (g) CHOICE OF LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT AND THE EXHIBITS HERETO SHALL BE GOVERNED BY THE INTERNAL LAW, AND NOT THE LAW OF CONFLICTS, OF THE STATE OF DELAWARE. (h) Remedies. Each of the parties to this Agreement (including any holder of Investor Equity or employee of the Company to which the Company assigns any of its repurchase rights under paragraph 3 hereof) shall be entitled to enforce its rights under this Agreement specifically, to recover damages and costs (including reasonable attorney's fees) caused by any breach of any provision of this Agreement and to exercise all other rights existing in its favor. The parties hereto agree and acknowledge that money damages would not be an adequate remedy for any breach of the provisions of this Agreement and that any party may in its sole discretion apply to any court of law or equity of competent jurisdiction (without posting any bond or deposit) for specific performance and/or other injunctive relief in order to enforce or prevent any violations of the provisions of this Agreement. (i) Amendment, Modification, or Waiver. The provisions of this Agreement may be amended, modified, or waived only with the prior written consent of the Company and the Executive. -16- 17 (j) Third-Party Beneficiaries. The parties hereto acknowledge and agree that certain provisions of this Agreement are intended for the benefit of certain holders of Investor Equity or employees of the Company to which the Company assigns any of its repurchase rights under paragraph 3 hereof, that such Persons are third-party beneficiaries of this Agreement and that provisions of this Agreement shall be enforceable by such Persons as provided herein. (k) Business Days. If any time period for giving notice or taking action hereunder expires on a day which is a Saturday, Sunday or legal holiday in the State of Illinois, the time period shall be automatically extended to the business day immediately following such Saturday, Sunday or holiday. (l) Descriptive Headings; Interpretation; No Strict Construction. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a substantive part of this Agreement. Whenever required by the context, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular forms of nouns, pronouns, and verbs shall include the plural and vice versa. Reference to any agreement, document, or instrument means such agreement, document, or instrument as amended or otherwise modified from time to time in accordance with the terms thereof, and if applicable hereof. The use of the words "include" or "including" in this Agreement shall be by way of example rather than by limitation. The use of the words "or," "either" or "any" shall not be exclusive. The parties hereto have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. (m) Notices. All notices, demands or other communications to be given or delivered under or by reason of the provisions of this Agreement shall be in writing and shall be deemed to have been given when (a) delivered personally to the recipient, (b) telecopied to the recipient (with hard copy sent to the recipient by reputable overnight courier service (charges prepaid) that same day) if telecopied before 5:00 p.m. Chicago, Illinois time on a business day, and otherwise on the next business day, or (c) one business day after being sent to the recipient by reputable overnight courier service (charges prepaid). Such notices, demands and other communications shall be sent to the following Persons at the following addresses: To the Company: 1950 N. Stemmons Freeway Suite 3026 Dallas, Texas 75207 Attention: Royce J. Holland Telephone: (214) 261-7105 Telecopy: (214) 261-7107 -17- 18 To an Executive Purchaser: at the address set forth in the Company's records. or to such other address or to the attention of such other person as the recipient party has specified by prior written notice to the sending party. (n) Delivery by Facsimile. This Agreement, the agreements referred to herein, and each other agreement or instrument entered into in connection herewith or therewith or contemplated hereby or thereby, and any amendments hereto or thereto, to the extent signed and delivered by means of a facsimile machine, shall be treated in all manner and respects as an original agreement or instrument and shall be considered to have the same binding legal effect as if it were the original signed version thereof delivered in person. At the request of any party hereto or to any such agreement or instrument, each other party hereto or thereto shall reexecute original forms thereof and deliver them to all other parties. No party hereto or to any such agreement or instrument shall raise the use of a facsimile machine to deliver a signature or the fact that any signature or agreement or instrument was transmitted or communicated through the use of a facsimile machine as a defense to the formation or enforceability of a contract and each such party forever waives any such defense. (o) Excise Tax. If either (a) it is determined by the Internal Revenue Service or any other applicable governmental agency that any payment or distribution of any type to or for the benefit of Executive pursuant to this Agreement by the Company, any Person who acquires ownership or effective control of the Company, or ownership of a substantial portion of the assets of the Company (within the meaning of section 280G of the Code and the regulations thereunder) or any affiliate of such Person (the "Total Payments") would be subject to the excise tax imposed by section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are collectively referred to as the "Excise Tax"), or (b) the Company or any such Person withholds any portion of such payment or distribution or otherwise seeks to reduce the benefits to Executive under this Agreement on account of the Excise Tax, then the Company and such Person shall be jointly and severally obligated to pay to Executive an additional payment (a "Gross-Up Payment") in an amount such that, after payment by Executive of all federal, state and local taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Total Payments. The Company and such Person shall be obligated to pay all costs of Executive (including attorney fees and expenses) incurred in enforcing their obligations under this Section 5(o). -18- 19 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first written above. ALLEGIANCE TELECOM, INC. By: /s/ ROYCE J. HOLLAND --------------------------------------- Its: Chairman & CEO --------------------------------------- EXECUTIVE PURCHASERS /s/ THOMAS M. LORD ---------------------------------------------- Thomas M. Lord (individually and on behalf of Brian T. Lord and Colin J. Lord) /s/ VICTORIA M. LORD ---------------------------------------------- Victoria M. Lord EX-10.11 5 AMEND/RESTATED EXECUTIVE PURCHASE AGREEMENT 1 EXHIBIT 10.11 AMENDED AND RESTATED EXECUTIVE PURCHASE AGREEMENT THIS AMENDED AND RESTATED EXECUTIVE PURCHASE AGREEMENT (this "Agreement") is made as of December 13, 1999, by and between Allegiance Telecom, Inc., a Delaware corporation (the "Company") and C. Daniel Yost ("Executive"). This Agreement amends and restates the Executive Purchase Agreement dated as of January 28, 1998 (the "Original Agreement") by and between the Executive and Transcend Telecom, L.L.C., a Delaware limited liability company (the "LLC") and the Company (then known as "Transcend Telecom, Inc."). Capitalized terms used but not otherwise defined herein have the meanings ascribed to such terms in paragraph 6 hereof. NOW, THEREFORE, in consideration of the mutual promises made herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: 1. PURCHASE AND SALE OF EXECUTIVE SECURITIES. (a) Initial Capital Contribution and Issuance of Executive Securities. Executive purchased the Executive Securities as provided for in the Original Agreement. (b) Acknowledgment of At-Will Employment. The Executive acknowledges and agrees that no agreement or arrangement between the Executive and the Company (including, without limitation, the issuance of the Executive Securities to the Executive and the execution and delivery of this Agreement) shall entitle Executive to remain in the employment of the Company and its Subsidiaries or affect the right of the Company or its Subsidiaries to terminate Executive's employment at any time and for any reason. 2. VESTING OF EXECUTIVE SECURITIES. (a) Vesting Schedule. Except as otherwise provided herein, an amount of Unvested Securities (as defined below) shall vest in accordance with the following schedule:
Cumulative Percentage of Executive Date Securities Vested on Such Date ---- ---------------------------------- January 28, 1998 20% January 28, 1999 60% January 28, 2000 80% January 28, 2001 100%
-1- 2 Notwithstanding the foregoing sentence, and except as otherwise provided herein, the above vesting schedule shall cease and no Unvested Securities (as defined below) shall vest after the date on which Executive's employment with the Company and its Subsidiaries terminates for any reason; provided that if Executive's employment is terminated by the Company without Cause, the Executive Securities shall thereafter continue to vest in accordance with the above schedule so long as Executive has not committed a Vesting Termination Breach (upon which breach the vesting schedule shall cease, and no Unvested Securities (as defined below) shall vest on or after the date of the first such breach). In the event the Company has alleged that Executive has committed a Vesting Termination Breach, Executive disputes such allegation, and the matter is subject to the dispute resolution provisions set forth in paragraph 5, vesting shall be tolled upon the date of the allegation of such breach; provided that (i) if it is ultimately resolved under paragraph 5 that Executive has committed a Vesting Termination Breach, the tolling shall become a permanent cessation such that vesting shall have forever ceased upon the date of such allegation, and (ii) if it is ultimately resolved under paragraph 5 that Executive did not commit a Vesting Termination Breach, a number of Unvested Securities shall vest giving retroactive effect to such vesting schedule such that there shall exist a number of Vested Securities as if the vesting schedule had not been tolled as a result of such allegations. Executive Securities which have become vested pursuant to this Agreement are referred to herein as "Vested Securities," and all other Executive Securities are referred to herein as "Unvested Securities." (b) Acceleration upon a Qualified Sale of the Company. All Unvested Securities shall become Vested Securities upon the consummation of a Qualified Sale of the Company (as defined below) so long as Executive is employed by the Company or any of its Subsidiaries on the date of such sale (or, if Executive's employment was terminated by the Company without Cause, so long as Executive has not committed a Vesting Termination Breach). A "Qualified Sale of the Company" means either (i) the sale, lease, transfer, conveyance or other disposition, in one or a series of related transactions, of all or substantially all of the assets of the Company and its Subsidiaries, taken as a whole, or (ii) a transaction or series of transactions (including by way of merger, consolidation, or sale of stock, but not including a Public Offering) the result of which is that the holders of the Company's outstanding voting stock immediately prior to such transaction are after giving effect to such transaction no longer, in the aggregate, the "beneficial owners" (as such term is defined in Rule 13d-3 and Rule 13d-5 promulgated under the Securities Exchange Act), directly or indirectly through one or more intermediaries, of more than 50% of the voting power of the outstanding voting stock of the Company, in each case where the consideration for such assets or stock in such sale or transfer consists of cash and/or publicly traded equity securities for at least 50% of the outstanding stock of the Company (e.g., 100% of such consideration would have to consist of cash and/or publicly traded equity securities if only 50.01% of such stock were sold in such transaction). (c) Acceleration upon a Public Offering. The vesting schedule set forth in (a) above gives effect to the fact that the Company consummated its initial Public Offering on July 7, 1998 and Executive was employed by the Company or any of its Subsidiaries on the closing date of such offering. -2- 3 (d) Acceleration upon Death or Disability. All Unvested Shares shall become Vested Shares if Executive's employment with the Company or any of its Subsidiaries terminates by reason of Executive's death or Disability. (e) Other Acceleration. Subject to paragraph 3(h) hereof, any Unvested Securities which the Company (or its assignees) has not elected to repurchase in the Repurchase Notice (as defined below) (including Unvested Securities originally included in the Repurchase Notice, but for which the election to repurchase was rescinded, pursuant to the terms of paragraph 3, by all of the Company and/or its assignees having made such election) shall thereafter be deemed Vested Securities. 3. REPURCHASE OPTION. (a) The Repurchase Option. Upon (i) the termination of Executive's employment with the Company and its Subsidiaries for any reason other than a termination by the Company without Cause, or (ii) if Executive's employment is terminated by the Company without Cause, upon Executive's commission of a Vesting Termination Breach (the occurrence of either (i) or (ii), a "Repurchase Event"), the Unvested Securities then in existence (whether held by Executive or one or more of the Executive's transferees) will be subject to repurchase by the Company at the Company's election pursuant to the terms and conditions set forth in this paragraph 3 (the "Repurchase Option"). In the event that the Company has alleged that Executive has committed a Vesting Termination Breach, Executive disputes such allegation, and the matter is subject to the dispute resolution provisions set forth in paragraph 6, the closing of the repurchase under this paragraph 3 shall not occur unless and until it is ultimately determined that Executive committed a Vesting Termination Breach; provided that during the pendency of such proceeding, the Executive Securities specified in the Repurchase Notice (as defined below) shall not be transferred by any holder thereof to any Person. (b) Repurchase Price. The repurchase price (the "Repurchase Price") of any Unvested Securities to be repurchased shall be the lesser of (x) the Fair Market Value of such Securities, and (y) the Original Cost of such Securities (with securities having the lowest Original Cost subject to repurchase prior to securities with a higher Original Cost). (c) Exercise of Repurchase Option. The Company may elect to purchase all or any portion of the Executive Securities by delivering written notice (the "Repurchase Notice") to the holder or holders of the Executive Securities within 30 days after the Repurchase Event. The Repurchase Notice shall set forth the amount, type, and class of Executive Securities to be acquired from each such holder. The Executive Securities to be repurchased by the Company shall first be satisfied to the extent possible from the Executive Securities held by Executive at the time of delivery of the Repurchase Notice. If the amount of Executive Securities then held by Executive is less than the total amount of Executive Securities that the Company has elected to purchase, the Company shall Purchase the remaining securities elected to be purchased from the other holder(s) of Executive Securities, pro rata according to the amount of Executive Securities held of record by each such other holder at the time of delivery of the Repurchase Notice. The amount of Unvested Securities to be repurchased hereunder shall be deemed to be allocated among Executive and the -3- 4 other holders of repurchased Executive Securities (if any) pro rata according to the amount of Executive Securities to be purchased from such persons. (d) Assignment by the Company. The Company, by action of the Board, will have the right to assign all or any portion of its repurchase rights hereunder to any holder of Investor Equity and/or to any executive employee of the Company or any of its Subsidiaries. (e) Fair Market Value of Repurchased Shares. (i) The "Fair Market Value" of Executive Securities subject to repurchase hereunder shall be determined in accordance with this paragraph (e). (ii) The Company and the holders of a majority of the Executive Securities to be repurchased shall attempt in good faith to agree on the Fair Market Value of the Executive Securities. Any agreement reached by such Persons shall be final and binding on all parties hereto. (iii) If such Persons are unable to reach such agreement within 20 days after the giving of Repurchase Notice, the Fair Market Value of any Executive Securities that are publicly traded shall be the average, over a period of 21 days consisting of the date of the Repurchase Event and the 20 consecutive business days prior to that date, of the average of the closing prices of the sales of such securities on all securities exchanges on which such securities may at that time be listed, or, if there have been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day such securities are not so listed, the average of the representative bid and asked prices quoted in the Nasdaq System as of 4:00 P.M., New York time, or, if on any day such securities are not quoted in the Nasdaq System, the average of the highest bid and lowest asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau Incorporated, or any similar successor organization. (iv) If such Persons are unable to reach agreement pursuant to subparagraph (ii) within 20 days after the giving of Repurchase Notice, and to the extent any Executive Securities are not publicly traded: (A) The Company and the holders of a majority of the Executive Securities shall each, within 10 days thereafter, choose one investment banker or other appraiser with experience in analyzing and making determinations concerning matters in the telecommunications industry and in valuing entities like the Company, and the two investment bankers/appraisers so selected shall together select a third investment banker/appraiser similarly qualified. (B) The three investment bankers/appraisers shall first appraise the fair market value of the Company (based on the assumption of an orderly, arm's length sale to a willing unaffiliated buyer). The three investment bankers/appraisers shall then -4- 5 appraise the fair market value of such non-publicly-traded Executive Securities as follows: the fair market value of each share of Common Stock shall be equal to the fair market value of the Company divided by the total number of shares of Common Stock outstanding on the date of the Repurchase Event (determined on a fully diluted basis (x) with respect to all outstanding securities convertible into the Company's Common Stock, assuming the conversion of such convertible securities (without regard to any conditions or other restrictions on such conversion), and (y) with respect to all outstanding options, warrants and other rights or securities exercisable or exchangeable for shares of the Company's Common Stock, in accordance with the Treasury Stock Method under generally accepted accounting principles for determination of fully diluted earnings per share). The three investment bankers/appraisers shall, within thirty days of their retention, provide the written results of such appraisals to the Company and/or its assignees and to each of the holders of Executive Securities. (C) The "Fair Market Value" of the non-publicly-traded Executive Securities to be repurchased shall be the average of the two appraisals closest to each other, and such amount shall be final and binding on all parties hereto; provided that the Company (and/or any assignee) may at any time within five days after receiving written notice of such determination rescind its prior exercise of the Repurchase Option by giving written notice of such revocation to the holder or holders of the Executive Securities to be repurchased, and upon such revocation the revoking party will be treated as if it had never exercised such Repurchase Option (it being understood that such revoking parties shall thereafter have no right to re-exercise such Repurchase Option). (D) The costs of such appraisal shall be allocated between the parties based on the percentage which the portion of the contested amount not awarded to each party bears to the amount actually contested by such party; provided that if any parties revoke their exercise of the Repurchase Option pursuant to paragraph (C) above, such revoking parties shall bear (pro rata among such revoking parties based on the number of Executive Securities with respect to which each such revoking party had initially exercised its Repurchase Option) any appraisal costs that would be allocated to the holder(s) of Executive Securities under this paragraph (D). (f) Closing of the Repurchase. Within 10 business days after the Repurchase Price for the Executive Securities to be repurchased has been determined, the Company shall send a notice to each holder of Executive Securities setting forth the consideration to be paid for such shares and the time and place for the closing of the transaction, which date shall not be more than 30 days nor less than five days after the delivery of such notice. At such closing, the holders of Executive Securities shall deliver all certificates (if any exist) evidencing the Executive Securities to be repurchased to the Company (and/or any assignees of the Company's repurchase right), and the Company (and/or any assignees) shall pay for the Executive Securities to be purchased pursuant to the Repurchase Option by delivery of a check or wire transfer of immediately available funds in the aggregate amount of the Repurchase Price for such securities; provided that in the event the Board determines in its good faith discretion that the Company is not in a position to pay in cash any -5- 6 or all of the Repurchase Price for Executive Securities to be repurchased by it. The Company may pay, in the form of a promissory note, a portion of the Repurchase Price for such securities equal to (x) the aggregate Repurchase Price for the Executive Securities to be repurchased minus (y) the Original Cost of such securities. Such a promissory note shall be subordinated to all of the Company's senior debt obligations either then or thereafter incurred, shall earn simple annual interest at the Base Rate, shall have all principal and accrued interest due and payable upon maturity, and shall mature upon the earliest to occur of a Qualified Sale of the Company or the fifth anniversary of the issuance of such promissory note. The purchasers of Executive Securities hereunder shall be entitled to receive customary representations and warranties from the sellers regarding good title to such shares, free and clear of any liens or encumbrances. (g) Restrictions. Notwithstanding anything to the contrary contained in this Agreement, all repurchases of Executive Securities by the Company shall be subject to applicable restrictions contained in the Delaware General Corporation Law and in the Company's and its Subsidiaries' debt and equity financing agreements. If any such restrictions prohibit the repurchase of Executive Securities hereunder which the Company is otherwise entitled or required to make, the time periods provided in this paragraph 3 shall be suspended, and the Company may make such repurchases as soon as it is permitted to do so under such restrictions, unless by such time such Repurchase Option has terminated pursuant to paragraph 3(h); provided that notwithstanding the foregoing, in no event shall the time periods provided in this paragraph 3 be suspended for more than 6 months. (h) Termination of Repurchase Option. All rights under this paragraph 3 of the Company and/or its assignees to repurchase Executive Securities shall terminate upon a Qualified Sale of the Company. 4. RESTRICTIONS ON TRANSFER. (a) Opinion of Valid Transfer. In addition to any other restrictions on transfer imposed by this Agreement, or the Securityholders Agreement, no holder of Executive Securities may sell, transfer or dispose of any Executive Securities (except pursuant to an effective registration statement under the Securities Act) without first delivering to the Company an opinion of counsel (reasonably acceptable in form and substance to the Company) that neither registration nor qualification under the Securities Act and applicable state securities laws is required in connection with such transfer. (b) Restrictive Legend. The certificates representing Executive Securities shall bear the following legend: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED ON JANUARY 28, 1998, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE, AND SUCH -6- 7 SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN EXEMPTION FROM REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER AND REPURCHASE OPTIONS SET FORTH IN AN EXECUTIVE PURCHASE AGREEMENT BETWEEN THE ISSUER OF SUCH SECURITIES (THE "ISSUER") AND THE INITIAL HOLDER OF SUCH SECURITIES (THE "INITIAL HOLDER"). A COPY OF SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT THE ISSUER'S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE." The legend set forth above shall be removed from the certificates evidencing any shares which cease to be Executive Securities. (c) Retention of Executive Stock. (i) No Executive Purchaser shall sell, transfer, assign, pledge or otherwise dispose of (whether with or without consideration and whether voluntarily or involuntarily or by operation of law) any interest in any Unvested Securities (a "Transfer"), except pursuant to (A) the repurchase provisions of paragraph 3 hereof or of the LLC Agreement, (B) the "Participation Rights" or "Put" provisions set forth in the Securityholders Agreement, or (C) a Sale of the Company (as defined in the Securityholders Agreement) (each of (A), (B), and (C), an "Exempt Transfer"). (ii) The restrictions contained in this paragraph (c) shall not apply with respect to transfers of Unvested Securities (A) pursuant to applicable laws of descent and distribution or (B) among Executive's Family Group; provided that the restrictions contained in this paragraph shall continue to be applicable to the Unvested Securities after any such Transfer, the transferees of such Unvested Securities shall have agreed in writing to be bound by the provisions of this Agreement with respect to the Unvested Securities so transferred, and (prior to the death of Executive) each such transferee of Unvested Securities shall have entered into proxies and other agreements satisfactory to the holders of a majority of the Investor Equity pursuant to which Executive shall have the sole right to vote such Unvested Securities for all purposes. For purposes of this Agreement, "Family Group" means Executive's spouse and descendants (whether natural or adopted), any trust which at the time of such Transfer and at all times thereafter is and remains solely for the benefit of Executive and/or Executive's spouse and/or descendants and any family partnership the partners of which consist solely of Executive, such spouse, such descendants or such trusts. 5. CONFIDENTIALITY, NONCOMPETE, AND NONSOLICITATION. (a) Nondisclosure and Nonuse of Confidential Information. Executive shall not disclose or use at any time, either during his employment with the Company or thereafter, any Confidential Information (as defined below) of which Executive is or becomes aware, whether or not such information is developed by him, except to the extent that such disclosure or use is directly -7- 8 related to and required by Executive's performance of duties assigned to Executive or the Company, or to the extent such disclosure is permissible under the confidentiality provisions set forth in the Stock Purchase Agreement. Executive shall take all appropriate steps to safeguard Confidential Information and to protect it against disclosure, misuse, espionage, loss and theft. As used in this Agreement, the term "Confidential Information" means information that is not generally known to the public and that is used, developed or obtained by the Company, or its Subsidiaries in connection with their business, including but not limited to (i) products or services, (ii) fees, costs and pricing structures, (iii) designs, (iv) analysis, (v) drawings, photographs and reports, (vi) computer software, including operating systems, applications and program listings, (vii) flow charts, manuals and documentation, (viii) data bases, (ix) accounting and business methods, (x) inventions, devices, new developments, methods and processes, whether patentable or unpatentable and whether or not reduced to practice, (xi) customers and clients and customer or client lists, (xii) copyrightable works, (xiv) all technology and trade secrets, (xv) business plans and financial models, and (xvi) all similar and related information in whatever form. Confidential Information shall not include any information that has been published in a form generally available to the public prior to the date Executive proposes to disclose or use such information. Information shall not be deemed to have been published merely because individual portions of the information have been separately published, but only if all material features constituting such information have been published in combination. Notwithstanding the foregoing, "Confidential Information" shall not include any information of which (a) Executive became aware prior to his affiliation with the Company, (b) Executive learns from sources other than the Company or its Subsidiaries, whether prior to or after such information is actually disclosed by the Company or its Subsidiaries or (c) is disclosed in a prospectus or other documents for dissemination to the public. (b) The Company's Ownership of Intellectual Property. (i) Acknowledgment of Company Ownership. In the event that Executive as part of his activities on behalf of the Company generates, authors or contributes to any invention, design, new development, device, product, method or process (whether or not patentable or reduced to practice or constituting Confidential Information), any copyrightable work (whether or not constituting Confidential Information) or any other form of Confidential Information relating directly or indirectly to the Company's business as now or hereafter conducted (collectively, "Intellectual Property"), Executive acknowledges that such Intellectual Property is the exclusive property of the Company and hereby assigns all right, title and interest in and to such Intellectual Property to the Company. Any copyrightable work prepared in whole or in part by Executive will be deemed "a work made for hire" under Section 201(b) of the 1976 Copyright Act, and the Company shall own all of the rights comprised by the copyright therein. Executive shall promptly and fully disclose all Intellectual Property to the Company and shall cooperate with the Company to protect the Company's interests in and rights to such Intellectual Property (including, without limitation, providing reasonable assistance in securing patent protection and copyright registrations and executing all documents as reasonably requested by the Company, whether such requests occur prior to or after termination of Executive's employment with the Company). -8- 9 (ii) Executive Invention. Executive understands that paragraph (b)(i) of this Agreement regarding the Company's ownership of Intellectual Property does not apply to any invention for which no equipment, supplies, facilities or trade secret information of the Company were used and which was developed entirely on Executive's own time, unless (i) the invention relates to the business of the Company or to the Company's actual or demonstrably anticipated research or development or (ii) the invention results from any work performed by Executive for the Company. (c) Delivery of Materials upon Termination of Employment. As requested by the Company from time to time and upon the termination of Executive's employment with the Company for any reason, Executive shall promptly deliver to the Company all copies and embodiments, in whatever form, of all Confidential Information and Intellectual Property in Executive's possession or within his control (including, but not limited to, written records, notes, photographs, manuals, notebooks, documentation, program listings, flow charts, magnetic media, disks, diskettes, tapes and all other materials containing any Confidential Information or Intellectual Property) irrespective of the location or form of such material and, if requested by the Company, shall provide the Company with written confirmation that all such materials have been delivered to the Company. (d) Noncompete. Executive acknowledges and agrees with the Company that in the course of his employment with the Company he shall become familiar with the Company's trade secrets and with other Confidential Information concerning the Company, that Executive's services to the Company are unique in nature and of an extraordinary value to the Company, and that the Company would be irreparably damaged if Executive were to provide similar services to any person or entity competing directly with the Company. In connection with the issuance to Executive of the Executive Securities hereunder, in consideration of and as an inducement to the Company's entering into this Agreement, Executive accordingly covenants and agrees with the Company that during the Noncompete Period (as defined below), Executive shall not, directly or indirectly, either for himself or for or through any other individual, corporation, partnership, joint venture or other entity, participate in any business or enterprise conducting business in any Covered MSA which engages or proposes to engage in the provision of competitive local exchange telecommunications services. For purposes of this Agreement, (i) the term "participate in" shall include, without limitation, having any direct or indirect interest in any corporation, partnership, joint venture or other entity, whether as a sole proprietor, owner, stockholder, partner, joint venturer, creditor or otherwise, or rendering any direct or indirect service or assistance to any individual, corporation, partnership, joint venture and other business entity (whether as a director, officer, manager, supervisor, employee, agent, consultant or otherwise), other than ownership of up to 2% of the outstanding stock of any company (public or private) wherein Executive has no material involvement in the management (other than as an independent director for which Executive receives no or only nominal cash compensation), (ii) the term "MSA" means metropolitan statistical area and (iii) the term "Covered MSA" means (1) any MSA in which the Company is engaged in business or has at any time had an Approved Business Plan (as defined in the Stock Purchase Agreement) to engage in business. Executive agrees that this covenant is reasonable with respect to its duration, geographical area and scope. (e) Nonsolicitation. During the Noncompete Period, Executive shall not (i) induce or attempt to induce any employee of the Company or any Subsidiary to leave the employ of -9- 10 the Company or any Subsidiary, or in any way interfere with the relationship between the Company or any Subsidiary and any employee thereof, (ii) hire directly or through another entity any person who was an employee of the Company or any Subsidiary at any time during the six months prior to the date such person is to be so hired, or (iii) induce or attempt to induce any customer, supplier, licensee or other business relation of the Company or any Subsidiary to cease doing business with the Company or any Subsidiary, or in any way interfere with the relationship between any such customer, supplier, licensee or business relation of the Company and its Subsidiaries (including, without limitation, making any negative statements or communications concerning the Company or any Subsidiary). (f) Noncompete Period. The "Noncompete Period" shall commence on the date hereof and shall continue until the first anniversary of the termination of Executive's employment with the Company and its Subsidiaries for any reason; provided that the Noncompete Period shall terminate immediately upon a Qualified Sale of the Company. (g) Judicial Modification. If the final judgment of a court of competent jurisdiction, or any final non-appealable decision of an arbitrator in connection with a mandatory arbitration, declares that any term or provision of this paragraph is invalid or unenforceable, the parties agree that the court making the determination of invalidity or unenforceability shall have the power to reduce the scope, duration, or geographic area of the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified after the expiration of the time within which the judgment or decision may be appealed. (h) Dispute Resolution. (i) Arbitration. All claims, disputes, controversies and other matters in question arising out of or relating to this paragraph 5, or to the alleged breach hereof, shall be settled by preliminary negotiation between the Company or other Person bringing such allegation and the Executive (the "parties") or, if such preliminary negotiation is unsuccessful for any reason (but in any event not later than 10 days after commencement of such negotiation), by binding arbitration in accordance with the procedures set forth in this paragraph (h). Without limiting the mandatory arbitration provision set forth in this paragraph (h), each of the parties hereto (A) waives the right to bring an action in any court of competent jurisdiction with respect to any such claims, controversies and disputes (other than any such action to enforce the award or other remedy resulting from any arbitration pursuant to this paragraph (h) or to prevent any arbitrator from exceeding the authority granted to the arbitrators hereunder) and (B) waives the right to trial by jury in any suit, action or other proceeding brought on, with respect to or in connection with this Agreement. (ii) Binding Arbitration. Upon filing of a notice of demand for binding arbitration by any party hereto, arbitration shall be commenced and conducted as follows: -10- 11 (A) Arbitrators. All claims, disputes, controversies and other matters (collectively "matters") in question shall be referred to and decided and settled by a panel of three arbitrators with experience in analyzing, understanding, and making determinations concerning matters in the telecommunications industry, one selected by each of the parties and the third by the two arbitrators so selected. (B) Cost of Arbitration. The cost of each arbitration proceeding, including without limitation the arbitrators' compensation and expenses, hearing room charges, court reporter transcript charges, etc., shall be allocated among the parties based upon the percentage which the portion of the contested amount not awarded to each party bears to the amount actually contested by such party. The arbitrators shall also award the party that prevails substantially in its pre-hearing position its reasonable attorneys' fees and costs incurred in connection with the arbitration. The arbitrators are specifically instructed to award attorneys' fees for instances of abuse of the discovery process. (C) Situs of Proceedings. The situs of the arbitration shall be in New York, New York, or such other place as is mutually agreeable to the parties. (iii) Pre-hearing Discovery. The parties shall have the right to conduct and enforce pre-hearing discovery in accordance with the then current Federal Rules of Civil Procedure, subject to the following limitations: (A) each party may serve no more than one set of interrogatories which set shall ask no more than twenty questions; (B) each party may depose the other party's expert witnesses who will be called to testify at the hearing, plus up to six fact witnesses without regard to whether they will be called to testify (each party will be entitled to a total of not more than 24 hours of depositions of the other party's witnesses, and not more than 6 hours with respect to any single witness); and (C) document discovery and other discovery shall be under the control of and enforceable by the arbitrators, and all disputes relating thereto shall be decided by the arbitrators. Notwithstanding any contrary foregoing provisions, the arbitrators shall have the power and authority to, and to the fullest extent practicable shall, abbreviate arbitration discovery in a manner which is fair to all parties in order to expedite the conclusion of each alternative dispute resolution proceeding. (iv) Pre-hearing Conference. Within thirty (30) days after filing of notice of demand for binding arbitration, the arbitrators shall hold a pre-hearing conference to establish schedules for completion of discovery, for exchange of exhibit and witness lists, for arbitration briefs, for the hearing, and to decide procedural matters and all other questions that may be presented. (v) Hearing Procedures. The hearing shall be conducted to preserve its privacy and to allow reasonable procedural due process. Rules of evidence need not be strictly followed, and the hearing shall be streamlined as follows: (A) documents shall be self-authenticating, subject to valid objection by the opposing party; (B) expert reports, witness biographies, depositions and affidavits may be utilized, subject to the opponent's right of a live cross-examination of the witness in person; (C) charts, graphs and summaries shall be utilized to present voluminous data, provided (1) that the underlying data was made -11- 12 available to the opposing party thirty (30) days prior to the hearing, and (2) that the preparer of each chart, graph or summary is available for explanation and live cross-examination in person; (D) the hearing should be held on consecutive business days without interruption to the maximum extent practicable; and (E) the arbitrators shall establish all other procedural rules for the conduct of the arbitration in accordance with the rules of arbitration of the American Arbitration Association. (vi) Governing Law. This arbitration provision shall be governed by, and all rights and obligations specifically enforceable under and pursuant to, the Federal Arbitration Act (9 U.S.C. Section 1, et seq.). (vii) Consolidation. No arbitration shall include, by consolidation, joinder or in any other manner, any additional person not a party to this Agreement (other than affiliates of any such party, which affiliates may be included in the arbitration), except by written consent of the parties hereto containing a specific reference to this Agreement. (viii) Award; Time Limit. The arbitrators are empowered to render an award of general compensatory damages and equitable relief (including, without limitation, injunctive relief), but is not empowered to award punitive damages. The award rendered by the arbitrators (A) shall be final; (B) shall not constitute a basis for collateral estoppel as to any issue; and (C) shall not be subject to vacation or modification. The arbitrators shall render any award or otherwise conclude the arbitration no later than 120 days after the date notice is given pursuant to this paragraph (h). (ix) Confidentiality. The Parties hereto will maintain the substance of any proceedings hereunder in confidence and the arbitrators, prior to any proceedings hereunder, will sign an agreement whereby the arbitrator agrees to keep the substance of any proceedings hereunder in confidence. 6. DEFINITIONS. "Approved Business Plan" has the meaning ascribed to such term in the Stock Purchase Agreement. "Board" means the board of directors of the Company. "Cause" means (A) Executive's theft or embezzlement, or attempted theft or embezzlement, of money or property of the Company, Executive's perpetration or attempted perpetration of fraud, or Executive's participation in a fraud or attempted fraud, on the Company, or Executive's unauthorized appropriation of, or attempt to misappropriate, any tangible or intangible assets or property of the Company, (B) any act or acts of disloyalty, misconduct or moral turpitude by Executive injurious to the interest, property, operations, business or reputation of the Company, or Executive's conviction of a crime the commission of which results in injury to the Company or (C) Executive's repeated refusal or failure (other than by reason of Disability) to carry out reasonable instructions by his superiors or the Board or the Company's board of directors. -12- 13 "Common Stock" means the Company's Common Stock, par value $.01 per share. "Disability" means (i) any permanent physical or mental incapacity or disability rendering the Executive unable or unfit to perform effectively the duties and obligations of his employment or to participate effectively and actively in the management of the Company, or (ii) any illness, accident, injury, physical or mental incapacity or other disability, where such condition has rendered the Executive unable or unfit to perform effectively the duties and obligations of his employment or to participate effectively and actively in the management of the Company for a period of at least 90 days (in either case, as determined in the good faith judgment of the Company's board of directors). "Executive Securities" means (i) the Common Stock issued to the Executive Purchasers under the Original Agreement, and (ii) any securities issued directly or indirectly with respect to the foregoing securities by way of a stock split, stock dividend, or other division of securities, or in connection with a combination of securities, recapitalization, merger, consolidation, or other reorganization, or upon conversion or exercise of any of the foregoing securities. As to any particular securities constituting Executive Securities, such securities shall cease to be Executive Securities when they have been (a) effectively registered under the Securities Act and disposed of in accordance with the registration statement covering them, or (b) distributed to the public through a broker, dealer or market maker pursuant to Rule 144 under the Securities Act (or any similar provision then in force). "Investor Equity" means (i) the securities distributed in respect of the securities purchased under the Investors Purchase Agreement and (ii) any securities issued directly or indirectly with respect to the foregoing securities by way of a stock split, stock dividend, or other division of securities, or in connection with a combination of securities, recapitalization, merger, consolidation, or other reorganization, or upon conversion or exercise of the foregoing. As to any particular securities constituting Investor Equity, such securities shall cease to be Investor Equity when they have been (a) effectively registered under the Securities Act and disposed of in accordance with the registration statement covering them, (b) distributed to the public through a broker, dealer or market maker pursuant to Rule 144 under the Securities Act (or any similar provision then in force) or (c) repurchased by the Company or any Subsidiary thereof. "LLC Agreement" means the limited liability company agreement of even date herewith, entered into by and among the members of the LLC, as amended from time to time in accordance with its terms. "MSA" means a metropolitan statistical area. "Original Cost" means, at any given time, (i) with respect to any Common Stock issued upon conversion of Preferred Stock, the Original Cost of such Preferred Stock, and (ii) with respect to any other securities, the original price paid upon issuance of such securities. -13- 14 "Person" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. "Public Offering" means any underwritten sale of the Company's common stock pursuant to an effective registration statement under the Securities Act filed with the Securities and Exchange Commission on Form S-1 (or a successor form adopted by the Securities and Exchange Commission); provided that the following shall not be considered a Public Offering: (i) any issuance of common stock as consideration or financing for a merger or acquisition, and (ii) any issuance of common stock or rights to acquire common stock to employees of the Company or its Subsidiaries as part of an incentive or compensation plan. "Securities Act" means the Securities Act of 1933, as amended, or any similar federal law then in force. "Securityholders Agreement" means the securityholders agreement entered into by and among the Company, the LLC, and the holders of interests in the LLC, as amended from time to time in accordance with its terms. "Stock Purchase Agreement" means the stock purchase agreement of even date herewith, entered into by and between the Company and the LLC, as amended from time to time in accordance with the terms thereof. "Subsidiary" means, with respect to any Person, any corporation, limited liability company, partnership, association or other business entity of which (i) if a corporation, a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof, or (ii) if a limited liability company, partnership, association or other business entity, a majority of the partnership or other similar ownership interest thereof is at the time owned or controlled, directly or indirectly, by any Person or one or more Subsidiaries of that Person or a combination thereof. For purposes hereof, a Person or Persons shall be deemed to have a majority ownership interest in a limited liability company, partnership, association or other business entity if such Person or Persons shall be allocated a majority of limited liability company, partnership, association or other business entity gains or losses or shall be or control any managing director or general partner of such limited liability company, partnership, association or other business entity. "Vesting Termination Breach" means (i) any breach of paragraph 5(d) or clause (ii) of paragraph 5(e) and (ii) any breach of any other provision of paragraph 5 which is material or is intentionally and knowingly committed by Executive. -14- 15 7. MISCELLANEOUS PROVISIONS. (a) Transfers in Violation of Agreement. Any Transfer or attempted Transfer of any Executive Securities in violation of any provision of this Agreement shall be void, and none of the Company, or any Subsidiary thereof shall record such purported Transfer on its books or treat any purported transferee of such Executive Securities as the owner of such securities for any purpose. (b) Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. (c) Complete Agreement. This Agreement, those documents expressly referred to herein and other documents of even date herewith embody the complete agreement and understanding among the parties and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way, including without limitation the Original Agreement. (d) Counterparts. This Agreement may be executed in separate counterparts, none of which need contain the signature of more than one party hereto but each of which shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (e) Successors and Assigns. Except as otherwise provided herein, this Agreement shall bind the parties hereto and their respective successors and assigns and shall inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns whether so expressed or not. (f) CHOICE OF LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT AND THE EXHIBITS HERETO SHALL BE GOVERNED BY THE INTERNAL LAW, AND NOT THE LAW OF CONFLICTS, OF THE STATE OF DELAWARE. (g) Remedies. Each of the parties to this Agreement (including any holder of Investor Equity or employee of the Company to which the Company assigns any of its repurchase rights under paragraph 3 hereof) shall be entitled to enforce its rights under this Agreement specifically, to recover damages and costs (including reasonable attorney's fees) caused by any breach of any provision of this Agreement and to exercise all other rights existing in its favor. The parties hereto agree and acknowledge that money damages would not be an adequate remedy for any breach of the provisions of this Agreement and that any party may in its sole discretion apply to any court of law or equity of competent jurisdiction (without posting any bond or deposit) for specific performance and/or other injunctive relief in order to enforce or prevent any violations of the provisions of this Agreement. -15- 16 (h) Amendment, Modification, or Waiver. The provisions of this Agreement may be amended, modified, or waived only with the prior written consent of the Company and the Executive. (i) Third-Party Beneficiaries. The parties hereto acknowledge and agree that certain provisions of this Agreement are intended for the benefit of certain holders of Investor Equity or employees of the Company to which the Company assigns any of its repurchase rights under paragraph 3 hereof, that such Persons are third-party beneficiaries of this Agreement and that provisions of this Agreement shall be enforceable by such Persons as provided herein. (j) Business Days. If any time period for giving notice or taking action hereunder expires on a day which is a Saturday, Sunday or legal holiday in the State of Illinois, the time period shall be automatically extended to the business day immediately following such Saturday, Sunday or holiday. (k) Descriptive Headings; Interpretation; No Strict Construction. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a substantive part of this Agreement. Whenever required by the context, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular forms of nouns, pronouns, and verbs shall include the plural and vice versa. Reference to any agreement, document, or instrument means such agreement, document, or instrument as amended or otherwise modified from time to time in accordance with the terms thereof, and if applicable hereof. The use of the words "include" or "including" in this Agreement shall be by way of example rather than by limitation. The use of the words "or," "either" or "any" shall not be exclusive. The parties hereto have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. (l) Notices. All notices, demands or other communications to be given or delivered under or by reason of the provisions of this Agreement shall be in writing and shall be deemed to have been given when (a) delivered personally to the recipient, (b) telecopied to the recipient (with hard copy sent to the recipient by reputable overnight courier service (charges prepaid) that same day) if telecopied before 5:00 p.m. Chicago, Illinois time on a business day, and otherwise on the next business day, or (c) one business day after being sent to the recipient by reputable overnight courier service (charges prepaid). Such notices, demands and other communications shall be sent to the following Persons at the following addresses: -16- 17 To the Company: 1950 N. Stemmons Freeway Suite 3026 Dallas, Texas 75207 Attention: Royce J. Holland Telephone: (214) 261-7105 Telecopy: (214) 261-7107 To an Executive Purchaser: at the address set forth in the Company's records. or to such other address or to the attention of such other person as the recipient party has specified by prior written notice to the sending party. (m) Delivery by Facsimile. This Agreement, the agreements referred to herein, and each other agreement or instrument entered into in connection herewith or therewith or contemplated hereby or thereby, and any amendments hereto or thereto, to the extent signed and delivered by means of a facsimile machine, shall be treated in all manner and respects as an original agreement or instrument and shall be considered to have the same binding legal effect as if it were the original signed version thereof delivered in person. At the request of any party hereto or to any such agreement or instrument, each other party hereto or thereto shall reexecute original forms thereof and deliver them to all other parties. No party hereto or to any such agreement or instrument shall raise the use of a facsimile machine to deliver a signature or the fact that any signature or agreement or instrument was transmitted or communicated through the use of a facsimile machine as a defense to the formation or enforceability of a contract and each such party forever waives any such defense. (n) Excise Tax. If either (a) it is determined by the Internal Revenue Service or any other applicable governmental agency that any payment or distribution of any type to or for the benefit of Executive pursuant to this Agreement by the Company, any Person who acquires ownership or effective control of the Company, or ownership of a substantial portion of the assets of the Company (within the meaning of section 280G of the Code and the regulations thereunder) or any affiliate of such Person (the "Total Payments") would be subject to the excise tax imposed by section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are collectively referred to as the "Excise Tax"), or (b) the Company or any such Person withholds any portion of such payment or distribution or otherwise seeks to reduce the benefits to Executive under this Agreement on account of the Excise Tax, then the Company and such Person shall be jointly and severally obligated to pay to Executive an additional payment (a "Gross-Up Payment") in an amount such that, after payment by Executive of all federal, state and local taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Total Payments. The Company and such Person shall be obligated to pay all costs of Executive (including attorney fees and expenses) incurred in enforcing their obligations under this Section 5(n). -17- 18 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first written above. ALLEGIANCE TELECOM, INC. By: /s/ ROYCE J. HOLLAND -------------------------------- Its: Chairman & CEO -------------------------------- EXECUTIVE /s/ C. DANIEL YOST ---------------------------------------- C. Daniel Yost EX-10.16 6 CREDIT AND GUARANTY AGREEMENT - 2/15/00 1 EXHIBIT 10.16 CREDIT AND GUARANTY AGREEMENT DATED AS OF FEBRUARY 15, 2000 AMONG ALLEGIANCE TELECOM COMPANY WORLDWIDE AS BORROWER, ALLEGIANCE TELECOM, INC., AND SUBSIDIARIES OF ALLEGIANCE TELECOM, INC., AS GUARANTORS, VARIOUS LENDERS, GOLDMAN SACHS CREDIT PARTNERS L.P., AS SYNDICATION AGENT AND SOLE LEAD ARRANGER, TORONTO DOMINION (TEXAS), INC. AS ADMINISTRATIVE AGENT, BANKBOSTON, N.A. AND MORGAN STANLEY SENIOR FUNDING, INC. AS CO-DOCUMENTATION AGENTS $500,000,000 SENIOR SECURED CREDIT FACILITIES ------------------------------------------------ EXECUTION 2 TABLE OF CONTENTS
Page ---- SECTION 1. DEFINITIONS AND INTERPRETATION....................................................2 1.1. Definitions..................................................................2 1.2. Accounting Terms............................................................33 1.3. Interpretation, etc.........................................................33 SECTION 2. AMOUNTS AND TERMS OF COMMITMENTS AND LOANS.......................................33 2.1. Loans.......................................................................33 2.2. Pro Rata Shares; Availability of Funds......................................37 2.3. Use of Proceeds.............................................................38 2.4. Evidence of Debt; Register; Lenders' Books and Records; Notes...............38 2.5. Interest Payments...........................................................39 2.6. Conversion/Continuation.....................................................40 2.7. Default Interest............................................................40 2.8. Fees........................................................................41 2.9. Scheduled Payments/Reductions...............................................41 2.10. Voluntary Prepayments/Reductions............................................42 2.11. Mandatory Prepayments/Reductions............................................44 2.12. Application of Prepayments/Reductions.......................................45 2.13. Allocation of Certain Payments and Proceeds.................................46 2.14. General Provisions Regarding Payments.......................................47 2.15. Ratable Sharing.............................................................48 2.16. Making or Maintaining Eurodollar Rate Loans.................................48 2.17. Increased Costs; Capital Adequacy...........................................50 2.18. Taxes; Withholding, Etc.....................................................51 2.19. Obligation to Mitigate......................................................54 2.20. Defaulting Lenders..........................................................54 2.21. Removal or Replacement of a Lender..........................................55 SECTION 3. CONDITIONS PRECEDENT.............................................................56 3.1. Conditions to Effectiveness of the Agreement................................56 3.2. Conditions to Each Loan.....................................................60 SECTION 4. REPRESENTATIONS AND WARRANTIES.................................................61 4.1. Organization; Powers; Qualification.........................................61 4.2. Authorization of Credit Documents; No Conflict..............................61 4.3. Governmental Consents.......................................................62 4.4. Binding Obligation..........................................................62 4.5. Historical Financial Statements; Projections................................62 4.6. No Material Adverse Change; No Restricted Junior Payments...................62 4.7. Adverse Proceedings, Etc....................................................63
ii EXECUTION 3 4.8. Payment of Taxes............................................................63 4.9. Title to Properties.........................................................63 4.10. Collateral..................................................................64 4.11. Environmental...............................................................64 4.12. No Defaults; Material Contracts.............................................65 4.13. Governmental Regulation.....................................................65 4.14. Margin Stock................................................................65 4.15. Employee Matters............................................................65 4.16. Employee Benefit Plans......................................................65 4.17. Certain Fees................................................................66 4.18. Solvency....................................................................66 4.19. Existing Indentures.........................................................66 4.20. Year 2000 Issues............................................................66 4.21. Disclosure..................................................................66 4.22. No Burdensome Restrictions..................................................67 SECTION 5. AFFIRMATIVE COVENANTS............................................................67 5.1. Financial Statements and Other Reports......................................67 5.2. Contribution................................................................71 5.3. Existence...................................................................71 5.4. Payment of Taxes and Claims.................................................71 5.5. Maintenance of Properties...................................................71 5.6. Insurance...................................................................72 5.7. Books and Records; Inspections; Lenders Meetings............................72 5.8. Compliance with Laws; Contractual Obligations...............................72 5.9. Environmental...............................................................73 5.10. Subsidiaries................................................................74 5.11. Real Estate Assets..........................................................75 5.12. Interest Rate Protection....................................................76 5.13. Certain Post Closing Matters................................................76 SECTION 6. NEGATIVE COVENANTS...............................................................76 6.1. Indebtedness................................................................77 6.2. Liens.......................................................................78 6.3. Equitable Lien; No Further Negative Pledges.................................80 6.4. Restricted Payments; Restrictions on Subsidiary Distributions...............80 6.5. Investments.................................................................81 6.6. Stage 1 Financial Covenants.................................................82 6.7. Stage 2 Financial Covenants.................................................82 6.8. Maximum Consolidated Capital Expenditures...................................83 6.9. Fundamental Changes; Disposition of Assets; Acquisitions....................83 6.10. Disposal of Subsidiary Interests............................................83 6.11. Sales and Lease-Backs.......................................................84 6.12. Sale or Discount of Receivables.............................................84
iii EXECUTION 4 6.13. Transactions with Shareholders and Affiliates...............................84 6.14. Conduct of Business.........................................................84 6.15. Amendments or Waivers of Existing Indentures/Subordinated Indebtedness................................................................85 6.16. Fiscal Year.................................................................85 6.17. Designation of Unrestricted Subsidiaries; RS Designations. .................85 SECTION 7. GUARANTY.........................................................................87 7.1. Guaranty of the Obligations.................................................87 7.2. Contribution by Guarantors..................................................87 7.3. Payment by Guarantors.......................................................88 7.4. Liability of Guarantors Absolute............................................88 7.5. Waivers by Guarantors.......................................................90 7.6. Guarantors' Rights of Subrogation, Contribution, Etc........................91 7.7. Subordination of Other Obligations..........................................91 7.8. Continuing Guaranty.........................................................92 7.9. Authority of Guarantors or Borrower.........................................92 7.10. Financial Condition of Borrower.............................................92 7.11. Bankruptcy, Etc.............................................................92 7.12. Notice of Events............................................................93 7.13. Discharge of Guaranty Upon Sale of Guarantor................................93 SECTION 8. EVENTS OF DEFAULT................................................................93 8.1. Events of Default...........................................................93 SECTION 9. AGENTS...........................................................................96 9.1. Appointment of Agents.......................................................96 9.2. Powers and Duties...........................................................96 9.3. General Immunity............................................................97 9.4. Agents Entitled to Act as Lender............................................97 9.5. Lenders' Representations, Warranties and Acknowledgment.....................98 9.6. Right to Indemnity..........................................................98 9.7. Successor Administrative Agent..............................................99 9.8. Collateral Documents and Guaranties.........................................99 SECTION 10. MISCELLANEOUS..................................................................100 10.1. Notices....................................................................100 10.2. Expenses...................................................................100 10.3. Indemnity..................................................................101 10.4. Set-Off....................................................................102 10.5. Amendments and Waivers; Requisite Lenders' Consent.........................102 10.6. Successors and Assigns; Participations.....................................104 10.7. Independence of Covenants..................................................107 10.8. Survival of Representations, Warranties and Agreements.....................107
iv EXECUTION 5 10.9. No Waiver; Remedies Cumulative.............................................107 10.10. Marshalling; Payments Set Aside............................................107 10.11. Severability...............................................................108 10.12. Entire Agreement...........................................................108 10.13. Obligations Several; Independent Nature of Lenders' Rights.................108 10.14. Headings...................................................................108 10.15. APPLICABLE LAW.............................................................108 10.16. CONSENT TO JURISDICTION....................................................108 10.17. WAIVER OF JURY TRIAL.......................................................109 10.18. Confidentiality............................................................109 10.19. Usury Savings Clause.......................................................110 10.20. Counterparts; Effectiveness................................................111
v EXECUTION 6 APPENDICES: A Commitments B Notice Addresses SCHEDULES: 1.1 Specified Geographic Markets 4.1 Organization, Etc. 4.2 Authorizations 4.3 Governmental Consents 4.7 Litigation 4.9(b) Real Estate Assets 4.10(b) Certain Approvals 4.12 Material Contracts 5.13(a) Interconnection Agreement Parties 6.2 Certain Liens 6.6(a) Minimum Revenues 6.6(b) Ratio of Senior Secured Debt to Annualized Adjusted EBITDA 6.7(a) Senior Leverage Ratio 6.7(b) Total Leverage Ratio 6.7(c) Interest Coverage Ratio 6.7(d) Pro Forma Debt Service Overage Ratio 6.8 Maximum Consolidated Capital Expenditures EXHIBITS: A-1 Funding Notice A-2 Conversion/Continuation Notice B-1 Revolving Loan Note B-2 Delayed Draw Term Loan Note B-3 New Term Loan Note C Compliance Certificate D-1 Opinion of Kirkland & Ellis, Counsel to Credit Parties D-2 Opinion of General Counsel of Borrower D-3 Opinion of Winstead Sechrest, Local Counsel to Credit Parties D-4 Opinion of Swidler & Berlin, Special Regulatory Counsel to Credit Parties E Assignment Agreement F Certificate Re Non-Bank Status G Closing Date Certificate H Joinder Agreement I Pledge and Security Agreement J Mortgage K Acknowledgment Letter L Counterpart Agreement
vi EXECUTION 7 CREDIT AND GUARANTY AGREEMENT This CREDIT AND GUARANTY AGREEMENT, dated as of February 15, 2000 is entered into by and among ALLEGIANCE TELECOM, INC., a Delaware corporation ("COMPANY"), ALLEGIANCE TELECOM COMPANY WORLDWIDE, a Delaware corporation ("BORROWER"), CERTAIN DOMESTIC SUBSIDIARIES OF COMPANY (other than the Borrower) PARTY HERETO, as Guarantors, the LENDERS party hereto from time to time, GOLDMAN SACHS CREDIT PARTNERS L.P. ("GSCP"), as Syndication Agent (in such capacity,"SYNDICATION AGENT"), TORONTO DOMINION (TEXAS), INC. ("TD"), as Administrative Agent (together with its permitted successors in such capacity,"ADMINISTRATIVE AGENT"), BANKBOSTON, N.A. ("FLEET BOSTON") and MORGAN STANLEY SENIOR FUNDING, INC. ("MSSF"), as Co-Documentation Agents (in such capacity, "CO-DOCUMENTATION AGENTS"), GSCP, as Sole Lead Arranger (in such capacity," SOLE LEAD ARRANGER"), and the Managing Agents listed on the signature pages hereof. RECITALS WHEREAS, capitalized terms used herein have the meanings assigned to those terms in Section 1.1; WHEREAS, Lenders have agreed to extend certain credit facilities to Borrower in an aggregate amount not to exceed $500,000,000, consisting of up to $150,000,000 aggregate principal amount of Delayed Draw Term Loans and up to $350,000,000 of Revolving Credit Commitments, the proceeds of which shall be used for general corporate purposes including working capital financing and to provide purchase money financing for the cost of design, development, acquisition, construction, installation, improvement, transportation or integration of equipment, inventory and network assets; WHEREAS, Borrower has agreed to secure all of its obligations hereunder by granting to Administrative Agent, for the benefit of Lenders, a First Priority Lien on substantially all of its assets, including a pledge of all of the Capital Stock of each of its Subsidiaries and first tier Unrestricted Subsidiaries (65% of all of the Capital Stock of each of its first tier Foreign Subsidiaries), but excluding assets acquired under any Permitted Equipment Financing; WHEREAS, Guarantors have agreed to guarantee the obligations of Borrower hereunder and to secure Borrower's and all of the Guarantors' respective Obligations hereunder by granting to Administrative Agent, for the benefit of Lenders, a First Priority Lien on their assets contemplated under the Collateral Documents, including a pledge of all of the Capital Stock of each of their respective Subsidiaries (including Borrower) and first tier Unrestricted Subsidiaries (65% of all of the Capital Stock of each of their respective first tier Foreign Subsidiaries). 1 EXECUTION 8 NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, Borrower, Company, Guarantors, Lenders and Agents agree as follows: SECTION 1. DEFINITIONS AND INTERPRETATION 1.1 Definitions. The following terms used herein, including the preamble, recitals, exhibits and schedules hereto, shall have the following meanings: "ADJUSTED EURODOLLAR RATE" means, for any Interest Rate Determination Date with respect to an Interest Period for a Eurodollar Rate Loan, the rate per annum obtained by dividing (i) (a) the rate per annum (rounded upward to the nearest 1/100th) equal to the rate determined by Administrative Agent to be the offered rate which appears on the page of the Telerate Screen which displays an average British Bankers Association Interest Settlement Rate (such page currently being page number 3740 or 3750, as applicable) for deposits (for delivery on the first day of such period) with a term equivalent to such period in Dollars, determined as of approximately 11:00 a.m. (London, England time) on such Interest Rate Determination Date, or (b) in the event the rate referenced in the preceding clause (a) does not appear on such page or service or if such page or service shall cease to be available, the rate per annum (rounded upward to the nearest 1/100th) equal to the rate determined by Administrative Agent to be the offered rate on such other page or other service which displays an average British Bankers Association Interest Settlement Rate for deposits (for delivery on the first day of such period) with a term equivalent to such period in Dollars, determined as of approximately 11:00 a.m. (London, England time) on such Interest Rate Determination Date, or (c) in the event the rates referenced in the preceding clauses (a) and (b) are not available, the rate per annum equal to the offered quotation rate (carried out to the fifth decimal place) to first class banks in the London interbank market by Administrative Agent for deposits (for delivery on the first day of the relevant period) in Dollars of amounts in same day funds comparable to the principal amount of the applicable Loan for which the Adjusted Eurodollar Rate is then being determined with maturities comparable to such period as of approximately 11:00 a.m. (London, England time) on such Interest Rate Determination Date, by (ii) an amount equal to (a) one minus (b) the Applicable Reserve Requirement. "ADMINISTRATIVE AGENT" as defined in the preamble hereto. "ADVERSE PROCEEDING" means any action, suit, proceeding (whether administrative, judicial or otherwise), governmental investigation or arbitration (whether or not purportedly on behalf of Company or any of its Subsidiaries) at law or in equity, or before or by any Governmental Authority, domestic or foreign (including any Environmental Claims), whether pending or, to the knowledge of Company or any of its Subsidiaries, threatened against or affecting Company or any of its Subsidiaries or any property of Company or any of its Subsidiaries. "AFFECTED LENDER" as defined in Section 2.16(b). "AFFECTED LOANS" as defined in Section 2.16(b). 2 EXECUTION 9 "AFFILIATE," as applied to any Person, means any other Person directly or indirectly controlling, controlled by, or under common control with, that Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that Person, whether through the ownership of voting securities or by contract or otherwise. Neither any Agent nor any Lender shall be deemed Affiliates of any Credit Party by virtue of the security interests granted by the Pledge and Security Agreement. "AGENT" means each of Syndication Agent, Administrative Agent and Co-Documentation Agents. "AGGREGATE AMOUNTS DUE" as defined in Section 2.15. "AGGREGATE PAYMENTS" as defined in Section 7.2. "AGREEMENT" means this Credit and Guaranty Agreement, dated as of February 15, 2000, as it may be amended, supplemented or otherwise modified from time to time. "ANNUALIZED ADJUSTED EBITDA" means the aggregate Pre-Overhead EBITDA for the most recent Fiscal Quarter multiplied by four. "ANNUALIZED CONSOLIDATED EBITDA" means Consolidated EBITDA for the most recently completed Fiscal Quarter multiplied by four. "APPLICABLE COMMITMENT FEE PERCENTAGE" means a percentage, per annum, determined by reference to the Facilities Usage in effect from time to time as set forth below:
Applicable Commitment Fee Facilities Usage Percentage - ---------------- -------------------------- < 1/3 1.50% < < 2/3 1.125% > or = 1/3 > or = 2/3 0.75%
"APPLICABLE MARGIN" means a percentage, per annum, determined by reference to the Total Leverage Ratio in effect from time to time as set forth below: 3 EXECUTION 10
Eurodollar Base Rate Total Leverage Ratio Rate Loan Loan -------------------- ------------- ---------- > or = 8.00:1.00 or negative 3.25% 2.25% < 8.00:1.00 3.00% 2.00% > or = 7.00:1.00 < 7.00:1.00 2.75% 1.75% > or = 6.00:1.00 < 6.00:1.00 2.50% 1.50% > or = 5.00:1.00 < 5.00:1.00 2.25% 1.25% > or = 4.00:1.00 < 4.00:1.00 2.00% 1.00%
; provided, however, that at any time during Stage 1 the Applicable Margin shall be 3.25% per annum with respect to Eurodollar Rate Loans and 2.25% per annum with respect to Base Rate Loans. No change in the Applicable Margin shall be effective until three Business Days after the date on which Administrative Agent shall have received the applicable financial statements and a Compliance Certificate pursuant to Section 5.1(d) calculating the Total Leverage Ratio. At any time Borrower has not submitted to Administrative Agent the applicable information as and when required under Section 5.1(d), the Applicable Margin shall be determined as if the Total Leverage Ratio were in excess of 8.00:1.00 or negative. Within one Business Day of receipt of the applicable information as and when required under Section 5.1(d), Administrative Agent shall give each Lender telefacsimile or telephonic notice (confirmed in writing) of the Applicable Margin in effect from such date. The Applicable Margin with respect to any New Term Loans shall be set forth in the applicable Joinder Agreement. "APPLICABLE RESERVE REQUIREMENT" means, at any time, for any Eurodollar Rate Loan the maximum rate at which reserves (including, without limitation, any marginal, special, supplemental or emergency reserves) are required to be maintained by such member banks with respect thereto against "Eurocurrency liabilities" (as such term is defined in Regulation D) under regulations issued from time to time by the Board of Governors of the Federal Reserve System or other applicable banking regulator. Without limiting the effect of the foregoing, the Applicable Reserve Requirement shall reflect any other reserves required to be maintained by such member banks with respect to (i) any category of liabilities which includes deposits by reference to which the applicable Adjusted Eurodollar Rate or any other interest rate of a Loan is to be determined, or (ii) any category of extensions of credit or other assets which include Eurodollar Rate Loans. A Eurodollar Rate Loan shall be deemed to constitute Eurocurrency liabilities and as such shall be deemed subject to reserve requirements without benefits of credit for proration, exceptions or offsets that may be available 4 EXECUTION 11 from time to time to the applicable Lender. The rate of interest on Eurodollar Rate Loans shall be adjusted automatically on and as of the effective date of any change in the Applicable Reserve Requirement. "ASSET SALE" means a sale, lease or sublease (as lessor or sublessor), transfer or disposition to any Person other than Company, Borrower or any Guarantor, in one transaction or a series of transactions, of all or any part of Company's or any of its Subsidiaries' businesses, properties or assets, whether now owned or hereafter acquired, including, without limitation, the equity Securities of any of Company' Subsidiaries, other than (i) the sale of Cash Equivalents in the ordinary course of business, (ii) inventory sold in the ordinary course of business, (iii) disposals of obsolete, worn out or surplus property, (iv) disposals of uneconomical, redundant or non-strategic property acquired in Permitted Acquisitions in an amount not in excess of $30,000,000 per fiscal year (provided that such property acquired in a Permitted Acquisition is disposed of in each case within 270 days of the acquisition thereof by Company or any of its Subsidiaries), (v) sales of assets the Net Asset Sale Proceeds of which are invested in assets of the general type used in the business of the Borrower and its Subsidiaries within 270 days of receipt of such proceeds and (vi) sales of assets in a single transaction or series of transactions not in excess of $45,000,000 in the aggregate during the term of this Agreement. "ASSIGNMENT AGREEMENT" means an Assignment Agreement in the form of Exhibit E (with such amendments or modifications as may be approved by Borrower and Administrative Agent). "AUTHORIZED OFFICER" means, as applied to any Person, any individual holding the position of chairman of the board (if an officer) or president or one of its vice presidents (or the equivalent thereof), and such Person's chief financial officer, treasurer or controller. "BANKRUPTCY CODE" means Title 11 of the United States Code entitled "Bankruptcy," as now and hereafter in effect, or any successor statute. "BASE RATE" means, for any day, a rate per annum (carried out to the fifth decimal place) equal to the greater of (i) the Prime Rate in effect on such day and (ii) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. Any change in the Base Rate resulting due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective on the effective day of such change in the Prime Rate or the Federal Funds Effective Rate, respectively. "BASE RATE LOAN" means a Loan bearing interest at a rate determined by reference to the Base Rate. "BENEFICIARY" means each Agent, each Lender and each Lender Counterparty. "BUSINESS DAY" means any day, excluding all of the following: Saturday, Sunday and any day which is a legal holiday under the laws of the State of New York or is a day on which banking institutions located in such state are authorized or required by law or other governmental action to 5 EXECUTION 12 close, and with respect to all notices, determinations, fundings and payments in connection with the Adjusted Eurodollar Rate or any Eurodollar Rate Loans, that is also a day for trading by and between banks in Dollar deposits in the London interbank market. "CAPITAL EXPENDITURES" means, for any period, the aggregate of all expenditures of any Person during such period that, in accordance with GAAP, are or should be included in "purchase of property and equipment" or similar items reflected in the statement of cash flows of such Person. Notwithstanding the foregoing, the term "Capital Expenditures" shall not include capital expenditures in respect of the reinvestment of Net Asset Sale Proceeds or Net Insurance/Condemnation Proceeds made in accordance with Sections 2.11(a) and (b). "CAPITAL LEASE" means, as applied to any Person, any lease of any property (whether real, personal or mixed) by that Person as lessee that, in conformity with GAAP, is accounted for as a capital lease on the balance sheet of that Person, including, without limitation, Dark Fiber Leases. "CASH" means money, currency or a credit balance in any demand or deposit account. "CASH EQUIVALENTS" means, as at any date of determination, (i) marketable securities (a) issued or directly and unconditionally guaranteed as to interest and principal by the United States Government or (b) issued by any agency of the United States the obligations of which are backed by the full faith and credit of the United States, in each case maturing within two years after such date; (ii) marketable direct obligations issued by any state of the United States or any political subdivision of any such state or any public instrumentality thereof, in each case maturing within one year after such date and having, at the time of the acquisition thereof, a rating of at least A-1 from S&P or at least P-1 from Moody's or the equivalent thereof; (iii) commercial paper maturing not more than one year from the date of creation thereof and having, at the time of the acquisition thereof, a rating of at least A-1 from S&P or at least P-1 from Moody's or the equivalent thereof; (iv) time deposits, certificates of deposit or bankers' acceptances maturing within one year after such date and issued or accepted by any Lender or by any commercial bank organized under the laws of the United States or any state or territory thereof or the District of Columbia or any foreign country recognized by the United States or United States branches of foreign banks or the parent company of any such bank that in each case (a) is at least "adequately capitalized" (as defined in the regulations of its primary Federal banking regulator) and (b) has Tier 1 capital (as defined in such regulations) of not less than $100,000,000; (v) shares of any money market mutual fund that (a) has at least 95% of its assets invested continuously in the types of investments referred to in clauses (i) and (ii) above, (b) has net assets of not less than $500,000,000, and (c) has the highest rating obtainable from either S&P or Moody's or the equivalent thereof; (vi) repurchase agreements maturing within 30 days from the date of acquisition thereof by Borrower or any of its Subsidiaries with any Lender or bank referred to in clause (iv) above, in each case for underlying securities of the type referred to in clause (i) above. "CERTIFICATE RE NON-BANK STATUS" means a certificate in the form of Exhibit F. 6 EXECUTION 13 "CHANGE OF CONTROL" means, at any time, (i) Holland shall cease to beneficially own and control at least 50% of the capital stock of Company owned or controlled by Holland as of the Closing Date (excluding any such capital stock transferred to a spouse as part of a divorce proceeding or any settlement thereof); provided that the foregoing shall not constitute a "change of control" at any time after Annualized Consolidated EBITDA of the Company has become positive; (ii) Company shall cease to beneficially own and control all of the issued and outstanding shares of capital stock of Borrower; (iii) any "change of control" or similar event under the Existing Indentures and other similar documents governing other Subordinated Indebtedness (or related documentation) shall occur; (iv) any "person" or "group" (as such terms are used in Section 13(d) and 14(d) of the Exchange Act), other than Holland is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of 20% or more of the then outstanding voting capital stock of Company other than in a transaction having the approval of the board of directors of Company at least a majority of which members are Continuing Directors; or (v) Continuing Directors shall cease to constitute at least a majority of the directors constituting the board of directors of Company. "CLASS" means (i) with respect to Lenders each of the following classes of Lenders: (a) Lenders having Revolving Loan Exposure, (b) Lenders having Delayed Draw Term Loan Exposure and (c) Lenders having New Term Loan Exposure, if any, and (ii) with respect to Loans, each of the following classes of Loans: (a) Revolving Loans, (b) Delayed Draw Term Loans and (c) New Term Loans, if any. "CLOSING DATE" means the date on or before February 15, 2000 on which the conditions set forth in Section 3.1 are satisfied or waived in accordance with the terms thereof. "CLOSING DATE CERTIFICATE" means a certificate in the form of Exhibit G. "COLLATERAL" means, collectively, all of the real, personal and mixed property (including capital stock and other equity Securities) on which Liens are purported to be granted pursuant to the Collateral Documents as security for the Obligations. "COLLATERAL DOCUMENTS" means the Pledge and Security Agreement, the Mortgages, if any, and all other instruments, documents and agreements delivered by any Credit Party pursuant to this Agreement or any of the other Credit Documents in order to grant to Administrative Agent, on behalf of Lenders, a Lien on any real, personal or mixed property of that Credit Party as security for the Obligations. "CO-LOCATION SITES" means the central office premises of a local exchange carrier on which a Subsidiary of Borrower has located telecommunications transmission equipment. "COMMITMENT" means the commitments of Lenders to make Loans as set forth in Section 2.1(a) of this Agreement. The amount of each Lender's Commitment is set forth on Appendix A or 7 EXECUTION 14 in the applicable Assignment Agreement or Joinder Agreement and is subject to any adjustment or reduction pursuant to the terms and conditions hereof. "COMPANY" as defined in the preamble hereto. "COMPLIANCE CERTIFICATE" means a certificate in the form of Exhibit C. "CONSOLIDATED CAPITAL EXPENDITURES" means, for any period, the aggregate of all Capital Expenditures of Company and its Subsidiaries during such period, determined in accordance with GAAP. "CONSOLIDATED CASH INTEREST EXPENSE" means, for any period, Consolidated Interest Expense for such period, excluding (i) any amount not payable in Cash and (ii) Cash interest payable from funds escrowed for such purpose by Company prior to the Closing Date. "CONSOLIDATED EBITDA" means, for any period, an amount determined for any Person on a consolidated basis equal to (i) the sum of the amounts for such period of (a) Consolidated Net Income, (b) Consolidated Interest Expense, (c) provisions for franchise taxes and taxes based on income, (d) total depreciation expense, (e) total amortization expense, and (f) other non-cash items reducing Consolidated Net Income (including management ownership allocation charges and non-cash deferred compensation), minus (ii) other non-cash items increasing Consolidated Net Income. "CONSOLIDATED EXCESS CASH FLOW" means, for any period, an amount (if positive) equal to Consolidated EBITDA minus the sum, without duplication, of the amounts for such period of (a) voluntary and scheduled repayments of Consolidated Total Debt (excluding repayments of Loans except to the extent the Commitments are permanently reduced in connection with such repayments), (b) Consolidated Capital Expenditures and, to the extent not otherwise deducted in determining Consolidated Excess Cash Flow, Cash consideration paid for Permitted Acquisitions and Investments permitted under this Agreement (in each case, net of any proceeds of any related financings incurred to finance, and issuances of equity Securities issued to finance, such expenditures, Permitted Acquisitions or Investments) (c) Consolidated Cash Interest Expense, and (d) provisions for current franchise taxes and taxes based on income of Company and its Subsidiaries and payable in cash with respect to such period. "CONSOLIDATED INTEREST EXPENSE" means, for any period, total interest expense (including that portion attributable to Capital Leases in accordance with GAAP and capitalized interest) of Company and its Subsidiaries on a consolidated basis with respect to all outstanding Indebtedness of Company and its Subsidiaries, including all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and net costs under Interest Rate Agreements, but excluding, however, any (i) amounts referred to in Section 2.8 payable on or before the Closing Date, (ii) any fees and expenses associated with the Existing Credit Agreement and (iii) any fees and expenses associated with issuances of Subordinated Debt. 8 EXECUTION 15 "CONSOLIDATED NET INCOME" means, for any period, (i) the net income (or loss) of Company and its Subsidiaries on a consolidated basis for such period taken as a single accounting period determined in conformity with GAAP, minus, to the extent included in (i), (ii) (a) the income of any Person (other than a Subsidiary of Company) in which any other Person (other than Company or any of its Subsidiaries) has a joint interest, except to the extent of the amount of dividends or other distributions actually paid to Company or any of its Subsidiaries by such Person during such period, (b) the income (or loss) of any Person accrued prior to the date it becomes a Subsidiary of Company or is merged into or consolidated with Company or any of its Subsidiaries or that Person's assets are acquired by Company or any of its Subsidiaries, (c) the income of any Subsidiary of Company to the extent that the declaration or payment of dividends or similar distributions by that Subsidiary of that income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary, (d) any after-tax gains or losses attributable to Asset Sales and other sales of assets not constituting Asset Sales (unless excluded from Asset Sales under clauses (i) or (ii) of the definition thereof), or returned surplus assets of any Pension Plan, and (e) (to the extent not included in clauses (a) through (d) above) any net extraordinary gains (without giving effect to any net non-cash extraordinary losses). "CONSOLIDATED TOTAL DEBT" means, as at any date of determination, the aggregate stated balance sheet amount of all Indebtedness of Company and its Subsidiaries determined on a consolidated basis in accordance with GAAP, less any funds escrowed for the purpose of paying interest on such Indebtedness. "CONTINUING DIRECTORS" means individuals who at the beginning of any period of two consecutive calendar years constituted the board of directors of Company, together with any new directors whose election by such board of directors or whose nomination for election was approved by a vote of at least two-thirds of the members of such board of directors then still in office who either were members of such board of directors at the beginning of such period or whose election or nomination for election was previously so approved. "CONTRACTUAL OBLIGATION" means, as applied to any Person, any provision of any Security issued by that Person or of any material indenture, mortgage, deed of trust, contract, undertaking, agreement or other instrument to which that Person is a party or by which it or any of its properties is bound or to which it or any of its properties is subject. "CONTRIBUTING GUARANTORS"as defined in Section 7.2. "CONVERSION/CONTINUATION DATE" means the effective date of a continuation or conversion, as the case may be, as set forth in the applicable Conversion/Continuation Notice. "CONVERSION/CONTINUATION NOTICE" means a notice in the form of Exhibit A-2. "COUNTERPART AGREEMENT" means the agreement in the form of Exhibit L. 9 EXECUTION 16 "CREDIT DATE" means the date of the making of a Loan. "CREDIT DOCUMENT" means any of this Agreement, the Notes, Joinder Agreements, if any, the Collateral Documents, and all other documents, instruments or agreements executed and delivered by a Credit Party for the benefit of Agents or any Lender in connection herewith, including Hedge Agreements with any Lender Counterparty, in each case as may be amended, supplemented or otherwise modified from time to time. "CREDIT PARTY" means each Person (other than any Agent or any Lender or any other representative thereof) from time to time party to a Credit Document. "CURRENCY AGREEMENT" means any foreign exchange contract, currency swap agreement, futures contract, option contract, synthetic cap or other similar agreement or arrangement, each of which is for the purpose of hedging the foreign currency risk associated with Company's and its Subsidiaries' operations. "DARK FIBER LEASES" as defined in Section 6.1(i). "DEFAULT" means a condition or event that, after notice or lapse of time or both, would constitute an Event of Default. "DELAYED DRAW TERM LOAN COMMITMENT" means the Commitment of a Lender to make or otherwise fund a Delayed Draw Term Loan to Borrower and "DELAYED DRAW TERM LOAN COMMITMENTS" means such commitments of all Lenders in the aggregate. The amount of each Lender's Delayed Draw Term Loan Commitment, if any is set forth in Appendix A or in the applicable Assignment Agreement, subject to any adjustment or reduction pursuant to the terms and conditions hereof. The aggregate amount of the Delayed Draw Term Loan Commitments as of the Closing Date is $150,000,000. "DELAYED DRAW TERM LOAN COMMITMENT PERIOD" means the time period commencing on the Closing Date through to and including the Delayed Draw Term Loan Commitment Termination Date. "DELAYED DRAW TERM LOAN COMMITMENT TERMINATION DATE" means the earlier to occur of (i) the date the Delayed Draw Term Loan Commitments are permanently reduced to zero pursuant to Sections 2.10 or 2.11, (ii) the date of the termination of the Commitments pursuant to Section 8.1 and (iii) the date occurring twenty-four (24) months after the Closing Date. "DELAYED DRAW TERM LOAN EXPOSURE" means, with respect to any Lender, as of any date of determination, the outstanding principal amount of the Delayed Draw Term Loans of such Lender; provided, at any time prior to the making of the Delayed Draw Term Loans, the Delayed Draw Term Loan Exposure of any Lender shall be equal to such Lender's Delayed Draw Term Loan Commitment. 10 EXECUTION 17 "DELAYED DRAW TERM LOAN INSTALLMENT" as defined in Section 2.9(b). "DELAYED DRAW TERM LOAN MATURITY DATE" means the earlier of (i) December 31, 2006 and (ii) the date that all Delayed Draw Term Loans shall become due and payable in full hereunder, whether by acceleration or otherwise. "DELAYED DRAW TERM LOAN NOTE" means a promissory note in the form of Exhibit B-2, as it may be amended, supplemented or otherwise modified from time to time. "DELAYED DRAW TERM LOANS" means any Delayed Draw Term Loans made by Lender to the Borrower pursuant to Section 2.1(a)(ii) of this Agreement and any New Delayed Draw Term Loans made by Lender to Borrower pursuant to Section 2.1(a)(iii) of this Agreement. "DEPOSIT ACCOUNT" means a demand, time, savings, passbook or like account with a bank, savings and loan association, credit union or like organization, other than an account evidenced by a negotiable certificate of deposit. "DOLLARS" and the sign "$" mean the lawful money of the United States. "DOMESTIC SUBSIDIARY" means any Subsidiary including an Unrestricted Subsidiary organized under the laws of the United States of America, any State thereof or the District of Columbia. "ELIGIBLE ASSIGNEE" means (i) any Lender, any Affiliate of any Lender and any Related Fund (any two or more Related Funds being treated as a single Eligible Assignee for all purposes hereof), and (ii) any commercial bank, insurance company, finance company, investment or mutual fund or other entity that is an "accredited investor" (as defined in Regulation D under the Securities Act) and which extends credit or buys loans as one of its businesses; provided that no Affiliate of Company or Borrower shall be an Eligible Assignee (it being understood that MSSF is not an Affiliate of Company or Borrower for purposes of the definition of "Eligible Assignee"). "EMPLOYEE BENEFIT PLAN" means any "employee benefit plan" as defined in Section 3(3) of ERISA which is or was maintained or contributed to by Company, any of its Subsidiaries or any of their respective ERISA Affiliates. "ENVIRONMENTAL CLAIM" means any investigation, notice, notice of violation, claim, action, suit, proceeding, demand, abatement order or other order or directive (conditional or otherwise), by any Governmental Authority or any other Person, arising (i) pursuant to or in connection with any actual or alleged violation of any Environmental Law; (ii) in connection with any Hazardous Material or any actual or alleged Hazardous Materials Activity; or (iii) in connection with any actual or alleged damage, injury, threat or harm to health, safety, natural resources or the environment. 11 EXECUTION 18 "ENVIRONMENTAL LAWS" means any and all current or future foreign or domestic, federal or state (or any subdivision of either of them), statutes, ordinances, orders, rules, regulations, guidance documents, judgments, Governmental Authorizations, or any other requirements of Governmental Authorities relating to (i) environmental matters, including those relating to any Hazardous Materials Activity; (ii) the generation, use, storage, transportation or disposal of Hazardous Materials; or (iii) occupational safety and health, industrial hygiene, land use or the protection of human, plant or animal health or welfare, in any manner applicable to Company or any of its Subsidiaries or any Facility. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor thereto. "ERISA AFFILIATE" means, as applied to any Person, (i) any corporation which is a member of a controlled group of corporations within the meaning of Section 414(b) of the Internal Revenue Code of which that Person is a member; (ii) any trade or business (whether or not incorporated) which is a member of a group of trades or businesses under common control within the meaning of Section 414(c) of the Internal Revenue Code of which that Person is a member; and (iii) any member of an affiliated service group within the meaning of Section 414(m) or (o) of the Internal Revenue Code of which that Person, any corporation described in clause (i) above or any trade or business described in clause (ii) above is a member. Any former ERISA Affiliate of Company or any of its Subsidiaries shall continue to be considered an ERISA Affiliate of Company or such Subsidiary within the meaning of this definition with respect to the period such entity was an ERISA Affiliate of Company or such Subsidiary and with respect to liabilities arising after such period for which Company or such Subsidiary could be liable under the Internal Revenue Code or ERISA. "ERISA EVENT" means (i) a "reportable event" within the meaning of Section 4043 of ERISA and the regulations issued thereunder with respect to any Pension Plan (excluding those for which the provision for 30-day notice to the PBGC has been waived by regulation); (ii) the failure to meet the minimum funding standard of Section 412 of the Internal Revenue Code with respect to any Pension Plan (whether or not waived in accordance with Section 412(d) of the Internal Revenue Code) or the failure to make by its due date a required installment under Section 412(m) of the Internal Revenue Code with respect to any Pension Plan or the failure to make any required contribution to a Multiemployer Plan; (iii) the provision by the administrator of any Pension Plan pursuant to Section 4041(a)(2) of ERISA of a notice of intent to terminate such plan in a distress termination described in Section 4041(c) of ERISA; (iv) the withdrawal by Company, any of its Subsidiaries or any of their respective ERISA Affiliates from any Pension Plan with two or more contributing sponsors or the termination of any such Pension Plan resulting in liability pursuant to Section 4063 or 4064 of ERISA; (v) the institution by the PBGC of proceedings to terminate any Pension Plan, or the occurrence of any event or condition which might constitute grounds under ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan; (vi) the imposition of liability on Company, any of its Subsidiaries or any of their respective ERISA Affiliates pursuant to Section 4062(e) or 4069 of ERISA or by reason of the application of Section 4212(c) of ERISA; (vii) the withdrawal of Company, any of its Subsidiaries or any of their respective 12 EXECUTION 19 ERISA Affiliates in a complete or partial withdrawal (within the meaning of Sections 4203 and 4205 of ERISA) from any Multiemployer Plan if there is any potential liability therefor, or the receipt by Company, any of its Subsidiaries or any of their respective ERISA Affiliates of notice from any Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA, or that it intends to terminate or has terminated under Section 4041A or 4042 of ERISA; (viii) the occurrence of an act or omission which could give rise to the imposition on Company, any of its Subsidiaries or any of their respective ERISA Affiliates of fines, penalties, taxes or related charges under Chapter 43 of the Internal Revenue Code or under Section 409, Section 502(c), (i) or (l), or Section 4071 of ERISA in respect of any Employee Benefit Plan; (ix) the assertion of a material claim (other than routine claims for benefits) against any Employee Benefit Plan other than a Multiemployer Plan or the assets thereof, or against Company, any of its Subsidiaries or any of their respective ERISA Affiliates in connection with any Employee Benefit Plan; (x) receipt from the Internal Revenue Service of notice of the failure of any Pension Plan (or any other Employee Benefit Plan intended to be qualified under Section 401(a) of the Internal Revenue Code) to qualify under Section 401(a) of the Internal Revenue Code, or the failure of any trust forming part of any Pension Plan to qualify for exemption from taxation under Section 501(a) of the Internal Revenue Code; or (xi) the imposition of a Lien pursuant to Section 401(a)(29) or 412(n) of the Internal Revenue Code or pursuant to ERISA with respect to any Pension Plan. "EURODOLLAR RATE LOAN" means a Loan bearing interest at a rate determined by reference to the Adjusted Eurodollar Rate. "EVENT OF DEFAULT" means each of the events set forth in Section 8.1. "EXCESS PROCEEDS AMOUNT" means a cumulative amount, as of any date of determination, equal to the sum of (i) $300,000,000, (ii) the net cash proceeds of any equity Securities issued pursuant to the "green shoe" in connection with the Company's offering of equity Securities most recently completed prior to the Closing Date, and (iii) the net cash proceeds of any other issuance of equity Securities by Company after the Closing Date which have been contributed as common equity to the Borrower, less the Excess Proceeds Usage as of such date. "EXCESS PROCEEDS GEOGRAPHIC MARKET" means up to six (6) Geographic Markets designated in writing by Borrower to Sole Lead Arranger and Administrative Agent as an Excess Proceeds Geographic Market; provided that, at the time of any such designation, the Excess Proceeds Amount is not less than the product of (y) the number of Excess Proceeds Geographic Markets so designated times (z) $50,000,000; provided further that Borrower may not designate more than four (4) such Excess Proceeds Geographic Markets in any Fiscal Year. "EXCESS PROCEEDS USAGE" means a cumulative amount, as of any date of determination equal to the sum of (i) the amount of Investments made pursuant to Section 6.5(m), (ii) the net cash proceeds of any equity Securities issued pursuant to the "green shoe" in connection with the Company's offering of equity Securities most recently completed prior to the Closing Date, plus the net cash proceeds of any other issuance of equity Securities by Company after the Closing Date to 13 EXECUTION 20 the extent utilized to pay all or any portion of the purchase price of a Permitted Acquisition and (iii) the product of (y) $50,000,000 times (z) each Geographic Market designated by Borrower as an Excess Proceeds Geographic Market. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time, and any successor statute. "EXISTING CREDIT AGREEMENT" means that certain Credit and Guaranty Agreement, dated as of April 1, 1999 by and among Company, Borrower (as successor to Allegiance Finance Company, Inc.), Guarantors (as defined therein), the lenders party thereto, GSCP and TDSI as Co-Lead Arrangers, MSSF, as Documentation Agent, and the Managing Agents and Co-Agents listed on the signature pages thereof. "EXISTING INDENTURES" means, collectively, the Indenture dated as of February 3, 1998 between Allegiance Telecom, Inc. and The Bank of New York, relating to the 11-3/4% Senior Discount Notes due 2008, and the Indenture dated as of July 7, 1998 between Allegiance Telecom, Inc. and The Bank of New York, relating to the 12-7/8% Senior Notes due 2008; in each case as in effect as of the Closing Date and without giving effect to any extension, restatement, amendment, modification or supplement thereof or waiver or consent with respect thereto dated after the date hereof. "FACILITIES" means any real property (including all buildings, fixtures or other improvements located thereon) now, hereafter or heretofore owned, leased, operated or used by Company or any of its Subsidiaries or any of their respective predecessors or Affiliates, but excluding for all purposes under this Agreement (other than with respect to rights purported to be granted pursuant to the Collateral Documents as security for the Obligations) all Co-Location Sites. "FACILITIES USAGE" means a fraction, calculated as of the last day of each Fiscal Quarter, the numerator of which is equal to the average daily Total Utilization of Commitments during such Fiscal Quarter and the denominator of which is equal to the average daily aggregate Revolving Loan Commitments for all Lenders during such Fiscal Quarter plus the average daily aggregate Delayed Draw Term Loan Commitments for such Fiscal Quarter. "FAIR SHARE CONTRIBUTION AMOUNT" as defined in Section 7.2. "FAIR SHARE" as defined in Section 7.2. "FAIR SHARE SHORTFALL" as defined in Section 7.2. "FCC" means the Federal Communications Commission. "FEDERAL FUNDS EFFECTIVE RATE" means for any day, the rate per annum (carried out to the fifth decimal place) equal to the weighted average of the rates on overnight Federal funds 14 EXECUTION 21 transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day; provided that (i) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (ii) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate charged to Administrative Agent, in its capacity as a Lender, on such day on such transactions as determined by Administrative Agent. "FINANCIAL OFFICER CERTIFICATION" means, with respect to the financial statements for which such certification is required, the certification of the chief financial officer, senior vice president of finance and accounting or treasurer of Company that such financial statements fairly present, in all material respects, the financial condition of Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated, subject to changes resulting from audit and normal year-end adjustments. "FINANCIAL PLAN" as defined in Section 5.1(j). "FIRST PRIORITY" means, with respect to any Lien purported to be created in any Collateral pursuant to any Collateral Document, that such Lien is the only Lien to which such Collateral is subject, other than and subject to Permitted Liens. "FISCAL QUARTER" means a fiscal quarter of any Fiscal Year. "FISCAL YEAR" means the fiscal year of Company and its Subsidiaries ending on December 31 of each calendar year. "FLEET BOSTON" means BankBoston, N.A.. "FLOOD HAZARD PROPERTY" means a Real Estate Asset located in an area designated by the Federal Emergency Management Agency as having special flood or mud slide hazards. "FOREIGN SUBSIDIARY" means any Subsidiary (including an Unrestricted Subsidiary) that is not a Domestic Subsidiary. "FUNDING GUARANTORS" as defined in Section 7.2. "FUNDING NOTICE" means a notice in the form of Exhibit A-1. "GAAP" means United States generally accepted accounting principles in effect as of the date of determination thereof. 15 EXECUTION 22 "GEOGRAPHIC MARKET" means each particular geographic market or one or more related geographic markets in the United States which is (i) identified on Schedule 1.1 of this Agreement, (ii) designated to constitute a Geographic Market by Borrower in accordance with paragraph (vi) of the definition of "Permitted Acquisition" or (iii) constitutes an Excess Proceeds Geographic Market, in which, in each case, one or more Subsidiaries of the Company conducts business operations. "GOVERNMENTAL ACTS" means any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or Governmental Authority. "GOVERNMENTAL AUTHORITY" means any federal, state, municipal, national or other governmental department, commission, board, bureau, court, agency or instrumentality or political subdivision thereof or any entity or officer exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to any government or any court, in each case whether associated with a state of the United States, the United States, or a foreign entity or government. "GOVERNMENTAL AUTHORIZATION" means any permit, license, authorization, plan, directive, consent order or consent decree of or from any Governmental Authority. "GSCP" means Goldman Sachs Credit Partners L.P. "GUARANTEED OBLIGATIONS" as defined in Section 7.1. "GUARANTOR" means each of Company and each direct and indirect Subsidiary of Company (other than Borrower) party hereto. "GUARANTY" means the guaranty of each Guarantor set forth in Section 7. "HAZARDOUS MATERIALS" means any chemical, material or substance, exposure to which is prohibited, limited or regulated by any Governmental Authority or which may or could pose a hazard to the health and safety of the owners, occupants or any Persons in the vicinity of any Facility or to the indoor or outdoor environment. "HAZARDOUS MATERIALS ACTIVITY" means any past, current, proposed or threatened activity, event or occurrence involving any Hazardous Materials, including the use, manufacture, possession, storage, holding, presence, existence, location, Release, threatened Release, discharge, placement, generation, transportation, processing, construction, treatment, abatement, removal, remediation, disposal, disposition or handling of any Hazardous Materials, and any corrective action or response action with respect to any of the foregoing. "HEDGE AGREEMENT" means an Interest Rate Agreement or a Currency Agreement entered into in the ordinary course of Company's or any of its Subsidiaries' businesses and not for speculative purposes. 16 EXECUTION 23 "HIGHEST LAWFUL RATE" means the maximum lawful interest rate, if any, that at any time or from time to time may be contracted for, charged, or received under the laws applicable to any Lender which are presently in effect or, to the extent allowed by law, under such applicable laws which may hereafter be in effect and which allow a higher maximum nonusurious interest rate than applicable laws now allow. "HISTORICAL FINANCIAL STATEMENTS" means the audited financial statements of Company and its Subsidiaries for Fiscal Years 1997 and 1998, consisting of balance sheets and the related consolidated statements of income, stockholders' equity and cash flows for such periods, certified by the chief financial officer of Company that they fairly present, in all material respects, the financial condition of Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated, subject to changes resulting from audit and normal year-end adjustments. "HOLLAND" means, collectively, Mr. Royce Holland, his direct descendants, any entity controlled by any of the foregoing or any trust for the benefit of any of the foregoing. "INCREASED AMOUNT DATE" as defined in Section 2.1(a)(iii). "INCREASED-COST LENDERS" as defined in Section 2.21. "INDEBTEDNESS", as applied to any Person, means, without duplication, (i) all indebtedness for borrowed money; (ii) that portion of obligations with respect to Capital Leases that is properly classified as a liability on a balance sheet in conformity with GAAP; (iii) notes payable and drafts accepted representing extensions of credit whether or not representing obligations for borrowed money; (iv) any obligation owed for all or any part of the deferred purchase price of property or services (excluding any such obligations incurred under ERISA and ordinary course trade payables and accrued expenses), which purchase price is (a) due more than six months from the date of incurrence of the obligation in respect thereof or (b) evidenced by a note or similar written instrument; (v) all indebtedness secured by any Lien on any property or asset owned or held by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is nonrecourse to the credit of that Person; (vi) the face amount of any letter of credit issued for the account of that Person or as to which that Person is otherwise liable for reimbursement of drawings; (vii) the direct or indirect guaranty, endorsement (otherwise than for collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse by such Person of the Indebtedness of another; (viii) any obligation of such Person the primary purpose or intent of which is to provide assurance to an obligee that the Indebtedness of the obligor thereof will be paid or discharged, or any agreement relating thereto will be complied with, or the holders thereof will be protected (in whole or in part) against loss in respect thereof; and (ix) any liability of such Person for the Indebtedness of another through any agreement (contingent or otherwise) (a) to purchase, repurchase or otherwise acquire such Indebtedness or any security therefor, or to provide funds for the payment or discharge of such Indebtedness (whether in the form of loans, advances, stock purchases, capital contributions or otherwise) or (b) to maintain the 17 EXECUTION 24 solvency or any balance sheet item, level of income or financial condition of another if, in the case of any agreement described under subclauses (a) or (b) of this clause (ix), the primary purpose or intent thereof is as described in clause (viii) above; and (x) obligations under Hedge Agreements; provided in no event shall an obligation under Hedge Agreements be deemed "Indebtedness" for any purpose under Sections 6.6, 6.7 and 6.8. "INDEMNIFIED LIABILITIES" means, collectively, any and all liabilities, obligations, losses, damages (including natural resource damages), penalties, actions, judgments, suits, claims (including Environmental Claims), costs (including the costs of any investigation, study, sampling, testing, abatement, cleanup, removal, remediation or other response action necessary to remove, remediate, clean up or abate any Hazardous Materials Activity), expenses and disbursements of any kind or nature whatsoever (including the reasonable fees and disbursements of counsel for Indemnitees in connection with any investigative, administrative or judicial proceeding commenced or threatened by any Person, whether or not any such Indemnitee shall be designated as a party or a potential party thereto, and any fees or expenses incurred by Indemnitees in enforcing this indemnity), whether direct, indirect or consequential and whether based on any federal, state or foreign laws, statutes, rules or regulations (including securities and commercial laws, statutes, rules or regulations and Environmental Laws), on common law or equitable cause or on contract or otherwise, that may be imposed on, incurred by, or asserted against any such Indemnitee, in any manner relating to or arising out of (i) this Agreement or the other Credit Documents or the transactions contemplated hereby or thereby (including Lenders' agreement to make Loans or the use or intended use of the proceeds thereof or the use or intended use of any thereof, or any enforcement of any of the Credit Documents (including any sale of, collection from, or other realization upon any of the Collateral or the enforcement of the Guaranty)); (ii) the statements contained in the commitment letter executed and delivered by any Lender to Company with respect thereto; or (iii) any Environmental Claim or any Hazardous Materials Activity relating to or arising from, directly or indirectly, any past or present activity, operation, land ownership, or practice of Company or any of its Subsidiaries. "INDEMNITEE" as defined in Section 10.3. "INITIAL FUNDING DATE" means the date on which the first Loan is made hereunder. "INSTALLMENT DATE" as defined in Section 2.9. "INTELLECTUAL PROPERTY COLLATERAL" means all of the Intellectual Property subject to the Lien of the Pledge and Security Agreement. "INTEREST COVERAGE RATIO" means the ratio as of the last day of any Fiscal Quarter of (i) Annualized Consolidated EBITDA to (ii) Consolidated Cash Interest Expense for the four-Fiscal Quarter period then ended, in each case as set forth in the most recent Compliance Certificate delivered by Borrower to Administrative Agent pursuant to Section 5.1(d). 18 EXECUTION 25 "INTEREST PAYMENT DATE" means with respect to (i) any Base Rate Loan, each March 31, June 30, September 30 and December 31 of each year, commencing on the first such date to occur after the Closing Date; and (ii) any Eurodollar Rate Loan, the last day of each Interest Period applicable to such Loan; provided that in the case of each Interest Period of longer than three months "Interest Payment Date" shall also include each date that is three months, or an integral multiple thereof, after the commencement of such Interest Period. "INTEREST PERIOD" means, in connection with a Eurodollar Rate Loan, an interest period of one, two, three or six-months, as selected by Borrower in the applicable Notice, (i) initially, commencing on the Credit Date or Conversion/Continuation Date thereof, as the case may be; and (ii) thereafter, commencing on the day on which the immediately preceding Interest Period expires; provided that (a) if an Interest Period would otherwise expire on a day that is not a Business Day, such Interest Period shall expire on the next succeeding Business Day unless no further Business Day occurs in such month, in which case such Interest Period shall expire on the immediately preceding Business Day; (b) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clauses (c) through (f) of this definition, end on the last Business Day of a calendar month; (c) no Interest Period with respect to any portion of any New Term Loans, if any, shall extend beyond the New Term Loan Maturity Date; (d) no Interest Period with respect to any portion of the Revolving Loans shall extend beyond the Revolving Loan Commitment Termination Date; (e) no Interest Period with respect to any portion of Revolving Loans shall extend beyond a date on which Borrower is required to make a scheduled reduction of Revolving Loan Commitments, unless the sum of (1) the aggregate principal amount of Revolving Loans that are Base Rate Loans, and (2) the aggregate principal amount of Revolving Loans that are Eurodollar Rate Loans with Interest Periods expiring on or before such date of reduction equals or exceeds the amount required to be paid with respect to the Revolving Loan Commitments on such date; and (f) no Interest Period with respect to any portion of New Term Loans, if any, shall extend beyond a date on which Borrower is required to make a scheduled payment of principal of such New Term Loans, unless the sum of (1) the aggregate principal amount of such New Term Loans that are Base Rate Loans and, (2) the aggregate principal amount of such New Term Loans that are Eurodollar Rate Loans with Interest Periods expiring on or before such date equals or exceeds the principal amount required to be paid on such New Term Loans on such date. "INTEREST RATE AGREEMENT" means any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement or other similar agreement or arrangement, each of which is for the purpose of hedging the interest rate exposure associated with Company's and its Subsidiaries' operations. "INTEREST RATE DETERMINATION DATE" means, with respect to any Interest Period, the date that is two Business Days prior to the first day of such Interest Period. "INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986, as amended to the date hereof and from time to time hereafter, and any successor statute. 19 EXECUTION 26 "INVESTMENT" means (i) any direct or indirect purchase or other acquisition by Company or any of its Subsidiaries of, or of a beneficial interest in, any of the Securities of any other Person (other than a Guarantor); (ii) any direct or indirect redemption, retirement, purchase or other acquisition for value, by any Subsidiary of Company from any Person (other than Company or any Guarantor), of any equity Securities of such Subsidiary; and (iii) any direct or indirect loan, advance (other than advances to employees for moving, entertainment and travel expenses, drawing accounts and similar expenditures in the ordinary course of business) or capital contribution by Company or any of its Subsidiaries to any other Person (other than Company), including all indebtedness and accounts receivable from that other Person that are not current assets or did not arise from sales to that other Person in the ordinary course of business. The amount of any Investment shall be the original cost of such Investment plus the cost of all additions thereto, without any adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment. "INVESTMENT COMPANY ACT" means the Investment Company Act of 1940, as amended. "INVESTMENT PROPERTY" as defined in the Pledge and Security Agreement. "JOINDER AGREEMENT" means a joinder agreement substantially in the form of Exhibit H, or as may be amended, supplemented or otherwise modified from time to time. "JOINT VENTURE" means a joint venture, partnership or other similar arrangement, whether in corporate, partnership or other legal form; provided that in no event shall any corporate Subsidiary of any Person be considered to be a Joint Venture to which such Person is a party. "LEASEHOLD PROPERTY" means any leasehold interest of any Credit Party as lessee under any lease of real property, other than any such leasehold interest designated from time to time by Administrative Agent in its sole discretion as not being required to be included in the Collateral. "LENDER" means any person who becomes a Lender under this Agreement as of the Closing Date or pursuant to Section 2.1(a)(iii) and their respective permitted successors and assigns. "LENDER COUNTERPARTY" means each Lender or Affiliate thereof counterparty to a Hedge Agreement. "LIEN" means any lien, mortgage, pledge, assignment, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, and any agreement to give any security interest) and any option, trust or other preferential arrangement having the practical effect of any of the foregoing. "LOAN" or "LOANS" means any Loan made by a Lender to Borrower pursuant to Section 2.1(a)(i), 2.1(a)(ii) or 2.1(a)(iii) of this Agreement. 20 EXECUTION 27 "MANAGING AGENTS" means each of the Managing Agents listed on the signature pages of this Agreement. "MARGIN STOCK" as defined in Regulation U of the Board of Governors of the Federal Reserve System as in effect from time to time. "MATERIAL ADVERSE EFFECT" means a material adverse effect on (i) the business, operations, properties, assets, condition (financial or otherwise) or prospects of Company and its Subsidiaries on a consolidated basis or (ii) the ability of any Agent or any Lender to enforce any of their rights or to collect any of the Obligations then due and payable. "MATERIAL CONTRACT" means any contract or other arrangement to which Company or any of its Subsidiaries is a party (other than the Credit Documents) for which breach, nonperformance, cancellation or failure to renew could reasonably be expected to have a Material Adverse Effect. "MATERIAL REAL ESTATE ASSET" means (i) all fee-owned Real Estate Assets having a fair market value in excess of $2,000,000 as of the date of the acquisition thereof and (ii) all Leasehold Properties other than those (a) with respect to which the aggregate payments under the term of the lease are less than $2,000,000 per annum, or (b) that relate to a site the loss of which would not otherwise have a Material Adverse Effect. "MOODY'S" means Moody's Investor Services, Inc. "MORTGAGE" means a mortgage, deed of trust or similar instrument in the form of Exhibit J, as it may be amended, supplemented or otherwise modified from time to time. "MORTGAGED PROPERTY" as defined in Section 5.10. "MULTIEMPLOYER PLAN" means any Employee Benefit Plan which is a "multiemployer plan" as defined in Section 3(37) of ERISA. "NAIC" means The National Association of Insurance Commissioners, and any successor thereto. "NARRATIVE REPORT" means, with respect to the financial statements for which such narrative report is required, a narrative report describing the operations of Company and its Subsidiaries in the form prepared for presentation to senior management thereof for the applicable month, Fiscal Quarter or Fiscal Year and for the period from the beginning of the then current Fiscal Year to the end of such period to which such financial statements relate. "NET ASSET SALE PROCEEDS" means, with respect to any Asset Sale, an amount equal to: (i) Cash payments (including any Cash received by way of deferred payment pursuant to, or by monetization of, a note receivable or otherwise, but only as and when so received) received from 21 EXECUTION 28 such Asset Sale, minus (ii) any bona fide direct costs incurred in connection with such Asset Sale, including (a) income or gains taxes reasonably estimated to be actually payable as a result of any gain recognized in connection with such Asset Sale, (b) payment of the outstanding principal amount of, premium or penalty, if any, and interest on any Indebtedness (other than the Loans) that is secured by a Lien on the stock or assets in question and that is required to be repaid under the terms thereof as a result of such Asset Sale, (c) attorney's fees, accountants fees, investment banking fees and other customary costs, fees, expenses and commissions actually incurred in connection therewith, and (d) the amount of any reasonable reserve established in accordance with GAAP against any liabilities associated with the assets sold or disposed of; provided that the amount of any subsequent reduction of such reserve (other than in connection with a payment in respect of such liability) shall be deemed to be Net Asset Sale Proceeds occurring on the date of such reduction. "NET INSURANCE/CONDEMNATION PROCEEDS" means an amount equal to: (i) any Cash payments or proceeds received by Company or any of its Subsidiaries (a) under any casualty insurance policy in respect of a covered loss thereunder or (b) as a result of the taking of any assets of Company or any of its Subsidiaries by any Person pursuant to the power of eminent domain, condemnation or otherwise, or pursuant to a sale of any such assets to a purchaser with such power under threat of such a taking, minus (ii) (a) any actual and reasonable documented costs incurred by Company or any of its Subsidiaries in connection with the adjustment or settlement of any claims of Company or such Subsidiary in respect thereof, and (b) any bona fide direct costs incurred in connection with any sale of such assets as referred to in clause (i)(b) of this definition, including income taxes reasonably estimated to be actually payable as a result of any gain recognized in connection therewith. "NEW DELAYED DRAW TERM LOANS" as defined in Section 2.1(a)(iii). "NEW DELAYED DRAW TERM LOAN COMMITMENTS" as defined in Section 2.1(a)(iii). "NEW REVOLVING LOAN" as defined in Section 2.1(a)(iii). "NEW REVOLVING LOAN COMMITMENTS" as defined in Section 2.1(a)(iii). "NEW REVOLVING LOAN LENDER" as defined in Section 2.1(a)(iii). "NEW TERM LOAN" as defined in Section 2.1(a)(iii). "NEW TERM LOAN COMMITMENTS" as defined in Section 2.1(a)(iii). "NEW TERM LOAN EXPOSURE" means, with respect to any Lender as of any date of determination (i) prior to the funding of the New Term Loans that Lender's New Term Loan Commitment, if any, and (ii) after the funding of the New Term Loans, the outstanding principal amount of the New Term Loan of that Lender. 22 EXECUTION 29 "NEW TERM LOAN LENDER" as defined in Section 2.1(a)(iii). "NEW TERM LOAN MATURITY DATE" means the date that New Term Loans of a Series shall become due and payable in full hereunder, as specified in the applicable Joinder Agreement. "NEW TERM LOAN NOTE" means a promissory note in the form of Exhibit B-3, as it may be amended, supplemented or otherwise modified from time to time. "NON-US LENDER" as defined in Section 2.18(c). "NOTE" means a Revolving Loan Note, Delayed Draw Term Loan Note or a New Term Loan Note. "NOTICE" means a Funding Notice or a Conversion/Continuation Notice. "OBLIGATIONS" means, with respect to any Credit Party, obligations of such Credit Party, whether now existing or hereafter made, incurred or created, whether absolute or contingent, liquidated or unliquidated, whether due or not due, and however arising under or in connection herewith and any other Credit Document and any Hedge Agreement with a Lender Counterparty (including, without limitation, with respect to a Hedge Agreement, obligations owed thereunder to any person who was a Lender or an Affiliate of a Lender at the time such Hedge Agreement was entered into), including those arising under successive borrowing transactions hereunder which shall either continue the Obligations of such Credit Party from time to time or renew them after they have been satisfied and including interest which, but for the filing of a petition in bankruptcy with respect to such Credit Party, would have accrued on any Obligation, whether or not a claim is allowed against such Credit Party for such interest in the related bankruptcy proceeding. "OBLIGEE GUARANTOR" as defined in Section 7.7. "ORGANIZATIONAL DOCUMENTS" means (i) with respect to any corporation, its certificate or articles of incorporation, as amended, and its by-laws, as amended, (ii) with respect to any limited partnership, its certificate of limited partnership, as amended, and its partnership agreement, as amended, (iii) with respect to any general partnership, its partnership agreement, as amended, and (iv) with respect to any limited liability company, its certificate of formation or articles of organization, as amended, and its operating agreement, as amended. In the event any term or condition of this Agreement or any other Credit Document requires any Organizational Document to be certified by a secretary of state or similar governmental official, the reference to any such "Organizational Document" shall only be to a document of a type customarily certified by such governmental official. "PBGC" means the Pension Benefit Guaranty Corporation or any successor thereto. 23 EXECUTION 30 "PENSION PLAN" means any Employee Benefit Plan, other than a Multiemployer Plan, which is subject to Section 412 of the Internal Revenue Code or Section 302 of ERISA. "PERMITTED ACQUISITION" means any acquisition, whether by purchase, merger or otherwise, of all or substantially all of the assets of, all of the equity Securities of, or a business line or a division of, any Person; provided that: (1) immediately prior to, and after giving effect thereto, no Default or Event of Default shall have occurred and be continuing or would result therefrom; (2) all transactions in connection therewith shall be consummated in accordance with all applicable laws and in conformity with all applicable Governmental Authorizations; (3) all of the equity Securities (except for any such Securities in the nature of directors qualifying shares required pursuant to applicable law) acquired or otherwise issued by such Person (or any newly formed Subsidiary of Company in connection with such acquisition) shall be owned 100% by Borrower or a Subsidiary, and Company and Borrower shall have taken, or caused to be taken, as of the date such Person becomes a Subsidiary of Borrower, each of the actions set forth in Section 5.10; (4) (A) the cash consideration paid by Company or any of its Subsidiaries for such acquisition shall be less than $1,000,000, or (B) the aggregate amount of all acquisitions occurring after the Closing Date, the individual Cash component of the purchase price of which is greater than $1,000,000 in each case, which are financed in whole or in part with Indebtedness (including all Indebtedness incurred, repaid or assumed in connection with all such acquisitions) and/or Cash on hand, shall not exceed (excluding the amount of equity Securities used in connection with or used to finance such acquisitions) an amount equal to $300,000,000; (5) all Persons, assets or divisions acquired shall be in the same business or lines of business engaged in by Borrower and/or its Subsidiaries on the Closing Date and similar or related businesses, or such other lines of business as may be consented to by Requisite Lenders; (6) the principal operations of all Persons, assets or divisions acquired shall be located only in those twenty seven (27) Geographic Markets specified in Schedule 1.1 (or substitution Geographic Markets reasonably acceptable to the Sole Lead Arranger and the Administrative Agent) plus up to an additional nine (9) Geographic Markets that Borrower designates in writing to the Sole Lead Arranger and the Administrative Agent as a Geographic Market that it anticipates operating in; provided that Permitted Acquisitions outside such thirty six (36) Geographic Markets shall be permitted if such principal operations, assets or divisions acquired are related to Company's core CLEC switched access business as conducted as of the Closing Date or similar or related businesses, including, 24 EXECUTION 31 without limitation, data communications, Internet access, Internet portal, web hosting, application hosting, and communication equipment collocation businesses; and (7) Company and its Subsidiaries shall be in compliance with, immediately before and after giving pro forma effect to any acquisition, Sections 6.6 or 6.7, as applicable, and Company shall have delivered to Administrative Agent a certificate in the form of a Compliance Certificate evidencing such compliance with such Sections. "PERMITTED EQUIPMENT FINANCING" means one or more purchase money, vendor or similar equipment financing facilities (i) in an aggregate principal amount not in excess of $50,000,000 outstanding at any time, (ii) pursuant to which Borrower or any of its Subsidiaries may be advanced funds principally to purchase or lease network equipment or services from the provider of such financing or its affiliates, (iii) which may be secured only by the assets being financed thereby and (iv) the form and substance of which are reasonably satisfactory to the Sole Lead Arranger and Requisite Lenders. "PERMITTED LIENS" means each of the Liens permitted pursuant to Section 6.2. "PERSON" means and includes natural persons, corporations, limited partnerships, general partnerships, limited liability companies, limited liability partnerships, joint stock companies, Joint Ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and governments (whether federal, state or local, domestic or foreign, and including political subdivisions thereof) and agencies or other administrative or regulatory bodies thereof. "PLAN OF CORRECTION" as defined in Section 4.20. "PLEDGE AND SECURITY AGREEMENT" means the Pledge and Security Agreement in the form of Exhibit I, as it may be amended, supplemented or otherwise modified from time to time. "PRE-OVERHEAD EBITDA" means, for any Fiscal Quarter, an amount determined for the operations of a Subsidiary of the Company in a Geographic Market, to the extent positive, equal to (i) the sum of the amounts for such period of (a) the net income of such market on a consolidated basis determined in accordance with GAAP, (b) total interest expense (including that portion attributable to Capital Leases in accordance with GAAP and capitalized interest) with respect to all outstanding Indebtedness of such market, including all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and net costs under Interest Rate Agreements, (c) provisions for franchise taxes and taxes of such market based on income for such market, (d) total depreciation expense of such market, (e) total amortization expense of such market, and (f) other non-cash items reducing the net income of such market (including management ownership allocation charge and non-cash deferred compensation), minus the sum of (ii) (a) any net extraordinary gains or net non-cash extraordinary losses of such Person for such market and (b) all other non-cash items increasing the net income of such market; all of the 25 EXECUTION 32 foregoing as calculated quarterly, on a basis which excludes all amounts attributable to corporate overhead expense of Company or any of its Subsidiaries (other than the Subsidiary which operates in the subject Geographic Market to the extent such overhead is allocable to such Geographic Market), and in a manner consistent with the calculations made and delivered pursuant to Section 3.1(f) on the Closing Date (it being understood that all corporate overhead expense is allocated as of the Closing Date by Company to Allegiance Service Corporation, and such practice will continue in the same manner after the Closing Date). It is expressly understood that, with respect to each Geographic Market (i) only those operations of a particular Subsidiary that have positive Pre-Overhead EBITDA shall be included in the calculation of Pre-Overhead EBITDA (ii) any negative Pre-Overhead EBITDA of a Subsidiary in another Geographic Market shall not be included in such calculation and (iii) any negative Pre-Overhead EBITDA of another Subsidiary operating in such Geographic Market shall not be included in such calculation. "PRIME RATE" means the rate that The Toronto-Dominion Bank, New York branch, announces from time to time as its prime lending rate, as in effect from time to time. The Prime Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. TD or any other Lender may make commercial loans or other loans at rates of interest at, above or below the Prime Rate. "PRINCIPAL OFFICE" means the Administrative Agent's "Principal Office" as set forth on Appendix B, or such other office as such Person may from time to time designate in writing to Borrower, Administrative Agent and each Lender. "PROJECTIONS" as defined in Section 4.5. "PRO FORMA ADJUSTMENT" means for purposes of determining compliance with the financial covenants set forth in Section 6.6(a), the minimum Revenues specified in such Section shall be increased for any Fiscal Quarter in which a Permitted Acquisition has occurred and each succeeding Fiscal Quarter thereafter by 100% of the average quarterly Revenues of the entity or assets being acquired calculated for the immediately preceding four quarter period using the historical financial statements of such entity or assets; and all such Pro Forma Adjustments shall be accompanied by a Financial Officer Certification. "PRO FORMA CONSOLIDATED DEBT SERVICE" means, as of any date of determination, the sum, without duplication, of (i) Consolidated Cash Interest Expense and (ii) all scheduled amortization (including any payment or prepayment of principal of, premium, if any, or interest on, or redemption, purchase, retirement, defeasance (including in-substance or legal defeasance), sinking fund or similar payment) in respect of Indebtedness, in each case payable by Company and its Subsidiaries during the immediately succeeding four Fiscal Quarters assuming, for purposes of calculating Consolidated Cash Interest Expense for any such succeeding four Fiscal Quarter period, Indebtedness outstanding as of the date of such calculation shall remain outstanding during such four Fiscal Quarter period (except to the extent of any scheduled amortization, redemption, retirement or similar payment scheduled during such four Fiscal Quarter period) and that the average interest rate applicable to 26 EXECUTION 33 outstanding Indebtedness of the Credit Parties as of the date of such calculation applies with respect to Indebtedness outstanding during such four Fiscal Quarter period. "PRO FORMA DEBT SERVICE COVERAGE RATIO" means the ratio as of the last day of any Fiscal Quarter of (i) Annualized Consolidated EBITDA for any period then ended to (ii) Pro Forma Consolidated Debt Service, in each case as set forth in the most recent Compliance Certificate delivered by Borrower to Administrative Agent pursuant to Section 5.1(d). "PRO RATA SHARE" means (i) with respect to all payments, computations and other matters relating to the Revolving Loan Commitment or the Revolving Loans of any Lender, the percentage obtained by dividing (x) the Revolving Loan Exposure of that Lender by (y) the aggregate Revolving Loan Exposure of all Lenders, (ii) with respect to all payments, computations and other matters relating to the Delayed Draw Term Loan Commitment or the Delayed Draw Term Loans, the percentage obtained by dividing (x) the Delayed Draw Term Loan Exposure of that Lender by the aggregate Delayed Draw Term Loan Exposure of all Lenders, (iii) with respect to all payments, computations and other matters relating to the New Term Loan Commitments, if any, or the New Term Loan, if any, of any Lender, the percentage obtained by dividing (x) the New Term Loan Exposure of that Lender for a Series by (y) the sum of the aggregate New Term Loan Exposure of all Lenders for such Series, and (iv) for all other purposes with respect to each Lender, the percentage obtained by dividing (x) the sum of the New Term Loan Exposure of that Lender for a Series plus the Revolving Loan Exposure of that Lender plus the Delayed Draw Loan Exposure of that Lender by (y) the sum of the aggregate New Term Loan Exposure of all Lenders for such Series plus the aggregate Revolving Loan Exposure of all Lenders plus the sum of the aggregate Delayed Draw Term Loan Exposure of all Lenders, in any such case as the applicable percentage may be adjusted by assignments permitted pursuant to Section 10.6. The Pro Rata Share of each Lender as of the Closing Date for purposes of each of clauses (i), (ii), (iii) and (iv) of the preceding sentence is set forth opposite the name of that Lender in Appendix A. "REAL ESTATE ASSET" means, at any time of determination, any interest then owned by any Credit Party in any real property (whether fee or leasehold). "RECORD DOCUMENT" means, with respect to any Leasehold Property, (i) the lease evidencing such Leasehold Property or a memorandum thereof, executed and acknowledged by the owner of the affected real property, as lessor, or (ii) if such Leasehold Property was acquired or subleased from the holder of a Recorded Leasehold Interest, the applicable assignment or sublease document, executed and acknowledged by such holder, in each case in form sufficient to give such constructive notice upon recordation and otherwise in form reasonably satisfactory to Administrative Agent. "RECORDED LEASEHOLD INTEREST" means a Leasehold Property with respect to which a Record Document has been recorded in all places necessary or desirable, in Administrative Agent's reasonable judgment, to give constructive notice of such Leasehold Property to third-party purchasers and encumbrancers of the affected real property. 27 EXECUTION 34 "REGISTER" as defined in Section 2.4(b). "REGULATION D" means Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "RELATED FUND" means, with respect to any Lender that is an investment fund, any other investment fund that invests in commercial loans and that is managed or advised by the same investment advisor as such Lender or by an Affiliate of such investment advisor. "RELEASE" means any release, spill, emission, leaking, pumping, pouring, injection, escaping, deposit, disposal, discharge, dispersal, dumping, leaching or migration of any Hazardous Material into the indoor or outdoor environment (including the abandonment or disposal of any barrels, containers or other closed receptacles containing any Hazardous Material), including the movement of any Hazardous Material through the air, soil, surface water or groundwater. "REPLACEMENT LENDER" as defined in Section 2.21. "REQUISITE CLASS LENDERS" means, at any time of determination (i) for the Class of Lenders having Revolving Loan Exposure, Lenders having or holding at least a majority of the sum of the aggregate Revolving Loan Exposure of all Lenders, (ii) for the Class of Lenders having Delayed Draw Term Loan Exposure, Lenders having or holding at least a majority of the sum of the aggregate Delayed Draw Term Loan Exposure of all Lenders and (iii) for each Class of Lenders having New Term Loan Exposure, if any, Lenders having or holding at least a majority of the sum of the aggregate New Term Loan Exposure of such Lenders. "REQUISITE LENDERS" means one or more Lenders having or holding Revolving Loan Exposure, Delayed Draw Term Loan Exposure and/or New Term Loan Exposure for a Series representing more than 50% of the sum of (i)the aggregate Revolving Loan Exposure of all Lenders (ii) the aggregate Delayed Draw Term Loan Exposure of all Lenders and (iii) the aggregate New Term Loan Exposure of all Lenders for each Series. "RESTRICTED JUNIOR PAYMENT" means (i) any dividend or other distribution, direct or indirect, on account of any shares of any class of stock of Company or Borrower now or hereafter outstanding, except a dividend payable solely in shares of that class of stock to the holders of that class, (ii) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any class of stock of Company or Borrower now or hereafter outstanding, (iii) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of stock of Company or Borrower now or hereafter outstanding, and (iv) any payment or prepayment of principal of, premium, if any, or interest on, or redemption, purchase, retirement, defeasance (including in-substance or legal defeasance), sinking fund or similar payment with respect to any Subordinated Indebtedness or Indebtedness outstanding under the Existing Indentures; provided that the foregoing will not prohibit 28 EXECUTION 35 payments in respect of repurchases of stock from former directors, officers, employees, or from consultants, of Company in an aggregate amount not to exceed $2,500,000. "REVENUES" means, for any Fiscal Quarter, the gross revenues of Company and its Subsidiaries on a consolidated basis for such period taken as a single accounting period determined in conformity with GAAP. "REVOLVING LOAN COMMITMENT" means the commitment of a Lender to make Revolving Loans to Borrower pursuant to subsection 2.1(a)(i) or New Revolving Loans pursuant to subsection 2.1(a)(iii), and "REVOLVING LOAN COMMITMENTS" means such commitments of all Lenders in the aggregate. The amount of each Lender's Revolving Loan Commitment, if any, is set forth in Appendix A or in the applicable Assignment Agreement, subject to any adjustment or reduction pursuant to the terms and conditions hereof. The aggregate amount of the Revolving Loan Commitments as of the Closing Date is $350,000,000. "REVOLVING LOAN COMMITMENT PERIOD" means the period commencing on the Closing Date to but excluding the Revolving Loan Commitment Termination Date. "REVOLVING LOAN COMMITMENT TERMINATION DATE" means the earliest to occur of (i) the Revolving Loan Maturity Date, (ii) the date the Revolving Loan Commitments are permanently reduced to zero pursuant to Sections 2.10 or 2.11, and (iii) the date of the termination of the Commitments pursuant to Section 8.1. "REVOLVING LOAN EXPOSURE" means, with respect to any Lender as of any date of determination, (i) prior to the termination of the Revolving Loan Commitments, such Lender's Revolving Loan Commitment; and (ii) after the termination of the Revolving Loan Commitments, the aggregate outstanding principal amount of the Revolving Loans of such Lender. "REVOLVING LOAN INSTALLMENT" as defined in Section 2.9(a). "REVOLVING LOAN MATURITY DATE" means the earlier of (i) December 31, 2006 and (ii) the date that all Revolving Loans shall become due and payable in full hereunder, whether by acceleration or otherwise. "REVOLVING LOAN NOTE" means a promissory note in the form of Exhibit B-1, as it may be amended, supplemented or otherwise modified from time to time. "REVOLVING LOANS" means any Revolving Loans made by Lenders to Borrower pursuant to Section 2.1(a)(i) of this Agreement and any New Revolving Loans made by Lenders to Borrower pursuant to Section 2.1(a)(iii) of this Agreement. "RS DESIGNATION" as defined in Section 6.17. 29 EXECUTION 36 "S&P" means Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies. "SECURITIES" means any stock, shares, partnership interests, voting trust certificates, certificates of interest or participation in any profit-sharing agreement or arrangement, options, warrants, bonds, debentures, notes, or other evidences of indebtedness, secured or unsecured, convertible, subordinated or otherwise, or in general any instruments commonly known as "securities" or any certificates of interest, shares or participations in temporary or interim certificates for the purchase or acquisition of, or any right to subscribe to, purchase or acquire, any of the foregoing. "SECURITIES ACT" means the Securities Act of 1933, as amended from time to time, and any successor statute. "SENIOR LEVERAGE RATIO" means the ratio, as of the last day of any Fiscal Quarter, of (a) Senior Secured Debt outstanding as of such day to (b) Annualized Consolidated EBITDA; in each case as set forth in the most recent Compliance Certificate delivered by Borrower to Administrative Agent pursuant to Section 5.1(d). "SENIOR SECURED DEBT" means an amount equal to the sum of Total Utilization of Commitments and the outstanding principal amount of all Permitted Equipment Financings, all secured trade payables and all Capital Leases of, in each case, Company and its Subsidiaries; provided Capital Lease obligations with respect to Dark Fiber Leases shall be excluded from Senior Secured Debt for purposes of calculations made under Section 6.6(b), but shall be included for all other purposes under this Agreement. "SERIES" as defined in Section 2.1(a)(iii). "SOLE LEAD ARRANGER" as defined in the preamble hereto. "SOLVENT" means, with respect to any Person, that as of the date of determination both (i) (a) the then fair saleable value of the property of such Person is (1) greater than the total amount of liabilities (including contingent liabilities) of such Person and (2) not less than the amount that will be required to pay the probable liabilities on such Person's then existing debts as they become absolute and matured considering all financing alternatives and potential asset sales reasonably available to such Person; (b) such Person's capital is not unreasonably small in relation to its business or any contemplated or undertaken transaction; and (c) such Person does not intend to incur, or believe (nor should it reasonably believe) that it will incur, debts beyond its ability to pay such debts as they become due; and (ii) such Person is "solvent" within the meaning given that term and similar terms under applicable laws relating to fraudulent transfers and conveyances. For purposes of this definition, the amount of any contingent liability at any time shall be computed as the amount that, in light of all of the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. 30 EXECUTION 37 "STAGE 1" shall mean the period from the Closing Date to December 31, 2002. "STAGE 2" shall mean the period from January 1, 2003 to the later of (i) the Revolving Loan Maturity Date and (ii) any New Term Loan Maturity Date. "SUBORDINATED INDEBTEDNESS" means Indebtedness outstanding under (A) the Existing Indentures and (B) Indebtedness incurred by Company (i) which is unsecured, (ii) which is structurally subordinated to the payment in full in cash of all Obligations, (iii) which shall not mature or amortize until at least six months beyond the Revolving Loan Maturity Date, or if later any New Term Loan Maturity Date, if any and (iv) the provisions of the definitive documentation of which (A) shall not contain covenants more restrictive than those contained herein, (B) shall not provide for any mandatory prepayments or redemptions at any time when similar payments are not required hereunder and (C) shall otherwise be reasonably satisfactory to Administrative Agent. "SUBSIDIARY" means, with respect to any Person, any corporation, partnership, limited liability company, association, joint venture or other business entity of which more than 50% of the total voting power of shares of stock or other ownership interests entitled (without regard to the occurrence of any contingency) to vote in the election of the Person or Persons (whether directors, managers, trustees or other Persons performing similar functions) having the power to direct or cause the direction of the management and policies thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof, and which is also a "Restricted Subsidiary" as defined in the Existing Indentures; provided that in determining the percentage of ownership interests of any Person controlled by another Person, no ownership interest in the nature of a "qualifying share" of the former Person shall be deemed to be outstanding. Unless otherwise expressly provided, an "Unrestricted Subsidiary" shall not be considered a Subsidiary for the purposes of this Agreement. "SUPPLEMENTAL COLLATERAL AGENT" as defined in Section 9.8(c). "SYNDICATION AGENT" as defined in the preamble hereto. "SYSTEMS" means any of the hardware, firmware or software systems associated with information processing and delivery, operations or services (e.g., security and alarms, elevators, communications, and HVAC) operated by, provided to or otherwise reasonably necessary to the business or operations of Company and its Subsidiaries. "TAX" means any present or future tax, levy, impost, duty, charge, fee, deduction or withholding of any nature and whatever called, by whomsoever, on whomsoever and wherever imposed, levied, collected, withheld or assessed; provided that "Tax on the overall net income" of a Person shall be construed as a reference to a tax imposed by the jurisdiction in which that Person is organized or in which that Person's principal office (and/or, in the case of a Lender, its lending office) is located or in which that Person (and/or, in the case of a Lender, its lending office) is 31 EXECUTION 38 deemed to be doing business on all or part of the net income, profits or gains (whether worldwide, or only insofar as such income, profits or gains are considered to arise in or to relate to a particular jurisdiction, or otherwise) of that Person (and/or, in the case of a Lender, its lending office). "TD" means Toronto Dominion (Texas), Inc. "TDSI" means TD Securities (USA) Inc. "TERM LOANS" means Delayed Draw Term Loans and New Term Loans. "TERMINATED LENDER" as defined in Section 2.21. "TOTAL CAPITALIZATION" means the sum of (a) Consolidated Total Debt and (b) paid-in-equity capital (including preferred stock but excluding additional equity issued as pay-in-kind dividends on issued and outstanding equity securities) and excluding any accumulated deficits resulting from operations, less the amount of Investments made pursuant to Section 6.5(m). "TOTAL LEVERAGE RATIO" means the ratio as of the last day of any Fiscal Quarter of (a) Consolidated Total Debt to (b) Annualized Consolidated EBITDA; in each case as set forth in the most recent Compliance Certificate delivered by Company to Administrative Agent pursuant to Section 5.1(d). "TOTAL UTILIZATION OF COMMITMENTS" means, as at any date of determination, the sum of the aggregate principal amount of all outstanding Loans. "TOTAL UTILIZATION OF DELAYED DRAW TERM LOAN COMMITMENTS" means, as of any date of determination, the sum of the aggregate outstanding principal amount of all Delayed Draw Term Loans. "TOTAL UTILIZATION OF REVOLVING LOAN COMMITMENTS" means, as of any date of determination, the sum of the aggregate outstanding principal amount of all Revolving Loans. "TRANSACTION COSTS" means the fees, costs and expenses payable by Borrower on or before the Closing Date in connection with the transactions contemplated by the Credit Documents. "TYPE OF LOAN" means a Base Rate Loan or a Eurodollar Rate Loan. "UNRESTRICTED SUBSIDIARY" means (i) each Subsidiary (with such term defined for purposes of this definition without giving effect to the last sentence in the definition of such term) of Company that shall be designated an "Unrestricted Subsidiary" pursuant to and in compliance with Section 6.17, (ii) each Foreign Subsidiary and (iii) each Subsidiary of an Unrestricted Subsidiary. 32 EXECUTION 39 "UCC" means the Uniform Commercial Code (or any similar or equivalent legislation) as in effect in any applicable jurisdiction. "YEAR 2000 ISSUES" means limitations in the capacity or readiness to handle date information for the Year 1999 or years beginning January 1, 2000 of any of the Systems. 1.2. Accounting Terms. Except as otherwise expressly provided herein, all accounting terms not otherwise defined herein shall have the meanings assigned to them in conformity with GAAP. Financial statements and other information required to be delivered by Borrower to Lenders pursuant to Sections 5.1(a), 5.1(b) and 5.1(c) shall be prepared in accordance with GAAP as in effect at the time of such preparation (and delivered together with the reconciliation statements provided for in Section 5.1(e), if applicable). Subject to the foregoing, calculations in connection with the definitions, covenants and other provisions hereof shall utilize accounting principles and policies in conformity with those used to prepare the Historical Financial Statements. 1.3. Interpretation, etc. Any of the terms defined herein may, unless the context otherwise requires, be used in the singular or the plural, depending on the reference. References herein to any Section, Appendix, Schedule or Exhibit shall be to a Section, an Appendix, a Schedule or an Exhibit, as the case may be, hereof unless otherwise specifically provided. The use herein of the word "include" or "including," when following any general statement, term or matter, shall not be construed to limit such statement, term or matter to the specific items or matters set forth immediately following such word or to similar items or matters, whether or not nonlimiting language (such as "without limitation" or "but not limited to" or words of similar import) is used with reference thereto, but rather shall be deemed to refer to all other items or matters that fall within the broadest possible scope of such general statement, term or matter. SECTION 2. AMOUNTS AND TERMS OF COMMITMENTS AND LOANS 2.1. Loans (1) Loans. (1) Revolving Loans. During the Revolving Loan Commitment Period, subject to the terms and conditions hereof, each Lender severally agrees to make Revolving Loans to Borrower in the aggregate amount up to but not exceeding such Lender's Revolving Loan Commitment as of the Closing Date; provided that after giving effect to the making of any Revolving Loans in no event shall the Total Utilization of Revolving Loan Commitments exceed the Revolving Loan Commitments then in effect. Amounts borrowed pursuant to this Section 2.1(a)(i) may be repaid and reborrowed during the Revolving Loan Commitment Period. Each Lender's Revolving Loan Commitment shall expire on the Revolving Loan Commitment Termination Date and all Revolving Loans and all other amounts owed hereunder with respect to the Revolving Loans and the Revolving Loan Commitments shall be paid in full no later than such date. EXECUTION 33 40 (2) Delayed Draw Term Loans. During the Delayed Draw Term Loan Commitment Period, subject to the terms and conditions hereof, each Lender severally agrees to make Delayed Draw Term Loans to Borrower in the aggregate amount up to but not exceeding such Lender's Delayed Draw Term Loan Commitment. Borrower may make one or more drawings on the Delayed Draw Term Loan Commitments during the Delayed Draw Term Loan Commitment Period. Any amounts borrowed under this Section 2.1(a)(ii) and subsequently repaid or prepaid may not be reborrowed. Subject to Sections 2.10 and 2.11, all amounts owed hereunder with respect to the Delayed Draw Term Loans shall be paid in full no later than the Delayed Draw Term Loan Maturity Date. Each Lender's Delayed Draw Term Loan Commitment shall terminate immediately and without further action upon the full funding of such Lender's Delayed Draw Term Loan Commitment. (3) Incremental Facilities. Borrower may by written notice to Sole Lead Arranger elect to request (A) an increase to the existing Revolving Loan Commitments (any such increase, the "NEW REVOLVING LOAN COMMITMENTS"), (B) an increase to the existing Delayed Draw Term Loan Commitments ("NEW DELAYED DRAW TERM LOAN COMMITMENTS") and/or (C) the establishment of one or more new term loan commitments (the "NEW TERM LOAN COMMITMENTS"), by an amount not in excess of $200,000,000 in the aggregate and not less than $25,000,000 individually (or such lesser amount which shall be approved by Administrative Agent and Syndication Agent or such lesser amount that shall constitute the difference between $200,000,000 and all such New Revolving Loan Commitments, New Delayed Draw Term Loan Commitments and New Term Loan Commitments), and integral multiples of $5,000,000 in excess of that amount, provided, however, that on and after January 1, 2004, Borrower may only elect the establishment of one or more New Term Loan Commitments. Each such notice shall specify (A) the date (each, an "INCREASED AMOUNT DATE") on which Borrower proposes that the New Revolving Loan Commitments, New Delayed Draw Term Loan Commitments or the New Term Loan Commitments, as applicable, shall be effective and that Loans be made pursuant to the New Term Loan Commitments ("NEW TERM LOANS"), which shall be a date not less than 10 Business Days after the date on which such notice is delivered to Administrative Agent and (B) the identity of each Lender or other Person (each, a "NEW REVOLVING LOAN LENDER", "NEW DELAYED DRAW TERM LOAN LENDER" or a "NEW TERM LOAN LENDER", as applicable) to whom Borrower proposes any portion of such New Revolving Loan Commitments, New Delayed Draw Term Loan Commitments or New Term Loan Commitments, as applicable, be allocated and the amounts of such allocations; provided that any Lender approached to provide all or a portion of the New Revolving Loan Commitments, New Delayed Draw Term Loan Commitments or New Term Loan Commitments may elect or decline, in its sole discretion, to provide a New Revolving Loan Commitment, New Delayed Draw Term Loan Commitment or a New Term Loan Commitment. Such New Revolving Loan Commitments, New Delayed Draw Term Loan Commitments or New Term Loan Commitments shall become effective and any such Series of New Term Loans shall be made, as applicable, as of such Increased Amount Date; provided that (1) no Default or Event of Default shall exist on such Increased Amount Date before or after giving effect to such New Revolving Loan 34 EXECUTION 41 Commitments, New Delayed Draw Term Loan Commitments or New Term Loan Commitments, as applicable; (2) both before and after giving effect to the making of any Series of New Term Loans each of the conditions set forth in Section 3.2 shall be satisfied; (3) each increase in the Revolving Loan Commitments, Delayed Draw Term Loan Commitments or New Term Loan Commitments, as applicable, shall be effected pursuant to one or more Joinder Agreements executed and delivered to Administrative Agent, and each shall be recorded in the Register, each of which shall be subject to the requirements set forth in Section 2.18(c); (4) Borrower shall make any payments required pursuant to Section 2.16(c) in connection with the New Revolving Loan Commitments or New Delayed Draw Term Loan Commitments, as applicable, and (5) Borrower shall deliver or cause to be delivered any legal opinions or other documents reasonably requested by Administrative Agent in connection with any such transaction. Any New Term Loans made may be, at the Borrower's option, a separate series ("SERIES") of New Term Loans for all purposes of this Agreement. On any Increased Amount Date on which New Revolving Loan Commitments are effected, subject to the satisfaction of the foregoing terms and conditions, (a) each of the Revolving Lenders shall assign to each of the New Revolving Loan Lenders, and each of the New Revolving Loan Lenders shall purchase from each of the Revolving Loan Lenders, at the principal amount thereof (together with accrued interest), such interests in the Revolving Loans outstanding on such Increased Amount Date as shall be necessary in order that, after giving effect to all such assignments and purchases, such Revolving Loans will be held by existing Revolving Loan Lenders and New Revolving Loan Lenders ratably in accordance with their Revolving Loan Commitments after giving effect to the addition of such New Revolving Loan Commitments to the Revolving Loan Commitments, (b) each New Revolving Loan Commitment shall be deemed for all purposes a Revolving Loan Commitment and each Loan made thereunder (a "NEW REVOLVING LOAN") shall be deemed, for all purposes, a Revolving Loan and (c) each New Revolving Loan Lender shall become a Lender with respect to the New Revolving Loan Commitment and all matters relating thereto. On any Increased Amount Date on which New Delayed Draw Term Loan Commitments are effected, subject to the satisfaction of the foregoing terms and conditions, (a) each of the Delayed Draw Term Loan Lenders shall assign to each of the New Delayed Draw Term Loan Lenders, and each of the New Delayed Draw Term Loan Lenders shall purchase from each of the Delayed Draw Term Loan Lenders, at the principal amount thereof (together with accrued interest), such interests in the Delayed Draw Term Loan outstanding on such Increased Amount Date as shall be necessary in order that, after giving effect to all such assignments and purchases, such Delayed Draw Term Loan will be held by existing Delayed Draw Term Loan Lenders and New Delayed Draw Term Loan Lenders ratably in accordance with their Delayed Draw Term Loan Commitments after giving effect to the addition of such New Delayed Draw Term Loan Commitments to the Delayed Draw Term Loan Commitments, (b) each New Delayed Draw Term Loan Commitment shall be deemed 35 EXECUTION 42 for all purposes a Delayed Draw Term Loan Commitment and each Loan made thereunder (a "NEW DELAYED DRAW TERM LOAN") shall be deemed, for all purposes, a Delayed Draw Term Loan and (c) each New Delayed Draw Term Loan Lender shall become a Lender with respect to the New Delayed Draw Term Loan Commitment and all matters relating thereto. On any Increased Amount Date on which any New Term Loan Commitments of any Series are effective, subject to the satisfaction of the foregoing terms and conditions, (i) each New Term Loan Lender of any Series shall make a New Term Loan to Borrower in an amount equal to its New Term Loan Commitment of such Series, and (ii) each New Term Loan Lender of any Series shall become a Lender hereunder with respect to the New Term Loan Commitment of such Series and the New Term Loans of such Series made pursuant thereto. The Administrative Agent shall notify the Lenders promptly upon receipt of Borrower's notice of each Increased Amount Date and in respect thereof the New Revolving Loan Commitments and the New Revolving Loan Lenders, the New Delayed Draw Term Loan Commitments and the New Delayed Draw Term Loan Lenders or the Series of New Term Loan Commitments and the New Term Loan Lenders of such Series, as applicable, and, in the case of each notice to any Revolving Loan Lender, the respective interests in such Revolving Loan Lender's Revolving Loans subject to the assignments contemplated by this section. The terms and provisions of the New Term Loans of any Series and New Term Loan Commitments of any Series shall be, except as otherwise set forth herein or in the Joinder Agreement, identical to the Revolving Loans in the case of New Revolving Loans, and identical to Delayed Draw Term Loans in the case of Term Loans and in any event (i) the weighted average life to maturity of all New Term Loans of any Series, shall be no shorter than the weighted average life to maturity of the Revolving Loans or the Term Loans (ii) the final maturity of all New Term Loans of any Series shall be no longer than six months prior to the maturity of any Subordinated Indebtedness and (iii) the rate of interest applicable to New Term Loans of any Series shall be determined by Borrower and applicable new Lenders and shall be set forth in each applicable Joinder Agreement; provided however that in the case of New Term Loans the Applicable Margin shall not be greater than the Applicable Margin to the Delayed Draw Term Loans. Each Joinder Agreement may, without the consent of any other Lenders, effect such amendments to this Agreement and the other Credit Documents as may be necessary or appropriate, in the opinion of the Syndication Agent and the Administrative Agent, to effect the provision of this Section 2.1(a)(iii). (2) Borrowing Mechanics for Loans. (1) Loans (other than New Term Loans) shall be made in a minimum amount of $5,000,000 and integral multiples of $1,000,000 in excess thereof. 36 EXECUTION 43 (2) Whenever Borrower desires that Lenders make Loans, Borrower shall deliver to Administrative Agent telephonic notice, followed by a fully executed and delivered Funding Notice no later than 10:00 a.m. (New York City time) at least three Business Days in advance of the proposed Credit Date in the case of a Eurodollar Rate Loan, and at least one Business Day in advance of the proposed Credit Date in the case of a Loan that is a Base Rate Loan. Except as otherwise provided herein, a Funding Notice for a Loan that is a Eurodollar Rate Loan shall be irrevocable on and after the related Interest Rate Determination Date, and Borrower shall be bound to make a borrowing in accordance therewith. (3) Notice of receipt of each Funding Notice in respect of Loans, together with the amount of each Lender's Pro Rata Share thereof, if any, together with the applicable interest rate, shall be provided by Administrative Agent to each applicable Lender by telefacsimile with reasonable promptness, but not later than 2:00 p.m. (New York City time) on the same day as Administrative Agent's receipt of such Notice from Borrower. (4) Each Lender shall make the amount of its Loan available to Administrative Agent not later than 12:00 Noon (New York City time) on the applicable Credit Date by wire transfer of same day funds in Dollars, at the Administrative Agent's Principal Office. Except as provided herein, upon satisfaction or waiver of the conditions precedent specified herein, Administrative Agent shall make the proceeds of such Loans available to Borrower on the applicable Credit Date by causing an amount of same day funds in Dollars equal to the proceeds of all such Loans received by Administrative Agent from Lenders to be credited to the account of Borrower at the Administrative Agent's Principal Office or such other account as may be designated in writing to Administrative Agent by Borrower. 2.2. Pro Rata Shares; Availability of Funds. (a) All Loans shall be made by Lenders simultaneously and proportionately to their respective Pro Rata Shares, it being understood that no Lender shall be responsible for any default by any other Lender in such other Lender's obligation to make a Loan requested hereunder nor shall the Commitment of any Lender be increased or decreased as a result of a default by any other Lender in such other Lender's obligation to make a Loan requested hereunder. (1) Unless Administrative Agent shall have been notified by any Lender prior to the applicable Credit Date that such Lender does not intend to make available to Administrative Agent the amount of such Lender's Loan requested on such Credit Date, Administrative Agent may assume that such Lender has made such amount available to Administrative Agent on such Credit Date and Administrative Agent may, in its sole discretion, but shall not be obligated to, make available to Borrower corresponding amount on such Credit Date. If such corresponding amount is not in fact made available to Administrative Agent by such Lender, Administrative Agent shall be entitled to recover such corresponding amount on demand from such Lender together with interest thereon, for each day from such Credit Date until the date such amount is paid to Administrative Agent, at the customary rate set by Administrative Agent for the correction of errors among banks for three Business Days and thereafter at the Base Rate. If such Lender does not pay such corresponding 37 EXECUTION 44 amount forthwith upon Administrative Agent's demand therefor, Administrative Agent shall promptly notify Borrower and Borrower shall immediately pay such corresponding amount to Administrative Agent together with interest thereon, for each day from such Credit Date until the date such amount is paid to Administrative Agent, at the rate payable hereunder for Base Rate Loans for such Type of Loans. Nothing in this Section 2.2(b) shall be deemed to relieve any Lender from its obligation to fulfill its Commitments hereunder or to prejudice any rights that Borrower may have against any Lender as a result of any default by such Lender hereunder. 2.3. Use of Proceeds. The proceeds of the Loans shall be used by Borrower and its Subsidiaries to provide (y) general corporate purposes including working capital financing in an amount outstanding hereunder not to exceed $100,000,000 and (z) purchase money financing for the cost of design, development, acquisition, construction, installation, improvement, transportation or integration of equipment, inventory, and network assets. No portion of the proceeds of any Loan shall be used by Borrower or any of its Subsidiaries in any manner that might cause such Loan or the application of such proceeds to violate Regulation T, Regulation U or Regulation X of the Board of Governors of the Federal Reserve System or any other regulation thereof or to violate the Exchange Act, in each case as in effect on the date or dates of such Loan and such use of proceeds. 2.4. Evidence of Debt; Register; Lenders' Books and Records; Notes. (a) Each Lender shall maintain on its internal records an account or accounts with respect to the Loans to Borrower by such Lender, including the amounts of the Loans made by it and each repayment and prepayment in respect thereof. Any such recordation shall be conclusive and binding on Borrower, absent manifest error; provided that failure to make any such recordation, or any error in such recordation, shall not affect any Lender's Commitments or Borrower's Obligations in respect of any applicable Loans; and provided further that in the event of any inconsistency between the Register and any Lender's records, the recordations in the Register shall govern. (1) Administrative Agent shall maintain at its Principal Office a register for the recordation of the names and addresses of Lenders and the Commitments and Loans of each Lender from time to time (the "REGISTER"). The Register shall be available for inspection by Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. Administrative Agent shall record in the Register the Commitments and the Loans, and each repayment or prepayment in respect of the principal amount of the Loans, and any such recordation shall be conclusive and binding on Borrower and each Lender, absent manifest error; provided that failure to make any such recordation, or any error in such recordation, shall not affect any Lender's Commitments or Borrower's Obligations in respect of any Loan. Borrower hereby designates TD to serve as Borrower's agent solely for purposes of maintaining the Register as provided in this Section 2.4, and Borrower hereby agrees that, to the extent TD serves in such capacity, TD and its officers, directors, employees, agents and affiliates shall constitute "INDEMNITEES". (b) If so requested by any Lender by written notice to Borrower (with a copy to Administrative Agent) at least two Business Days prior to the Closing Date, or at any time thereafter, Borrower shall execute and deliver to such Lender (and/or, if applicable and if so specified in such 38 EXECUTION 45 notice, to any Person who is an assignee of such Lender pursuant to Section 10.6) on the Closing Date (or, if such notice is delivered after the Closing Date, promptly after Borrower's receipt of such notice) a Note or Notes to evidence such Lender's Loans. 2.5. Interest Payments. (a) Except as otherwise set forth herein, each Loan shall bear interest on the unpaid principal amount thereof from the date made through repayment (whether by acceleration or otherwise) as follows: (1) if a Base Rate Loan, at the Base Rate plus the Applicable Margin; or (2) if a Eurodollar Rate Loan, at the Adjusted Eurodollar Rate plus the Applicable Margin. (2) The basis for determining the rate of interest with respect to any Loan and the Interest Period with respect to any Eurodollar Rate Loan, shall be selected by Borrower and notified to Administrative Agent and Lenders pursuant to the applicable Funding Notice or Conversion/Continuation Notice, as the case may be. If on any day a Loan is outstanding with respect to which a Funding Notice or Conversion/Continuation Notice has not been delivered to Administrative Agent in accordance with the terms hereof specifying the applicable basis for determining the rate of interest, then for that day such Loan shall be a Base Rate Loan. (3) In connection with Eurodollar Rate Loans there shall be no more than twelve (12) Interest Periods outstanding at any time; provided that such number may be increased to fifteen (15) at the request of Borrower in connection with New Term Loans. In the event Borrower fails to specify an Interest Period for any Eurodollar Rate Loan in the applicable Funding Notice or Conversion/Continuation Notice, Borrower shall be deemed to have selected an Interest Period of one month. A soon as practicable after 10:00 A.M. (New York City time) on each Interest Rate Determination Date, Administrative Agent shall determine (which determination shall, absent manifest error, be final, conclusive and binding upon all parties) the interest rate that shall apply to the Eurodollar Rate Loans for which an interest rate is then being determined for the applicable Interest Period and shall promptly give notice thereof (in writing or by telephone confirmed in writing) to Borrower and each Lender. (4) Interest payable pursuant to Section 2.5(a) shall be computed (i) in the case of Base Rate Loans on the basis of a 365-day or 366-day year, as the case may be, and (ii) in the case of Eurodollar Rate Loans, on the basis of a 360-day year, in each case for the actual number of days elapsed in the period during which it accrues. In computing interest on any Loan, the date of the making of such Loan or the first day of an Interest Period applicable to such Loan or, with respect to a Base Rate Loan being converted from a Eurodollar Rate Loan, the date of conversion of such Eurodollar Rate Loan to such Base Rate Loan, as the case may be, shall be included, and the date of payment of such Loan or the expiration date of an Interest Period applicable to such Loan or, with respect to a Base Rate Loan being converted to a Eurodollar Rate Loan, the date of conversion of such Base Rate Loan to such Eurodollar Rate Loan, as the case may be, shall be excluded; provided 39 EXECUTION 46 that if a Loan is repaid on the same day on which it is made, one day's interest shall be paid on that Loan. (5) Except as otherwise set forth herein, interest on each Loan shall be payable in arrears on and to (i) each Interest Payment Date applicable to that Loan; (ii) any prepayment of that Loan, whether voluntary or mandatory, to the extent accrued on the amount being prepaid; and (iii) at maturity, including final maturity. 2.6. Conversion/Continuation. (a) So long as no Default or Event of Default shall have occurred and then be continuing, Borrower shall have the option: (1) to convert at any time all or any part of any Loan equal to $5,000,000 and integral multiples of $1,000,000 in excess of that amount from one Type of Loan to another Type of Loan; provided that a Eurodollar Rate Loan may only be converted into a Base Rate Loan on the expiration of the Interest Period applicable to such Eurodollar Rate Loan unless Borrower shall pay all amounts due under Section 2.16 in connection with any such conversion; or (2) upon the expiration of any Interest Period applicable to any Eurodollar Rate Loan, to continue all or any portion of such Loan equal to $5,000,000 and integral multiples of $1,000,000 in excess of that amount as a Eurodollar Rate Loan. (2) The Borrower shall deliver a Conversion/Continuation Notice to Administrative Agent no later than 10:00 A.M. (New York City time) at least one Business Day in advance of the proposed conversion date (in the case of a conversion to a Base Rate Loan) and at least three Business Days in advance of the proposed conversion/continuation date (in the case of a conversion to, or a continuation of, a Eurodollar Rate Loan). Except as otherwise provided herein, a Conversion/Continuation Notice for conversion to, or continuation of, any Eurodollar Rate Loans (or telephonic notice in lieu thereof) shall be irrevocable on and after the related Interest Rate Determination Date, and Borrower shall be bound to effect a conversion or continuation in accordance therewith. 2.7. Default Interest. Upon the occurrence and during the continuance of an Event of Default of the type specified in Section 8.1(a), the principal amount of all Loans, and, to the extent permitted by applicable law, any interest payments on the Loans or any fees or other amounts owed hereunder not paid when due, in each case whether at stated maturity, by notice of prepayment, by acceleration or otherwise, shall thereafter bear interest (including post-petition interest in any proceeding under the Bankruptcy Code or other applicable bankruptcy laws) payable on demand at a rate that is 2% per annum in excess of the interest rate otherwise payable hereunder with respect to the applicable Loans (or, in the case of any such fees and other amounts, at a rate which is 2% per annum in excess of the interest rate otherwise payable hereunder for Base Rate Loans); provided that in the case of Eurodollar Rate Loans, upon the expiration of the Interest Period in effect at the time any such increase in interest rate is effective such Eurodollar Rate Loans shall thereupon become 40 EXECUTION 47 Base Rate Loans and shall thereafter bear interest payable upon demand at a rate which is 2% per annum in excess of the interest rate otherwise payable hereunder for Base Rate Loans. Payment or acceptance of the increased rates of interest provided for in this Section 2.7 is not a permitted alternative to timely payment and shall not constitute a waiver of any Event of Default or otherwise prejudice or limit any rights or remedies of Administrative Agent or any Lender. 2.8. Fees. (a) Borrower agrees to pay to Lenders having Revolving Loan Exposure and/or Delayed Draw Term Loan Exposure through Administrative Agent a commitment fee equal to the average daily unused Commitments of such Lender during the preceding quarter multiplied by the Applicable Commitment Fee Percentage. All fees referred to in this Section 2.8(a) shall be paid to Administrative Agent at its Principal Office and upon receipt, Administrative Agent shall promptly distribute to each Lender its Pro Rata Share thereof. (1) All fees referred to in Section 2.8(a) shall be calculated on the basis of a 360-day year and the actual number of days elapsed and shall be payable (i) quarterly in arrears on March 31, June 30, September 30 and December 31 of each year commencing on the first such date to occur after the Closing Date, (ii) on the Delayed Draw Term Loan Commitment Termination Date and (iii) on the Revolving Loan Commitment Termination Date. (2) In addition to the foregoing fees, Borrower agrees to pay to Agents such other fees in the amounts and at the times separately agreed upon by Borrower and such Agents thereby. (3) In addition, Borrower agrees to pay such commitment and other fees as may be payable in connection with New Term Loans as set forth in the applicable Joinder Agreement or otherwise agreed to in writing by Borrower. 2.9. Scheduled Payments/Reductions. (1) The total Revolving Loan Commitments hereunder shall be permanently reduced in the aggregate annual percentages set forth below in consecutive quarterly installments (each, a "REDUCTION") on March 31, June 30, September 30 and December 31 of each year (each, a "REDUCTION DATE") occurring in each of the Fiscal Years set forth below, commencing March 31, 2004, with 25% of each annual amount being applied in reducing the Revolving Loan Commitments in consecutive quarterly installments (each, a "REVOLVING LOAN INSTALLMENT") on the last day of each Fiscal Quarter (each, an "INSTALLMENT DATE"):
REVOLVING LOAN FISCAL YEAR COMMITMENT REDUCTIONS 2004 20% 2005 30% 2006 50%
41 EXECUTION 48 Notwithstanding the foregoing, such Reductions shall be reduced in connection with any voluntary or mandatory reductions of the Revolving Loan Commitments in accordance with Sections 2.10, 2.11 and 2.12. (2) The principal amounts of the Delayed Draw Term Loans (other than New Term Loans) shall be repaid in the aggregate annual percentages set forth below in consecutive quarterly installments (each, a "DELAYED DRAW TERM LOAN INSTALLMENT") on each Installment Date occurring in each of the Fiscal Years set forth below, commencing March 31, 2004, with 25% of each annual amount being paid on each Installment Date:
DELAYED DRAW TERM LOAN FISCAL YEAR INSTALLMENTS 2004 20% 2005 30% 2006 50%
Notwithstanding anything to the contrary set forth above the scheduled repayment and reduction provisions with respect to New Term Loans shall be set forth in each applicable Joinder Agreement. Further notwithstanding the foregoing, (i) such Delayed Draw Term Loan Installments shall be reduced in connection with any voluntary or mandatory reduction or prepayments of the Delayed Draw Term Loan Commitments and/or the Delayed Draw Term Loans in accordance with Section 2.10, 2.11 and 2.12 and (ii) the Delayed Draw Term Loans, together with all other amounts owed hereunder with respect thereto, shall be paid in full no later than the Delayed Draw Term Loan Maturity Date. (3) Provisions with respect to scheduled repayments of New Term Loans shall be as set forth in each applicable Joinder Agreement. 2.10. Voluntary Prepayments/Reductions. (1) Prepayments. (1) Any time and from time to time Borrower may prepay any Loans on any Business Day in whole or in part without premium (but subject to Section 2.16) in any 42 EXECUTION 49 aggregate minimum amount of $5,000,000 and integral multiples of $1,000,000 in excess of that amount. (2) All such prepayments shall be made: (1) upon not less than one Business Day's prior written or telephonic notice, in the case of Base Rate Loans and (2) upon not less than three Business Days' prior written or telephonic notice, in the case of Eurodollar Rate Loans; in each case given to Administrative Agent by 12:00 noon (New York City time) on the date required and, if given by telephone, promptly confirmed in writing to Administrative Agent (and Administrative Agent will promptly transmit such telephonic or original notice by telefacsimile or telephone to each Lender). Upon the giving of any such notice, the principal amount of the Loans specified in such notice shall become due and payable on the prepayment date specified therein. Any such prepayment made pursuant to this Section 2.10(a) shall not reduce the Revolving Loan Commitments unless Borrower has so requested in accordance with Section 2.10(b). (2) Reductions. (1) Borrower may, upon not less than three Business Days' prior written or telephonic notice confirmed in writing to Administrative Agent (which original written or telephonic notice Administrative Agent will promptly transmit by telefacsimile or telephone to each applicable Lender), at any time and from time to time terminate in whole or permanently reduce in part, without premium or penalty, the Revolving Loan Commitments in an amount up to the amount by which the Revolving Loan Commitments exceed the Total Utilization of Revolving Loan Commitments at the time of such proposed termination or reduction plus the amount that the Revolving Loans are prepaid pursuant to clause (a) above; provided that any such partial reduction of the Revolving Loan Commitments shall be in an aggregate minimum amount of $5,000,000 and integral multiples of $1,000,000 in excess of that amount; provided further that in the event that Borrower fails to specify otherwise any such termination or permanent reduction shall be applied against the scheduled Reductions set forth in Section 2.9 on a pro rata basis (in accordance with the outstanding Revolving Loan Commitments at such time). (2) Borrower may, upon not less than three Business Days' prior written or telephonic notice confirmed in writing to Administrative Agent (which original written or telephonic notice Administrative Agent will promptly transmit by telefacsimile or telephone to each applicable Lender), at any time and from time to time terminate in whole or permanently reduce in part, without premium or penalty, the Delayed Draw Term Loan Commitments in an amount up to the amount by which the Delayed Draw Term Loan 43 EXECUTION 50 Commitments exceed the Total Utilization of Delayed Draw Term Loan Commitments at the time of such proposed termination or reduction; provided, any such partial reduction of the Delayed Draw Term Loan Commitments shall be in an aggregate minimum amount of $5,000,000 and integral multiples of $1,000,000 in excess of that amount. (3) Borrower's notice to Administrative Agent shall designate the date (which shall be a Business Day) of such termination or reduction and the amount of any partial reduction, and such termination or reduction of the Revolving Loan Commitments and/or Delayed Draw Term Loan Commitments, as applicable, shall be effective on the date specified in Borrower's notice and shall reduce the Revolving Loan Commitment and/or Delayed Draw Term Loan Commitment, as applicable of each Lender proportionately to its Pro Rata Share thereof. 2.11. Mandatory Prepayments/Reductions. (a) Asset Sales. If, within the period of two hundred seventy (270) days after the receipt by Borrower or any of its Subsidiaries of Net Asset Sales Proceeds, Company has not invested such Net Asset Sale Proceeds in the business of Borrower and its Subsidiaries, as certified to Administrative Agent by Company, then, to the extent Borrower has not previously done so, Company shall prepay Loans and the Commitments shall be permanently reduced as set forth in Section 2.12, in either case in an amount equal to the excess of such Net Asset Sale Proceeds over amounts invested as aforesaid. Pending a determination whether any Net Asset Sale Proceeds will be applied to prepay Loans and/or reduce Commitments pursuant to the preceding sentence, such Net Asset Sale Proceeds shall be applied to prepay outstanding Revolving Loans (without a reduction in the Revolving Loan Commitments). (1) Insurance/Condemnation Proceeds. No later than the third Business Day following the date of receipt by Company or any of its Subsidiaries, or Administrative Agent as loss payee, of any Net Insurance/Condemnation Proceeds, Borrower shall prepay the Loans and the Commitments shall be permanently reduced as set forth in Section 2.12 in an aggregate amount equal to such Net Insurance/Condemnation Proceeds; provided that so long as no Default or Event of Default shall have occurred and be continuing, Company shall have the option, through one or more of its Subsidiaries, to invest such Net Insurance/Condemnation Proceeds within two hundred seventy (270) days of receipt thereof in long term productive assets of the general type used in the business of Borrower and its Subsidiaries, which investment may include the repair, restoration or replacement of the applicable assets of Company or its Subsidiaries; provided further that pending any such investment all such Net Insurance/Condemnation Proceeds, as the case may be, shall be applied to prepay outstanding Revolving Loans (without a reduction in Revolving Loan Commitments). (2) Consolidated Excess Cash Flow. In the event that there shall be Consolidated Excess Cash Flow for any Fiscal Year (commencing with Fiscal Year 2004), Borrower shall, no later than ninety (90) days after the end of such Fiscal Year, prepay the Loans and the Commitments shall be permanently reduced as set forth in Section 2.12 in an aggregate amount equal to 50% of such Consolidated Excess Cash Flow. 44 EXECUTION 51 (3) Commitment Amounts. Borrower shall from time to time prepay the Revolving Loans to the extent necessary so that the Total Utilization of Revolving Loan Commitments shall not at any time exceed the Revolving Loan Commitments then in effect. Borrower shall also from time to time prepay the Delayed Draw Term Loans to the extent necessary so that the Total Utilization of Delayed Draw Term Loan Commitments shall not at any time exceed the Delayed Draw Term Loan Commitments then in effect. (4) Certain Additional Payments. Concurrently with any prepayment of the Loans and/or reduction of the Commitments pursuant to Sections 2.11(a), 2.11 (b) and 2.11(c), Borrower shall deliver to Administrative Agent a certificate of an Authorized Officer demonstrating the calculation of the amount of the applicable net proceeds or Consolidated Excess Cash Flow, as the case may be. In the event that Borrower shall subsequently determine that the actual amount received exceeded the amount set forth in such certificate, Borrower shall promptly make an additional prepayment of the Loans and the Commitments shall be permanently reduced in an amount equal to such excess, and Borrower shall concurrently therewith deliver to Administrative Agent a certificate of an Authorized Officer demonstrating the derivation of such excess. 2.12. Application of Prepayments/Reductions. (1) Application of Voluntary Prepayments by Type of Loans. Any prepayment of any Loan pursuant to Section 2.10(a) shall be applied as specified by Borrower in the applicable notice of prepayment; provided that in the event Borrower fails to specify the Loans to which any such prepayment shall be applied, such prepayment shall be applied as follows: first, to repay outstanding Revolving Loans to the full extent thereof; second, to repay outstanding Delayed Draw Term Loans on a pro rata basis to the full extent thereof and shall be further applied to each scheduled Delayed Draw Term Loan Installment of principal of Delayed Draw Term Loans on a pro rata basis; and third, to prepay the New Term Loans if any, on a pro rata basis to each scheduled installment of principal of the New Term Loans (pro rata in the case of New Term Loans among each outstanding Series). (2) Application of Mandatory Prepayments by Type of Loans. Any amount required to be paid pursuant to Sections 2.11(a), (b) and (c) shall be applied on a pro rata basis against Revolving Loans, Delayed Draw Term Loans and New Term Loans (pro rata in the case of New Term Loans among each outstanding Series), if any, and shall be further applied to reduce the Revolving Loan Commitments by the amount allocable to Revolving Loans and to reduce the Delayed Draw Term Loan Commitments by an amount, if any, equal to the excess of the amount allocable to the Delayed Draw Term Loans over the amount of the Delayed Draw Term Loans outstanding immediately prior to the making of any such mandatory prepayment; provided that any such reduction of Revolving Loan Commitments shall be applied against the scheduled Reductions 45 EXECUTION 52 set forth in Section 2.9 on a pro rata basis (in accordance with the outstanding Revolving Loan Commitments of such time); provided that with respect to New Term Loans, a lesser amount may be required to be prepaid or waived if set forth in the applicable Joinder Agreement; provided that, any such amounts waived or not used to prepay New Term Loans shall be used to further prepay, on a pro rata basis, Revolving Loans and Delayed Draw Term Loans. (3) Application of Prepayments of Loans to Base Rate Loans and Eurodollar Rate Loans. Considering each Class of Loans being prepaid separately, any prepayment thereof shall be applied first to Base Rate Loans to the full extent thereof before application to Eurodollar Rate Loans, in each case in a manner which minimizes the amount of any payments required to be made by Borrower pursuant to Section 2.16(c). 2.13. Allocation of Certain Payments and Proceeds. If an Event of Default shall have occurred and not otherwise be waived, and the maturity of the Obligations shall have been accelerated pursuant to Section 8.1, all payments or proceeds received by Agents hereunder in respect of any of the Obligations, shall be applied by Agents in the following order: first, amounts due to the Agents pursuant to Section 10.2; second, amounts due to Lenders, if any, pursuant to Sections 2.16, 2.17 or 2.18, to be applied for the ratable benefit of Lenders without distinction or preference as among them; third, amounts due to Lenders pursuant to Sections 2.8 and 10.2, to be applied for the ratable benefit of Lenders without distinction or preference as among them; fourth, amounts due to Agents pursuant to Section 2.8, to be applied in accordance therewith; fifth, payments of interest on Loans, without distinction or preference as among them; sixth, payments of principal on Loans, and all Obligations then payable to any Lender Counterparty pursuant to a Hedge Agreement permitted hereby, to be applied for the ratable benefit of Lenders and such Lender Counterparties, without distinction or preference as among them; seventh, amounts due to Indemnitees pursuant to Section 10.3, to be applied for the ratable benefit thereof; eighth, payments of all other Obligations due under any of the Credit Documents, if any, to be applied for the ratable benefit of Lenders and Agents; and ninth, any surplus remaining after application as provided for herein, to Borrower or as otherwise may be required by applicable law. 46 EXECUTION 53 2.14. General Provisions Regarding Payments. (a) All payments by Borrower of principal, interest, fees and other Obligations shall be made in Dollars in same day funds, without defense, setoff or counterclaim, free of any restriction or condition, and delivered to Administrative Agent not later than 12:00 Noon (New York City time) on the date due at the Administrative Agent's Principal Office for the account of Lenders; funds received by Administrative Agent after that time on such due date shall be deemed to have been paid by Borrower on the next succeeding Business Day. (1) All payments in respect of the principal amount of any Loan shall include payment of accrued interest on the principal amount being repaid or prepaid, and all such payments (and, in any event, any payments in respect of any Loan on a date when interest is due and payable with respect to such Loan) shall be applied to the payment of interest before application to principal. (2) Administrative Agent shall promptly distribute to each Lender at such address as such Lender shall indicate in writing, such Lender's applicable Pro Rata Share, giving effect to any adjustments in Pro Rata Shares on and after the Closing Date, of all payments and prepayments of principal and interest due hereunder, together with all other amounts due thereto, including, without limitation, all fees payable with respect thereto, to the extent received by Administrative Agent. (3) Notwithstanding the foregoing provisions hereof, if any Conversion/Continuation Notice is withdrawn as to any Affected Lender or if any Affected Lender makes Base Rate Loans in lieu of its Pro Rata Share of any Eurodollar Rate Loans, Administrative Agent shall give effect thereto in apportioning payments received thereafter. (4) Subject to the provisos set forth in the definition of "INTEREST PERIOD", whenever any payment to be made hereunder shall be stated to be due on a day that is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in the computation of the payment of interest hereunder or of the Commitment fees hereunder, as the case may be. (5) Borrower hereby authorizes Administrative Agent to charge Borrower's or Company's accounts with Administrative Agent in order to cause timely payment to be made to Administrative Agent of all principal, interest, fees and expenses due hereunder (subject to sufficient funds being available in its accounts for that purpose). (6) Administrative Agent shall deem any payment by or on behalf of Borrower hereunder that is not made in same day funds prior to 12:00 noon (New York City time) on or before the due date to be a non-conforming payment. Any such payment shall not be deemed to have been received by Administrative Agent until the later of (i) the time such funds become available funds, and (ii) the applicable next Business Day. Administrative Agent shall give prompt telephonic notice to Borrower and each applicable Lender (confirmed in writing) if any payment is non-conforming. Any non-conforming payment may constitute or become a Default or Event of Default in accordance with 47 EXECUTION 54 the terms of Section 8.1(a). Interest shall continue to accrue on any principal as to which a non-conforming payment is made until such funds become available funds (but in no event less than the period from the date of such payment to the next succeeding applicable Business Day) at the rate determined pursuant to Section 2.7 from the date such amount was due and payable until the date such amount is paid in full. 2.15. Ratable Sharing. Lenders hereby agree among themselves that if any of them shall, whether by voluntary payment (other than a voluntary prepayment of Loans made and applied in accordance with the terms hereof), by realization upon security, through the exercise of any right of set-off or banker's lien, by counterclaim or cross action or by the enforcement of any right under the Credit Documents or otherwise, or as adequate protection of a deposit treated as cash collateral under the Bankruptcy Code, receive payment or reduction of a proportion of the aggregate amount of principal, interest, fees and other amounts then due and owing to such Lender hereunder or under the other Credit Documents (collectively, the "AGGREGATE AMOUNTS DUE" to such Lender) which is greater than the proportion received by any other Lender in respect of the Aggregate Amounts Due to such other Lender, then the Lender receiving such proportionately greater payment shall (a) notify Administrative Agent and each other Lender of the receipt of such payment and (b) apply a portion of such payment to purchase participations (which it shall be deemed to have purchased from each seller of a participation simultaneously upon the receipt by such seller of its portion of such payment) in the Aggregate Amounts Due to the other Lenders so that all such recoveries of Aggregate Amounts Due shall be shared by all Lenders in proportion to the Aggregate Amounts Due to them; provided that, if all or part of such proportionately greater payment received by such purchasing Lender is thereafter recovered from such Lender upon the bankruptcy or reorganization of Borrower or otherwise, those purchases shall be rescinded and the purchase prices paid for such participations shall be returned to such purchasing Lender ratably to the extent of such recovery, but without interest. Borrower expressly consents to the foregoing arrangement and agrees that any holder of a participation so purchased may exercise any and all rights of banker's lien, set-off or counterclaim with respect to any and all monies owing by Borrower to that holder with respect thereto as fully as if that holder were owed the amount of the participation held by that holder. 2.16. Making or Maintaining Eurodollar Rate Loans. (a) In the event that Administrative Agent shall have determined (which determination shall be final and conclusive and binding upon all parties hereto), on any Interest Rate Determination Date with respect to any Eurodollar Rate Loans, that by reason of circumstances affecting the London interbank market adequate and fair means do not exist for ascertaining the interest rate applicable to such Loans on the basis provided for in the definition of Adjusted Eurodollar Rate, Administrative Agent shall on such date give notice (by telefacsimile or by telephone confirmed in writing) to Borrower and each Lender of such determination, whereupon (i) no Loans may be made as, or converted to, Eurodollar Rate Loans until such time as Administrative Agent notifies Borrower and Lenders that the circumstances giving rise to such notice no longer exist, and (ii) any Funding Notice or Conversion/Continuation Notice given by Borrower with respect to the Loans in respect of which such determination was made shall be deemed to be rescinded by Borrower. 48 EXECUTION 55 (1) In the event that on any date any Lender shall have determined (which determination shall be final and conclusive and binding upon all parties hereto but shall be made only after consultation with Borrower and Administrative Agent) that the making, maintaining or continuation of its Eurodollar Rate Loans (i) has become unlawful as a result of compliance by such Lender in good faith with any law, treaty, governmental rule, regulation, guideline or order (or would conflict with any such treaty, governmental rule, regulation, guideline or order not having the force of law even though the failure to comply therewith would not be unlawful), or (ii) has become impracticable, as a result of contingencies occurring after the date hereof which materially and adversely affect the London interbank market or the position of such Lender in that market, then, and in any such event, such Lender shall be an "AFFECTED LENDER" and it shall on that day give notice (by telefacsimile or by telephone confirmed in writing) to Borrower and Administrative Agent of such determination (which notice Administrative Agent shall promptly transmit to each other Lender). Thereafter (1) the obligation of the Affected Lender to make or to continue Loans as, or to convert Loans to, Eurodollar Rate Loans shall be suspended until such notice shall be withdrawn by the Affected Lender, (2) to the extent such determination by the Affected Lender relates to a Eurodollar Rate Loan then being requested by Borrower pursuant to a Funding Notice or a Conversion/Continuation Notice, the Affected Lender shall make such Loan as (or convert such Loan to, as the case may be) a Base Rate Loan, (3) the Affected Lender's obligation to maintain its outstanding Eurodollar Rate Loans (the "AFFECTED LOANS") shall be terminated at the earlier to occur of the expiration of the Interest Period then in effect with respect to the Affected Loans or when required by law, and the Affected Loans shall automatically convert into Base Rate Loans on the date of such termination. Notwithstanding the foregoing, to the extent a determination by an Affected Lender as described above relates to a Eurodollar Rate Loan then being requested by Borrower pursuant to a Funding Notice or a Conversion/Continuation Notice, Borrower shall have the option, subject to the provisions of Section 2.17(c), to rescind such Funding Notice or Conversion/Continuation Notice as to all Lenders by giving notice (by telefacsimile or by telephone confirmed in writing) to Administrative Agent of such rescission on the date on which the Affected Lender gives notice of its determination as described above (which notice of rescission Administrative Agent shall promptly transmit to each other Lender). Except as provided in the immediately preceding sentence, nothing in this Section 2.16(b) shall affect the obligation of any Lender other than an Affected Lender to make or maintain Loans as, or to convert Loans to, Eurodollar Rate Loans in accordance with the terms hereof. (2) Borrower shall compensate each Lender, upon written request by such Lender (which request shall set forth the basis for requesting such amounts), for all reasonable losses, expenses and liabilities (including any interest paid by such Lender to lenders of funds borrowed by it to make or carry its Eurodollar Rate Loans and any loss, expense or liability sustained by such Lender in connection with the liquidation or re-employment of such funds but excluding loss of anticipated profits) which such Lender may sustain: (i) if for any reason (other than a default by such Lender) a borrowing of any Eurodollar Rate Loan does not occur on a date specified therefor in a Funding Notice or a telephonic request for borrowing, or a conversion to or continuation of any Eurodollar Rate Loan does not occur on a date specified therefor in a Conversion/Continuation Notice or a telephonic request for conversion or continuation; (ii) if any prepayment or other principal payment 49 EXECUTION 56 or any conversion of any of its Eurodollar Rate Loans occurs on a date prior to the last day of an Interest Period applicable to that Loan; (iii) if any prepayment of any of its Eurodollar Rate Loans is not made on any date specified in a notice of prepayment given by Borrower; or as a consequence of any other default by Borrower in the repayment of its Eurodollar Rate Loans when required by the terms hereof. (3) Any Lender may make, carry or transfer Eurodollar Rate Loans at, to, or for the account of any of its branch offices or the office of an Affiliate of such Lender. (4) Calculation of all amounts payable to a Lender under this Section 2.16 and under Section 2.17 shall be made as though such Lender had actually funded each of its relevant Eurodollar Rate Loans through the purchase of a Eurodollar deposit bearing interest at the rate obtained pursuant to clause (i) of the definition of Adjusted Eurodollar Rate in an amount equal to the amount of such Eurodollar Rate Loan and having a maturity comparable to the relevant Interest Period and through the transfer of such Eurodollar deposit from an offshore office of such Lender to a domestic office of such Lender in the United States; provided that each Lender may fund each of its Eurodollar Rate Loans in any manner it sees fit and the foregoing assumptions shall be utilized only for the purposes of calculating amounts payable under this Section 2.16 and under Section 2.17. 2.17. Increased Costs; Capital Adequacy. (1) Subject to the provisions of Section 2.18 (which shall be controlling with respect to the matters covered thereby), in the event that any Lender shall determine (which determination shall, absent manifest error, be final and conclusive and binding upon all parties hereto) that any law, treaty or governmental rule, regulation or order, or any change therein or in the interpretation, administration or application thereof (including the introduction of any new law, treaty or governmental rule, regulation or order), or any determination of a court or Governmental Authority, in each case that becomes effective after the date hereof, or compliance by such Lender with any guideline, request or directive issued or made after the date hereof by any central bank or other governmental or quasi-governmental authority (whether or not having the force of law): (i) subjects such Lender (or its applicable lending office) to any additional Tax (other than any Tax on the overall net income of such Lender) with respect to this Agreement or any of its obligations hereunder or any payments to such Lender (or its applicable lending office) of principal, interest, fees or any other amount payable hereunder; (ii) imposes, modifies or holds applicable any reserve (including any marginal, emergency, supplemental, special or other reserve), special deposit, compulsory loan, FDIC insurance or similar requirement against assets held by, or deposits or other liabilities in or for the account of, or advances or loans by, or other credit extended by, or any other acquisition of funds by, any office of such Lender (other than any such reserve or other requirements with respect to Eurodollar Rate Loans that are reflected in the definition of Adjusted Eurodollar Rate); or (iii) imposes any other condition (other than with respect to a Tax matter) on or affecting such Lender (or its applicable lending office) or its obligations hereunder or the London interbank market; and the result of any of the foregoing is to increase the cost to such Lender of agreeing to make, making or maintaining Loans hereunder or to reduce any amount received or receivable by such Lender (or 50 EXECUTION 57 its applicable lending office) with respect thereto; then, in any such case, Borrower shall pay to such Lender within 10 days upon receipt of the statement referred to in the next sentence, such additional amount or amounts (in the form of an increased rate of, or a different method of calculating, interest or otherwise as such Lender in its sole discretion shall determine) as may be necessary to compensate such Lender for any such increased cost or reduction in amounts received or receivable hereunder; provided that Borrower shall not be obligated to reimburse any Lender for such increase or reduction for any period 180 days prior to such Lender providing notice if such Lender was aware of the circumstances that existed which would cause such increase or reduction during such 180 day period. Such Lender shall deliver to Borrower (with a copy to Administrative Agent) a written statement, setting forth in reasonable detail the basis for calculating the additional amounts owed to such Lender under this Section 2.17(a), which statement shall be conclusive and binding upon all parties hereto absent manifest error. (2) In the event that any Lender shall have determined that the adoption, effectiveness, phase-in or applicability after the date hereof of any law, rule or regulation (or any provision thereof) regarding capital adequacy, or any change therein or in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or its applicable lending office) with any guideline, request or directive regarding capital adequacy (whether or not having the force of law) of any such Governmental Authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the capital of such Lender or any corporation controlling such Lender as a consequence of, or with reference to, such Lender's Loans or Commitments or other obligations hereunder with respect to the Loans to a level below that which such Lender or such controlling corporation could have achieved but for such adoption, effectiveness, phase-in, applicability, change or compliance (taking into consideration the policies of such Lender or such controlling corporation with regard to capital adequacy), then from time to time, within 10 days after receipt by Borrower from such Lender of the statement referred to in the next sentence, Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender or such controlling corporation on an after-tax basis for such reduction; provided that Borrower shall not be obligated to reimburse any Lender for such increase or reduction for any period 180 days prior to such Lender providing notice if such Lender was aware of the circumstances that existed which would cause such increase or reduction during such 180 day period. Such Lender shall deliver to Borrower (with a copy to Administrative Agent) a written statement, setting forth in reasonable detail the basis of the calculation of such additional amounts, which statement shall be conclusive and binding upon all parties hereto absent manifest error. 2.18. Taxes; Withholding, Etc. (a) All sums payable by any Credit Party hereunder and the other Credit Documents shall (except to the extent required by law) be paid free and clear of, and without any deduction or withholding on account of, any Tax (other than a Tax on the overall net income of any Lender) imposed, levied, collected, withheld or assessed by or within the United States or any political subdivision in or of the United States or any other jurisdiction from or to which a payment is made by or on behalf of any Credit Party or by any federation or organization of which the United States or any such jurisdiction is a member at the time of payment. 51 EXECUTION 58 (1) If any Credit Party or any other Person is required by law to make any deduction or withholding on account of any such Tax from any sum paid or payable by any Credit Party to Administrative Agent or any Lender under any of the Credit Documents: (i) Borrower shall notify Administrative Agent of any such requirement or any change in any such requirement as soon as Borrower becomes aware of it; (ii) Borrower shall pay any such Tax before the date on which penalties attach thereto, such payment to be made (if the liability to pay is imposed on any Credit Party) for its own account or (if that liability is imposed on Administrative Agent or such Lender, as the case may be) on behalf of and in the name of Administrative Agent or such Lender; (iii) the sum payable by such Credit Party in respect of which the relevant deduction, withholding or payment is required shall be increased to the extent necessary to ensure that, after the making of that deduction, withholding or payment, Administrative Agent or such Lender, as the case may be, receives on the due date a net sum equal to what it would have received had no such deduction, withholding or payment been required or made; and (iv) within thirty (30) days after paying any sum from which it is required by law to make any deduction or withholding, and within thirty (30) days after the due date of payment of any Tax which it is required by clause (ii) above to pay, Borrower shall deliver to Administrative Agent evidence satisfactory to the other affected parties of such deduction, withholding or payment and of the remittance thereof to the relevant taxing or other authority; provided that no such additional amount shall be required to be paid to any Lender under clause (iii) above except to the extent that any change after the date hereof (in the case of each Lender listed on the signature pages hereof on the Closing Date) or after the effective date of the Assignment Agreement or Joinder Agreement pursuant to which such Lender became a Lender (in the case of each other Lender) in any such requirement for a deduction, withholding or payment as is mentioned therein shall result in an increase in the rate of such deduction, withholding or payment from that in effect at the date hereof or at the date of such Assignment Agreement, as the case may be, in respect of payments to such Lender. (2) Each Lender that is organized under the laws of any jurisdiction other than the United States or any state or other political subdivision thereof (a "NON-US LENDER") shall deliver to Administrative Agent for transmission to Borrower, on or prior to the Closing Date (in the case of each Lender listed on the signature pages hereof on the Closing Date) or on or prior to the date of the Assignment Agreement or Joinder Agreement pursuant to which it becomes a Lender (in the case of each other Lender), and at such other times as may be necessary in the determination of Borrower or Administrative Agent (each in the reasonable exercise of its discretion), (i) two original copies of Internal Revenue Service Form 1001 or 4224 (or any successor forms, including Form W-8BEN or W-8ECI), properly completed and duly executed by such Lender, together with any other certificate or statement of exemption required under the Internal Revenue Code or the regulations issued thereunder to establish that such Lender is not subject to deduction or withholding of United States federal income tax with respect to any payments to such Lender of principal, interest, fees or other amounts payable under any of the Credit Documents, or (ii) if such Lender is not a "bank" or other Person described in Section 881(c)(3) of the Internal Revenue Code and cannot deliver either Internal Revenue Service Form 1001 or 4224 pursuant to clause (i) above, a Certificate re Non-Bank Status together with two original copies of Internal Revenue Service Form W-8 (or any successor form), properly completed and duly executed by such Lender, together with any other certificate or 52 EXECUTION 59 statement of exemption required under the Internal Revenue Code or the regulations issued thereunder to establish that such Lender is not subject to deduction or withholding of United States federal income tax with respect to any payments to such Lender of interest payable under any of the Credit Documents. Each Lender required to deliver any forms, certificates or other evidence with respect to United States federal income tax withholding matters pursuant to this Section 2.18(c) hereby agrees, from time to time after the initial delivery by such Lender of such forms, certificates or other evidence, whenever a lapse in time or change in circumstances renders such forms, certificates or other evidence obsolete or inaccurate in any material respect, that such Lender shall promptly deliver to Administrative Agent for transmission to Borrower two new original copies of Internal Revenue Service Form 1001 or 4224, or a Certificate re Non-Bank Status and two original copies of Internal Revenue Service Form W-8, as the case may be, properly completed and duly executed by such Lender, together with any other certificate or statement of exemption required in order to confirm or establish that such Lender is not subject to deduction or withholding of United States federal income tax with respect to payments to such Lender under the Credit Documents, or notify Administrative Agent and Borrower of its inability to deliver any such forms, certificates or other evidence. Borrower shall not be required to pay any additional amount under Section 2.18(b)(iii) if such Lender shall have failed to deliver the forms, certificates or other evidence referred to in the second sentence of this Section 2.18(c), or to notify Administrative Agent and Borrower of its inability to deliver any such forms, certificates or other evidence, as the case may be; provided that if such Lender shall have satisfied the requirements of the first sentence of this Section 2.18(c) on the Closing Date or on the date of the Assignment Agreement or Joinder Agreement pursuant to which it became a Lender, as applicable, nothing in this last sentence of Section 2.18(c) shall relieve Borrower of its obligation to pay any additional amounts pursuant to Section 2.18(a) in the event that, as a result of any change in any applicable law, treaty or governmental rule, regulation or order, or any change in the interpretation, administration or application thereof, such Lender is no longer properly entitled to deliver forms, certificates or other evidence at a subsequent date establishing the fact that such Lender is not subject to withholding as described herein. (3) If any Tax is refunded to Administrative Agent, it will pay such refund to Borrower to the extent Administrative Agent determines in its sole discretion that such refund is attributable to any Tax paid by Borrower and to the extent Borrower has previously indemnified the Administrative Agent therefor pursuant to this Section 2.18, net of expenses and without interest except any interest (net of taxes) included in such refund. Borrower shall return such refund (together with any taxes, penalties or other charges) in the event any Agent or any Lender is required to repay such refund. Notwithstanding the foregoing, nothing in this Section 2.18 shall be construed to (i) entitle Borrower or any other Persons to (A) any information determined by any Agent or Lender, in each case, in its sole discretion, to be confidential or proprietary information of such Agent or Lender, (B) any tax or financial information of such Agent or Lender, or (C) inspect or review any books and records of any Agent or Lender, or (ii) interfere with the rights of any Agent or Lender to conduct its fiscal or tax affairs in such matter as it deems fit. A certificate as to the amount of such payment or liability delivered to Borrower by Administrative Agent on its own behalf or on behalf of any Lender or Agent shall be conclusive absent manifest error. 53 EXECUTION 60 2.19. Obligation to Mitigate. Each Lender agrees that, as promptly as practicable after the officer of such Lender responsible for administering its Loans becomes aware of the occurrence of an event or the existence of a condition that would cause such Lender to become an Affected Lender or that would entitle such Lender to receive payments under Sections 2.16, 2.17 or 2.18, it will, to the extent not inconsistent with the internal policies of such Lender and any applicable legal or regulatory restrictions, (i) use reasonable efforts to make, issue, fund or maintain its applicable Commitment or Loans, including any Affected Loans, through another office of such Lender, or (ii) take such other measures as such Lender may deem reasonable, if as a result thereof the circumstances which would cause such Lender to be an Affected Lender would cease to exist or the additional amounts which would otherwise be required to be paid to such Lender pursuant to Sections 2.16, 2.17 or 2.18 would be materially reduced and if, as determined by such Lender in its sole discretion, the making, issuing, funding or maintaining of such Commitments or Loans through such other office or in accordance with such other measures, as the case may be, would not otherwise adversely affect such Commitments or Loans or the interests of such Lender; provided that such Lender will not be obligated to utilize such other office pursuant to this Section 2.19 unless Borrower agrees to pay all incremental expenses incurred by such Lender as a result of utilizing such other office as described in clause (i) above. A certificate as to the amount of any such expenses payable by Borrower pursuant to this Section 2.19 (setting forth in reasonable detail the basis for requesting such amount) submitted by such Lender to Borrower (with a copy to Administrative Agent) shall be conclusive absent manifest error. 2.20. Defaulting Lenders. Anything contained herein to the contrary notwithstanding, in the event that any Lender defaults (a "DEFAULTING LENDER") in its obligation to fund (a "FUNDING DEFAULT") any Loan (a "DEFAULTED LOAN"), then (a) during such period when such default is continuing with respect to such Defaulting Lender (the "DEFAULT PERIOD"), such Defaulting Lender shall be deemed not to be a "Lender" for purposes of voting on any matters (including the granting of any consents or waivers) with respect to any of the Credit Documents; (b) to the extent permitted by applicable law, until such time as such unfunded amount with respect to such Defaulting Lender shall have been reduced to zero, (i) any voluntary prepayment of the Loans shall, if Borrower so directs at the time of making such voluntary prepayment, be applied to the Loans of other Lenders as if such Defaulting Lender had no Loans outstanding and the Revolving Loan Exposure and Delayed Draw Term Loan Exposure of such Defaulting Lender were zero, and (ii) any mandatory prepayment of the Loans shall, if Borrower so directs at the time of making such mandatory prepayment, be applied to the Loans of other Lenders (but not to the Revolving Loans of such Defaulting Lender) as if such Defaulting Lender had funded all Defaulted Loans of such Defaulting Lender, it being understood and agreed that Borrower shall be entitled to retain any portion of any mandatory prepayment of the Loans that is not paid to such Defaulting Lender solely as a result of the operation of the provisions of this clause (b); (c) such Defaulting Lender's Revolving Loan Commitment and Delayed Draw Term Loan Commitment shall be excluded for purposes of calculating the commitment fee payable to Lenders in respect of any day during any Default Period with respect to such Defaulting Lender, and such Defaulting Lender shall not be entitled to receive any commitment fee pursuant to Section 2.8 with respect to such Defaulting Lender's Revolving 54 EXECUTION 61 Commitment and Delayed Draw Term Loan Commitment in respect of any Default Period with respect to such Defaulting Lender; and (d) the Total Utilization of Commitments as at any date of determination shall be calculated as if such Defaulting Lender had funded all Defaulted Loans of such Defaulting Lender. No Commitment of any Lender shall be increased or otherwise affected, and, except as otherwise expressly provided in this Section 2.20, performance by Borrower of its obligations hereunder and the other Credit Documents shall not be excused or otherwise modified as a result of any Funding Default or the operation of this Section 2.20. The rights and remedies against a Defaulting Lender under this Section 2.20 are in addition to other rights and remedies which Borrower may have against such Defaulting Lender with respect to any Funding Default and which Administrative Agent or any Lender may have against such Defaulting Lender with respect to any Funding Default. 2.21. Removal or Replacement of a Lender. Anything contained herein to the contrary notwithstanding, in the event that: (a) any Lender (an "INCREASED-COST LENDER") shall give notice to Borrower that such Lender is an Affected Lender or that such Lender is entitled to receive payments under Sections 2.16, 2.17 or 2.18, the circumstances which have caused such Lender to be an Affected Lender or which entitle such Lender to receive such payments shall remain in effect, and such Lender shall fail to withdraw such notice within five Business Days after Borrower's request for such withdrawal; or (b) any Lender shall become a Defaulting Lender, the Default Period for such Defaulting Lender shall remain in effect, and such Defaulting Lender shall fail to cure the default as a result of which it has become a Defaulting Lender within five Business Days after Borrower's request that it cure such default; or (c) in connection with any proposed amendment, modification, termination, waiver or consent with respect to any of the provisions hereof as contemplated by Section 10.5(b), the consent of Requisite Lenders shall have been obtained but the consent of one or more of such other Lenders (each a "NON-CONSENTING LENDER") whose consent is required shall not have been obtained, and the failure to obtain Non-Consenting Lenders' consents does not result solely from the exercise of Non-Consenting Lenders' rights (and the withholding of any required consents by Non-Consenting Lenders) pursuant to the proviso to Section 10.5(c)(i); then, with respect to each such Increased-Cost Lender, Defaulting Lender or Non-Consenting Lender (the "TERMINATED LENDER"), Borrower may, by giving written notice to Administrative Agent and any Terminated Lender of its election to do so, elect to: (A) cause such Terminated Lender (and such Terminated Lender hereby irrevocably agrees) to assign its outstanding Loans and its Commitments, if any, in full to one or more Eligible Assignees (each a "REPLACEMENT LENDER") in accordance with the provisions of Section 10.6 and Terminated Lender shall pay any fees payable thereunder in connection with such assignment; provided that (1) on the date of such assignment, Borrower shall pay any amounts payable to such Terminated Lender pursuant to Sections 2.16(c), 2.17 or 2.18 or otherwise as if it were a prepayment, and shall pay the assignment fee specified in Section 10.6(d) and (2) in the event such Terminated Lender is a Non-Consenting Lender, each Replacement Lender shall consent, at the time of such assignment, to each matter in respect of which such Terminated Lender was a Non-Consenting Lender; provided that Borrower may not make such election with respect to any Non-Consenting Lender unless EXECUTION 55 62 Borrower also makes such election with respect to each other Terminated Lender which is a Non-Consenting Lender; and upon the prepayment of all amounts due and owing to any Terminated Lender pursuant to Sections 2.16(c), 2.17 and 2.18 and the assignment of such Terminated Lender's Commitments, if any, and such Terminated Lender shall no longer constitute a "Lender" for purposes hereof; provided that any rights of such Terminated Lender to indemnification hereunder shall survive as to such Terminated Lender; or (B)(1) terminate the Commitment of such Terminated Lender upon receipt by such Terminated Lender of such notice and (2) prepay on the date of such termination any outstanding Loans, if any, made by such Terminated Lender, together with accrued and unpaid interest thereon and any other amounts payable to such Terminated Lender hereunder pursuant to Sections 2.16(c), 2.17 and 2.18 or otherwise; provided that, in the event such Terminated Lender has any Loans outstanding at the time of such termination, the written consent of Administrative Agent and all Lenders (which consent shall not be unreasonably withheld or delayed) shall be required in order for Borrower to make such election; and provided further that Borrower may not make such election with respect to any Non-Consenting Lender unless Borrower also makes such election with respect to each other Terminated Lender which is a Non-Consenting Lender. SECTION 3. CONDITIONS PRECEDENT The obligation of Lenders to make Loans hereunder is subject to the satisfaction of the following conditions: 3.1. Conditions to Effectiveness of the Agreement. Each of the following conditions must be satisfied or waived in accordance with Section 10.5 on or before the Closing Date: (1) CREDIT DOCUMENTS. Administrative Agent shall have received sufficient copies of each Credit Document originally executed and delivered by each applicable Credit Party for each Lender. (2) ORGANIZATIONAL DOCUMENTS; INCUMBENCY. Administrative Agent shall have received sufficient copies of each Organizational Document originally executed and delivered by each Credit Party, as applicable, and, to the extent applicable, certified as of a recent date by the appropriate governmental official, for each Lender and its counsel, each dated the Closing Date or a recent date prior thereto, together (i) with signature and incumbency certificates of the officers of such Person executing the Credit Documents to which it is a party (ii) resolutions of the Board of Directors or similar governing body of each Credit Party approving and authorizing the execution, delivery and performance of this Agreement and the other Credit Documents to which it is a party or by which it or its assets may be bound as of the Closing Date, certified as of the Closing Date by its secretary or an assistant secretary as being in full force and effect without modification or amendment; (iii) a good standing certificate from the applicable Governmental Authority of each Credit Party's jurisdiction of incorporation, organization or formation and in each jurisdiction in 56 EXECUTION 63 which it is qualified as a foreign corporation or other entity to do business, each dated a recent date prior to the Effective Date; and (iv) such other documents as Administrative Agent may reasonably request. (3) ORGANIZATIONAL AND CAPITAL STRUCTURE. The organizational structure and the capital structure of Company and its Subsidiaries shall be as set forth on Schedule 4.1. (4) GOVERNMENTAL AUTHORIZATIONS AND CONSENTS. Except as set forth on Schedules 4.2 and 4.10(b), each Credit Party shall have obtained all Governmental Authorizations and all consents of other Persons, in each case that are necessary or advisable in connection with the transactions contemplated by the Credit Documents and each of the foregoing shall be in full force and effect. No action, request for stay, petition for review or rehearing, reconsideration, or appeal with respect to any of the foregoing shall be pending, and the time for any applicable agency to take action to set aside its consent on its own motion shall have expired. (5) PERSONAL AND MIXED PROPERTY COLLATERAL. In order to create in favor of Administrative Agent, for the benefit of Lenders, a valid and, subject to any filing and/or recording referred to herein, perfected First Priority security interest in the Collateral, Administrative Agent shall have received: (1) certificates (which certificates shall be accompanied by irrevocable undated stock powers, duly endorsed in blank and otherwise satisfactory in form and substance to Administrative Agent) representing all capital stock pledged pursuant to the Pledge and Security Agreement; (2) (1) the results of a recent search, by a Person satisfactory to Syndication Agent and Administrative Agent, of UCC financing statements in all jurisdictions where each Credit Party is located, together with copies of all such filings disclosed by such search, and (2) UCC termination statements duly executed by all applicable Persons for filing in all applicable jurisdictions as may be necessary to terminate any effective UCC financing statements or fixture filings disclosed in such search (other than any such financing statements or fixture filings in respect of Permitted Liens); (3) UCC financing statements, duly executed by each applicable Credit Party with respect to all personal and mixed property Collateral of such Credit Party, for filing in all jurisdictions as may be necessary or, in the opinion of Syndication Agent and Administrative Agent, desirable to perfect the security interests created in such Collateral pursuant to the Collateral Documents under the UCC; (4) an opinion of counsel (which counsel shall be reasonably satisfactory to Syndication Agent and Administrative Agent) with respect to the creation and perfection of the security interests in favor of Administrative Agent in such Collateral and such other matters governed by the laws of each jurisdiction in which any Credit Party or any personal 57 EXECUTION 64 or mixed property Collateral is located as Syndication Agent and Administrative Agent may reasonably request, in each case in form and substance reasonably satisfactory to Syndication Agent and Administrative Agent; and (5) evidence that each Credit Party shall have taken or caused to be taken any other action, executed and delivered or caused to be executed and delivered any other agreement, document and instrument, and made or caused to be made any other filing and recording (other than as set forth herein) reasonably required by Syndication Agent and Administrative Agent. (6) FINANCIAL STATEMENTS; PROJECTIONS. Lenders shall have received from Company (i) the Historical Financial Statements, (ii) copies of all management reports and management letters prepared for Company and its Subsidiaries by Arthur Andersen LLP or other independent certified public accountants of recognized national standing, (iii) a pro forma balance sheet as at December 31, 1999 and an income and cash flow statement for the twelve-month period ending December 31, 1999, in each case for Company and its Subsidiaries, prepared in accordance with GAAP on a consolidated basis and reflecting the transactions contemplated hereby, and (iv) a financial forecast dated January 2000 for Company and its Subsidiaries for the period from Fiscal Year 2000 through and including Fiscal Year 2007 (with Fiscal Years 2000, 2001 and 2002 detailed by Fiscal Quarter together with (x) with respect to the Fiscal Year 2000, a quarterly Annualized Adjusted EBITDA analysis and (y) with respect to the Fiscal Years 2001 and 2002, an Annualized Adjusted EBITDA analysis, in each case with respect to each of Company's and its subsidiaries principal markets, on a Geographic Market-by-Geographic Market basis); and all of the foregoing financial statements and other information will not be inconsistent, in any material respect, with any information previously provided to Lenders. (7) EVIDENCE OF INSURANCE. Syndication Agent and Administrative Agent shall have received a certificate from Company's insurance broker or other evidence satisfactory to it that all insurance required to be maintained pursuant to Section 5.6 is in full force and effect and that Administrative Agent on behalf of Lenders has been named as additional insured and/or loss payee thereunder to the extent required under Section 5.6. (8) OPINIONS OF COUNSEL TO CREDIT PARTIES. Lenders and their respective counsel shall have received originally executed copies of the favorable written opinions of (i) Kirkland & Ellis and the General Counsel of Company, counsel for Credit Parties, (ii) Winstead Sechrest & Minnick, Texas local counsel to Company and (iii) Swidler, Berlin Shereff Friedman, LLP special regulatory counsel to the Company, in the forms of Exhibits D-1, D-2, D-3 and D-4, respectively, and as to such other matters as Administrative Agent or Syndication Agent may reasonably request, and otherwise in forms and substance reasonably satisfactory to Administrative Agent and Syndication Agent and its counsel, dated the Closing Date. (9) OPINIONS OF COUNSEL TO SYNDICATION AGENT AND ADMINISTRATIVE AGENT. Lenders shall have received originally executed copies of one or more favorable written opinions of Skadden, 58 EXECUTION 65 Arps, Slate, Meagher & Flom LLP, counsel to Syndication Agent and Administrative Agent, dated the Closing Date, in form and substance reasonably satisfactory to Syndication Agent and Administrative Agent. (10) FEES. Borrower shall have paid to Syndication Agent, Administrative Agent and Co-Documentation Agents, for distribution (as appropriate) to Syndication Agent, Administrative Agent, Co-Documentation Agents and Lenders, the fees payable on the Closing Date referred to in Section 2.8. (11) SOLVENCY CERTIFICATE. On the Closing Date, Syndication Agent, Administrative Agent and Lenders shall have received a solvency certificate from the chief financial officer of Company dated the Closing Date and addressed to Syndication Agent, Administrative Agent and Lenders, in form and substance satisfactory to Syndication Agent and Administrative Agent and with appropriate attachments. (12) COMPLETION OF PROCEEDINGS. All corporate and other proceedings taken or to be taken in connection with the transactions contemplated hereby and all documents incidental thereto not previously found acceptable by Administrative Agent, acting on behalf of Lenders, or Syndication Agent and its counsel shall be satisfactory in form and substance to Administrative Agent and Syndication Agent and such counsel, and Administrative Agent, Syndication Agent and such counsel shall have received all such counterpart originals or certified copies of such documents as Administrative Agent or Syndication Agent may reasonably request. (13) EXISTING CREDIT AGREEMENT. All Loans and Obligations under the Existing Credit Agreement shall have been repaid and the commitments thereunder shall have been permanently terminated. (14) LUCENT CONSENT. Company shall have used reasonable best efforts to obtain from Lucent Technologies, Inc. ("LUCENT") a consent to the collateral assignment to Administrative Agent and Lenders of rights existing under the General Agreement between Company and Lucent dated as of October 16, 1997, as amended, modified or otherwise supplemented from time to time, such consent in form and substance reasonably satisfactory to Administrative Agent. (15) CLOSING DATE CERTIFICATE. Borrower shall have delivered to Syndication Agent and Administrative Agent an originally executed Closing Date Certificate, together with all attachments thereto. Each Lender, by delivering its signature page to this Agreement on the Closing Date, shall be deemed to have acknowledged receipt of, and consented to and approved, each Credit Document and each other document required to be approved by any Agent, Requisite Lenders or Lenders, as applicable, on or prior to the Closing Date. 59 EXECUTION 66 3.2. Conditions to Each Loan. (a) The obligation of each Lender to make any Loan on any Credit Date, including the Initial Funding Date, is subject to the satisfaction, or waiver in accordance with Section 10.5, of the following conditions precedent: (1) Administrative Agent shall have received a fully executed and delivered Funding Notice; (2) after making any Revolving Loans requested on such Credit Date, the Total Utilization of Revolving Loan Commitments shall not exceed the Revolving Loan Commitments then in effect; (3) after making any Delayed Draw Term Loans requested on such Credit Date, the Total Utilization of Delayed Draw Term Loan Commitments shall not exceed the Delayed Draw Term Loan Commitments then in effect; (4) no injunction or other restraining order shall have been issued and no hearing to cause an injunction or other restraining order to be issued shall be pending or noticed with respect to any action, suit or proceeding seeking to enjoin or otherwise prevent the consummation of, or to recover any damages or obtain relief as a result of, the transactions contemplated hereby or the making of any Loan; (5) as of such Credit Date, the representations and warranties contained herein and in the other Credit Documents shall be true, correct and complete in all material respects on and as of that Credit Date to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case such representations and warranties shall have been true, correct and complete in all material respects on and as of such earlier date; (6) as of the first Credit Date, Lenders and their respective counsel shall have received originally executed copies of the favorable written opinion of Kirkland & Ellis, counsel for Credit Parties, in form and substance satisfactory to Administrative Agent and its counsel, to the effect that no Credit Party is required to be registered as an "investment company" within the meaning of the Investment Company Act; and (7) as of such Credit Date, no event shall have occurred and be continuing or would result from the consummation of the applicable Loan that would constitute an Event of Default or a Default (it being understood that, with respect to a breach of Section 5.13(b), 6.6 or 6.7 of this Agreement prior to the Initial Funding Date, such breach shall not prohibit the making of Loans on the Initial Funding Date so long as, as of the Initial Funding Date Credit Parties are in compliance with Section 5.13(b) and, as of the Fiscal Quarter most recently ended prior to the Initial Funding Date, Credit Parties were in compliance with the provisions of Section 6.6 or 6.7, as applicable). 60 EXECUTION 67 (2) Any Notice shall be executed by the chief executive officer, the chief financial officer or the treasurer of Borrower or by the executive officer thereof designated by the chief executive officer, the chief financial officer or the treasurer of Borrower in a writing delivered to Administrative Agent. In lieu of delivering a Notice, Borrower may give Administrative Agent telephonic notice by the required time of any proposed borrowing or conversion/continuation, as the case may be; provided that each such notice shall be promptly confirmed in writing by delivery of the applicable Notice to Administrative Agent on or before the applicable date of borrowing or, continuation/conversion. Neither Administrative Agent nor any Lender shall incur any liability to Borrower in acting upon any telephonic notice referred to above that Administrative Agent believes in good faith to have been given by a duly authorized officer or other person authorized on behalf of Borrower or for otherwise acting in good faith. SECTION 4. REPRESENTATIONS AND WARRANTIES In order to induce Lenders to enter into this Agreement and to make each Loan to be made thereby, each Credit Party represents and warrants to each Lender on the Closing Date and on each Credit Date, that the following statements are true, correct and complete: 4.1. Organization; Powers; Qualification. Each of Company and its Subsidiaries including, on the Closing Date, Unrestricted Subsidiaries, if any (a) is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization as identified in Schedule 4.1, (b) has all requisite power and authority to own and operate its properties, to carry on its business as now conducted and as proposed to be conducted, to enter into the Credit Documents to which it is a party and to carry out the transactions contemplated thereby, and (c) is qualified to do business and in good standing in every jurisdiction where its assets are located and wherever necessary to carry out its business and operations, except in jurisdictions where the failure to be so qualified or in good standing has not had, and could not be reasonably expected to have, a Material Adverse Effect. Schedule 4.1, as may be amended pursuant to Sections 5.1(b) or (c), correctly sets forth the ownership interest of Company and each of its Subsidiaries in their respective Subsidiaries. 4.2. Authorization of Credit Documents; No Conflict. The execution, delivery and performance of the Credit Documents have been duly authorized by all necessary action on the part of each Credit Party that is a party thereto. Except as set forth on Schedule 4.2, the execution, delivery and performance by Credit Parties of the Credit Documents to which they are parties and the consummation of the transactions contemplated by the Credit Documents do not and will not (a) violate any provision of any law or any governmental rule or regulation applicable to Company or any of its Subsidiaries, any of the Organizational Documents of Company or any of its Subsidiaries, or any order, judgment or decree of any court or other agency of government binding on Company or any of its Subsidiaries; (b) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any Contractual Obligation of Company or any of its Subsidiaries; (c) result in or require the creation or imposition of any Lien upon any of the properties or assets of Company or any of its Subsidiaries (other than any Liens created under any of the Credit Documents in favor of Administrative Agent on behalf of Lenders); or (d) require any 61 EXECUTION 68 approval of stockholders or any approval or consent of any Person under any Contractual Obligation of Company or any of its Subsidiaries. 4.3. Governmental Consents. The execution, delivery and performance by Credit Parties of the Credit Documents to which they are parties and the consummation of the transactions contemplated by the Credit Documents do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by, any Governmental Authority except as otherwise set forth on Schedule 4.3, and except for filings and recordings with respect to the Collateral to be made, or otherwise delivered to Administrative Agent, as of the Closing Date. 4.4. Binding Obligation. Each Credit Document has been duly executed and delivered by each Credit Party that is a party thereto and is the legally valid and binding obligation of such Credit Party, enforceable against such Credit Party in accordance with its respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability. 4.5. Historical Financial Statements; Projections. The Historical Financial Statements were prepared in conformity with GAAP and fairly present, in all material respects, the financial position, on a consolidated basis, of the Persons described in such financial statements as at the respective dates thereof and the results of operations and cash flows, on a consolidated basis, of the entities described therein for each of the periods then ended, subject, in the case of any such unaudited financial statements, to changes resulting from audit and normal year-end adjustments. On the Closing Date, neither Company nor any of its Subsidiaries has any contingent liability or liability for taxes, long-term lease or unusual forward or long-term commitment that is not reflected in the Historical Financial Statements or the notes thereto and which in accordance with GAAP would be required to be shown thereon and which in any such case is material in relation to the business, operations, properties, assets, condition (financial or otherwise) or prospects of Company and any of its Subsidiaries taken as a whole. On and as of the Closing Date, the financial forecast of Company and its Subsidiaries delivered pursuant to Section 3.1(f) (the "PROJECTIONS") are based on good faith estimates and assumptions made by the management of Company; provided that the Projections are not to be viewed as facts and that actual results during the period or periods covered by the Projections may differ from such Projections and that the differences may be material; provided further that as of the Closing Date, management of Company believed that the Projections were reasonable and attainable. 4.6. No Material Adverse Change; No Restricted Junior Payments. Since December 31, 1998, no event or change has occurred that has caused or evidences, either in any case or in the aggregate, a Material Adverse Effect, and since such date neither Company nor any of its Subsidiaries has directly or indirectly declared, ordered, paid or made, or set apart any sum or property for, any Restricted Junior Payment or agreed to do so except as permitted pursuant to Section 6.4. 62 EXECUTION 69 4.7. Adverse Proceedings, Etc. Except as set forth on Schedule 4.7, there are no Adverse Proceedings, individually or in the aggregate, that could reasonably be expected to have a Material Adverse Effect. Neither Company nor any of its Subsidiaries (a) is in violation of any applicable laws (including Environmental Laws) that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect, or (b) is subject to or in default with respect to any final judgments, writs, injunctions, decrees, rules or regulations of any court or any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. 4.8. Payment of Taxes. Except as otherwise permitted under Section 5.3, all tax returns and reports of Company and its Subsidiaries required to be filed by any of them have been timely filed, and all taxes shown on such tax returns to be due and payable and all assessments, fees and other governmental charges upon Company and its Subsidiaries and upon their respective properties, assets, income, businesses and franchises which are due and payable have been paid when due and payable, except where the failure to do so could not reasonably be expected to have a Material Adverse Effect. Company knows of no proposed tax assessment against Company or any of its Subsidiaries which is not being actively contested by Company or such Subsidiary in good faith and by appropriate proceedings; provided that such reserves or other appropriate provisions, if any, as shall be required in conformity with GAAP shall have been made or provided therefor. 4.9. Title to Properties. (a) Company and its Subsidiaries have (i) good, sufficient and legal title to (in the case of fee interests in real property), (ii) valid leasehold interests in (in the case of leasehold interests in real or personal property), or (iii) good title to (in the case of all other personal property), all of their respective properties and assets reflected in the Historical Financial Statements referred to in Section 4.5 and in the most recent financial statements delivered pursuant to Section 5.1, in each case except for (1) assets disposed of since the date of such financial statements in the ordinary course of business or as otherwise permitted under Section 6.8 and (2) minor defects in title that do not interfere with the ability of Company or any of its Subsidiaries to conduct their business as currently conducted or to utilize such properties for their intended purposes. Except as permitted by this Agreement, all such properties and assets are free and clear of Liens. (1) As of the Closing Date, Schedule 4.9(b) contains a true, accurate and complete list of (i) all Real Estate Assets, and (ii) all leases, subleases or assignments of leases (together with all amendments, modifications, supplements, renewals or extensions of any thereof) affecting each Real Estate Asset of any Credit Party, regardless of whether such Credit Party is the landlord or tenant (whether directly or as an assignee or successor in interest) under such lease, sublease or assignment. Except as specified in Schedule 4.9(b), each agreement listed in clause (ii) of the immediately preceding sentence is in full force and effect and Company does not have knowledge of any default that has occurred and is continuing thereunder, and each such agreement constitutes the legally valid and binding obligation of each applicable Credit Party, enforceable against such Credit Party in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, 63 EXECUTION 70 reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles. 4.10. Collateral. (a) The execution and delivery of the Collateral Documents by the Credit Parties, together with the actions taken on or prior to the date hereof pursuant to Section 3.1(e) hereof, are effective to create in favor of Administrative Agent for the benefit of Lenders, as security for their respective Obligations, a valid and perfected First Priority Lien on all of the Collateral, and all filings and other actions necessary or desirable to perfect and maintain the perfection and First Priority status of such Liens have been duly made or taken and remain in full force and effect, other than the filing of any UCC financing statements delivered to Administrative Agent for filing (but not yet filed) and the periodic filing of UCC continuation statements in respect of UCC financing statements filed by or on behalf of Administrative Agent. (1) Except as set forth on Schedule 4.10(b), no authorization, approval or other action by, and no notice to or filing with, any Governmental Authority or regulatory body is required for either (i) the pledge or grant by any Credit Party of the Liens purported to be created in favor of Administrative Agent pursuant to any of the Collateral Documents or (ii) the exercise by Administrative Agent of any rights or remedies in respect of any Collateral (whether specifically granted or created pursuant to any of the Collateral Documents or created or provided for by applicable law), except for filings or recordings contemplated by Section 3.1(e) and except as may be required, in connection with the disposition of any Investment Property, by laws generally affecting the offering and sale of securities. (2) Except with respect to any Permitted Lien and as may have been filed in favor of Administrative Agent as contemplated by Section 3.1(e), no effective UCC financing statement, fixture filing or other instrument similar in effect covering all or any part of the Collateral is on file in any filing or recording office. (3) All information supplied to Administrative Agent by or on behalf of any Credit Party with respect to any of the Collateral (in each case taken as a whole with respect to any particular Collateral) is accurate and complete in all material respects. 4.11. Environmental. No Credit Party nor any of its Subsidiaries nor any of their respective Facilities or operations are subject to any outstanding written order, consent decree or settlement agreement with any Person relating to any Environmental Law, any Environmental Claim, or any Hazardous Materials Activity that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. No Credit Party nor any of its Subsidiaries has received any letter or request for information under Section 104 of the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. ss. 9604) or any comparable state law. There are and, to each Credit Party's knowledge, have been no conditions, occurrences, or Hazardous Materials Activities which could reasonably be expected to form the basis of an Environmental Claim against Company or any of its Subsidiaries that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. Neither Company nor any of its Subsidiaries nor, to any 64 EXECUTION 71 Credit Party's knowledge, any predecessor of Company or any of its Subsidiaries has filed any notice under any Environmental Law indicating past or present treatment of Hazardous Materials at any Facility, and none of Company's or any of its Subsidiaries' operations involves the generation, transportation, treatment, storage or disposal of hazardous waste, as defined under 40 C.F.R. Parts 260-270 or any state equivalent. Compliance by Company and its Subsidiaries with all current or reasonably foreseeable future requirements pursuant to or under Environmental Laws could not be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect. No event or condition has occurred or is occurring with respect to Company or any of its Subsidiaries relating to any Environmental Law, any Release of Hazardous Materials, or any Hazardous Materials Activity which individually or in the aggregate has had, or could reasonably be expected to have, a Material Adverse Effect. 4.12. No Defaults; Material Contracts. No Credit Party is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any of its Contractual Obligations, and no condition exists that, with the giving of notice or the lapse of time or both, could constitute such a default, except where the consequences, direct or indirect, of such default or defaults, if any, could not reasonably be expected to have a Material Adverse Effect. Schedule 4.12 contains a true, correct and complete list of all the Material Contracts in effect on the Closing Date, and except as described thereon, all such Material Contracts are in full force and effect and no defaults currently exist thereunder by any Credit Party or, to the knowledge of any Credit Party, by any other Person. 4.13. Governmental Regulation. Neither Company nor any of its Subsidiaries is subject to regulation under the Investment Company Act, Public Utility Holding Company Act of 1935 or the Federal Power Act or under any other federal or state statute or regulation which may limit its ability to incur Indebtedness or which may otherwise render all or any portion of the Obligations unenforceable. 4.14. Margin Stock. Neither Company nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any Margin Stock. No part of the proceeds of the Loans made to such Credit Party will be used to purchase or carry any such margin stock or to extend credit to others for the purpose of purchasing or carrying any such margin stock or for any purpose that violates, or is inconsistent with, the provisions of Regulation T, U or X of the Board of Governors of the Federal Reserve System. 4.15. Employee Matters. There is no strike or work stoppage in existence or threatened involving Company or any of its Subsidiaries that could reasonably be expected to have a Material Adverse Effect. 4.16. Employee Benefit Plans. Company, each of its Subsidiaries and each of their respective ERISA Affiliates are in compliance with all applicable provisions and requirements of ERISA and the regulations and published interpretations thereunder with respect to each Employee Benefit Plan, and have performed all their obligations under each Employee Benefit Plan. Each 65 EXECUTION 72 Employee Benefit Plan which is intended to qualify under Section 401(a) of the Internal Revenue Code is so qualified. No ERISA Event has occurred or is reasonably expected to occur. Except to the extent required under Section 4980B of the Internal Revenue Code, no Employee Benefit Plan provides health or welfare benefits (through the purchase of insurance or otherwise) for any retired or former employee of Company, any of its Subsidiaries or any of their respective ERISA Affiliates. As of the most recent valuation date for any Pension Plan, the amount of unfunded benefit liabilities (as defined in Section 4001(a)(18) of ERISA), individually or in the aggregate for all Pension Plans (excluding for purposes of such computation any Pension Plans with respect to which assets exceed benefit liabilities), does not exceed $5,000,000. As of the most recent valuation date for each Multiemployer Plan for which the actuarial report is available, the potential liability of Company, its Subsidiaries and their respective ERISA Affiliates for a complete withdrawal from such Multiemployer Plan (within the meaning of Section 4203 of ERISA), when aggregated with such potential liability for a complete withdrawal from all Multiemployer Plans, based on information available pursuant to Section 4221(e) of ERISA, does not exceed $5,000,000. 4.17. Certain Fees. No broker's or finder's fee or commission will be payable with respect hereto or any of the transactions contemplated hereby. 4.18. Solvency. Each Credit Party is and, upon the incurrence of any Obligation by such Credit Party on any date on which this representation and warranty is made, will be, Solvent. 4.19. Existing Indentures. Borrower has delivered to Syndication Agent and Administrative Agent complete and correct copies of each Existing Indenture and of all exhibits and schedules thereto. 4.20. Year 2000 Issues. Company and its Subsidiaries have (a) engaged in a process of assessment of the existence of any Year 2000 Issues reasonably appropriate to the scope and complexity of their respective Systems; (b) adopted and have successfully implemented a plan of correction ("PLAN OF CORRECTION") which Company reasonably believes has resulted in a substantial elimination of any Year 2000 Issues before any processing failure of a System or of Systems due to Year 2000 Issues which might have a material effect on the business, operations or financial performance of Company and, in the case of all Systems critical to the business or operations of Company and its Subsidiaries, a virtually complete elimination of Year 2000 Issues; (c) adopted and have successfully implemented validation procedures reasonably calculated to test on an ongoing basis the sufficiency of the Plan of Correction, its implementation, and the correction of Year 2000 Issues in any System; and (d) adopted and have successfully implemented policies and procedures requiring regular reports to, and monitoring by, senior management of Company concerning the foregoing matters; it being understood with respect to the foregoing that no representation or warranty is being made with respect to the Systems of Persons to whose networks Company and its Subsidiaries are interconnected. 4.21. Disclosure. No representation or warranty of any Credit Party contained in any Credit Document or in any other document, certificate or written statement furnished to Lenders by or on 66 EXECUTION 73 behalf of Company or any of its Subsidiaries (other than projections and pro forma financial information contained in such materials) for use in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact (known to Borrower or Company, in the case of any document not furnished by either of them) necessary in order to make the statements contained herein or therein not misleading in light of the circumstances in which the same were made. Any projections and pro forma financial information contained in such materials are based upon good faith estimates and assumptions believed by Company to be reasonable at the time made, it being recognized by Lenders that such projections as to future events are not to be viewed as facts and that actual results during the period or periods covered by any such projections may differ from the projected results. There are no facts known (or which should upon the reasonable exercise of diligence be known) to Company or Borrower (excluding matters of a general economic nature or matters regarding the telecommunications industry which are generally available to the public) that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect and that have not been disclosed herein or in such other documents, certificates and statements furnished to Lenders for use in connection with the transactions contemplated hereby. 4.22. No Burdensome Restrictions. Neither Company nor any of its Subsidiaries is a party to or bound by any Contractual Obligation which could reasonably be expected to have a Material Adverse Effect. SECTION 5. AFFIRMATIVE COVENANTS Each Credit Party covenants and agrees that so long as any Commitment is in effect and until payment in full of all Obligations (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), each Credit Party shall perform, and shall cause each of its Subsidiaries to perform, all covenants in this Section 5 (it being understood that failure to comply with Section 5.13(b) prior to the Initial Funding Date shall not result in an Event of Default; provided that, Credit Parties shall, in any event, be in compliance with Section 5.13 as of the Initial Funding Date). 5.1. Financial Statements and Other Reports. Borrower will deliver to Administrative Agent and Lenders: (1) During Stage 1, in the event that there has been a funding of any Loans, as soon as available and in any event within thirty (30) days after the end of each month ending after the Closing Date, the consolidated balance sheet of Company and its Subsidiaries as at the end of such month and the related consolidated statements of income, stockholders' equity and cash flows of Company and its Subsidiaries for such month and for the period from the beginning of the then current Fiscal Year to the end of such month, setting forth in each case in comparative form the corresponding figures for the corresponding periods of the previous Fiscal Year and the corresponding figures from the Financial Plan for the current Fiscal Year, to the extent prepared on a monthly 67 EXECUTION 74 basis, all in reasonable detail, together with a Financial Officer Certification and a Narrative Report with respect thereto; (2) as soon as available and in any event within sixty (60) days after the end of each of the first three Fiscal Quarters of each Fiscal Year, the consolidated balance sheet of Company and its Subsidiaries as at the end of such Fiscal Quarter and the related consolidated statements of income, stockholders' equity and cash flows of Company and its Subsidiaries for such Fiscal Quarter and for the period from the beginning of the then current Fiscal Year to the end of such Fiscal Quarter, setting forth in each case in comparative form the corresponding figures for the corresponding periods of the previous Fiscal Year and the corresponding figures from the Financial Plan for the current Fiscal Year, all in reasonable detail, together with (1) a Financial Officer Certification, (2) a Narrative Report with respect thereto and (3) a revised Schedule 4.1 (if necessary) reflecting all changes in the organizational structure and capital structure of Company and its Subsidiaries since the delivery of the last quarterly financial information, which revised Schedule 4.1 will be deemed to amend the then-existing Schedule 4.1 for all purposes under this Agreement; (3) as soon as available and in any event within ninety (90) days after the end of each Fiscal Year, (i) the consolidated balance sheet of Company and its Subsidiaries as at the end of such Fiscal Year and the related consolidated statements of income, stockholders' equity and cash flows of Company and its Subsidiaries for such Fiscal Year, setting forth in each case in comparative form the corresponding figures for the previous Fiscal Year and the corresponding figures from the Financial Plan for the Fiscal Year covered by such financial statements, in reasonable detail, together with a Financial Officer Certification and a Narrative Report with respect thereto; (ii) a report thereon of Arthur Andersen LLP or other independent certified public accountants of recognized national standing selected by Company and in form and substance satisfactory to Administrative Agent, (which report shall be unqualified as to going concern and scope of audit and shall state that such consolidated financial statements fairly present in all material respects, the consolidated financial position of Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated in conformity with GAAP applied on a basis consistent with prior years (except as otherwise disclosed in such financial statements) and that the examination by such accountants in connection with such consolidated financial statements has been made in accordance with generally accepted auditing standards) together with a written statement by such independent certified public accountants stating (1) that their audit examination has included a review of the terms of the Credit Documents, (2) whether, in connection therewith, any condition or event that constitutes a Default or an Event of Default has come to their attention and, if such a condition or event has come to their attention, specifying the nature and period of existence thereof, and (3) that nothing has come to their attention that causes them to believe that the information contained in any Compliance Certificate is not correct or that the matters set forth in such Compliance Certificate are not stated in accordance with the terms hereof and (iii) a revised Schedule 4.1 (if necessary) reflecting all changes in the organizational structure and capital structure of Company and its Subsidiaries since the delivery of the last quarterly financial information, which revised Schedule 4.1 will be deemed to amend the then-existing Schedule 4.1 for all purposes under this Agreement; 68 EXECUTION 75 (4) together with each delivery of financial statements of Company and its Subsidiaries pursuant to Sections 5.1(b) and 5.1(c), a duly executed and completed Compliance Certificate; (5) if, as a result of any change in accounting principles and policies from those used in the preparation of the Historical Financial Statements, the consolidated financial statements of Company and its Subsidiaries delivered pursuant to Sections 5.1(a), 5.1(b) or 5.1(c) will differ in any material respect from the consolidated financial statements that would have been delivered pursuant to such subdivisions had no such change in accounting principles and policies been made, then together with the first delivery of such financial statements after such change, one or more statements of reconciliation for all such prior financial statements in form and substance satisfactory to Administrative Agent; (6) promptly upon their becoming available, copies of (i) all financial statements, reports, notices and proxy statements sent or made available generally by Company to its security holders acting in such capacity or by any Subsidiary of Company to its security holders other than Company or another Subsidiary of Company, (ii) all regular and periodic reports (but not including, unless requested by Administrative Agent, routine reports regularly filed with the FCC and state commissions with jurisdiction over telecommunications matters) and all registration statements (other than on Form S-8 or a similar form) and prospectuses, if any, filed by Company or any of its Subsidiaries with any securities exchange or with the Securities and Exchange Commission or any governmental or private regulatory authority, and (iii) all press releases and other statements made available generally by Company or any of its Subsidiaries to the public concerning material developments in the business of Company or any of its Subsidiaries; (7) promptly upon any officer of Borrower or Company obtaining knowledge (i) of any condition or event that constitutes a Default or an Event of Default or that notice has been given to Borrower or Company with respect thereto; (ii) that any Person has given any notice to Company or any of its Subsidiaries or taken any other action with respect to any event or condition set forth in Section 8.1(b); (iii) of any condition or event of a type required to be disclosed in a current report on Form 8-K of the Securities and Exchange Commission; or (iv) of the occurrence of any event or change that has caused or evidences, either in any case or in the aggregate, a Material Adverse Effect, a certificate of an Authorized Officer specifying the nature and period of existence of such condition, event or change, or specifying the notice given or action taken by any such Person and the nature of such claimed Event of Default, Default, default, event or condition, and what action Company has taken, is taking and proposes to take with respect thereto; (8) promptly upon any officer of Borrower or Company obtaining knowledge of (i) the institution of, or non-frivolous threat of, any Adverse Proceeding not previously disclosed in writing by Borrower or Company to Lenders, or (ii) any material development in any Adverse Proceeding that, in the case of either (i) or (ii) if adversely determined, could be reasonably expected to have a Material Adverse Effect, or seeks to enjoin or otherwise prevent the consummation of, or to recover any damages or obtain relief as a result of, the transactions contemplated hereby, written notice 69 EXECUTION 76 thereof together with such other information as may be reasonably available to Borrower or Company to enable Lenders and their counsel to evaluate such matters; (9) (i) promptly upon becoming aware of the occurrence of or forthcoming occurrence of any ERISA Event, a written notice specifying the nature thereof, what action Company, any of its Subsidiaries or any of their respective ERISA Affiliates has taken, is taking or proposes to take with respect thereto and, when known, any action taken or threatened by the Internal Revenue Service, the Department of Labor or the PBGC with respect thereto; and (ii) with reasonable promptness, copies of (1) each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) filed by Company, any of its Subsidiaries or any of their respective ERISA Affiliates with the Internal Revenue Service with respect to each Pension Plan; (2) all notices received by Company, any of its Subsidiaries or any of their respective ERISA Affiliates from a Multiemployer Plan sponsor concerning an ERISA Event; and (3) copies of such other documents or governmental reports or filings relating to any Employee Benefit Plan as Administrative Agent shall reasonably request; (10) as soon as practicable and in any event no later than 10 days prior to the beginning of each Fiscal Year, a consolidated plan and financial forecast for such Fiscal Year and the next three succeeding Fiscal Years (a "FINANCIAL PLAN") in substantially the same level of detail as that set forth in the business plan and forecast included in the Confidential Information Memorandum dated January 2000 relating to the transactions contemplated hereby, including (i) a forecasted consolidated balance sheet and forecasted consolidated statements of income and cash flows of Company and its Subsidiaries for each such Fiscal Year, together with pro forma Compliance Certificates for each such Fiscal Year and an explanation of the assumptions on which such forecasts are based and (ii) during Stage 1, forecasted consolidated statements of income and cash flows of Company and its Subsidiaries for each quarter of the first such Fiscal Year included in a Financial Plan, together with an explanation of the assumptions on which such forecasts are based; (11) as soon as practicable and in any event by the last day of each Fiscal Year, a report in form and substance satisfactory to Administrative Agent outlining all material insurance coverage maintained as of the date of such report by Company and its Subsidiaries and all material insurance coverage planned to be maintained by Company and its Subsidiaries in the immediately succeeding Fiscal Year; (12) with reasonable promptness, written notice of any change in the Board of Directors of Company; (13) promptly, and in any event within ten (10) Business Days after any Material Contract of Company or any of its Subsidiaries is terminated prior to its scheduled term or amended in a manner that is materially adverse to Company or such Subsidiary, as the case may be, or any new Material Contract is entered into, a written statement describing such event, with copies of such material amendments or new contracts, delivered to Administrative Agent (to the extent such delivery is permitted by the terms of any such Material Contract, provided that no such prohibition 70 EXECUTION 77 on delivery shall be effective if it were bargained for by Company or its applicable Subsidiary with the intent of avoiding compliance with this Section 5.1(m)), and an explanation of any actions being taken with respect thereto; and (14) with reasonable promptness, such other information and data with respect to Company or any of its Subsidiaries as from time to time may be reasonably requested by any Lender. 5.2. Contribution. Company and its Subsidiaries shall promptly upon the receipt of any Cash proceeds after January 1, 2000 from (i) the incurrence of Subordinated Indebtedness and (ii) the issuance of any equity Securities, contribute all of such Cash proceeds to Borrower, net of underwriting discounts and commissions and other reasonable costs and expenses associated therewith, including reasonable legal fees and expenses. 5.3. Existence. Except as otherwise permitted under Section 6.9, each Credit Party will, and will cause each of its Subsidiaries to, at all times preserve and keep in full force and effect its existence and all rights and franchises material to its business; provided that no Credit Party nor any of its Subsidiaries shall be required to preserve any such existence, right or franchise if such Person's Board of Directors (or similar governing body) shall determine that the preservation thereof is no longer desirable in the conduct of the business of such Person, and that the loss thereof is not disadvantageous in any material respect to such Person or Lenders. 5.4. Payment of Taxes and Claims. Each Credit Party will, and will cause each of its Subsidiaries and Unrestricted Subsidiaries to, pay all taxes, assessments and other governmental charges imposed upon it or any of its properties or assets or in respect of any of its income, businesses or franchises before any penalty accrues thereon, and all claims (including claims for labor, services, materials and supplies) for sums that have become due and payable and that by law have or may become a Lien upon any of its properties or assets, prior to the time when any penalty or fine shall be incurred with respect thereto, except where the failure to do so could not reasonably be expected to result in a Material Adverse Effect; provided that no such charge or claim need be paid if it is being contested in good faith by appropriate proceedings promptly instituted and diligently conducted, so long as such reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor, and in the case of a charge or claim which has or may become a Lien against any of the Collateral, such contest proceedings conclusively operate to stay the sale of any portion of the Collateral to satisfy such charge or claim. Company will not, nor will it permit any of its Subsidiaries to, file or consent to the filing of any consolidated income tax return with any Person (other than Company or any of its Subsidiaries). 5.5. Maintenance of Properties. Each Credit Party will, and will cause each of its Subsidiaries to, maintain or cause to be maintained in good repair, working order and condition, ordinary wear and tear excepted, all material properties used or useful in the business of Company and its Subsidiaries and from time to time will make or cause to be made all appropriate repairs, renewals and replacements thereof. 71 EXECUTION 78 5.6. Insurance. Company will maintain or cause to be maintained, with financially sound and reputable insurers, such public liability insurance, third party property damage insurance, business interruption insurance and casualty insurance with respect to liabilities, losses or damage in respect of the assets, properties and businesses of Company and its Subsidiaries as may customarily be carried or maintained under similar circumstances by Persons of established reputation engaged in similar businesses, in each case in such amounts (giving effect to self-insurance), with such deductibles, covering such risks and otherwise on such terms and conditions as shall be customary for such Persons. Without limiting the generality of the foregoing, Company will maintain or cause to be maintained (a) flood insurance with respect to each Flood Hazard Property that is located in a community that participates in the National Flood Insurance Program, in each case in compliance with any applicable regulations of the Board of Governors of the Federal Reserve System, and (b) replacement value casualty insurance on the Collateral under such policies of insurance, with such insurance companies, in such amounts, with such deductibles, and covering such risks as are at all times carried or maintained under similar circumstances by Persons of established reputation engaged in similar businesses. Each such policy of insurance shall (i) name Administrative Agent for the benefit of Lenders as an additional insured thereunder as its interests may appear and (ii) in the case of each business interruption and casualty insurance policy, contain a loss payable clause or endorsement, satisfactory in form and substance to Administrative Agent, that names Administrative Agent for the benefit of Lenders as the loss payee thereunder for any covered loss in excess of $1,000,000 and provides for at least thirty (30) days prior written notice to Administrative Agent of any modification adverse in any respect to Administrative Agent or Lenders or cancellation of such policy. 5.7. Books and Records; Inspections; Lenders Meetings. Each Credit Party will, and will cause each of its Subsidiaries to, keep proper books of record and account in which full, true and correct entries are made of all dealings and transactions in relation to its business and activities. Each Credit Party will, and will cause each of its Subsidiaries to, permit any authorized representatives designated by any Lender to visit and inspect any of the Facilities of Company or of any of its Subsidiaries, to inspect, copy and take extracts from its and their financial and accounting records, and to discuss its and their affairs, finances and accounts with its and their officers and independent public accountants, all upon reasonable notice and at such reasonable times during normal business hours and as often as may reasonably be requested. Borrower and Company will, upon the request of Administrative Agent or Requisite Lenders, participate in a meeting of Administrative Agent and Lenders once during each Fiscal Year to be held at Company's corporate offices (or at such other location as may be agreed to by Borrower and Administrative Agent) at such time as may be agreed to by Borrower and Administrative Agent. 1.1. 5.8. Compliance with Laws; Contractual Obligations. Each Credit Party will comply, and shall cause each of its Subsidiaries, Unrestricted Subsidiaries and all other Persons, if any, on or occupying any Facilities to comply, with applicable laws, rules, regulations and orders of any Governmental Authority (including all Environmental Laws), noncompliance with which could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. 72 EXECUTION 79 5.9. Environmental. (1) ENVIRONMENTAL DISCLOSURE. Borrower will deliver to Administrative Agent and Lenders: (1) as soon as practicable following receipt thereof, copies of all environmental audits, investigations, analyses and reports of any kind or character, whether prepared by personnel of Company or any of its Subsidiaries or any Unrestricted Subsidiaries or by independent consultants, governmental authorities or any other Persons, with respect to significant environmental matters at any Facility or with respect to any Environmental Claims; (2) promptly upon the occurrence thereof, written notice describing in reasonable detail (1) any Release required to be reported to any federal, state or local governmental or regulatory agency under any applicable Environmental Laws, (2) any remedial action taken by Company or any other Person in response to (A) any Hazardous Materials Activities the existence of which has a reasonable possibility of resulting in one or more Environmental Claims having, individually or in the aggregate, a Material Adverse Effect, or (B) any Environmental Claims that, individually or in the aggregate, have a reasonable possibility of resulting in a Material Adverse Effect, and (3) Company's discovery of any occurrence or condition on any real property adjoining or in the vicinity of any Facility that could cause such Facility or any part thereof to be subject to any material restrictions on the ownership, occupancy, transferability or use thereof under any Environmental Laws; (3) as soon as practicable following the sending or receipt thereof by Company or any of its Subsidiaries or any Unrestricted Subsidiaries, a copy of any and all written communications with respect to (1) any Environmental Claims that, individually or in the aggregate, have a reasonable possibility of giving rise to a Material Adverse Effect, (2) any Release required to be reported to any federal, state or local governmental or regulatory agency, and (3) any request for information from any governmental agency that suggests such agency is investigating whether Company or any of its Subsidiaries or any Unrestricted Subsidiaries may be potentially responsible for any Hazardous Materials Activity; (4) prompt written notice describing in reasonable detail (1) any proposed acquisition of stock, assets, or property by Company or any of its Subsidiaries or any Unrestricted Subsidiaries that could reasonably be expected to (A) expose Company or any of its Subsidiaries to, or result in, Environmental Claims that could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect or (B) affect the ability of Company or any of its Subsidiaries or any Unrestricted Subsidiaries to maintain in full force and effect all material Governmental Authorizations required under any Environmental Laws for their respective operations and (2) any proposed action to be taken by Company or any of its Subsidiaries or any Unrestricted Subsidiaries to modify current operations in a manner that could reasonably be expected to subject Company or any of its Subsidiaries or 73 EXECUTION 80 any Unrestricted Subsidiaries to any additional obligations or requirements under any Environmental Laws; and (5) with reasonable promptness, such other documents and information as from time to time may be reasonably requested by Administrative Agent in relation to any matters disclosed pursuant to this Section 5.9(a). (2) HAZARDOUS MATERIALS ACTIVITIES, ETC. Each Credit Party shall promptly take, and shall cause each of its Subsidiaries or any Unrestricted Subsidiaries promptly to take, any and all actions necessary to (i) cure any violation of applicable Environmental Laws by such Credit Party or its Subsidiaries or any Unrestricted Subsidiaries that could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, and (ii) make an appropriate response to any Environmental Claim against such Credit Party or any of its Subsidiaries or any Unrestricted Subsidiaries and discharge any obligations it may have to any Person thereunder where failure to do so could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. 5.10. Subsidiaries. In the event that any Person becomes a Subsidiary of Company, Company shall (other than with respect to Borrower and any Subsidiary of Borrower as of the Closing Date) promptly (i) contribute 100% of the capital stock of such Subsidiary to Borrower, such that after each such contribution, such Subsidiary is a subsidiary of Borrower, and deliver to Administrative Agent certificates (accompanied by irrevocable undated stock powers, duly endorsed in blank and otherwise satisfactory in form and substance to Administrative Agent) representing such capital stock, which shall be pledged pursuant to the Pledge and Security Agreement and shall deliver such other additional agreements or instruments, each in form and substance to Administrative Agent, as may be necessary or desirable to create in favor of Administrative Agent, for the benefit of Lenders, a valid and perfected First Priority security interest in 100% of the capital stock of such Subsidiary, (ii) cause such Subsidiary to become a Guarantor hereunder and a Grantor under the Pledge and Security Agreement by executing and delivering to Administrative Agent a Counterpart Agreement, and (iii) take all such actions and execute and deliver, or cause to be executed and delivered, all such documents, instruments, agreements, and certificates similar to those described in Sections 3.1(b), 3.1(e) and 3.1(h). In the event that any Person becomes a first tier Unrestricted Subsidiary, Company shall promptly, subject to applicable law, (a) pledge all certificated shares of Capital Stock of such Unrestricted Subsidiary (65% in the case of a Foreign Subsidiary) pursuant to the Pledge and Security Agreement, and (b) take all such actions and execute and deliver, or cause to be executed and delivered, all such documents, instruments, agreements, and certificates as are similar to those described in Sections 3.1(b), 3.1(e) and 3.1(h) (to the extent applicable to a pledge of stock). With respect to each such Subsidiary, Borrower shall promptly send to Administrative Agent written notice setting forth with respect to such Person (i) the date on which such Person became a Subsidiary of Company, and (ii) all of the data required to be set forth in Schedule 4.1 with respect to all Subsidiaries of Company, and such written notice shall be deemed to supplement Schedule 4.1 for all purposes hereof. Notwithstanding the foregoing, if Company or any of its Subsidiaries acquires a Person and liquidates or dissolves such Person within 30 days after 74 EXECUTION 81 the acquisition thereof in accordance with the provisions hereof, this Section 5.10 shall not require that any action be taken with respect to such Person. 5.11. Real Estate Assets. In the event that any Credit Party hereafter acquires an interest in any Material Real Estate Asset and such interest has not otherwise been made subject to the Lien of the Collateral Documents in favor of Administrative Agent, for the benefit of Lenders, then such Credit Party, contemporaneously with acquiring such Material Real Estate Asset, shall take all such actions and execute and deliver, or cause to be executed and delivered, the following: (1) fully executed and notarized Mortgages, in proper form for recording in all appropriate places in all applicable jurisdictions, encumbering (each, a "MORTGAGED PROPERTY") (a) each such fee-owned Material Real Estate Asset, and (b) each such Material Real Estate Asset which is a Leasehold Property to the extent that such Credit Party is able to obtain, after use of reasonable best efforts, (x) a written consent of the related lessor to such mortgage in form and substance satisfactory to Administrative Agent and (y) evidence that such Leasehold Property is a Recorded Leasehold Interest; (2) an opinion of counsel (which counsel shall be reasonably satisfactory to Syndication Agent and Administrative Agent) in each state in which such Material Real Estate Asset is located with respect to the enforceability of the form(s) of Mortgages to be recorded in such state and such other matters as Syndication Agent and Administrative Agent may reasonably request, in each case in form and substance reasonably satisfactory to Syndication Agent and Administrative Agent; (3) from time to time, at the request of Administrative Agent, appraisals of each such Mortgaged Property as are required by law or regulation; (4) ALTA mortgagee title insurance policies or unconditional commitments therefor issued by a title company with respect to each such Mortgaged Property, together with a title report issued by a title company with respect thereto, dated not more than thirty (30) days prior to the effective date of such executed Mortgage and copies of all recorded documents listed as exceptions to title or otherwise referred to therein, each in form and substance reasonably satisfactory to Syndication Agent and Administrative Agent; (5) evidence of flood insurance with respect to each such Mortgaged Property that is a Flood Hazard Property and that is located in a community that participates in the National Flood Insurance Program, in each case in compliance with any applicable regulations of the Board of Governors of the Federal Reserve System, in form and substance reasonably satisfactory to Syndication Agent and Administrative Agent; and (6) ALTA surveys of all such Mortgaged Properties which are not Leasehold Properties, certified to Administrative Agent and dated not more than thirty (30) days prior to the effective date of such executed Mortgage. 75 EXECUTION 82 5.12. Interest Rate Protection. To the extent necessary, Company shall maintain, or caused to be maintained, in effect one or more Interest Rate Agreements for a term of not less than two years and otherwise in form and substance reasonably satisfactory to Administrative Agent and Syndication Agent, which Interest Rate Agreements shall at all times effectively limit the amount of Indebtedness bearing interest at a floating rate to no more than 50% of the aggregate principal amount of Consolidated Total Debt outstanding as of any date of determination. 5.13. Certain Post Closing Matters. (1) Within 45 days after the Closing Date, Company shall have used reasonable best efforts to obtain from each Person identified on Schedule 5.13(a) an acknowledgment letter in favor of Administrative Agent, for the benefit of Lenders, in the form of Exhibit K with respect to each corresponding agreement listed on such Schedule 5.13(a). (2) With respect to Allegiance Telecom of Pennsylvania, Inc., Allegiance Telecom of New Jersey, Inc. and Allegiance Telecom of Georgia, Inc., within three hundred-sixty (360) days following the Closing Date, Company shall (i) effect the contribution by Company of 100% of the capital stock of any such Subsidiaries that are not Subsidiaries of Borrower to Borrower, (ii) obtain all consents and approvals necessary to enable each such Subsidiary to become a Guarantor hereunder and to become a Grantor under the Pledge and Security Agreement, (iii) cause each such Subsidiary to become a Guarantor and a Grantor under the Pledge and Security Agreement, and (iv) take such actions and execute and deliver, or cause to be executed and delivered, all such documents, instruments, agreements, and certificates similar to those described in Sections 3.1(b), 3.1(e), 3.1(h) and 3.1(l), in connection with the foregoing to the extent the same would have been required on the Closing Date as if such Subsidiaries had been Guarantors as of the Closing Date. SECTION 6. NEGATIVE COVENANTS Each Credit Party covenants and agrees that, so long as any Commitment is in effect and until payment in full of all Obligations (other than inchoate indemnification obligations with respect to claims, losses or liabilities which have not yet arisen and are not yet due and payable), such Credit Party shall perform, and shall cause each of its Subsidiaries to perform, all covenants in this Section 6 (it being understood that the covenants in Sections 6.6 and 6.7 will be measured during Stage 1 and Stage 2, respectively, but shall not result in an Event of Default if any Credit Party shall not be in compliance therewith at any time prior to the Initial Funding Date; provided that, Credit Parties shall be required, in any event, to comply with Section 6.6 or 6.7, as applicable, as of the Fiscal Quarter most recently ended prior to the Initial Funding Date). 6.1. Indebtedness. No Credit Party shall, nor shall it permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or guaranty, or otherwise become or remain directly or indirectly liable with respect to any Indebtedness, except: 76 EXECUTION 83 (1) the Obligations, including any Indebtedness under any Hedge Agreement with any Lender Counterparty; (2) Indebtedness of any Subsidiary Guarantor to Borrower or to any other Subsidiary Guarantor, or of Borrower to any Subsidiary Guarantor; provided that (i) all such Indebtedness shall be evidenced by promissory notes and all such notes shall be subject to a First Priority Lien pursuant to the Pledge and Security Agreement, (ii) all such Indebtedness owed by Company to any of its Subsidiaries shall be subordinated in right of payment to the payment in full of the Obligations pursuant to the terms of the applicable promissory notes, and any payment by any such Subsidiary of Company under any guaranty of the Obligations shall result in a pro tanto reduction of the amount of any Indebtedness owed by such Subsidiary to Company or to any of its Subsidiaries for whose benefit such payment is made; (3) Subordinated Indebtedness (excluding for purposes of this clause (c) Indebtedness under the Existing Indentures); provided that in any case, as of the date of the incurrence of such Subordinated Indebtedness, no event shall have occurred and be continuing or would result from such incurrence that would result in a Default or Event of Default; (4) Indebtedness incurred by Company or any of its Subsidiaries arising from agreements providing for indemnification, adjustment of purchase price or similar obligations, or from guaranties or letters of credit, surety bonds or performance bonds securing the performance of Company or any such Subsidiary pursuant to such agreements, in connection with acquisitions or dispositions of any business, assets or Subsidiary of Company or any of its Subsidiaries not prohibited by this Agreement; (5) Indebtedness which may be deemed to exist pursuant to any guaranties, performance, surety, statutory, appeal or similar obligations obtained in the ordinary course of business; (6) Indebtedness in respect of netting services, overdraft protections and otherwise in connection with Deposit Accounts; (7) guaranties in the ordinary course of business of the obligations of suppliers, customers, franchisees and licensees of Company and its Subsidiaries; (8) Indebtedness of Company outstanding under the Existing Indentures; (9) Indebtedness with respect to (A) leases and rights to use fiber optic cable incurred in the ordinary course of business ("DARK FIBER LEASES"), which for all purposes under this Agreement shall be deemed to constitute and shall be accounted for as Capital Leases in an aggregate amount not to exceed at any time $225,000,000 and (B) other Capital Leases in an aggregate amount not to exceed at any time $10,000,000; (10) Permitted Equipment Financings; 77 EXECUTION 84 (11) Indebtedness incurred or assumed by Company or any of its Subsidiaries in connection with any Permitted Acquisition; (12) Indebtedness in the form of notes issued by Company or any of its Subsidiaries in connection with the repurchase of Securities from any director, officer, employee or consultant in an aggregate amount not to exceed $5,000,000; (13) Indebtedness in the form of letters of credit for the account of Company or any of its Subsidiaries in an aggregate face amount not to exceed $15,000,000 at any time outstanding; (14) Indebtedness not otherwise permitted under this Section 6.1 in an aggregate amount not to exceed $15,000,000 at any time outstanding; and (15) extensions, renewals and replacements of any such Indebtedness listed in clauses (h), (j) and (k) above, that do not in any such case increase the outstanding principal amount thereof. 6.2. Liens. No Credit Party shall, nor shall it permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or permit to exist any Lien on or with respect to any property or asset of any kind (including any document or instrument in respect of goods or accounts receivable) of Company or any of its Subsidiaries, whether now owned or hereafter acquired, or any income or profits therefrom, or file or permit the filing of, or permit to remain in effect, any financing statement or other similar notice of any Lien with respect to any such property, asset, income or profits under the UCC of any State or under any similar recording or notice statute, except: (1) Liens in favor of Administrative Agent, as agent, for the benefit of Lenders and Lender Counterparties granted pursuant to any Credit Document; (2) Liens for taxes, assessments or governmental charges or claims that are not yet due or are being contested in good faith by appropriate proceedings, so long as such reserves or other appropriate provisions, if any, as shall be required by GAAP shall have been made for any such contested amounts; (3) statutory Liens of landlords, carriers, warehousemen, mechanics, repairmen, workmen and materialmen, and other Liens imposed by law, in each case incurred in the ordinary course of business (i) for amounts not yet overdue or (ii) for amounts that are overdue and that (in the case of any such amounts overdue for a period in excess of five days) are being contested in good faith by appropriate proceedings, so long as such reserves or other appropriate provisions, if any, as shall be required by GAAP shall have been made for any such contested amounts; (4) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, deposits made in the ordinary course of business with utility companies, and Liens incurred or deposits made in the 78 EXECUTION 85 ordinary course of business to secure the performance of tenders, statutory or regulatory obligations, surety and appeal bonds, bids, leases, government contracts, trade contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money), so long as no foreclosure, sale or similar proceedings have been commenced with respect to any portion of the Collateral on account thereof; (5) easements, rights-of-way, restrictions, encroachments, and other minor defects or irregularities in title, and other similar encumbrances in each case which do not and will not interfere in any material respect with the ordinary conduct of the business of Company or any of its Subsidiaries; (6) any interest or title of a lessor or sublessor under any lease permitted hereunder; (7) Liens solely on any cash earnest money deposits made by Company or any of its Subsidiaries in connection with any letter of intent or purchase agreement entered into by it; (8) Liens incurred in connection with the purchase or shipping of goods or assets on the related assets and proceeds thereof in favor of the seller or shipper of such goods or assets; (9) Liens arising from filing precautionary UCC financing statements relating solely to leases entered into the ordinary course of business (including Capital Leases permitted hereunder); (10) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (11) any zoning or similar law or right reserved to or vested in any governmental office or agency to control or regulate the use of any real property; (12) licenses of patents, trademarks and other intellectual property rights granted by Company or any of its Subsidiaries in the ordinary course of business and not interfering in any respect with the ordinary conduct of the business of Company or such Subsidiary; (13) judgment liens not constituting an Event of Default pursuant to Section 8.1(h); (14) Liens described in Schedule 6.2 or on a title report delivered pursuant to Section 5.11; (15) Liens securing Indebtedness permitted pursuant to Section 6.1(j); provided that any such Lien shall encumber only the assets acquired with the proceeds of such Indebtedness; (16) Liens existing on any property or assets acquired pursuant to a Permitted Acquisition prior to the acquisition thereof by Borrower or any of its Subsidiaries or existing on any property or asset of any Person that becomes a Subsidiary (other than by RS Designation) after the date hereof prior to the time such Person becomes a Subsidiary; provided that (i) such Lien is not created in 79 EXECUTION 86 contemplation of or in connection with such acquisition or such Person becoming a Subsidiary, as the case may be, (ii) such Lien shall not apply to any other property or assets of Borrower or any of its Subsidiaries and (iii) such Lien shall secure only those obligations which it secures on the date of such acquisition or the date such Person becomes a Subsidiary, as the case may be, and extensions, renewals and replacements thereof that do not increase the outstanding principal amount thereof; (17) Liens securing reimbursement obligations with respect to letters of credit permitted pursuant to Section 6.1(m); and (18) Liens that secure other obligations in an aggregate principal amount not to exceed $5,000,000 at any time outstanding. 6.3. Equitable Lien; No Further Negative Pledges. If any Credit Party or any of its Subsidiaries shall create or assume any Lien upon any of its properties or assets, whether now owned or hereafter acquired, other than Permitted Liens, it shall make or cause to be made effective provision whereby the Obligations will be secured by such Lien equally and ratably with any and all other Indebtedness secured thereby as long as any such Indebtedness shall be so secured; provided that notwithstanding the foregoing, this covenant shall not be construed as a consent by Requisite Lenders to the creation or assumption of any such Lien not otherwise permitted hereby. Except with respect to (a) the Existing Indentures, (b) specific property encumbered to secure payment of particular Indebtedness or to be sold pursuant to an executed agreement with respect to an Asset Sale or assets not constituting an Asset Sale, or (c) any agreement prohibiting only the creation of Liens securing Subordinated Indebtedness, no Credit Party nor any of its Subsidiaries shall enter into any agreement prohibiting the creation or assumption of any Lien upon any of its properties or assets, whether now owned or hereafter acquired. 6.4. Restricted Payments; Restrictions on Subsidiary Distributions. (a) No Credit Party shall nor shall it permit any of its Subsidiaries to, directly or indirectly, declare, order, pay, make or set apart any sum for any Restricted Junior Payment except the following: (1) Company may make regularly scheduled payments required to be made to holders of the Subordinated Indebtedness; and (2) so long as no Event of Default (A) of the type specified in Section 8.1(a) has occurred or (B) has occurred as the result of a breach of any of Sections 6.6, 6.7, 6.8 and 6.9 Borrower may make Restricted Junior Payments to Company at such times and in such amounts as are necessary to enable Company to make the payments specified in clause (i) above. (2) Except as provided in Section 6.3 and as otherwise provided herein, no Credit Party shall, nor shall it permit any of its Subsidiaries to, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any 80 EXECUTION 87 Subsidiary of Company to (i) pay dividends or make any other distributions on any of such Subsidiary's capital stock owned by Company or any other Subsidiary of Company, (ii) repay or prepay any Indebtedness owed by such Subsidiary to Company or any other Subsidiary of Company, (iii) make loans or advances to Company or any other Subsidiary of Company, or (iv) transfer any of its property or assets to Company or any other Subsidiary of Company. 6.5. Investments. No Credit Party shall, nor shall it permit any of its Subsidiaries to, directly or indirectly, make or own any Investment in any Person, including any Joint Venture, except: (1) Cash Equivalents; (2) Investments by any Credit Party in any Subsidiary of Company (3) the contribution by Company of 100% of the capital stock of each of its Subsidiaries to Borrower, such that after each such contribution, each such Subsidiary is a subsidiary of Borrower; (4) Investments (i) in accounts receivable arising and trade credit granted in the ordinary course of business and in any Securities received in satisfaction or partial satisfaction thereof from financially troubled account debtors and (ii) prepayments and other credits to suppliers, agents, consultants and customers made in the ordinary course of business consistent with the past practices of Company and its Subsidiaries; (5) intercompany loans to the extent permitted under Section 6.1(b); (6) Consolidated Capital Expenditures permitted by Sections 6.6(d) and 6.7(e); (7) Permitted Acquisitions; (8) Investments in the form of notes issued by Company or any of its Subsidiaries in connection with the repurchase of Securities from any director, officer, employee or consultant pursuant to Section 6.1(l); (9) Investments in the form of Hedge Agreements; (10) deposits permitted under Section 6.1(d); (11) loans or advances to employees in an aggregate amount not to exceed $2,500,000; (12) other cash Investments in an aggregate amount not in excess of $50,000,000 at any time outstanding; and 81 EXECUTION 88 (13) cumulative cash Investments in Unrestricted Subsidiaries (including any Subsidiary designated as an Unrestricted Subsidiary pursuant to Section 6.17) in an aggregate amount not to exceed, after giving effect to the proposed Investment, the Excess Proceeds Amount; provided that, in no event shall Investments made pursuant to this subsection (m) exceed $200,000,000 in any Fiscal Year. 6.6. Stage 1 Financial Covenants. During Stage 1: (1) MINIMUM REVENUES. Company shall not permit Revenues as of the last day of any Fiscal Quarter, beginning with the Fiscal Quarter ending March 31, 2000, to be less than the correlative amount indicated as set forth on Schedule 6.6(a). (2) RATIO OF SENIOR SECURED DEBT TO ANNUALIZED ADJUSTED EBITDA. As of the last day of any Fiscal Quarter beginning with the Fiscal Quarter ending March 31, 2000, Company shall not permit the ratio of (y) Senior Secured Debt to (y) the aggregate Annualized Pre-Overhead EBITDA to exceed the correlative ratio indicated as set forth on Schedule 6.6(b). (3) SENIOR SECURED DEBT TO TOTAL CAPITALIZATION. Company shall not permit the ratio of Senior Secured Debt to Total Capitalization to exceed 0.35:1.00 at any time during Stage 1. (4) CONSOLIDATED TOTAL DEBT TO TOTAL CAPITALIZATION. Company shall not permit the ratio of Consolidated Total Debt to Total Capitalization to exceed 0.60:1.00 at any time during Stage 1. 6.7. Stage 2 Financial Covenants. During Stage 2: (1) SENIOR LEVERAGE RATIO. Company shall not permit the Senior Leverage Ratio as of the last day of any Fiscal Quarter beginning with the Fiscal Quarter ending March 31, 2003 to exceed the correlative ratio indicated as set forth on Schedule 6.7(a). (2) TOTAL LEVERAGE RATIO. Company shall not permit the Total Leverage Ratio as of the last day of any Fiscal Quarter beginning with the Fiscal Quarter ending March 31, 2003 to exceed the correlative ratio indicated as set forth on Schedule 6.7(b). (3) INTEREST COVERAGE RATIO. Company shall not permit the Interest Coverage Ratio as of the last day of any Fiscal Quarter, beginning with the Fiscal Quarter ending March 31, 2003, to be less than the correlative ratio indicated as set forth on Schedule 6.7(c). (4) PRO FORMA DEBT SERVICE COVERAGE RATIO. Company shall not permit the Pro Forma Debt Service Coverage Ratio as of the last day of any Fiscal Quarter beginning with the Fiscal Quarter ending December 31, 2003 to be less than the correlative ratio indicated as set forth on Schedule 6.7(d). 82 EXECUTION 89 6.8. Maximum Consolidated Capital Expenditures. During Stage 1 and Stage 2, Company shall not and shall not permit its Subsidiaries to make or incur Consolidated Capital Expenditures, in any Fiscal Year indicated on Schedule 6.8, in an aggregate amount for Company and its Subsidiaries in excess of the corresponding amount set forth on Schedule 6.8. 6.9. Fundamental Changes; Disposition of Assets; Acquisitions. No Credit Party shall, nor shall it permit any of its Subsidiaries to, enter into any transaction of merger or consolidation, or liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, lease or sub-lease (as lessor or sublessor), transfer or otherwise dispose of, in one transaction or a series of transactions, all or any part of its business, property or assets, whether now owned or hereafter acquired, or acquire by purchase or otherwise (other than purchases or other acquisitions of inventory, materials and equipment in the ordinary course of business) the business, property or fixed assets of, or stock or other evidence of beneficial ownership of, any Person or any division or line of business of any Person, except: (1) subject to Section 6.14, any Subsidiary of Borrower may be merged with or into Company or any other Subsidiary, or be liquidated, wound up or dissolved, or all or any part of its business, property or assets may be conveyed, sold, leased, transferred or otherwise disposed of, in one transaction or a series of transactions, to Borrower or any of its Subsidiaries; provided that in the case of such a merger, Company or such Subsidiary shall be the continuing or surviving Person; (2) sales of assets which do not constitute Asset Sales; (3) leases or subleases to or from other Persons of assets by Company or any of its Subsidiaries in the ordinary course of business; (4) licenses to or from other Persons of Intellectual Property by Company or any Subsidiary thereof in the ordinary course of business; (5) Permitted Acquisitions; (6) Investments made in accordance with Section 6.5; and (7) subject to the requirements of Section 2.11(a), Asset Sales. 6.10. Disposal of Subsidiary Interests. Except for any sale of 100% of the equity Securities of any of its Subsidiaries in compliance with the provisions of Section 6.9, no Credit Party shall directly or indirectly sell, assign, pledge or otherwise encumber or dispose of any equity Securities of any of its Subsidiaries, except to qualify directors if required by applicable law; or permit any of its Subsidiaries directly or indirectly to sell, assign, pledge or otherwise encumber or dispose of any equity Securities of any of its Subsidiaries (including such Subsidiary), except to another Credit 83 EXECUTION 90 Party (subject to the restrictions on such disposition otherwise imposed hereunder), or to qualify directors if required by applicable law. 6.11. Sales and Lease-Backs. No Credit Party shall, nor shall it permit any of its Subsidiaries to, directly or indirectly, become or remain liable as a lessee or as a guarantor or other surety with respect to any lease of any property (whether real, personal or mixed), whether now owned or hereafter acquired, which Company or any of its Subsidiaries (a) has sold or transferred or is to sell or to transfer to any other Person (other than Company or any of its Subsidiaries), or (b) intends to use for substantially the same purpose as any other property which has been or is to be sold or transferred by Company or any of its Subsidiaries to any Person (other than Company or any of its Subsidiaries) in connection with such lease. 6.12. Sale or Discount of Receivables. No Credit Party shall, nor shall it permit any of its Subsidiaries to, directly or indirectly, sell with recourse, or discount or otherwise sell for less than the face value thereof, any of its notes or accounts receivable (it being understood that the restrictions contained in this Section 6.12 shall not apply to any write-off of bad debt in the ordinary course of business consistent with prior practice). 6.13. Transactions with Shareholders and Affiliates. No Credit Party shall, nor shall it permit any of its Subsidiaries to, directly or indirectly, enter into or permit to exist any transaction (including the purchase, sale, lease or exchange of any property or the rendering of any service) with any holder of 5% or more of any class of equity Securities of Company or any of its Subsidiaries or with any Affiliate of Company or of any such holder, on terms that are less favorable to Company or that Subsidiary, as the case may be, than those that might be obtained at the time from Persons who are not such a holder or Affiliate; provided that the foregoing restriction shall not apply to (a) any transaction between Company and any of its Subsidiaries or between any of the Subsidiaries; (b) reasonable and customary fees and expenses paid to members of the Boards of Directors of Company and its Subsidiaries; or (c) compensation arrangements entered into in the ordinary course of business with respect to officers and other employees of Company and its Subsidiaries. 6.14. Conduct of Business. From and after the Closing Date, no Credit Party shall, nor shall it permit any of its Subsidiaries to, engage in any business other than (a) the businesses engaged in by such Credit Party on the Closing Date and similar or related businesses including, without limitation, data communications, Internet access, Internet portal, web hosting, application hosting, and communication equipment collocation businesses, in any event without the consent of the Requisite Lenders, in no more than thirty six (36) Geographic Markets (plus up to an additional six (6) markets designated as Excess Proceeds Geographic Markets), or as otherwise permitted under clause (vi) of the definition of Permitted Acquisition, and (b) such other lines of business as may be consented to by Requisite Lenders. Company will not engage in any business activities (other than the issuance of Securities to the extent not otherwise prohibited in this Agreement) or own any assets or properties other than the capital stock of its Subsidiaries and otherwise as incident to its existence as a holding company. 84 EXECUTION 91 6.15. Amendments or Waivers of Existing Indentures/Subordinated Indebtedness. No Credit Party shall, nor shall it permit any of its Subsidiaries to, amend or otherwise change the terms of the Existing Indentures or any Subordinated Indebtedness, or make any payment consistent with an amendment thereof or change thereto, if the effect of such amendment or change is to increase the interest rate on the Existing Indentures or such Subordinated Indebtedness, change (to earlier dates) any dates upon which payments of principal or interest are due thereon, change any event of default or condition to an event of default with respect thereto (other than to eliminate any such event of default or increase any grace period related thereto), change the redemption, prepayment or defeasance provisions thereof, change the subordination provisions of such Subordinated Indebtedness (or of any guaranty thereof), or change any collateral therefor (other than to release such collateral), or if the effect of such amendment or change, together with all other amendments or changes made, is to increase materially the obligations of the obligor thereunder or to confer any additional rights on the holders of notes issued under the Existing Indentures or such Subordinated Indebtedness (or a trustee or other representative on their behalf) which would be adverse to any Credit Party or Lenders. 6.16. Fiscal Year. No Credit Party shall, nor shall it permit any of its Subsidiaries to, change its Fiscal Year-end from December 31. 6.17. Designation of Unrestricted Subsidiaries; RS Designations. (a) Borrower may designate a Subsidiary acquired or formed after the Closing Date as an Unrestricted Subsidiary under this Agreement (a "DESIGNATION") only if: (i) no Event of Default shall have occurred and be continuing at the time of or after giving effect to such Designation; (ii) after giving effect to such Designation, Company and its Subsidiaries would be in compliance with each of the covenants set forth in Sections 6.6, 6.7 and 6.8, as applicable, calculated on a pro forma basis as if such Designation had occurred immediately prior to the first day of the period of four consecutive fiscal quarters most recently ended; (iii) no Designation shall be made for any Subsidiary whose assets, rights or franchises are material to the conduct of the business of Company and its Subsidiaries in a Geographic Market (other than an Excess Proceeds Geographic Market); and (iv) Borrower has delivered to the Administrative Agent (x) written notice of such Designation and (y) a certificate, dated the effective date of such Designation, of an Authorized Officer of Borrower stating that no Event of Default has occurred and is continuing and setting forth reasonably detailed calculations demonstrating pro forma compliance with each of Sections 6.6, 6.7 and 6.8, as applicable, in accordance with clause (ii) above. 85 EXECUTION 92 (b) Borrower may designate any Unrestricted Subsidiary as a Subsidiary under this Agreement (an "RS DESIGNATION") only if: (i) such Subsidiary is predominantly engaged in similar business activities to Company and its Subsidiaries; (ii) no Event of Default shall have occurred and be continuing at the time of or after giving effect to such RS Designation; (iii) after giving effect to such RS Designation, Company and its Subsidiaries would be in compliance with each of the covenants set forth in Sections 6.6, 6.7 and 6.8, as applicable, calculated on a pro forma basis as if such RS Designation had occurred immediately prior to the first day of the relevant period specified in such Section, as applicable; (iv) Borrower has delivered to the Administrative Agent (x) written notice of such RS Designation and (y) a certificate, dated the effective date of such RS Designation, of an Authorized Officer of Borrower stating that no Event of Default has occurred and is continuing and setting forth reasonably detailed calculations demonstrating pro forma compliance with each of Section 6.6, 6.7 and 6.8, as applicable, in accordance with clause (iii) above; and (v) all Indebtedness of such Subsidiary outstanding and all Liens on assets of such Subsidiary existing immediately following the RS Designation would, if initially incurred at such time, have been permitted to be incurred pursuant to Sections 6.1 and 6.2 without reliance on Section 6.2(p), provided, however, that, if the Person subject to an RS Designation had Liens described in Section 6.2(p) at the time such Person was designated an Unrestricted Subsidiary, such Liens shall be permitted following such RS Designation. Upon any such RS Designation, Borrower shall be deemed to have (i) received a return of its Investment in such Unrestricted Subsidiary equal to the lesser of (x) the amount of such Investment immediately prior to such RS Designation and (y) the fair market value (as reasonably determined by Borrower) of the net assets of such Subsidiary at the time of such RS Designation and (ii) a permanent Investment in an Unrestricted Subsidiary equal to the excess, if positive, of the amount referred to in clause (i)(x) above over the amount referred to in clause (i)(y) above. (c) Neither Borrower nor any Subsidiary shall at any time (x) provide a Guaranty of any Indebtedness of any Unrestricted Subsidiary, (y) be directly or indirectly liable for any Indebtedness of any Unrestricted Subsidiary or (z) be directly or indirectly liable for any other Indebtedness which provides that the holder thereof may (upon notice, lapse of time or both) declare a default thereon (or cause such Indebtedness or the payment thereof to be accelerated, payable or subject to repurchase prior to its final scheduled maturity) upon the occurrence of a default with respect to any other Indebtedness that is Indebtedness of an Unrestricted Subsidiary. 86 EXECUTION 93 SECTION 7. GUARANTY 7.1. Guaranty of the Obligations. Subject to the provisions of Section 7.2, Guarantors jointly and severally hereby irrevocably and unconditionally guaranty to Administrative Agent for the rateable benefit of the Beneficiaries the due and punctual payment in full of all Obligations when the same shall become due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. ss. 362(a) (collectively, the "GUARANTEED OBLIGATIONS")). 7.2. Contribution by Guarantors. Each Guarantor desires to allocate among themselves (collectively, the "CONTRIBUTING GUARANTORS"), in a fair and equitable manner, their obligations arising under this Guaranty. Accordingly, in the event any payment or distribution is made on any date by a Guarantor under this Guaranty (a "FUNDING GUARANTOR") that exceeds its Fair Share as of such date, that Funding Guarantor shall be entitled to a contribution from each of the other Contributing Guarantors in the amount of such other Contributing Guarantor's Fair Share Shortfall as of such date, with the result that all such contributions will cause each Contributing Guarantor's Aggregate Payments to equal its Fair Share as of such date. "FAIR SHARE" means, with respect to a Contributing Guarantor as of any date of determination, an amount equal to (a) the ratio of (i) the Fair Share Contribution Amount with respect to such Contributing Guarantor to (ii) the aggregate of the Fair Share Contribution Amounts with respect to all Contributing Guarantors multiplied by (b) the aggregate amount paid or distributed on or before such date by all Funding Guarantors under this Guaranty in respect of the obligations guarantied. "FAIR SHARE SHORTFALL" means, with respect to a Contributing Guarantor as of any date of determination, the excess, if any, of the Fair Share of such Contributing Guarantor over the Aggregate Payments of such Contributing Guarantor. "FAIR SHARE CONTRIBUTION AMOUNT" means, with respect to a Contributing Guarantor as of any date of determination, the maximum aggregate amount of the obligations of such Contributing Guarantor under this Guaranty that would not render its obligations hereunder or thereunder subject to avoidance as a fraudulent transfer or conveyance under Section 548 of Title 11 of the United States Code or any applicable provisions of comparable state law; provided that solely for purposes of calculating the "FAIR SHARE CONTRIBUTION AMOUNT" with respect to any Contributing Guarantor for purposes of this Section 7.2, any assets or liabilities of such Contributing Guarantor arising by virtue of any rights to subrogation, reimbursement or indemnification or any rights to or obligations of contribution hereunder shall not be considered as assets or liabilities of such Contributing Guarantor. "AGGREGATE PAYMENTS" means, with respect to a Contributing Guarantor as of any date of determination, an amount equal to (1) the aggregate amount of all payments and distributions made on or before such date by such Contributing Guarantor in respect of this Guaranty (including, without limitation, in respect of this Section 7.2), minus (2) the aggregate amount of all payments received on or before such date by such Contributing Guarantor from the other Contributing Guarantors as contributions under this Section 7.2. The amounts payable as contributions hereunder shall be determined as of the date on which the related payment or distribution is made by the 87 EXECUTION 94 applicable Funding Guarantor. The allocation among Contributing Guarantors of their obligations as set forth in this Section 7.2 shall not be construed in any way to limit the liability of any Contributing Guarantor hereunder. Each Guarantor is a beneficiary to the contribution agreement set forth in this Section 7.2. 7.3. Payment by Guarantors. Subject to Section 7.2, Guarantors hereby jointly and severally agree, in furtherance of the foregoing and not in limitation of any other right which any Beneficiary may have at law or in equity against any Guarantor by virtue hereof, that upon the failure of Borrower to pay any of the Guaranteed Obligations when and as the same shall become due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. ss. 362(a)), Guarantors will upon demand pay, or cause to be paid, in cash, to Administrative Agent for the ratable benefit of Beneficiaries, an amount equal to the sum of the unpaid principal amount of all Guaranteed Obligations then due as aforesaid, accrued and unpaid interest on such Guaranteed Obligations (including interest which, but for the filing of a petition in bankruptcy with respect to Borrower, would have accrued on such Guaranteed Obligations, whether or not a claim is allowed against Borrower for such interest in the related bankruptcy proceeding) and all other Obligations then owed to Beneficiaries as aforesaid. 7.4. Liability of Guarantors Absolute. Each Guarantor agrees that its obligations hereunder are irrevocable, absolute, independent and unconditional and shall not be affected by any circumstance which constitutes a legal or equitable discharge of a guarantor or surety other than payment in full of the Guaranteed Obligations. In furtherance of the foregoing and without limiting the generality thereof, each Guarantor agrees as follows: (1) this Guaranty is a guaranty of payment when due and not of collectibility; (2) Administrative Agent may enforce this Guaranty upon the occurrence of an Event of Default notwithstanding the existence of any dispute between Borrower and any Beneficiary with respect to the existence of such Event of Default; (3) the obligations of each Guarantor hereunder are independent of the obligations of Borrower and the obligations of any other guarantor (including any other Guarantor) of the obligations of Borrower, and a separate action or actions may be brought and prosecuted against such Guarantor whether or not any action is brought against Borrower or any of such other guarantors and whether or not Borrower is joined in any such action or actions; (4) payment by any Guarantor of a portion, but not all, of the Guaranteed Obligations shall in no way limit, affect, modify or abridge any Guarantor's liability for any portion of the Guaranteed Obligations which has not been paid. Without limiting the generality of the foregoing, if Administrative Agent is awarded a judgment in any suit brought to enforce any Guarantor's covenant to pay a portion of the Guaranteed Obligations, such judgment shall not be deemed to release such Guarantor from its covenant to pay the portion of the Guaranteed Obligations that is not 88 EXECUTION 95 the subject of such suit, and such judgment shall not, except to the extent satisfied by such Guarantor, limit, affect, modify or abridge any other Guarantor's liability hereunder in respect of the Guaranteed Obligations; (5) any Beneficiary, upon such terms as it deems appropriate, without notice or demand and without affecting the validity or enforceability hereof or giving rise to any reduction, limitation, impairment, discharge or termination of any Guarantor's liability hereunder, from time to time may (i) renew, extend, accelerate, increase the rate of interest on, or otherwise change the time, place, manner or terms of payment of the Guaranteed Obligations; (ii) settle, compromise, release or discharge, or accept or refuse any offer of performance with respect to, or substitutions for, the Guaranteed Obligations or any agreement relating thereto and/or subordinate the payment of the same to the payment of any other obligations; (iii) request and accept other guaranties of the Guaranteed Obligations and take and hold security for the payment hereof or the Guaranteed Obligations; (iv) release, surrender, exchange, substitute, compromise, settle, rescind, waive, alter, subordinate or modify, with or without consideration, any security for payment of the Guaranteed Obligations, any other guaranties of the Guaranteed Obligations, or any other obligation of any Person (including any other Guarantor) with respect to the Guaranteed Obligations; (v) enforce and apply any security now or hereafter held by or for the benefit of such Beneficiary in respect hereof or the Guaranteed Obligations and direct the order or manner of sale thereof, or exercise any other right or remedy that such Beneficiary may have against any such security, in each case as such Beneficiary in its discretion may determine consistent herewith and any applicable security agreement or Hedge Agreement, including foreclosure on any such security pursuant to one or more judicial or nonjudicial sales, whether or not every aspect of any such sale is commercially reasonable, and even though such action operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of any Guarantor against Borrower or any security for the Guaranteed Obligations; and (vi) exercise any other rights available to it under the Credit Documents or the Hedge Agreements; and (6) this Guaranty and the obligations of Guarantors hereunder shall be valid and enforceable and shall not be subject to any reduction, limitation, impairment, discharge or termination for any reason (other than payment in full of the Guaranteed Obligations), including the occurrence of any of the following, whether or not any Guarantor shall have had notice or knowledge of any of them: (i) any failure or omission to assert or enforce, or agreement or election not to assert or enforce, or the stay or enjoining, by order of court, by operation of law or otherwise, of the exercise or enforcement of, any claim or demand or any right, power or remedy (whether arising under the Credit Documents or the Hedge Agreements, at law, in equity or otherwise) with respect to the Guaranteed Obligations or any agreement relating thereto, or with respect to any other guaranty of or security for the payment of the Guaranteed Obligations; (ii) any rescission, waiver, amendment or modification of, or any consent to departure from, any of the terms or provisions (including provisions relating to events of default) hereof, any of the other Credit Documents or the Hedge Agreements or any agreement or instrument executed pursuant hereto or thereto, or of any other guaranty or security for the Guaranteed Obligations, in each case whether or not in accordance with the terms hereof or such Credit Document or Hedge Agreement or any agreement relating to 89 EXECUTION 96 such other guaranty or security; (iii) the Guaranteed Obligations, or any agreement relating thereto, at any time being found to be illegal, invalid or unenforceable in any respect; (iv) the application of payments received from any source (other than payments received pursuant to the other Credit Documents or any Hedge Agreement or from the proceeds of any security for the Guaranteed Obligations, except to the extent such security also serves as collateral for indebtedness other than the Guaranteed Obligations) to the payment of indebtedness other than the Guaranteed Obligations, even though any Beneficiary might have elected to apply such payment to any part or all of the Guaranteed Obligations; (v) any Beneficiary's consent to the change, reorganization or termination of the corporate structure or existence of Company or any of its Subsidiaries and to any corresponding restructuring of the Guaranteed Obligations; (vi) any failure to perfect or continue perfection of a security interest in any collateral which secures any of the Guaranteed Obligations; (vii) any defenses, set-offs or counterclaims which Borrower may allege or assert against any Beneficiary in respect of the Guaranteed Obligations, including failure of consideration, breach of warranty, payment, statute of frauds, statute of limitations, accord and satisfaction and usury; and (viii) any other act or thing or omission, or delay to do any other act or thing, which may or might in any manner or to any extent vary the risk of any Guarantor as an obligor in respect of the Guaranteed Obligations. 7.5. Waivers by Guarantors. Each Guarantor hereby waives, for the benefit of Beneficiaries: (a) any right to require any Beneficiary, as a condition of payment or performance by such Guarantor, to (i) proceed against Borrower, any other guarantor (including any other Guarantor) of the Guaranteed Obligations or any other Person, (ii) proceed against or exhaust any security held from Borrower, any such other guarantor or any other Person, (iii) proceed against or have resort to any balance of any deposit account or credit on the books of any Beneficiary in favor of Borrower or any other Person, or (iv) pursue any other remedy in the power of any Beneficiary whatsoever; (b) any defense arising by reason of the incapacity, lack of authority or any disability or other defense of Borrower including any defense based on or arising out of the lack of validity or the unenforceability of the Guaranteed Obligations or any agreement or instrument relating thereto or by reason of the cessation of the liability of Borrower from any cause other than payment in full of the Guaranteed Obligations; (c) any defense based upon any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal; (d) any defense based upon any Beneficiary's errors or omissions in the administration of the Guaranteed Obligations, except behavior which amounts to gross negligence, willful misconduct or bad faith; (e)(i) any principles or provisions of law, statutory or otherwise, which are or might be in conflict with the terms hereof and any legal or equitable discharge of such Guarantor's obligations hereunder, (ii) the benefit of any statute of limitations affecting such Guarantor's liability hereunder or the enforcement hereof, (iii) any rights to set-offs, recoupments and counterclaims, and (iv) promptness, diligence and any requirement that any Beneficiary protect, secure, perfect or insure any security interest or lien or any property subject thereto; (f) notices, demands, presentments, protests, notices of protest, notices of dishonor and notices of any action or inaction, including acceptance hereof, notices of default hereunder, the Hedge Agreements or any agreement or instrument related hereto or thereto, notices of any renewal, extension or modification of the Guaranteed Obligations or any agreement related thereto, notices 90 EXECUTION 97 of any extension of credit to Borrower and notices of any of the matters referred to in Section 7.4 and any right to consent to any thereof; and (g) any defenses or benefits that may be derived from or afforded by law which limit the liability of or exonerate guarantors or sureties, or which may conflict with the terms hereof. 7.6. Guarantors' Rights of Subrogation, Contribution, Etc. Each Guarantor hereby waives any claim, right or remedy, direct or indirect, that such Guarantor now has or may hereafter have against Borrower or any of its assets in connection with this Guaranty or the performance by such Guarantor of its obligations hereunder for so long (but only for so long) as any Obligation of any Credit Party remains outstanding, in each case whether such claim, right or remedy arises in equity, under contract, by statute, under common law or otherwise and including, without limitation, (a) any right of subrogation, reimbursement or indemnification that such Guarantor now has or may hereafter have against Borrower with respect to the Guaranteed Obligations, (b) any right to enforce, or to participate in, any claim, right or remedy that any Beneficiary now has or may hereafter have against Borrower, and (c) any benefit of, and any right to participate in, any collateral or security now or hereafter held by any Beneficiary. In addition, until the Guaranteed Obligations shall have been indefeasibly paid in full and the Commitments shall have terminated each Guarantor shall withhold exercise of any right of contribution such Guarantor may have against any other guarantor (including any other Guarantor) of the Guaranteed Obligations, including, without limitation, any such right of contribution as contemplated by Section 7.2. Each Guarantor further agrees that, to the extent the waiver or agreement to withhold the exercise of its rights of subrogation, reimbursement, indemnification and contribution as set forth herein is found by a court of competent jurisdiction to be void or voidable for any reason, any rights of subrogation, reimbursement or indemnification such Guarantor may have against Borrower or against any collateral or security, and any rights of contribution such Guarantor may have against any such other guarantor, shall be junior and subordinate to any rights any Beneficiary may have against Borrower, to all right, title and interest any Beneficiary may have in any such collateral or security, and to any right any Beneficiary may have against such other guarantor. If any amount shall be paid to any Guarantor on account of any such subrogation, reimbursement, indemnification or contribution rights at any time when all Guaranteed Obligations shall not have been paid in full, such amount shall be held in trust for guarantied party on behalf of Beneficiaries and shall forthwith be paid over to guarantied party for the benefit of Beneficiaries to be credited and applied against the Guaranteed Obligations, whether matured or unmatured, in accordance with the terms hereof. 7.7. Subordination of Other Obligations. Any Indebtedness of Borrower or any Guarantor now or hereafter held by any Guarantor (the "OBLIGEE GUARANTOR") is hereby subordinated in right of payment to the Guaranteed Obligations, and any such indebtedness collected or received by the Obligee Guarantor after an Event of Default has occurred and is continuing shall be held in trust for Administrative Agent on behalf of Beneficiaries and shall forthwith be paid over to Administrative Agent for the benefit of Beneficiaries to be credited and applied against the Guaranteed Obligations but without affecting, impairing or limiting in any manner the liability of the Obligee Guarantor under any other provision hereof. 91 EXECUTION 98 7.8. Continuing Guaranty. This Guaranty is a continuing guaranty and shall remain in effect until all of the Guaranteed Obligations shall have been paid in full and the Commitments shall have terminated. Each Guarantor hereby irrevocably waives any right to revoke this Guaranty as to future transactions giving rise to any Guaranteed Obligations. 7.9. Authority of Guarantors or Borrower. It is not necessary for any Beneficiary to inquire into the capacity or powers of any Guarantor or Borrower or the officers, directors or any agents acting or purporting to act on behalf of any of them. 7.10. Financial Condition of Borrower. Any Loan may be granted to Borrower or continued from time to time, and any Hedge Agreement may be entered into from time to time, in each case without notice to or authorization from any Guarantor regardless of the financial or other condition of Borrower at the time of any such grant or continuation or at the time such Hedge Agreement is entered into, as the case may be. No Beneficiary shall have any obligation to disclose or discuss with any Guarantor its assessment, or any Guarantor's assessment, of the financial condition of Borrower. Each Guarantor has adequate means to obtain information from Borrower on a continuing basis concerning the financial condition of Borrower and its ability to perform its obligations under the Credit Documents and the Hedge Agreements, and each Guarantor assumes the responsibility for being and keeping informed of the financial condition of Borrower and of all circumstances bearing upon the risk of nonpayment of the Guaranteed Obligations. Each Guarantor hereby waives and relinquishes any duty on the part of any Beneficiary to disclose any matter, fact or thing relating to the business, operations or conditions of Borrower now known or hereafter known by any Beneficiary. 7.11. Bankruptcy, Etc. (a) So long as any Guaranteed Obligations remain outstanding, no Guarantor shall, without the prior written consent of Administrative Agent acting pursuant to the instructions of Requisite Lenders, commence or join with any other Person in commencing any bankruptcy, reorganization or insolvency proceedings of or against Borrower. The obligations of Guarantors hereunder shall not be reduced, limited, impaired, discharged, deferred, suspended or terminated by any proceeding, voluntary or involuntary, involving the bankruptcy, insolvency, receivership, reorganization, liquidation or arrangement of Borrower or by any defense which Borrower may have by reason of the order, decree or decision of any court or administrative body resulting from any such proceeding. (1) Each Guarantor acknowledges and agrees that any interest on any portion of the Guaranteed Obligations which accrues after the commencement of any proceeding referred to in clause (a) above (or, if interest on any portion of the Guaranteed Obligations ceases to accrue by operation of law by reason of the commencement of said proceeding, such interest as would have accrued on such portion of the Guaranteed Obligations if said proceedings had not been commenced) shall be included in the Guaranteed Obligations because it is the intention of Guarantors and Beneficiaries that the Guaranteed Obligations which are guarantied by Guarantors pursuant hereto should be determined without regard to any rule of law or order which may relieve Borrower of any portion of such Guaranteed Obligations. Guarantors will permit any trustee in bankruptcy, receiver, 92 EXECUTION 99 debtor in possession, assignee for the benefit of creditors or similar person to pay Administrative Agent, or allow the claim of Administrative Agent in respect of, any such interest accruing after the date on which such proceeding is commenced. (2) In the event that all or any portion of the Guaranteed Obligations are paid by Borrower, the obligations of Guarantors hereunder shall continue and remain in full force and effect or be reinstated, as the case may be, in the event that all or any part of such payment(s) are rescinded or recovered directly or indirectly from any Beneficiary as a preference, fraudulent transfer or otherwise, and any such payments which are so rescinded or recovered shall constitute Guaranteed Obligations for all purposes hereunder. 7.12. Notice of Events. As soon as any Guarantor obtains knowledge thereof, such Guarantor shall give Administrative Agent written notice of any condition or event which has resulted in a material adverse change in the financial condition of any Guarantor or Borrower or a breach of or noncompliance with any term, condition or covenant contained herein, any other Credit Document, any Hedge Agreement or any other document delivered pursuant hereto or thereto. 7.13. Discharge of Guaranty Upon Sale of Guarantor. If all of the equity Securities of any Guarantor or any of its successors in interest hereunder shall be sold or otherwise disposed of (including by merger or consolidation) in accordance with the terms and conditions hereof, the Guaranty of such Guarantor or such successor in interest, as the case may be, hereunder shall automatically be discharged and released without any further action by any Beneficiary or any other Person effective as of the time of such Asset Sale; provided that as a condition precedent to such discharge and release, Administrative Agent shall have received evidence satisfactory to it that arrangements satisfactory to it have been made for delivery to Administrative Agent of the applicable Net Asset Sale Proceeds of such disposition pursuant to Section 2.13(a). SECTION 8. EVENTS OF DEFAULT 8.1. Events of Default. If any one or more of the following conditions or events shall occur: (1) FAILURE TO MAKE PAYMENTS WHEN DUE. Failure by Borrower to pay (i) any installment of principal of any Loan when due, whether at stated maturity, by acceleration, by notice of voluntary prepayment, by mandatory prepayment or otherwise; or (ii) any interest on any Loan or any fee or any other amount due hereunder within five (5) days after the date due; or (1) (2) DEFAULT IN OTHER AGREEMENTS. (i) Failure of any Credit Party to pay when due any principal of or interest on or any other amount payable in respect of one or more items of Indebtedness (other than Indebtedness referred to in Section 8.1(a)) in an aggregate principal amount of $5,000,000 or more, in each case beyond the grace period, if any, provided therefor; or (ii) breach or default by any Credit Party with respect to any other material term of (1) one or more items of Indebtedness in the individual or aggregate principal amounts referred to in clause (i) above or (2) 93 EXECUTION 100 any loan agreement, mortgage, indenture or other agreement relating to such item(s) of Indebtedness, in each case beyond the grace period, if any, provided therefor, if the effect of such breach or default is to cause, or to permit the holder or holders of that Indebtedness (or a trustee on behalf of such holder or holders) to cause, that Indebtedness to become or be declared due and payable (or redeemable) prior to its stated maturity or the stated maturity of any underlying obligation, as the case may be; or (3) BREACH OF CERTAIN COVENANTS. Failure of any Credit Party to perform or comply with any term or condition contained in Sections 2.3, 5.1(g), 5.2 or Section 6 (other than, at any time prior to the Initial Funding Date, Sections 5.13(b), 6.6 and Section 6.7) hereof; or (4) BREACH OF REPRESENTATIONS, ETC. Any representation, warranty, certification or other statement made or deemed made by any Credit Party in any Credit Document or in any statement or certificate at any time given by Company or any of its Subsidiaries in writing pursuant hereto or thereto or in connection herewith or therewith shall be false in any material respect as the date made or deemed made; or (5) OTHER DEFAULTS UNDER CREDIT DOCUMENTS. Any Credit Party shall default in the performance of or compliance with any term contained herein or any of the other Credit Documents, other than any such term referred to in any other Section of this Section 8.1 (including, on and after the Initial Funding Date, Sections 5.13(b), 6.6 and 6.7), and such default shall not have been remedied or waived within thirty (30) days after the earlier of (i) an officer of such Credit Party becoming aware of such default or (ii) receipt by Borrower of notice from Administrative Agent or any Lender of such default; or (6) INVOLUNTARY BANKRUPTCY; APPOINTMENT OF RECEIVER, ETC. (i) A court of competent jurisdiction shall enter a decree or order for relief in respect of any Credit Party in an involuntary case under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, which decree or order is not stayed; or any other similar relief shall be granted under any applicable federal or state law; or (ii) an involuntary case shall be commenced against any Credit Party under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect; or a decree or order of a court having jurisdiction in the premises for the appointment of a receiver, liquidator, sequestrator, trustee, custodian or other officer having similar powers over any Credit Party, or over all or a substantial part of its property, shall have been entered; or there shall have occurred the involuntary appointment of an interim receiver, trustee or other custodian of any Credit Party for all or a substantial part of its property; or a warrant of attachment, execution or similar process shall have been issued against any substantial part of the property of any Credit Party, and any such event described in this clause (ii) shall continue for sixty (60) days without having been dismissed, bonded or discharged; or (7) VOLUNTARY BANKRUPTCY. (i) Any Credit Party shall have an order for relief entered with respect to it or commence a voluntary case under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, or shall consent to the 94 EXECUTION 101 entry of an order for relief in an involuntary case, or to the conversion of an involuntary case to a voluntary case, under any such law, or shall consent to the appointment of or taking possession by a receiver, trustee or other custodian for all or a substantial part of its property; or any Credit Party shall make any assignment for the benefit of creditors; or (ii) any Credit Party shall be unable, or shall fail generally, or shall admit in writing its inability, to pay its debts as such debts become due; or the Board of Directors of any Credit Party (or any committee thereof) shall adopt any resolution or otherwise authorize any action to approve any of the actions referred to herein or in Section 8.1(f); or (8) JUDGMENTS OF ATTACHMENTS. Any money judgment, writ or warrant of attachment or similar process involving in the aggregate at any time an amount in excess of $5,000,000 (not adequately covered by insurance as to which a solvent and unaffiliated insurance company has acknowledged coverage) shall be entered or filed against any Credit Party or any of their respective assets and shall remain undischarged, unvacated, unbonded or unstayed for a period of sixty (60) days (or in any event later than five days prior to the date of any proposed sale thereunder); or (9) DISSOLUTION. Any order, judgment or decree shall be entered against any Credit Party decreeing the dissolution or split up of Company or that Subsidiary and such order shall remain undischarged or unstayed for a period in excess of thirty (30) days; or (10) EMPLOYEE BENEFIT PLANS. There shall occur one or more ERISA Events which individually or in the aggregate results in or might reasonably be expected to result in liability of Company, any of its Subsidiaries or any of their respective ERISA Affiliates in excess of $5,000,000 during the term hereof; or there shall exist an amount of unfunded benefit liabilities (as defined in Section 4001(a)(18) of ERISA), individually or in the aggregate for all Pension Plans (excluding for purposes of such computation any Pension Plans with respect to which assets exceed benefit liabilities), which exceeds $5,000,000; or (11) CHANGE OF CONTROL. A Change of Control shall occur; or (12) GUARANTIES, COLLATERAL DOCUMENTS AND OTHER CREDIT DOCUMENTS. At any time after the execution and delivery thereof, (i) the Guaranty for any reason, other than the satisfaction in full of all Obligations, shall cease to be in full force and effect (other than in accordance with its terms) or shall be declared to be null and void or any Guarantor shall repudiate its obligations thereunder, (ii) this Agreement or any Collateral Document ceases to be in full force and effect (other than by reason of a release of Collateral in accordance with the terms hereof or thereof or the satisfaction in full of the Obligations in accordance with the terms hereof) or shall be declared null and void, or Administrative Agent shall not have or shall cease to have a valid and perfected Lien in any material Collateral purported to be covered by the Collateral Documents with the priority required by the relevant Collateral Documents, in each case for any reason other than the failure of Administrative Agent or any Lender to take any action within its control, or (iii) any Credit Party shall contest the validity or enforceability of any Credit Document in writing or deny in writing that 95 EXECUTION 102 it has any further liability, including with respect to future advances by Lenders, under any Credit Document to which it is a party; THEN, (1) upon the occurrence of any Event of Default described in Sections 8.1(f) or 8.1(g), automatically, and (2) upon the occurrence of any other Event of Default, at the request of (or with the consent of) Requisite Lenders, upon notice to Borrower by Administrative Agent, (A) the Commitments, if any, of each Lender having such Commitments shall terminate, and (B) each of the following shall immediately become due and payable, in each case without presentment, demand, protest or other requirements of any kind, all of which are hereby expressly waived by each Credit Party: (I) the unpaid principal amount of and accrued interest on the Loans and (II) all other Obligations. SECTION 9. AGENTS 9.1. Appointment of Agents. GSCP is hereby appointed Sole Lead Arranger and Syndication Agent hereunder, and each Lender hereby authorizes Sole Lead Arranger and Syndication Agent to act as its agent in accordance with the terms hereof and the other Credit Documents. TD is hereby appointed Administrative Agent hereunder and under the other Credit Documents and each Lender hereby authorizes Administrative Agent to act as its agent in accordance with the terms hereof and the other Credit Documents (except with respect to the rights granted to it in the second sentence of Section 9.7). Each of Fleet Boston and MSSF is hereby appointed Co-Documentation Agent hereunder, and each Lender hereby authorizes each Co-Documentation Agent to act as its agent in accordance with the terms hereof and the other Credit Documents. Each Agent hereby agrees to act upon the express conditions contained herein and the other Credit Documents, as applicable. The provisions of this Section 9 are solely for the benefit of Agents and Lenders and no Credit Party shall have any rights as a third party beneficiary of any of the provisions thereof. In performing its functions and duties hereunder, each Agent shall act solely as an agent of Lenders and does not assume and shall not be deemed to have assumed any obligation towards or relationship of agency or trust with or for Company or any of its Subsidiaries. Each Agent, without consent of or notice to any party hereto, may assign any and all of its rights or obligations hereunder to any of its Affiliates. As of the Closing Date, all the respective obligations of (i) GSCP, in its capacity as Syndication Agent and (ii) each of Fleet Boston and MSSF, in its capacity as Co-Documentation Agent, shall terminate. 9.2. Powers and Duties. Each Lender irrevocably authorizes each Agent to take such action on such Lender's behalf and to exercise such powers, rights and remedies hereunder and under the other Credit Documents as are specifically delegated or granted to such Agent by the terms hereof and thereof, together with such powers, rights and remedies as are reasonably incidental thereto. Each Agent shall have only those duties and responsibilities that are expressly specified herein and the other Credit Documents. Each Agent may exercise such powers, rights and remedies and perform such duties by or through its agents or employees. No Agent shall have, by reason hereof or any of the other Credit Documents, a fiduciary relationship in respect of any Lender; and nothing herein or any of the other Credit Documents, expressed or implied, is intended to or shall 96 EXECUTION 103 be so construed as to impose upon any Agent any obligations in respect hereof or any of the other Credit Documents except as expressly set forth herein or therein. 9.3. General Immunity. (1) NO RESPONSIBILITY FOR CERTAIN MATTERS. No Agent shall be responsible to any Lender for the execution, effectiveness, genuineness, validity, enforceability, collectibility or sufficiency hereof or any other Credit Document or for any representations, warranties, recitals or statements made herein or therein or made in any written or oral statements or in any financial or other statements, instruments, reports or certificates or any other documents furnished or made by any of Agent to Lenders or by or on behalf of Borrower to any Agent or any Lender in connection with the Credit Documents and the transactions contemplated thereby or for the financial condition or business affairs of any Credit Party or any other Person liable for the payment of any Obligations, nor shall any Agent be required to ascertain or inquire as to the performance or observance of any of the terms, conditions, provisions, covenants or agreements contained in any of the Credit Documents or as to the use of the proceeds of the Loans or as to the existence or possible existence of any Event of Default or Default. Anything contained herein to the contrary notwithstanding, Administrative Agent shall not have any liability arising from confirmations of the amount of outstanding Loans. (2) EXCULPATORY PROVISIONS. No Agent nor any of its officers, partners, directors, employees or agents shall be liable to Lenders for any action taken or omitted by any Agent under or in connection with any of the Credit Documents except to the extent caused by such Agent's gross negligence or willful misconduct. Each Agent shall be entitled to refrain from any act or the taking of any action (including the failure to take an action) in connection herewith or any of the other Credit Documents or from the exercise of any power, discretion or authority vested in it hereunder or thereunder unless and until such Agent shall have received instructions in respect thereof from Requisite Lenders (or such other Lenders as may be required to give such instructions under Section 10.5) and, upon receipt of such instructions from Requisite Lenders (or such other Lenders, as the case may be), such Agent shall be entitled to act or (where so instructed) refrain from acting, or to exercise such power, discretion or authority, in accordance with such instructions. Without prejudice to the generality of the foregoing, (i) each Agent shall be entitled to rely, and shall be fully protected in relying, upon any communication, instrument or document believed by it to be genuine and correct and to have been signed or sent by the proper Person or Persons, and shall be entitled to rely and shall be protected in relying on opinions and judgments of attorneys (who may be attorneys for Company and its Subsidiaries), accountants, experts and other professional advisors selected by it; and (ii) no Lender shall have any right of action whatsoever against any Agent as a result of such Agent acting or (where so instructed) refraining from acting hereunder or any of the other Credit Documents in accordance with the instructions of Requisite Lenders (or such other Lenders as may be required to give such instructions under Section 10.5). 9.4. Agents Entitled to Act as Lender. The agency hereby created shall in no way impair or affect any of the rights and powers of, or impose any duties or obligations upon, any Agent in its 97 EXECUTION 104 individual capacity as a Lender hereunder. With respect to its participation in the Loans, each Agent, in its individual capacity, shall have the same rights and powers hereunder as any other Lender and may exercise the same as if it were not performing the duties and functions delegated to it hereunder, and the term "LENDER" shall, unless the context clearly otherwise indicates, include each Agent in its individual capacity. Any Agent, in its individual capacity, and its Affiliates may accept deposits from, lend money to and generally engage in any kind of banking, trust, financial advisory or other business with Borrower or any of its Affiliates as if it were not performing the duties specified herein, and may accept fees and other consideration from Borrower for services in connection herewith and otherwise without having to account for the same to Lenders. 9.5. Lenders' Representations, Warranties and Acknowledgment. Each Lender represents and warrants that it has made its own independent investigation of the financial condition and affairs of Company and its Subsidiaries in connection with Loans hereunder and that it has made and shall continue to make its own appraisal of the creditworthiness of Company and its Subsidiaries. No Agent shall have any duty or responsibility, either initially or on a continuing basis, to make any such investigation or any such appraisal on behalf of Lenders or to provide any Lender with any credit or other information with respect thereto, whether coming into its possession before the making of the Loans or at any time or times thereafter, and no Agent shall have any responsibility with respect to the accuracy of or the completeness of any information provided to Lenders. 9.6. Right to Indemnity. Each Lender, in proportion to its Pro Rata Share, severally agrees to indemnify each Agent, to the extent that such Agent shall not have been reimbursed by any Credit Party, for and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including counsel fees and disbursements) or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against such Agent in exercising its powers, rights and remedies or performing its duties hereunder or under the other Credit Documents or otherwise in its capacity as such Agent in any way relating to or arising out hereof or the other Credit Documents; provided that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from such Agent's gross negligence or willful misconduct. If any indemnity furnished to any Agent for any purpose shall, in the opinion of such Agent, be insufficient or become impaired, such Agent may call for additional indemnity and cease, or not commence, to do the acts indemnified against until such additional indemnity is furnished; provided that in no event shall this sentence require any Lender to indemnify any Agent against any liability, obligation, loss, damage, penalty, action, judgment, suit, cost, expense or disbursement in excess of such Lender's Pro Rata Share thereof; and provided further that this sentence shall not be deemed to require any Lender to indemnify any Agent against any liability, obligation, loss, damage, penalty, action, judgment, suit, cost, expense or disbursement described in the proviso in the immediately preceding sentence. 9.7. Successor Administrative Agent. Administrative Agent may resign at any time by giving thirty (30) days' prior written notice thereof to Lenders and Borrower. Upon any such notice of resignation, Requisite Lenders shall have the right, with the consent of Borrower (which shall not be unreasonably withheld or delayed or required at any time an Event of Default shall have occurred 98 EXECUTION 105 and then be continuing), to appoint a successor Administrative Agent. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, that successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After any retiring Administrative Agent's resignation hereunder as Administrative Agent, the provisions of this Section 9 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent hereunder. 9.8. Collateral Documents and Guaranties. (A) ADMINISTRATIVE AGENT AS AGENT UNDER COLLATERAL DOCUMENTS AND GUARANTIES. Each Lender hereby further authorizes Administrative Agent, on behalf of and for the benefit of Lenders, to be the agent for and representative of Lenders with respect to the Guaranty, the Collateral and the Collateral Documents. Subject to Section 10.5, without further written consent or authorization from Lenders, Administrative Agent may execute any documents or instruments necessary to (i) release any Lien encumbering any item of Collateral that is the subject of a sale or other disposition of assets permitted hereby or to which Requisite Lenders (or such other Lenders as may be required to give such consent under Section 10.5) have otherwise consented or (ii) release any Guarantor from the Guaranty pursuant to Section 7.13 or with respect to which Requisite Lenders (or such other Lenders as may be required to give such consent under Section 10.5) have otherwise consented. (1) ADMINISTRATIVE AGENTS' RIGHT TO REALIZE ON COLLATERAL AND ENFORCE GUARANTY. Anything contained in any of the Credit Documents to the contrary notwithstanding, each Credit Party, Administrative Agent and each Lender hereby agree that (i) no Lender shall have any right individually to realize upon any of the Collateral or to enforce the Guaranty, it being understood and agreed that all powers, rights and remedies hereunder may be exercised solely by Administrative Agent for the benefit of Lenders in accordance with the terms hereof, and (ii) in the event of a foreclosure by Administrative Agent on any of the Collateral pursuant to a public or private sale, Administrative Agent or any Lender may be the purchaser of any or all of such Collateral at any such sale and Administrative Agent, as agent for and representative of Lenders (but not any Lender or Lenders in its or their respective individual capacities unless Requisite Lenders shall otherwise agree in writing) shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Obligations as a credit on account of the purchase price for any collateral payable by Administrative Agent at such sale. (2) SUPPLEMENTAL COLLATERAL AGENT. It is the purpose hereof and the other Credit Documents that there shall be no violation of any law of any jurisdiction denying or restricting the right of banking corporations or associations to transact business as agent or trustee in such jurisdiction. It is recognized that in case of litigation hereunder or any of the other Credit Documents, and in particular in case of the enforcement of any of the Credit Documents, or in case Administrative Agent deems that by reason of any present or future law of any jurisdiction it may not exercise any of the rights, powers or remedies granted herein or in any of the other Credit Documents or take any other action which may be desirable or necessary in connection therewith, 99 EXECUTION 106 it may be necessary that Administrative Agent appoint an additional individual or institution as a separate trustee, co-trustee, collateral agent or collateral co-agent (a "SUPPLEMENTAL COLLATERAL AGENT"). In the event that Administrative Agent appoints a Supplemental Collateral Agent with respect to any Collateral, (i) each and every right, power, privilege or duty expressed or intended hereby or any of the other Credit Documents to be exercised by or vested in or conveyed to Administrative Agent with respect to such Collateral shall be exercisable by and vest in such Supplemental Collateral Agent to the extent, and only to the extent, necessary to enable such Supplemental Collateral Agent to exercise such rights, powers and privileges with respect to such Collateral and to perform such duties with respect to such Collateral, and every covenant and obligation contained in the Credit Documents and necessary to the exercise or performance thereof by such Supplemental Collateral Agent shall run to and be enforceable by either Agent or such Supplemental Collateral Agent, and (ii) the provisions of this Section 9 and of Sections 10.2 and 10.3 that refer to Administrative Agent shall inure to the benefit of such Supplemental Collateral Agent and all references therein to Administrative Agent shall be deemed to be references to Administrative Agent and/or such Supplemental Collateral Agent, as the context may require. Should any instrument in writing from Borrower or any other Credit Party be required by any Supplemental Collateral Agent so appointed by Administrative Agent for more fully and certainly vesting in and confirming to him or it such rights, powers, privileges and duties, Borrower shall, or shall cause such Credit Party to, execute, acknowledge and deliver any and all such instruments promptly upon request by Administrative Agent. In case any Supplemental Collateral Agent, or a successor thereto, shall die, become incapable of acting, resign or be removed, all the rights, powers, privileges and duties of such Supplemental Collateral Agent, to the extent permitted by law, shall vest in and be exercised by Administrative Agent until the appointment of a new Supplemental Collateral Agent. SECTION 10. MISCELLANEOUS 10.1. Notices. Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given to a Credit Party or any Agent, shall be sent to such Person's address as set forth on Appendix B or in the other relevant Credit Document, and in the case of any Lender, the address as indicated on Appendix B or otherwise indicated to Administrative Agent in writing. Each notice hereunder shall be in writing and may be personally served, telexed or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service and signed for against receipt thereof, upon receipt of telefacsimile or telex, or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed; provided that no notice to any Agent or Lender shall be effective until received by such Agent or Lender. 10.2. Expenses. Whether or not the transactions contemplated hereby shall be consummated, Borrower agrees to pay promptly (a) all the reasonable out-of-pocket costs and expenses of Sole Lead Arranger associated with the syndication of the credit facilities hereunder and the preparation of the Credit Documents and any consents, amendments, waivers or other modifications thereto; (b) all reasonable costs of furnishing all opinions by counsel for any Credit 100 EXECUTION 107 Party (including any opinions requested by Lenders as to any legal matters arising hereunder) and of Borrower's and each Credit Party's performance of and compliance with all agreements and conditions on its part to be performed or complied with hereunder and the other Credit Documents including with respect to confirming compliance with environmental, insurance and solvency requirements; (c) the reasonable fees, expenses and disbursements of counsel to Sole Lead Arranger in connection with the negotiation, preparation, execution and administration of the Credit Documents and any consents, amendments, waivers or other modifications thereto and any other documents or matters requested by any Credit Party; (d) all the reasonable out-of-pocket expenses of creating and perfecting Liens in favor of Administrative Agent for the benefit of Lenders pursuant hereto, including filing and recording fees, expenses and taxes, stamp or documentary taxes, search fees, title insurance premiums and reasonable fees, expenses and disbursements of counsel to each Agent and of counsel providing any opinions that any Agent or Requisite Lenders may request in respect of the Collateral or the Liens created pursuant to the Collateral Documents; (e) all the reasonable out-of-pocket costs and fees, expenses and disbursements of any auditors, accountants, consultants or appraisers; (f) all the reasonable out of pocket costs and expenses (including the reasonable fees, expenses and disbursements of any appraisers, consultants, advisors and agents employed or retained by Administrative Agent and its counsel) in connection with the custody or preservation of any of the Collateral; (g) all other reasonable out-of-pocket costs and expenses incurred by each Agent in connection with the syndication of the Loans and Commitments and the negotiation, preparation and execution of the Credit Documents and any consents, amendments, waivers or other modifications thereto and the transactions contemplated thereby; and (h) after the occurrence of a Default or an Event of Default, all costs and expenses, including reasonable attorneys' fees and costs of settlement, incurred by any Agent and Lenders in enforcing any Obligations of or in collecting any payments due from any Credit Party hereunder or under the other Credit Documents by reason of such Default or Event of Default (including in connection with the sale of, collection from, or other realization upon any of the Collateral or the enforcement of the Guaranty) or in connection with any refinancing or restructuring of the credit arrangements provided hereunder in the nature of a "work-out" or pursuant to any insolvency or bankruptcy cases or proceedings. 10.3. Indemnity. In addition to the payment of expenses pursuant to Section 10.2, whether or not the transactions contemplated hereby shall be consummated, each Credit Party agrees to defend (subject to Indemnitees' selection of counsel), indemnify, pay and hold harmless, each Agent and Lender and the officers, partners, directors, trustees, employees, agents and Affiliates of each Agent and each Lender (each, an "INDEMNITEE"), from and against any and all Indemnified Liabilities; provided that no Credit Party shall have any obligation to any Indemnitee hereunder with respect to any Indemnified Liabilities to the extent such Indemnified Liabilities arise from the gross negligence or willful misconduct of that Indemnitee. To the extent that the undertakings to defend, indemnify, pay and hold harmless set forth in this Section 10.3 may be unenforceable in whole or in part because they are violative of any law or public policy, the applicable Credit Party shall contribute the maximum portion that it is permitted to pay and satisfy under applicable law to the payment and satisfaction of all Indemnified Liabilities incurred by Indemnitees or any of them. 101 108 10.4. Set-Off. In addition to any rights now or hereafter granted under applicable law and not by way of limitation of any such rights, upon the occurrence and during the continuance of any Event of Default each Lender is hereby authorized by each Credit Party at any time or from time to time subject to the consent of Administrative Agent (such consent not to be unreasonably withheld or delayed), without notice to any Credit Party or to any other Person (other than Administrative Agent), any such notice being hereby expressly waived, to set off and to appropriate and to apply any and all deposits (general or special, including Indebtedness evidenced by certificates of deposit, whether matured or unmatured, but not including trust accounts) and any other Indebtedness at any time held or owing by such Lender to or for the credit or the account of any Credit Party against and on account of the obligations and liabilities of any Credit Party to such Lender hereunder and the other Credit Documents, including all claims of any nature or description arising out of or connected herewith, or any other Credit Document, irrespective of whether or not (a) such Lender shall have made any demand hereunder or (b) the principal of or the interest on the Loans or any other amounts due hereunder shall have become due and payable pursuant to Section 2 and although said obligations and liabilities, or any of them, may be contingent or unmatured. Each Credit Party hereby further grants to Administrative Agent and each Lender a security interest in all Deposit Accounts maintained with Administrative Agent or such Lender as security for the Obligations. 10.5. Amendments and Waivers; Requisite Lenders' Consent. (a) Subject to Sections 10.5(b) and 10.5(c), no amendment, modification, termination or waiver of any provision of the Credit Documents, or consent to any departure by any Credit Party therefrom, shall in any event be effective without the written concurrence of the Requisite Lenders. (1) AFFECTED LENDERS' CONSENT. Without the written consent of each Lender that would be affected thereby (other than a Defaulting Lender), no amendment, modification, termination, or consent shall be effective if the effect thereof would: (1) extend the scheduled final maturity of any Loan or Note; (2) waive, reduce or postpone any scheduled repayment (but not prepayment) or the Delayed Draw Term Loan Commitment Termination Date; (3) reduce the rate of interest on any Loan (other than any waiver of any increase in the interest rate applicable to any Loan pursuant to Section 2.7) or any fee payable hereunder; (4) extend the time for payment of any such interest or fees; (5) reduce the principal amount of any Loan; (6) amend, modify, terminate or waive any provision of this Section 10.5(b), Section 10.5(c) or Section 10.6(a); 102 EXECUTION 109 (7) amend the definition of "REQUISITE LENDERS" or "PRO RATA SHARE"; provided that with the consent of Requisite Lenders (except that such consent shall not be required in the case of Indebtedness incurred or commitments made under Section 2.1(a)(iii) of this Agreement), additional extensions of credit pursuant hereto may be included in the determination of "REQUISITE LENDERS" or "PRO RATA SHARE" on substantially the same basis as the Revolving Loan Commitments, the Revolving Loans, the Delayed Draw Term Loan Commitments, the Delayed Draw Term Loans, the New Term Loan Commitments and the New Term Loans are included on the Closing Date; (8) release or otherwise subordinate all or substantially all of the Collateral or all or substantially all of the Guarantors from the Guaranty except as expressly provided in the Credit Documents; or (9) consent to the assignment or transfer by any Credit Party of any of its rights and obligations under any Credit Document. (2) OTHER CONSENTS. No amendment, modification, termination or waiver of any provision of the Credit Documents, or consent to any departure by any Credit Party therefrom, shall: (1) increase any Commitment of any Lender over the amount thereof then in effect without the consent of such Lender; provided that no amendment, modification or waiver of any condition precedent, covenant, Default or Event of Default shall constitute an increase in any Commitment of any Lender; (2) amend the definition of "REQUISITE CLASS LENDERS" without the consent of Requisite Class Lenders of each Class; provided that with the consent of the Requisite Lenders additional extensions of credit pursuant hereto may be included in the determination of such "REQUISITE CLASS LENDERS" on substantially the same basis as the Revolving Credit Commitments, the Revolving Loans, the Delayed Draw Term Loan Commitments and the Delayed Draw Term Loans the New Term Loan Commitments and the New Term Loans are included on the Closing Date; (3) alter the required application of any repayments or prepayments as between Classes pursuant to Section 2.12 without the consent of Requisite Class Lenders of each Class which is being allocated a lesser repayment or prepayment as a result thereof; provided that Requisite Lenders may waive, in whole or in part, any prepayment so long as the application, as between Classes, of any portion of such prepayment which is still required to be made is not altered; or (4) amend, modify, terminate or waive any provision of Section 9 or Section 10 as the same applies to any Agent, or any other provision hereof (including, without limitation Section 2.1) as the same applies to the rights or obligations of any Agent, in each case without the consent of such Agent. 103 EXECUTION 110 (3) EXECUTION OF AMENDMENTS, ETC. Administrative Agent may, but shall have no obligation to, with the concurrence of any Lender, execute amendments, modifications, waivers or consents on behalf of such Lender. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. No notice to or demand on any Credit Party in any case shall entitle any Credit Party to any other or further notice or demand in similar or other circumstances. Any amendment, modification, termination, waiver or consent effected in accordance with this Section 10.5 shall be binding upon each Lender at the time outstanding, each future Lender and, if signed by a Credit Party, on such Credit Party. 10.6. Successors and Assigns; Participations. (a) This Agreement shall be binding upon the parties hereto and their respective successors and assigns and shall inure to the benefit of the parties hereto and the successors and assigns of Lenders. No Credit Party's rights or obligations hereunder nor any interest therein may be assigned or delegated by any Credit Party without the prior written consent of all Lenders. (1) Borrower, Administrative Agent and Lenders shall deem and treat the Persons listed as Lenders in the Register as the holders and owners of the corresponding Commitments and Loans listed therein for all purposes hereof, and no assignment or transfer of any such Commitment or Loan shall be effective, in each case, unless and until an Assignment Agreement effecting the assignment or transfer thereof shall have been delivered to and accepted by Administrative Agent and recorded in the Register. Prior to such recordation, all amounts owed with respect to the applicable Commitment or Loan shall be owed to the Lender listed in the Register as the owner thereof, and any request, authority or consent of any Person who, at the time of making such request or giving such authority or consent, is listed in the Register as a Lender shall be conclusive and binding on any subsequent holder, assignee or transferee of the corresponding Commitments or Loans. (2) Each Lender shall have the right at any time to sell, assign or transfer all or a portion of its rights and obligations under this Agreement, including, without limitation, all or a portion of its Commitment or Loans owing to it, Note or Notes held by it, or other Obligation (provided that each such assignment shall be of a uniform, and not varying, percentage of all rights and obligations under and in respect of any Loan and its related Commitments): (1) to any Person meeting the criteria of clause (i) of the definition of the term of "ELIGIBLE ASSIGNEE" upon the giving of notice to Borrower and Administrative Agent; and (2) to any Person meeting the criteria of clause (ii) of the definition of the term of "Eligible Assignee" and, in the case of assignments of Commitments and Loans to any such Person (except in the case of assignments made by or to GSCP) consented to by each of Borrower and Administrative Agent (such consent not to be unreasonably withheld or delayed or, in the case of Borrower, required at any time an Event of Default shall have occurred and then be continuing); provided that each such assignment pursuant to this Section 10.6(c)(ii) shall be in an aggregate amount of not less than (A) $5,000,000 (or such 104 EXECUTION 111 lesser amount as may be agreed to by Borrower and Administrative Agent or as shall constitute the aggregate amount of the Revolving Loan Commitments, Revolving Loans and/or the aggregate amount of the Delayed Draw Term Loan Commitments, Delayed Draw Term Loans and other Obligations of the assigning Lender) with respect to the assignment of the Revolving Loan Commitments and Revolving Loans and/or the Delayed Draw Term Loan Commitments and Delayed Draw Term Loans and (B) $1,000,000 (or such lesser amount as may be agreed to by Borrower and the Administrative Agent or as shall constitute the aggregate amount of New Term Loans of the assigning Lender with respect to the assignment of New Term Loans) with respect to the assignment of New Term Loans and/or New Term Loan Commitments; provided further that after giving effect to such assignment, the assigning Lender shall have Commitments and Loans aggregating at least $2,000,000 (unless such assigning Lender is assigning all of its Commitments and Loans), in each case unless otherwise agreed to the Borrower and the Administrative Agent. (3) The assigning Lender and the assignee thereof shall execute and deliver to Administrative Agent an Assignment Agreement, together with (i) unless otherwise agreed to by Administrative Agent a processing and recordation fee of $750 in the case of assignments pursuant to Section 10.6(c)(i) and $3,500 in the case of all other assignments), and (ii) such forms, certificates or other evidence, if any, with respect to United States federal income tax withholding matters as the assignee under such Assignment Agreement may be required to deliver to Administrative Agent pursuant to Section 2.18(c). (4) Upon its receipt of a duly executed and completed Assignment Agreement, together with the processing and recordation fee referred to in Section 10.6(d) (and any forms, certificates or other evidence required by this Agreement in connection therewith), Administrative Agent shall record the information contained in such Assignment Agreement in the Register, shall give prompt notice thereof to Borrower and shall maintain a copy of such Assignment Agreement. (5) Each Lender, upon execution and delivery hereof or upon executing and delivering an Assignment Agreement, as the case may be, represents and warrants as of the Closing Date or as of the applicable Effective Date (as defined in the applicable Assignment Agreement) that it is an Eligible Assignee; it has experience and expertise in the making of or investing in commitments or loans such as the Revolving Loan Commitments or Loans, as the case may be; and it will make or invest in, as the case may be, its Revolving Loan Commitments or Loans for its own account in the ordinary course of its business and without a view to distribution of such Revolving Loan Commitments or Loans within the meaning of the Securities Act or the Exchange Act or other federal securities laws (it being understood that, subject to the provisions of this Section 10.6, the disposition of such Revolving Loan Commitments or Loans or any interests therein shall at all times remain within its exclusive control). (6) Subject to the terms and conditions of this Section 10.6, as of the "Effective Date" specified in the applicable Assignment Agreement: the assignee thereunder shall have the rights and obligations of a "Lender" hereunder to the extent such rights and obligations hereunder have been 105 EXECUTION 112 assigned to it pursuant to such Assignment Agreement and shall thereafter be a party hereto and a "Lender" for all purposes hereof; the assigning Lender thereunder shall, to the extent that rights and obligations hereunder have been assigned thereby pursuant to such Assignment Agreement, relinquish its rights (other than any rights which survive the termination hereof under Section 10.8) and be released from its obligations hereunder (and, in the case of an Assignment Agreement covering all or the remaining portion of an assigning Lender's rights and obligations hereunder, such Lender shall cease to be a party hereto; provided that anything contained in any of the Credit Documents to the contrary notwithstanding, such assigning Lender shall continue to be entitled to the benefit of all indemnities hereunder as specified herein with respect to matters arising out of the prior involvement of such assigning Lender as a Lender hereunder); the Revolving Loan Commitments shall be modified to reflect the Revolving Loan Commitment of such assignee and any remaining Revolving Loan Commitment of such assigning Lender, if any; and if any such assignment occurs after the issuance of any Note hereunder, the assigning Lender shall, upon the effectiveness of such assignment or as promptly thereafter as practicable, surrender its applicable Notes to Administrative Agent for cancellation, and thereupon Borrower shall issue and deliver new Notes, if so requested by the assignee and/or assigning Lender, to such assignee and/or to such assigning Lender, with appropriate insertions, to reflect the new Revolving Loan Commitments, new Delayed Draw Term Loan Commitments and/or outstanding Loans of the assignee and/or the assigning Lender. (7) Each Lender shall have the right at any time to sell one or more participations to any Person (other than Company, any of its Subsidiaries or any of its Affiliates) in all or any part of its Revolving Loan Commitments, Loans or in any other Obligation. The holder of any such participation, other than an Affiliate of the Lender granting such participation, shall not be entitled to require such Lender to take or omit to take any action hereunder except with respect to any amendment, modification or waiver that would (i) extend the final scheduled maturity of any Loan or Note in which such participant is participating, or reduce the rate or extend the time of payment of interest or fees thereon (except in connection with a waiver of applicability of any post-default increase in interest rates) or reduce the principal amount thereof, or increase the amount of the participant's participation over the amount thereof then in effect (it being understood that a waiver of any Default or Event of Default or of a mandatory reduction in the Commitment shall not constitute a change in the terms of such participation, and that an increase in any Commitment or Loan shall be permitted without the consent of any participant if the participant's participation is not increased as a result thereof), (ii) consent to the assignment or transfer by any Credit Party of any of its rights and obligations under this Agreement or (iii) release all or substantially all of the Collateral under the Collateral Documents (except as expressly provided in the Credit Documents) supporting the Loans hereunder in which such participant is participating. All amounts payable by any Credit Party hereunder, including amounts payable to such Lender pursuant to Sections 2.16(c), 2.17 or 2.18, shall be determined as if such Lender had not sold such participation. Each Credit Party and each Lender hereby acknowledge and agree that, solely for purposes of Sections 2.15 and 10.4, any participation will give rise to a direct obligation of each Credit Party to the participant and the participant shall be considered to be a "Lender". 106 EXECUTION 113 (8) In addition to any other assignment permitted pursuant to this Section 10.6, (i) any Lender may assign and pledge all or any portion of its Loans, the other Obligations owed to such Lender, and its Notes, if any, to secure obligations of such Lender, including any pledge or assignment to secure obligations to any Federal Reserve Bank, and this Section 10.6 shall not apply to any such pledge or assignment of a security interest; provided, (x) no Lender, as between Borrower and such Lender, shall be relieved of any of its obligations hereunder as a result of any such assignment and pledge and (y) in no event shall the applicable pledgee or assignee be considered to be a "Lender" or be entitled to require the assigning Lender to take or omit to take any action hereunder and (z) any transfer of the rights and obligations of a "Lender" hereunder to any Person upon the foreclosure of any pledge or security interest referred to in this clause (i) may only be made pursuant to the provisions of Sections 10.6(c) through (e) governing assignments of interests in the Loans. 10.7. Independence of Covenants. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or would otherwise be within the limitations of, another covenant shall not avoid the occurrence of a Default or an Event of Default if such action is taken or condition exists. 10.8. Survival of Representations, Warranties and Agreements. All representations, warranties and agreements made herein shall survive the execution and delivery hereof and the making of any Loan. Notwithstanding anything herein or implied by law to the contrary, the agreements of each Credit Party set forth in Sections 2.16(c), 2.17, 2.18, 7.2, 10.2, 10.3 and 10.4 and the agreements of Lenders set forth in Sections 2.15 and 9.6 shall survive the payment of the Loans. 10.9. No Waiver; Remedies Cumulative. No failure or delay on the part of Administrative Agent or any Lender in the exercise of any power, right or privilege hereunder or under any other Credit Document shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other power, right or privilege. The rights, powers and remedies given to each Agent and each Lender hereby are cumulative and shall be in addition to and independent of all rights, powers and remedies existing by virtue of any statute or rule of law or in any of the other Credit Documents or any Hedge Agreement. Any forbearance or failure to exercise, and any delay in exercising, any right, power or remedy hereunder shall not impair any such right, power or remedy or be construed to be a waiver thereof, nor shall it preclude the further exercise of any such right, power or remedy. 10.10. Marshalling; Payments Set Aside. Neither Administrative Agent nor any Lender shall be under any obligation to marshal any assets in favor of any Credit Party or any other Person or against or in payment of any or all of the Obligations. To the extent that any Credit Party makes a payment or payments to Administrative Agent or Lenders (or to Administrative Agent on behalf of Lenders), or Administrative Agent or Lenders enforce any security interests or exercise their rights of setoff, and such payment or payments or the proceeds of such enforcement or setoff or any part 107 EXECUTION 114 thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, any other state or federal law, common law or any equitable cause, then, to the extent of such recovery, the obligation or part thereof originally intended to be satisfied, and all Liens, rights and remedies therefor or related thereto, shall be revived and continued in full force and effect as if such payment or payments had not been made or such enforcement or setoff had not occurred. 10.11. Severability. In case any provision in or obligation hereunder or any Note shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 10.12. Entire Agreement. This Agreement (together with the Exhibits hereto, the schedules hereto and the other agreements, documents and instruments delivered in connection herewith) and the Credit Documents constitute the entire agreement among the parties with respect to the subject matter hereof and thereof and supersede all other prior agreements and understandings, both written and verbal, among the parties or any of them with respect to the subject matter hereof. 10.13. Obligations Several; Independent Nature of Lenders' Rights. The obligations of Lenders hereunder are several and no Lender shall be responsible for the obligations or Commitments of any other Lender hereunder. Nothing contained herein or in any other Credit Document, and no action taken by Lenders pursuant hereto or thereto, shall be deemed to constitute Lenders as a partnership, an association, a joint venture or any other kind of entity. The amounts payable at any time hereunder to each Lender shall be a separate and independent debt, and each Lender shall be entitled to protect and enforce its rights hereunder and it shall not be necessary for any other Lender to be joined as an additional party in any proceeding for such purpose. 10.14. Headings. Section headings herein are included herein for convenience of reference only and shall not constitute a part hereof for any other purpose or be given any substantive effect. 10.15. APPLICABLE LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES THEREOF. 10.16. CONSENT TO JURISDICTION. ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST ANY CREDIT PARTY ARISING OUT OF OR RELATING HERETO OR ANY OTHER CREDIT DOCUMENT, OR ANY OF THE OBLIGATIONS, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, EACH CREDIT PARTY, FOR ITSELF AND IN CONNECTION WITH ITS 108 EXECUTION 115 PROPERTIES, IRREVOCABLY ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO THE APPLICABLE CREDIT PARTY AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SECTION 10.1; AGREES THAT SERVICE AS PROVIDED IN CLAUSE (c) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER THE APPLICABLE CREDIT PARTY IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; AND AGREES SUCH LENDERS RETAIN THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST ANY CREDIT PARTY IN THE COURTS OF ANY OTHER JURISDICTION. 10.17. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING HEREUNDER OR UNDER ANY OF THE OTHER CREDIT DOCUMENTS OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS LOAN TRANSACTION OR THE LENDER/BORROWER RELATIONSHIP THAT IS BEING ESTABLISHED. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. EACH PARTY HERETO ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS AGREEMENT, AND THAT EACH WILL CONTINUE TO RELY ON THIS WAIVER IN ITS RELATED FUTURE DEALINGS. EACH PARTY HERETO FURTHER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 10.17 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS HERETO OR ANY OF THE OTHER CREDIT DOCUMENTS OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE LOANS MADE HEREUNDER. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 10.18. Confidentiality. Each Lender shall hold all non-public information obtained pursuant to the requirements hereof in accordance with such Lender's customary procedures for handling confidential information of this nature and in accordance with prudent lending or investing practices, 109 EXECUTION 116 it being understood and agreed by Company that in any event a Lender may make disclosures to Affiliates of such Lender (and to other persons authorized by a Lender or Agent to organize, present or disseminate such information in connection with disclosures otherwise made in accordance with this Section 10.18) or disclosures reasonably required by any bona fide or potential assignee, transferee or participant in connection with the contemplated assignment, transfer or participation by such Lender of any Loans or any participations therein or by any direct or indirect contractual counterparties (or the professional advisors thereto) in Hedge Agreements (provided that such counterparties and advisors are advised of and agree to be bound by the provisions of this Section 10.18) or disclosures required or requested by any governmental agency or representative thereof or by the NAIC or pursuant to legal process; provided that unless prohibited by applicable law or court order, each Lender shall make reasonable efforts to notify Company of any request by any governmental agency or representative thereof (other than any such request in connection with any examination of the financial condition or other routine examination of such Lender by such governmental agency) for disclosure of any such non-public information prior to disclosure of such information; and provided further that in no event shall any Lender be obligated or required to return any materials furnished by Company or any of its Subsidiaries. 10.19. Usury Savings Clause. Notwithstanding any other provision herein, the aggregate interest rate charged with respect to any of the Obligations, including all charges or fees in connection therewith deemed in the nature of interest under applicable law shall not exceed the Highest Lawful Rate. If the rate of interest (determined without regard to the preceding sentence) under this Agreement at any time exceeds the Highest Lawful Rate, the outstanding amount of the Loans made hereunder shall bear interest at the Highest Lawful Rate until the total amount of interest due hereunder equals the amount of interest which would have been due hereunder if the stated rates of interest set forth in this Agreement had at all times been in effect. In addition, if when the Loans made hereunder are repaid in full the total interest due hereunder (taking into account the increase provided for above) is less than the total amount of interest which would have been due hereunder if the stated rates of interest set forth in this Agreement had at all times been in effect, then to the extent permitted by law, Borrower shall pay to Administrative Agent an amount equal to the difference between the amount of interest paid and the amount of interest which would have been paid if the Highest Lawful Rate had at all times been in effect. Notwithstanding the foregoing, it is the intention of Lenders and Borrower to conform strictly to any applicable usury laws. Accordingly, if any Lender contracts for, charges, or receives any consideration which constitutes interest in excess of the Highest Lawful Rate, then any such excess shall be cancelled automatically and, if previously paid, shall at such Lender's option be applied to the outstanding amount of the Loans made hereunder or be refunded to Borrower. 110 EXECUTION 117 10.20. Counterparts; Effectiveness. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. This Agreement shall become effective upon the execution of a counterpart hereof by all Lenders, Agents, Company, Borrower and each Guarantor and receipt by Borrower and Administrative Agent of written or telephonic notification of such execution and authorization of delivery thereof. [Remainder of page intentionally left blank.] 111 EXECUTION 118 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. COMPANY: ALLEGIANCE TELECOM, INC. By: --------------------------------- Name: Title: BORROWER: ALLEGIANCE TELECOM COMPANY WORLDWIDE By: --------------------------------- Name: Title: GUARANTORS: ALLEGIANCE TELECOM SERVICE CORPORATION, as a Guarantor By: --------------------------------- Name: Title: ALLEGIANCE TELECOM INTERNATIONAL, INC., as a Guarantor By: --------------------------------- Name: Title: INTERNET ALLEGIANCE INC, as a Guarantor By: --------------------------------- Name: Title: S-1 EXECUTION 119 ALLEGIANCE TELECOM OF TEXAS, INC., as a Guarantor By: --------------------------------- Name: Title: ALLEGIANCE TELECOM OF ILLINOIS, INC., as a Guarantor By: --------------------------------- Name: Title: ALLEGIANCE TELECOM OF MICHIGAN, INC., as a Guarantor By: --------------------------------- Name: Title: ALLEGIANCE TELECOM OF MARYLAND, INC., as a Guarantor By: --------------------------------- Name: Title: ALLEGIANCE TELECOM OF THE DISTRICT OF COLUMBIA, INC., as a Guarantor By: --------------------------------- Name: Title: S-2 EXECUTION 120 ALLEGIANCE TELECOM OF COLORADO, INC., as a Guarantor By: --------------------------------- Name: Title: ALLEGIANCE TELECOM OF FLORIDA, INC., as a Guarantor By: --------------------------------- Name: Title: ALLEGIANCE TELECOM OF CALIFORNIA, INC., as a Guarantor By: --------------------------------- Name: Title: ALLEGIANCE TELECOM OF NEW YORK, INC., as a Guarantor By: --------------------------------- Name: Title: ALLEGIANCE TELECOM OF VIRGINIA, INC., as a Guarantor By: --------------------------------- Name: Title: S-3 EXECUTION 121 ALLEGIANCE TELECOM OF MASSACHUSETTS, INC., as a Guarantor By: --------------------------------- Name: Title: ALLEGIANCE TELECOM OF ARIZONA, INC., as a Guarantor By: --------------------------------- Name: Title: ALLEGIANCE TELECOM OF MISSOURI, INC., as a Guarantor By: --------------------------------- Name: Title: ALLEGIANCE TELECOM OF OHIO, INC., as a Guarantor By: --------------------------------- Name: Title: ALLEGIANCE TELECOM OF WASHINGTON, INC., as a Guarantor By: --------------------------------- Name: Title: S-4 EXECUTION 122 KIVEX, INC., as a Guarantor By: --------------------------------- Name: Title: CONNECTNET, INC., as a Guarantor By: --------------------------------- Name: Title: S-5 EXECUTION 123 AGENTS GOLDMAN SACHS CREDIT PARTNERS L.P., AND LENDERS: as Syndication Agent, Sole Lead Arranger and a Lender By: --------------------------------- Authorized Signatory S-6 EXECUTION 124 TORONTO DOMINION (TEXAS), INC., as Administrative Agent and a Lender By: --------------------------------- Name: Title: S-7 EXECUTION 125 BANK BOSTON, N.A., as Co-Documentation Agent and a Lender By: --------------------------------- Name: Title: S-8 EXECUTION 126 MORGAN STANLEY SENIOR FUNDING, INC., as Co-Documentation Agent and a Lender By: --------------------------------- Name: Title: S-9 EXECUTION 127 THE BANK OF NEW YORK, as Managing Agent and a Lender By: --------------------------------- Name: Title: S-10 EXECUTION 128 PNC BANK, NATIONAL ASSOCIATION, as Managing Agent and a Lender By: --------------------------------- Name: Title: S-11 EXECUTION 129 CREDIT LYONNAIS NEW YORK BRANCH, as Managing Agent and a Lender By: --------------------------------- Name: Title: S-12 EXECUTION 130 FIRST UNION NATIONAL BANK, as Managing Agent and a Lender By: --------------------------------- Name: Title: S-13 EXECUTION 131 GENERAL ELECTRIC CAPITAL CORPORATION, as Managing Agent and a Lender By: --------------------------------- Name: Title: S-14 EXECUTION 132 THE BANK OF NOVA SCOTIA, as Managing Agent and a Lender By: --------------------------------- Name: Title: S-15 EXECUTION 133 DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES, as Managing Agent and a Lender By: --------------------------------- Name: Title: By: --------------------------------- Name: Title: S-16 EXECUTION 134 CITICORP USA, INC., as Managing Agent and a Lender By: --------------------------------- Name: Title: S-17 EXECUTION 135 ABN AMRO BANK N.V., as Managing Agent and a Lender By: --------------------------------- Name: Title: S-18 EXECUTION 136 BANK OF AMERICA N.A., as Managing Agent and a Lender By: --------------------------------- Name: Title: S-19 EXECUTION 137 FRANKLIN FLOATING RATE TRUST, as Managing Agent and a Lender By: --------------------------------- Name: Title: S-20 EXECUTION 138 MEESPIERSON CAPITAL CORP., as Managing Agent and a Lender By: --------------------------------- Name: Title: By: --------------------------------- Name: Title: S-21 EXECUTION 139 DLJ, CAPITAL FUNDING INC., as Managing Agent and a Lender By: --------------------------------- Name: Title: S-22 EXECUTION 140 BEAR STEARNS CORPORATE LENDING INC., as Managing Agent and a Lender By: --------------------------------- Name: Title: S-23 EXECUTION 141 UBS AG, STAMFORD BRANCH, as Managing Agent and a Lender By: --------------------------------- Name: Title: By: --------------------------------- Name: Title: S-24 EXECUTION 142 LENDERS: UNION BANK OF CALIFORNIA, N.A., as a Lender By: --------------------------------- Name: Title: S-25 EXECUTION 143 HELLER FINANCIAL, INC., as a Lender By: --------------------------------- Name: Title: S-26 EXECUTION 144 BANK OF MONTREAL, as a Lender By: --------------------------------- Name: Title: S-27 EXECUTION 145 PARIBAS, as a Lender By: --------------------------------- Name: Title: By: --------------------------------- Name: Title: S-28 EXECUTION 146 BANK AUSTRIA CREDITANSTALT CORPORATE FINANCE INC., as a Lender By: --------------------------------- Name: Title: S-29 EXECUTION 147 IBM CREDIT CORPORATION, as a Lender By: --------------------------------- Name: Title: S-30 EXECUTION 148 ING (US) CAPITAL LLC, as a Lender By: --------------------------------- Name: Title: S-31 EXECUTION 149 APPENDIX A TO CREDIT AND GUARANTY AGREEMENT
Pro Lender Revolving Loan Pro Delayed Draw Term Rata Commitment Rata Share Loan Commitment Share Toronto Dominion (Texas) Inc. $16,800,000 3.36% $ 7,200,000 1.44% Goldman Sachs Credit Partners L.P. $16,800,000 3.36% $ 7,200,000 1.44% Morgan Stanley Senior Funding, Inc. $16,800,000 3.36% $ 7,200,000 1.44% BankBoston, N.A $16,800,000 3.36% $ 7,200,000 1.44% ABN AMRO Bank N.V $14,000,000 2.80% $ 6,000,000 1.20% Bank of America N.A $14,000,000 2.80% $ 6,000,000 1.20% Bear Stearns Corporate Lending Inc. $14,000,000 2.80% $ 6,000,000 1.20% The Bank of New York $14,000,000 2.80% $ 6,000,000 1.20% The Bank of Nova Scotia $14,000,000 2.80% $ 6,000,000 1.20% Citicorp USA, Inc. $14,000,000 2.80% $ 6,000,000 1.20% Credit Lyonnais New York Branch $14,000,000 2.80% $ 6,000,000 1.20% DLJ, Captial Funding Inc. $14,000,000 2.80% $ 6,000,000 1.20% Dresdner Bank AG, New York and Grand Cayman Branches $14,000,000 2.80% $ 6,000,000 1.20% First Union National Bank $14,000,000 2.80% $ 6,000,000 1.20% Franklin Floating Rate Trust $14,000,000 2.80% $ 6,000,000 1.20% General Electric Capital Corporation $14,000,000 2.80% $ 6,000,000 1.20% ING (US) Capital LLC $14,000,000 2.80% $ 6,000,000 1.20% MeesPierson Capital Corp. $14,000,000 2.80% $ 6,000,000 1.20% PNC Bank, National Association $14,000,000 2.80% $ 6,000,000 1.20% UBS AG, Stamford Branch $14,000,000 2.80% $ 6,000,000 1.20%
APPENDIX A-1 EXECUTION 150
Pro Lender Revolving Loan Pro Delayed Draw Term Rata Commitment Rata Share Loan Commitment Share Bank Austria Creditanstalt Corporate Finance Inc. $ 9,800,000 1.96% $ 4,200,000 0.84% Bank of Montreal $ 9,800,000 1.96% $ 4,200,000 0.84% Heller Financial, Inc. $ 9,800,000 1.96% $ 4,200,000 0.84% IBM Credit Corporation $ 9,800,000 1.96% $ 4,200,000 0.84% Paribas $ 9,800,000 1.96% $ 4,200,000 0.84% Union Bank of California, N.A $ 9,800,000 1.96% $ 4,200,000 0.84% Total $350,000,000 100% $150,000,000 100%
APPENDIX A-2 EXECUTION 151 APPENDIX B TO CREDIT AND GUARANTY AGREEMENT NOTICE ADDRESSES ALLEGIANCE TELECOM, INC. Allegiance Telecom, Inc. 4 Westbrook Corporate Center, Suite 400 Westchester, Illinois 60154 Attention: Mark B. Tresnowski Telephone: 708-836-5240 Facsimile: 708-836-5250 For each of the following: ALLEGIANCE TELECOM COMPANY WORLDWIDE ALLEGIANCE TELECOM SERVICE CORPORATION ALLEGIANCE TELECOM INTERNATIONAL, INC. INTERNET ALLEGIANCE, INC. ALLEGIANCE TELECOM OF ILLINOIS, INC. ALLEGIANCE TELECOM OF MICHIGAN, INC. ALLEGIANCE TELECOM OF MARYLAND, INC. ALLEGIANCE TELECOM OF THE DISTRICT OF COLUMBIA, INC. ALLEGIANCE TELECOM OF COLORADO, INC. ALLEGIANCE TELECOM OF FLORIDA, INC.. ALLEGIANCE TELECOM OF CALIFORNIA, INC.. ALLEGIANCE TELECOM OF NEW YORK, INC. ALLEGIANCE TELECOM OF TEXAS, INC. ALLEGIANCE TELECOM OF VIRGINIA, INC. ALLEGIANCE TELECOM OF MASSACHUSETTS, INC. ALLEGIANCE TELECOM OF ARIZONA, INC. ALLEGIANCE TELECOM OF MISSOURI, INC. ALLEGIANCE TELECOM OF OHIO, INC. ALLEGIANCE TELECOM OF WASHINGTON, INC. KIVEX, INC. CONNECTNET, INC. c/o Allegiance Telecom, Inc. 4 Westbrook Corporate Center, Suite 400 Westchester, Illinois 60154 Attention: Mark B. Tresnowski Telephone: 708-836-5240 Facsimile: 708-836-5250 APPENDIX B-1 EXECUTION 152 In each case, with a copy to: Kirkland & Ellis 200 East Randolph Drive Chicago, Illinois 60601 Attention: Andrew M. Kaufman Telephone: 312-861-2313 Facsimile: 312-861-2200 APPENDIX B-2 EXECUTION 153 GOLDMAN SACHS CREDIT PARTNERS L.P., as Syndication Agent Goldman Sachs Credit Partners L.P. c/o Goldman, Sachs & Co. 85 Broad Street New York, New York 10004 Attention: Stephen King Telephone: 212-902-8123 Facsimile: 212-902-1021 with a copy of all Notices to: Goldman Sachs Credit Partners L.P. c/o Goldman, Sachs & Co. 85 Broad Street New York, New York 10004 Attention: John Makrinos Telephone: 212-902-5977 Facsimile: 212-357-4597 APPENDIX B-3 EXECUTION 154 TORONTO DOMINION (TEXAS), INC., as Administrative Agent Administrative Agent's Principal Office: Toronto Dominion Bank - Houston Agency 909 Fannin Street, Suite 1700 Houston, TX 77010 Attention: Diane Bailey Attention: Kimberly Burleson Telephone: 713-653-8241 Facsimile: 713-951-0033 APPENDIX B-4 EXECUTION 155 BANK BOSTON, N.A. as Co-Documentation Agent Co-Documentation Agent's Principal Office: 100 Federal Street MA: BOSO-08-08 Boston, MA 02110 Attention: Margie Hery, Loan Administrator Telephone: 617-434-9725 Facsimile: 617-434-9820 In each case, with a copy to: 100 Federal Street MA: BOSO-08-08 Boston, MA 02110 Attention: Kay Campbell Telephone: 617-434-9584 Facsimile: 617-434-3401 APPENDIX B-5 EXECUTION 156 MORGAN STANLEY SENIOR FUNDING, INC. as Co-Documentation Agent Co-Documentation Agent's Principal Office: 1221 Avenue of the Americas New York, New York 10020 Attention: Morgan Edwards, Principal Telephone: 212-762-5814 Facsimile: 212-762-9181 In each case, with a copy to: 1221 Avenue of the Americas New York, New York 10020 Attention: Mark Cross Telephone: 212-762-6755 Facsimile: 212-762-9181 APPENDIX B-6 EXECUTION 157 THE BANK OF NEW YORK as Managing Agent and a Lender Lender's Principal Office: The Bank of New York One Wall Street New York, NY 10286 Attention: Andrew Moore Telephone: 212-635-8746 Facsimile: 212-635-8593 APPENDIX B-7 EXECUTION 158 THE BANK OF NOVA SCOTIA as Managing Agent and a Lender Lender's Principal Office: The Bank of Nova Scotia One Liberty Plaza New York, NY 10006 Attention: Robert Cole Telephone: 212-225-5058 Facsimile: 212-225-5090 In each case, with a copy to: The Bank of Nova Scotia One Liberty Plaza New York, NY 10006 Attention: Steve Levi Telephone: 212-225-5039 Facsimile: 212-225-5090 APPENDIX B-8 EXECUTION 159 DRESDNER BANK AG, NEW YORK AND CAYMAN ISLAND BRANCHES as Managing Agent and a Lender Lender's Principal Office: Dresdner Bank AG, New York Branch 75 Wall Street New York, NY 10005 Attention: Jane Majeski Telephone: 212-429-2100 Facsimile: 212-429-4181 APPENDIX B-9 EXECUTION 160 CITICORP USA, INC. as Managing Agent and a Lender Lender's Principal Office: 390 Greenwich Street New York, New York 10013 Attention: James Garvin Telephone: 212-723-6662 Facsimile: 212-723-8547 APPENDIX B-10 EXECUTION 161 CREDIT LYONNAIS, NEW YORK BRANCH as Managing Agent and a Lender Lender's Principal Office: 1301 Avenue of the Americas New York, New York 10019 Attention: John Judge Telephone: 212-261-7841 Facsimile: 212-261-3288 In each case, with a copy to: 1301 Avenue of the Americas New York, New York 10019 Attention: David Bernstein Telephone: 212-261-7057 Facsimile: 212-459-3187 APPENDIX B-11 EXECUTION 162 FIRST UNION NATIONAL BANK as Managing Agenet and a Lender Lender's Principal Office: 301 S. College Street NC0735 Charlotte, NC 28288-0735 Attention: Mark L. Cook, Sr. Vice President Telephone: 704-374-4636 Facsimile: 704-374-4092 In each case, with a copy to: 301 S. College Street NC0735 Charlotte, NC 28288-0735 Attention: Mark Harden Telephone: 704-383-1369 Facsimile: 704-374-4092 APPENDIX B-12 EXECUTION 163 GENERAL ELECTRIC CAPTIAL CORPORATION as Managing Agent and a Lender Lender's Principal Office: 120 Long Ridge Road Stamford, CT 06927 Attention: Jim Morris Telephone: 203-961-2193 Facsimile: 203-708-1256 In each case, with a copy to: 120 Long Ridge Road Stamford, CT 06927 Attention: Brian Jack Telephone: 203-357-6859 Facsimile: 203-357-3962 APPENDIX B-13 EXECUTION 164 HELLER FINANCIAL, INC. as a Lender Lender's Principal Office: 500 W. Monroe Chicago, IL 60661 Attention: Craig Gallehugh Telephone: 312-441-7630 Facsimile: 312-441-7357 APPENDIX B-14 EXECUTION 165 PNC BANK, NATIONAL ASSOCIATION as Managing Agent and a Lender Lender's Principal Office: PNC Bank, N.A. 1600 Market Street Philadelphia, PA 19103 Attention: Jeffrey E. Hauser Telephone: 215-585-6468 Facsimile: 215-585-6680 In each case, with a copy to: PNC Bank, N.A. 1600 Market Street Philadelphia, PA 19103 Attention: Karen Kooman Telephone: 215-585-6470 Facsimile: 215-585-6680 APPENDIX B-15 EXECUTION 166 UNION BANK OF CALIFORNIA, N.A. as a Lender Lender's Principal Office: 445 So. Figueroa Street Monterey Park, CA 90071-7601 Attention: Keith Wilson Telephone: 213-236-6514 Facsimile: 323-236-5747 APPENDIX B-16 EXECUTION 167 ABN AMRO BANK N.V. as Managing Agent and a Lender Lender's Principal Office: 500 Park Avenue New York, NY 10022 Attention: Tom Byrne Telephone: 212-446-4241 Facsimile: 212-446-4203 In each case, with a copy to: 208 South LaSalle Street Suite 1500 Chicago, IL 60604-10003 Attention: Loan Administration Telephone: 312-992-5151 Facsimile: 312-992-5156 APPENDIX B-17 EXECUTION 168 BANK OF AMERICA, N.A. as Managing Agent and a Lender Lender's Principal Office: 901 Main Street Dallas, TX 75202 Attention: Roselyn Drake Telephone: 214-209-0988 Facsimile: 214-209-9390 In each case, with a copy to: 901 Main Street Dallas, TX 75202 Attention: Michael Cannon Telephone: 214-209-0760 Facsimile: 214-209-9390 APPENDIX B-18 EXECUTION 169 FRANKLIN FLOATING RATE TRUST as Managing Agent and a Lender Lender's Principal Office: 777 Mariners Island Boulevard San Mateo, CA 94404-1585 Attention: Maryanne Chase Telephone: 650-525-7424 Facsimile: 650-312-3346 APPENDIX B-19 EXECUTION 170 MEESPIERSON CAPITAL CORP. as Managing Agent and a Lender Lender's Principal Office: 3 Stamford Plaza (301 Tresser Boulevard) Stamford, CT 06927 Attention: Scott Webster Telephone: 203-705-5752 Facsimile: 203-705-5890 APPENDIX B-20 EXECUTION 171 DLJ, CAPITAL FUNDING INC. as Managing Agent and a Lender Lender's Principal Office: 277 Park Avenue New York, NY 10172 Attention: Tom Newbury Telephone: 212-892-2409 Facsimile: 212-892-5286 In each case, with a copy to: 277 Park Avenue New York, NY 10172 Attention: Diane Albany Telephone: 212-892-2903 Facsimile: 212-892-6031 APPENDIX B-21 EXECUTION 172 BEAR STEARNS CORPORATE LENDING as Managing Agent and a Lender Lender's Principal Office: 245 Park Avenue New York, New York 10172 Attention: Gloria Dombrowski Telephone: 212-272-6043 Facsimile: 212-272-4844 In each case, with a copy to: 245 Park Avenue New York, New York 10172 Attention: Steve Capp Telephone: 212-272-3669 Facsimile: 212-272-9743 APPENDIX B-22 EXECUTION 173 UBS AG, STAMFORD BRANCH as Managing Agent and a Lender Lender's Principal Office: 677 Washington Bouelvard Stamford, CT 06912 Attention: Philip Fitzgerald Telephone: 203-719-5993 Facsimile: 212-719-4176 In each case, with a copy to: Warburg Dillon Read 299 Park Avenue New York, NY 10171 Attention: Wit Williams Telephone: 212-821-4469 Facsimile: 212-821-6136 APPENDIX B-23 EXECUTION 174 BANK OF MONTREAL as a Lender Lender's Principal Office: 430 Park Avenue New York, New York 10022 Attention: Tom Calder Telephone: 212-605-1460 Facsimile: 212-605-1621 In each case, with a copy to: 430 Park Avenue New York, New York 10022 Attention: Mr. Ola Anderson Telephone: 212-605-1453 Facsimile: 212-605-1621 APPENDIX B-24 EXECUTION 175 PARIBAS as a Lender Lender's Principal Office: 2029 Century Park East Suite 3900 Los Angeles, CA 90067 Attention: Darlynn Ernst Telephone: 310-551-7350 Facsimile: 310-556-3762 APPENDIX B-25 EXECUTION 176 BANK AUSTRIA CREDITANSTALT CORPORATE FINANCE, INC. as a Lender Lender's Principal Office: Two Greenwich Plaza 2nd Floor Greenwich, CT 06830 Attention: Robert Biringer Telephone: 203-861-1408 Facsimile: 203-861-1532 In each case, with a copy to: Two Ravinia Drive Suite 1680 Atlanta, GA 30346 Attention: Richard Varalla Telephone: 770-390-1854 Facsimile: 770-390-1851 APPENDIX B-26 EXECUTION 177 IBM CREDIT CORPORATION as a Lender Lender's Principal Office: North Castle Drive Armonk, New York 10504 Attention: Ron Bachner Telephone: 914-765-6068 Facsimile: 914-765-6430 In each case, with a copy to: North Castle Drive Armonk, New York 10504 Attention: Ronald Perkrul Telephone: 914-765-6578 Facsimile: 914-765-6430 APPENDIX B-27 EXECUTION 178 ING (US) CAPITAL LLC as a Lender Lender's Principal Office: 55 East 52nd Street New York, New York 10055 Attention: David Gray Telephone: 212-409-7044 Facsimile: 212-409-5852 In each case, with a copy to: 55 East 52nd Street New York, New York 10055 Attention: Susanne Camus Telephone: 212-409-5218 Facsimile: 212-409-5852 APPENDIX B-28 EXECUTION EX-11.1 7 COMPUTATION OF PER SHARE EARNINGS YEAR END 12/99 1 EXHIBIT 11.1 ALLEGIANCE TELECOM, INC. COMPUTATION OF PER SHARE EARNINGS (LOSS) Year Ended December 31, 1999 (In thousands, except share and per share amounts)
Number of Shares Percent Outstanding Equivalent Shares ---------------- ------------------- ----------------- Prior to Initial Public Offering 1997 Common Stock Offering 639 100.00% 639 After Initial Public Offering 1997 Common Stock Offering 639 100.00% 639 1998 Common Stock Offering 15,000,000 100.00% 15,000,000 Preferred Stock Converted to Common Stock 60,511,692 100.00% 60,511,692 Treasury Shares (25,312) 84.93% (21,498) 1999 Employee Stock Discount Purchase Plan Shares Issued 45,574 74.28% 108,133 1999 Common Stock Offering 21,041,100 70.07% 14,742,865 Warrants Exercised 560,502 58.32% 326,873 Stock Options Exercised - 1997 Plan 157,629 36.94% 58,221 Stock Options Exercised - 1998 Plan 42,541 22.41% 9,536 -------------- 90,736,461 WEIGHTED AVERAGE SHARES OUTSTANDING 90,736,461 NET LOSS APPLICABLE TO COMMON STOCK $ (214,868) NET LOSS PER SHARE, BASIC AND DILUTED $ (2.37) ==============
EX-11.2 8 COMPUTATION OF PER SHARE EARNINGS YEAR END 12/98 1 EXHIBIT 11.2 ALLEGIANCE TELECOM, INC. COMPUTATION OF PER SHARE EARNINGS (LOSS) Year Ended December 31, 1998 (In thousands, except share and per share amounts)
Number of Shares Percent Outstanding Equivalent Shares ---------------- ------------------- ----------------- Prior to Initial Public Offering 1997 Common Stock Offering 639 52.00% 327 After Initial Public Offering 1997 Common Stock Offering 639 48.77% 312 1998 Common Stock Offering 15,000,000 48.77% 7,315,068 Preferred Stock Converted to Common Stock 60,511,692 48.77% 29,509,812 -------------- 36,825,519 WEIGHTED AVERAGE SHARES OUTSTANDING 36,825,519 NET LOSS APPLICABLE TO COMMON STOCK $ (214,460) NET LOSS PER SHARE, BASIC AND DILUTED $ (7.02) ==============
EX-11.3 9 COMPUTATION OF PER SHARE EARNINGS, 4/97-12/97 1 EXHIBIT 11.3 ALLEGIANCE TELECOM, INC. COMPUTATION OF PER SHARE EARNINGS (LOSS) Period From Inception (April 22, 1997) to December 31, 1997 (In thousands, except share and per share amounts)
Number of Shares Percent Outstanding Equivalent Shares ---------------- ------------------- ----------------- 1997 Common Stock Offering 639 100.00% 639 WEIGHTED AVERAGE SHARES OUTSTANDING 639 NET LOSS APPLICABLE TO COMMON STOCK $ (7,502) NET LOSS PER SHARE, BASIC AND DILUTED $ (11,740.22) =============
EX-13.1 10 ANNUAL REPORT TO STOCKHOLDERS 1 EXHIBIT 13.1 ALLEGIANCE TELECOM, INC. PORTIONS OF ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1999 SELECTED FINANCIAL DATA (dollars in thousands, except share and per share information) The selected consolidated financial data presented below as of and for the years ended December 31, 1999 and 1998, and for the period from inception (April 22, 1997) through December 31, 1997, were derived from the audited consolidated financial statements of the Company and should be read in conjunction with "Management's Discussion & Analysis of Financial Condition & Results of Operations" and the Company's audited financial statements and the notes thereto contained elsewhere in this annual report.
AS OF DECEMBER 31, -------------------------- BALANCE SHEET DATA: 1999 1998 -------- -------- Cash and cash equivalents $502,234 $262,502 Short-term investments 23,783 143,390 Short-term investments, restricted (1) 25,518 25,543 Working capital (2) 484,458 367,492 Property and equipment, net of accumulated depreciation and amortization 377,413 144,860 Long-term investments, restricted (1) 13,232 36,699 Total assets 1,033,875 637,874 Long-term debt 514,432 471,652 Redeemable warrants -- 8,634 Stockholders' equity 443,616 110,430
2 ALLEGIANCE TELECOM 1999 ANNUAL REPORT
PERIOD FROM INCEPTION (APRIL 22, 1997) YEAR ENDED YEAR ENDED THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, STATEMENT OF OPERATIONS DATA: 1999 1998 1997 ------------ ------------ ---------------- Revenue $ 99,061 $ 9,786 $ -- Network expenses 62,542 9,529 151 Selling, general and administrative expenses 140,745 46,089 3,426 Depreciation and amortization expense 55,822 9,003 13 Management ownership allocation charge 18,789 167,312 -- Noncash deferred compensation expense 7,851 5,307 210 ------------ ------------ ------------ Loss from operations (186,688) (227,454) (3,800) Interest income 31,354 19,918 112 Interest expense (59,404) (38,952) -- ------------ ------------ ------------ Net loss (214,738) (246,488) (3,688) Accretion of redeemable preferred stock and warrant values (130) (11,972) (3,814) ------------ ------------ ------------ Net loss applicable to common stock $ (214,868) $ (258,460) $ (7,502) ============ ============ ============ Net loss per share, basic and diluted (4) $ (2.37) $ (7.02) $ (11,740.22) ============ ============ ============ Weighted average number of shares outstanding, basic and diluted (4) 90,736,461 36,825,519 639 ============ ============ ============ OTHER FINANCIAL DATA: EBITDA (3) $ (104,226) $ (45,832) $ (3,577) Capital expenditures (273,015) (113,539) (21,926)
(1) Reflects the purchase of U.S. government securities, which have been placed in a pledge account, to fund the first three years' interest payments on the 12 7/8% Senior Notes due 2008, the first semiannual installment of which was paid in November 1998. The securities are stated at their accreted value, which approximates fair value, and are classified as short-term and long-term based upon the maturity dates of each of the securities at the balance sheet date. (2) Working capital was calculated as total current assets, less restricted short-term investments, less total current liabilities. (3) EBITDA consists of earnings before interest, income taxes, depreciation and amortization, management ownership allocation charge and non-cash deferred compensation. While not a measure under generally accepted accounting principles, EBITDA is a measure commonly used in the telecommunications industry and is presented to assist in understanding the Company's operating results. Although EBITDA should not be construed as a substitute for operating income (loss) 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. The calculation of EBITDA does not include the cash outlays of the Company for capital expenditures and debt service and should not be deemed to represent funds available to the Company. See "Management's Discussion & Analysis of Financial Condition & Results of Operations" for a discussion of the financial operations and liquidity of the Company as determined in accordance with generally accepted accounting principles. (4) All periods presented reflect a three-for-two stock split effected on February 28, 2000. 3 EXHIBIT 13.1 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS OVERVIEW Allegiance Telecom, Inc. (Allegiance) is a leading competitive provider of telecommunications services to small- and medium-sized business, government and other institutional users in major metropolitan areas across the United States. Allegiance offers an integrated set of telecommunications services including local exchange, local access, domestic and international long distance, data and a full suite of Internet services. Our principal competitors are incumbent local exchange carriers (ILECs), such as the regional Bell operating companies and GTE Corporation operating units. We are developing networks throughout the United States using what we refer to as a "smart build" approach. In contrast to the traditional network build-out strategy under which carriers install their own telecommunications switch in each market and then construct their own fiber optic networks to reach customers, we install our own switch in each market but then lease other elements of the network from the ILECs. The smart build strategy specifically involves: o leasing existing ILEC copper wire connections throughout a local market area, also called the "local loop," which connect customers to the central offices or "hubs" of an ILEC network; and o installing, or physically locating, transmission equipment in these central offices to route customer traffic through them to our switch. Locating equipment at ILEC facilities, also known as "collocation," is central to the success of the smart build strategy. By collocating, we have the ability to lease, on a monthly or long-term basis, local loop and other network elements owned by the ILEC. This enables us to reach a wide range of customers without having to build network connections to each one of them. Management believes that the smart build approach offers a number of competitive advantages over the traditional build-out strategy by allowing us to: o accelerate market entry by nine to 18 months through eliminating or at least deferring the need for city franchises, rights-of-way and building access; o reduce initial capital expenditures in each market, allowing us to focus our initial capital resources on the critical areas of sales, marketing and operations support systems, instead of on constructing extensive fiber optic networks to each customer; o improve return on capital by generating revenue with a smaller capital investment; o defer capital expenditures for network assets to the time when revenue generated by customer demand is available to finance such expenditures; and o address attractive service areas selectively throughout target markets and not just in those areas where we have constructed fiber transmission facilities. We believe that the smart build approach allows us to reduce up-front capital expenditures to approximately 25% of the total capital expenditures required to develop such a network as compared with up-front capital expenditures of approximately 50% under traditional build-out models. The level of "up-front" capital required to be spent to develop a network will vary depending on a number of factors. These factors include: o the size and geography of the market; o the cost of development of our network in each market; o the degree of penetration of the market; o the extent of price and service competition for telecommunications services, regulatory and technological developments; and o our ability to negotiate favorable prices for purchases of equipment. 4 We initiated service by buying phone lines at wholesale prices and then reselling them to customers in Dallas during December 1997. We began providing service using our own switch and transmission equipment in April 1998 to customers in New York City. Throughout the remainder of 1998, we initiated facilities-based services in Atlanta, Boston, Chicago, Dallas, Fort Worth, Los Angeles, Oakland and San Francisco. During 1999, we commenced operations in: Philadelphia (February 1999), Washington, D.C. (March 1999), including suburban Maryland and Virginia, San Jose (March 1999), Houston (April 1999), Northern New Jersey (May 1999), Orange County (June 1999), San Diego (July 1999), Long Island (August 1999), Baltimore (October 1999) and Detroit (November 1999). Although we initiated resale of local services in Dallas in 1997, reselling local service is not our core focus and comprises a small percentage of our sales. We now generally resell local services in order to provide a comprehensive telecommunications solution to a customer that has a need for local services both within and outside of our markets. In these cases, we resell services to those locations that are not within markets where we have facilities. We also resell services in certain cases where customers require services that we do not currently provide on a facilities basis. We earn significantly higher margins by providing facilities-based services instead of resale services and our sales teams have focused their efforts on selling services that require the use of our facilities. We may acquire unused fiber capacity to which we add our own electronic transmission equipment once traffic volume justifies this investment or other factors make it attractive. This unused fiber is known as "dark fiber" because no light is transmitted through it while it is unused. We believe that dark fiber is readily available in most major markets. We are moving to the next stage of our smart build strategy in most of our existing markets by acquiring dark fiber capacity to connect many of the central offices at which we are located. These dark fiber rings will replace the network elements that we are leasing on a short-term basis from the ILECs and are expected to provide us with higher operating margins and more reliable network services. We currently have dark fiber rings in operation in Dallas, Houston and New York City and we have entered into contracts for dark fiber rings in an additional 16 metropolitan markets, all of which are expected to be in operation before the end of 2000. We have also contracted for similar long-term arrangements for long-haul fiber routes connecting our Boston, New York City and Washington, D.C. networks. The table below provides selected key operational data:
AS OF DECEMBER 31, --------------------------- 1999 1998 ------------ ------------ Markets served 19 9 Number of switches deployed 15 7 Central office collocations 327 101 Addressable market--business lines (in millions) 10.1 3.6 Lines sold 337,500 86,500 Lines installed 241,700 47,700 Sales force employees 707 295 Total employees 1,784 649
Our business plan covers 36 of the largest metropolitan areas in the United States. We have successfully raised the projected capital to build our networks and operate in each of these markets to the point at which operating cash flow from the market is sufficient to fund such market's operating costs and capital expenditures. RESULTS OF OPERATIONS Year ended December 31, 1999 compared with year ended December 31, 1998 For the years ended December 31, 1999 and 1998, we generated revenues of $99.1 million and $9.8 million, respectively. For the years ended December 31, 1999 and 1998, we sold 251,000 lines and 86,500 lines, and installed 194,000 lines and 47,700 lines, respectively. From inception through December 31, 1999, we sold 337,500 lines and installed 241,700 lines. From inception through December 31, 1998, we sold 86,500 lines and installed 47,700 lines. Facilities-based lines represented 86% of all lines installed at December 31, 1999 as compared to 64% at December 31, 1998. 5 Local service revenues for the years ended December 31, 1999 and 1998 were approximately $40.3 million and $6.9 million, respectively. Local service revenues consisted of: o the monthly recurring charge for basic service; o usage-based charges for local calls in certain markets; o charges for services such as call waiting and call forwarding; and o to a lesser extent, non-recurring charges, such as charges for additional lines for an existing customer. We earn "access charges" revenue by connecting our local service customers to their selected long distance carriers for outbound calls or by delivering inbound long distance traffic to our local service customers. We earn "reciprocal compensation" revenue by terminating on our network local calls that originate on another carrier's network. Access charge revenue and reciprocal compensation revenue accounted for $44.8 million of our revenues for the year ended December 31, 1999 and $2.2 million of our revenues for the year ended December 31, 1998. Our interstate access charges were filed largely mirroring those used by the National Exchange Carrier Association (NECA), an association of independent local exchange carriers and our state access charges were generally set the same as those of state associations similar to NECA or of individual ILECs operating in other areas within the same state. These charges are generally higher than those charged by the larger ILECs operating in the same areas because these large ILECs have many more customers and therefore have lower per unit costs. Access charges are intended to compensate the local exchange carrier for the costs incurred in originating and terminating long distance calls on its network and we believe our access charges are appropriately set at levels approximately the same as those of the smaller ILECs. Access charge levels in general, and those charged by CLECs in particular, are subject to various disputes and are under review by the FCC. Reciprocal compensation charges as they relate to traffic generated by Internet service providers are also subject to various disputes. A discussion of the uncertainties involved in access charge revenue and reciprocal compensation revenue related to Internet service provider traffic is set forth in our Annual Report on Form 10-K for the period ended December 31, 1999 under the caption "Risk Factors." Long distance revenues for the years ended December 31, 1999 and 1998 were approximately $2.9 million and $0.7 million, respectively. Internet access and other Internet revenues for the year ended December 31, 1999 were approximately $10.4 million and for the year ended December 31, 1998 were immaterial. All other sources of revenue accounted for approximately $0.7 million for the year ended December 31, 1999. Other revenues for the year ended December 31, 1998 were immaterial. We are using the purchase method of accounting for the acquisitions of the common stock of Kivex, Inc. and ConnectNet, Inc. and the acquisition of certain assets of ConnecTen, L.L.C. We have recognized the revenues earned since the ConnecTen, L.L.C. and ConnectNet, Inc. transactions, both of which closed in April 1999, and the Kivex, Inc. transaction which closed on June 30, 1999, in our consolidated statement of operations for the year ended December 31, 1999. Kivex, Inc. revenues contributed approximately $5.0 million to consolidated revenues for the year ended December 31, 1999. The other two companies' revenues were immaterial to revenues for the year ended December 31, 1999. We have had discussions, and will continue to have discussions in the foreseeable future, concerning other potential acquisitions of Internet service providers and other providers of telecommunications services. The systems that have historically been used to switch customers from their existing carrier to Allegiance and to begin providing them service generally required multiple entries of customer information by hand and were exchanged by fax with the ILEC. In January 1999, we announced that we had successfully achieved "electronic bonding" between our operations support systems and those of Bell Atlantic in the New York City market with respect to processing local service orders. Electronic bonding is a method by which manual processing and faxing of information is replaced with electronic processing where our computer systems and those of other carriers communicate directly. The manual approach which we must use in the absence of electronic bonding is not only labor intensive, but also creates numerous opportunities for: o errors in providing new service and billing; o service interruptions; o poor customer service; and o increased customer turnover. 6 These problems create added expenses and decrease customer satisfaction. Without electronic bonding, confirmation of receipt and installation of orders has taken from between two business days to one month. Electronic bonding is expected to improve productivity by decreasing the period between the time of sale and the time a customer's line is installed. In addition to Bell Atlantic in New York City, we are now electronically bonding with Bell Atlantic in Boston and Long Island and with Southwestern Bell in Dallas, Fort Worth and Houston. Testing with SBC Communications (SBC) and Pacific Bell in California was completed during the third quarter 1999 on the electronic data interface which is now in use there. Local service requests for all Texas and California markets are now processed electronically with SBC. We have recently completed electronic bonding testing with Ameritech, and currently we are processing data for local service requests electronically with Ameritech. We are currently testing electronic bonding with Bell Atlantic in their southern region and expect to begin sending production orders sometime after the first quarter 2000. We plan on testing electronic bonding with BellSouth in the second quarter and US West in the third quarter 2000. We are also working towards the electronic bonding of that portion of the billing process in which we gather customer specific information, including their current service options, and the process of identifying and resolving customer service problems. These additional "electronic bonding" initiatives will require additional capital expenditures and should result in additional efficiencies. For the years ended December 31, 1999 and 1998, network expenses were $62.5 million and $9.5 million, respectively. This sharp increase is consistent with the deployment of our networks and initiation and growth of our services during 1999 and 1998. Network expenses included: o the cost of leasing high-capacity digital lines that interconnect our network with ILEC networks; o the cost of leasing high-capacity digital lines that connect our switching equipment to our transmission equipment located in ILEC central offices; o the cost of leasing local loop lines which connect our customers to our network; o the cost of completing local and long distance calls originated by our customers; o the cost of leasing space in ILEC central offices for collocating our transmission equipment; and o the cost of leasing our nationwide Internet network. The costs to lease local loop lines and high-capacity digital lines from the ILECs vary by ILEC and are regulated by state authorities under the Telecommunications Act of 1996. We believe that in many instances there are multiple carriers in addition to the ILEC from which we can lease high-capacity lines, and that we can generally lease those lines at lower prices than are charged by the ILEC. We expect that the costs associated with these leases will increase with customer volume and will be a significant part of our ongoing cost of services. The cost of leasing switch sites is also a significant part of our ongoing cost of services. In constructing switching and transmission equipment for a new market, we capitalize as a component of property and equipment only the non-recurring charges associated with our initial network facilities and the monthly recurring costs of those network facilities until the switching equipment begins to carry revenue producing traffic. Typically, the charges for just one to two months are capitalized. We generally expense the monthly recurring costs resulting from the growth of existing collocation sites, and the costs related to expansion of the network to additional collocation sites in operational markets as we incur these charges. We incur "reciprocal compensation" costs in providing both voice and data services and expect reciprocal compensation costs to be a major portion of our cost of services. We must enter into an interconnection agreement with the ILEC in each market to make widespread calling available to our customers. These agreements typically set the cost per minute to be charged by each party for the calls that are exchanged between the two carriers' networks. Generally, a carrier must compensate another carrier when a local call by the first carrier's customer terminates on the other carrier's network. These reciprocal compensation costs will grow as our customers' outbound calling volume grows. 7 The cost of securing long distance service capacity is a variable cost that increases in direct relationship to increases in our customer base and their long distance calling volumes. We believe that these costs, measured as a percentage of long distance revenues, will be relatively consistent from period to period. However, we do expect period over period growth in the absolute cost of such capacity, and that the cost of long distance capacity will be a significant portion of our cost of long distance services. We have entered into one resale agreement with a long distance carrier to provide Allegiance with the ability to provide our customers with long distance service. We expect to enter into resale agreements for long distance service with other carriers in the future. Such agreements typically provide for the resale of long distance services on a per-minute basis and may contain minimum volume commitments. Our existing resale agreement, however, does not contain a minimum volume commitment. If we agree to minimum volume commitments and fail to meet them, we may be obligated to pay underutilization charges. Under most of these types of agreements, if a company underestimates its need for transmission capacity and exceeds the maximum amount agreed to under such agreements, it may be required to obtain capacity through more expensive means. We have developed a national Internet data network by connecting our markets with leased high-capacity digital lines. The costs of these lines will increase as we increase capacity to address customer demand, open new markets and connect additional markets to our Internet network. For the year ended December 31, 1999, selling, general and administrative expenses increased to $140.7 million from $46.1 million for the year ended December 31, 1998. Selling, general and administrative expenses include salaries and related personnel costs, facilities costs and legal and consulting fees. The number of employees increased to 1,784 as of December 31, 1999, from 649 as of December 31, 1998. As of December 31, 1999, the sales force, including sales managers and sales administrators, had grown to 707 from 295 as of December 31, 1998. We currently do not have any print or other media advertising campaigns. Although we currently do not use sales agents, we may use agents in the future. As we continue to grow in terms of number of customers and call volume, we expect that ongoing expenses for customer care and billing will increase. We amortized $18.8 million and $167.3 million of the deferred management ownership allocation charge, a non-cash charge to income, for the years ended December 31, 1999 and 1998, respectively. Our original private equity fund investors and original management team investors owned 95.0% and 5.0%, respectively, of the ownership interests of Allegiance Telecom, LLC, an entity that owned substantially all of our outstanding capital stock prior to our initial public offering of common stock. As a result of that offering, the assets of Allegiance Telecom, LLC, which consisted almost entirely of such capital stock, were distributed to the original fund investors and management investors in accordance with the Allegiance Telecom, LLC limited liability company agreement. This agreement provided that the equity allocation between the fund investors and management investors would be 66.7% and 33.3%, respectively, based upon the valuation implied by the initial public offering. We recorded the increase in the assets of Allegiance Telecom, LLC allocated to the management investors as a $193.5 million increase in additional paid-in capital. This transaction was recorded during the third quarter of 1998. Of this charge, we recorded $122.5 million as a non-cash, non-recurring charge to operating expense and $71.0 million as a deferred management ownership allocation charge. We will further amortize this deferred charge at $6.6 million and $0.2 million during the years 2000 and 2001, respectively. This period is the time frame over which we have the right to repurchase a portion of the securities, at the lower of fair market value or the price paid by the employee, in the event the management employee's employment with Allegiance is terminated. During 1999, we repurchased 25,312 shares from terminated management employees, and reversed the remaining deferred charge of $0.6 million related to these shares to additional paid-in capital. For the years ended December 31, 1999 and 1998, we recorded $7.8 million and $5.3 million of amortization of deferred compensation expense, respectively. Such deferred compensation was recorded in connection with membership units of Allegiance Telecom, LLC sold to certain management employees and options granted to employees under our 1997 Stock Option Plan and 1998 Stock Incentive Plan. For the years ended December 31, 1999 and 1998, we recorded depreciation and amortization of property and equipment of $49.1 million and $9.0 million, respectively. Such increase was consistent with the deployment of our networks and initiation of services in 19 markets by December 31, 1999. In connection with the ConnecTen, ConnectNet and Kivex acquisitions completed during the second quarter of 1999, we assigned an aggregate of $5.5 million of the purchase price to customer lists and $0.2 million to workforces. We also recorded an aggregate of $34.2 million of goodwill. Each of these intangible assets is being amortized over their estimated useful lives of three years, beginning at their respective date of the acquisition. For the year ended December 31, 1999, we recorded $5.7 million of amortization for goodwill and $1.0 million of amortization of customer list and workforces. 8 For the years ended December 31, 1999 and 1998, interest expense was $59.4 million and $39.0 million, respectively. Interest expense recorded during the period ended December 31, 1999 reflects the accretion of the 113/4% notes and related amortization of the original issue discount, and the amortization of the original issue discount on the 12 7/8% notes. The 12 7/8% notes were issued on July 1, 1998. The amount of interest capitalized for the years ended December 31, 1999 and 1998 was $6.0 million and $2.8 million, respectively. Interest income for the years ended December 31, 1999 and 1998 was $31.4 million and $19.9 million, respectively. Interest income results from the investment of cash and from U.S. government securities which we purchased and placed in a pledge account to secure the semiannual payments of interest through May 2001 on the 12 7/8% notes. Interest income during 1999 is greater than for 1998 because we had additional cash to invest. The additional cash was generated primarily from the sale of common stock during April 1999. From February 1998 through March 1999, we recorded accretion of our redeemable warrants to reflect the possibility that they would be redeemed at fair market value in February 2008. Amounts were accreted using the effective interest method and management's estimate of the future fair market value of such warrants at the time redemption is permitted. Amounts accreted increased the recorded value of such warrants on the balance sheet and resulted in non-cash charges to increase the net loss applicable to common stock. As the terms and conditions of the Warrant Agreement do not specify a date certain for redemption of the warrants and the exchange of warrants for cash is no longer beyond the control of management, we have ceased accretion of the warrants and reclassified the accreted value of the redeemable warrants at April 1, 1999 to the stockholders' equity section. If a repurchase event occurs in the future or becomes probable, we will adjust the warrants to the estimated redemption value at that time. For the year ending December 31, 1999, we recorded accretion of $0.1 million related to the redeemable warrants. For the year ending December 31, 1998, we recorded $0.5 million of such accretion. Until the consummation of our initial public offering of common stock in July 1998, we also recorded the potential redemption values of redeemable convertible preferred stock, in the event that those shares would be redeemed at fair market value in August 2004. At the time of our initial public offering, such preferred stock was converted into common stock. Accordingly, the amounts accreted for the redeemable convertible preferred stock were reclassified as an increase to additional paid-in capital in the stockholders' equity section of the consolidated balance sheet. Therefore, we will not record any additional accretion of redeemable convertible preferred stock values. Accretion related to the redeemable convertible preferred stock was $11.5 million for the year ended December 31, 1998. Our net loss for the year ended December 31, 1999, after amortization of the non-cash management ownership allocation charge and amortization of deferred compensation, but before accretion of redeemable warrants, was $214.7 million. Our net loss for the year ended December 31, 1998, after amortization of the non-cash management ownership allocation charge and amortization of deferred compensation, but before the accretion of the redeemable convertible preferred stock and redeemable warrants, was $246.5 million. After deducting accretion of redeemable warrant values, the net loss applicable to common stock was $214.9 million for the year ended December 31, 1999. After deducting accretion of redeemable convertible preferred stock and warrant values, the net loss applicable to common stock was $258.5 million for the year ended December 31, 1998. Many securities analysts use the measure of earnings before deducting interest, taxes, depreciation and amortization, also commonly referred to as "EBITDA," as a way of measuring the performance of a company. We had EBITDA losses of $104.2 million for the year ended December 31, 1999, and EBITDA losses of $45.8 million for the year ended December 31, 1998. In calculating EBITDA, we also exclude the non-cash charges to operations for the management ownership allocation charge and deferred compensation expense totaling $26.6 million for the year ended December 31, 1999 and $172.6 million for the year ended December 31, 1998. We expect to continue to experience operating losses and negative EBITDA as a result of our development and market expansion activities. We typically do not expect to achieve positive EBITDA in any market until at least its third year of operation. Year ended December 31, 1998 compared to the period from inception (April 22, 1997) to December 31, 1997 Allegiance commenced operations in August 1997. During the period from August to December 1997, we did not sell any services or open any markets. Instead, substantial effort was devoted to developing business plans, initiating applications for governmental authorizations, hiring management and other key personnel, working on the design and development of local exchange telephone networks and operations support systems, acquiring equipment and facilities, and negotiating interconnection agreements. We initiated service by buying phone lines at wholesale prices and then reselling them to nine "beta" customers in Dallas during December 1997, generating only $400 of revenue for that period. Given that we have significantly increased our customer base and geographic markets from the commencement of operations in Dallas during 1997, comparisons of 1998 results with those of 1997 are not meaningful. 9 LIQUIDITY AND CAPITAL RESOURCES Our financing plan is predicated on the pre-funding of each market's expansion to positive free cash flow. By using this approach, we avoid being in the position of seeking additional capital to fund a market after we have already made a significant capital investment in that market. We believe that by raising all required capital prior to making any commitments in a market, we can raise capital on more favorable terms and conditions. On January 3, 2000, we announced a significant expansion of our business plan to include a total of 36 target markets and which: o includes an increase in our collocation footprint by approximately 100 central offices in our initial 24 target markets; and o provides for the acquisition of dark fiber capacity in an additional 16 of our target markets as well as in the Boston - New York - Washington, D.C. corridor. We do not begin to develop a new market until we have raised the capital that we project to be necessary to build and operate our network in the market to the point at which operating cash flow from the market is sufficient to fund such market's ongoing operating costs and capital expenditures. All of our 36 target markets are now fully funded in this manner. We may decide to seek additional capital in the future to expand our business. Sources of additional financing may include vendor financing and/or the private or public sale of our equity or debt securities. We cannot assure you, however, that such financing will be available at all or on terms acceptable to us, or that our estimate of additional funds required is accurate. The actual amount and timing of future capital requirements may differ materially from our estimates as a result of, among other things: o the cost of the development of our networks in each of our markets; o a change in or inaccuracy of our development plans or projections that leads to an alteration in the schedule or targets of our roll-out plan; o the extent of price and service competition for telecommunications services in our markets; o the demand for our services; o regulatory and technological developments, including additional market developments and new opportunities in our industry; o an inability to borrow under our new credit facilities; and o the consummation of acquisitions. Our cost of rolling out our networks and operating our business, as well as our revenues, will depend on a variety of factors, including: o our ability to meet our roll-out schedules; o our ability to negotiate favorable prices for purchases of equipment; o our ability to develop, acquire and integrate the necessary operations support systems and other back office systems; o the number of customers and the services for which they subscribe; o the nature and penetration of new services that we may offer; and o the impact of changes in technology and telecommunication regulations. As such, actual costs and revenues may vary from expected amounts, possibly to a material degree, and such variations are likely to affect our future capital requirements. 10 For the years ended December 31, 1999 and 1998, we made capital expenditures of $273.0 million and $113.5 million, respectively. For the year ended 1997, we made capital expenditures of $21.9 million. We also used capital during these periods to fund our operations. Excess cash was used to purchase short-term investments and money market investments. As of December 31, 1999, we had transmission equipment collocated in 327 ILEC central offices. Pursuant to our expanded business plan, we expect to incur approximately $400.0 million of capital expenditures in 2000. As of December 31, 1999, we had approximately $526.0 million of cash and short-term investments. In addition, $37.8 million of restricted U.S. government securities have been placed in a pledge account to fund interest payments on our 12 7/8% notes through May 2001. On February 28, 2000, a three-for-two stock split of our common stock was effected in the form of a 50% dividend to shareholders of record on February 18, 2000. All references to the number of common shares and per share amounts have been restated to reflect the stock split for the periods presented. We initially raised approximately $50.1 million from certain members of our management team and from affiliates of four private equity investment funds with extensive experience in financing telecommunications companies: Madison Dearborn Capital Partners, Morgan Stanley Dean Witter Capital Partners, Frontenac Company and Battery Ventures. On February 3, 1998, we raised gross proceeds of approximately $250.5 million in an offering of 445,000 units, each unit consisting of one 11 3/4% note and one redeemable warrant. Net proceeds of approximately $240.7 million were received from that offering. The 11 3/4% notes have a principal amount at maturity of $445.0 million and an effective interest rate of 12.21%. The 11 3/4% notes mature on February 15, 2008. From and after February 15, 2003, interest on such notes will be payable semi-annually in cash at the rate of 11 3/4% per annum. The accretion of original issue discount will cause an increase in indebtedness from December 31, 1999 to February 15, 2008 of $140.6 million. We completed the initial public offering of our common stock and the offering of the 12 7/8% notes early in the third quarter of 1998. We raised net proceeds of approximately $137.8 million from our initial public offering of common stock and approximately $124.8 million from the offering of these notes. The 12 7/8% notes mature on May 15, 2008. Interest on these notes is payable in cash semi-annually, commencing November 15, 1998. The 12 7/8% notes were sold at less than par, resulting in an effective rate of 13.24%, and the value of the 12 7/8% notes is being accreted, using the effective interest method, from the $200.9 million gross proceeds realized at the time of the sale to the aggregate value at maturity, $205.0 million, over the period ending May 15, 2008. The accretion of original issue discount will cause an increase in indebtedness from December 31, 1999 to May 15, 2008 of $3.7 million. In connection with the sale of the 12 7/8% notes, we purchased U.S. government securities for approximately $69.0 million and placed them in a pledge account to fund interest payments for the first three years the 12 7/8% notes are outstanding. The first interest payment was made in November 1998. Such U.S. government securities are reflected in the balance sheet as of December 31, 1999, at an accreted value of approximately $37.8 million, $25.5 million of which we classified as current assets and $12.3 million of which we classified as non-current assets. On April 20, 1999, we completed the public offering of 17,739,000 new shares of our common stock at a price of $25.33 per share, raising gross proceeds of $449.4 million. After underwriters' fees and other expenses, we realized net proceeds of approximately $430.3 million. On April 28, 1999, the underwriters of this offering exercised an option to purchase an additional 3,302,100 shares of common stock at the same price per share. As a result, we raised an additional $83.6 million of gross proceeds and $80.3 million of net proceeds, at that time. On February 2, 2000, we completed the public offering of 9,900,000 new shares of our common stock at a price of $70.00 per share, raising gross proceeds of $693.0 million. After underwriters' fees and other expenses, we realized net proceeds of approximately $667.1 million. On February 29, 2000, the underwriters of this offering exercised an option to purchase an additional 803,109 shares of common stock at the same price per share. As a result, we raised an additional $56.2 million of gross proceeds and $54.1 million of net proceeds. In February 2000, we completed $500.0 million of senior secured credit facilities, which replaced the Revolving Credit Facility. The new credit facilities consist of a $350.0 million revolving credit facility and a $150.0 million delayed draw term loan facility. The credit facilities are available, subject to satisfaction of certain terms and conditions, to provide purchase money financing for network build-out, including the cost to develop, acquire and integrate the necessary operations support and back office systems, as well as for additional dark fiber purchases and central office collocations. Interest on amounts drawn is variable, based on leverage ratios, and is expected to be the London Interbank Offered Rate + 3.25%. The initial commitment fee on the unused portion of the credit facility will be 1.5% and will step down based upon usage. The credit facility contains certain representations, warranties, covenants and events of default customary for credit of this nature and otherwise agreed upon by the parties. 11 IMPACT OF THE YEAR 2000 The "year 2000" issue generally describes the various problems that may result from the improper processing of dates and date-sensitive transactions by computers and other equipment as a result of computer hardware and software using two digits to identify the year in a date. In 1999, we completed a company-wide inventory of all computer systems on which we relied, both within and outside of Allegiance. We have attempted to assess, and we plan to continue to monitor year 2000 issues. If any year 2000 issues are not adequately resolved by Allegiance, there could be a material adverse effect on our business, financial condition or results of operations. To date, however, we have not experienced any year 2000 issues. Even though we have not identified or experienced any specific year 2000 issues, we believe that the design of our networks and support systems could provide Allegiance with certain operating contingencies in the event material external systems fail. We have developed contingency plans for all of our operating support systems. If we should, in the future, experience year 2000 issues with any of these operating support systems, we will have our personnel resort to the manual systems which we used prior to implementing the operating support systems, during the period that remediation efforts would be undertaken. We have attempted to ensure that our own operating facilities and systems are fully backed up with auxiliary power generators capable of operating all equipment and systems for indeterminate periods should power supplies fail, subject to the availability of fuel to run these generators. We also have the ability to relocate headquarters and administrative personnel to other Allegiance facilities should power and other services at our Dallas headquarters fail. Because of the inability of our contingency plans to eliminate the negative impact that disruptions in ILEC service or the service of other carriers would create, there can be no assurance that we will not experience numerous disruptions that could have a material effect on our operations. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our investment policy is limited by our existing bond indentures. We are restricted to investing in financial instruments with a maturity of one year or less. The indentures require investments in high quality instruments, such as obligations of the U.S. Government or any agency thereof guaranteed by the United States of America, money market deposits and commercial paper with a rating of A1/P1. We are thus exposed to market risk related to changes in short-term U.S. interest rates. We manage these risks by closely monitoring market rates and the duration of our investments. We do not enter into financial or commodity investments for speculation or trading purposes and are not a party to any financial or commodity derivatives. Interest income earned on our investment portfolio is affected by changes in short-term interest rates. We believe that we are not exposed to significant changes in fair value because of our conservative investment strategy. However, the estimated interest income for 2000, based on the estimated average 1999 earned rate on investments is $51.9 million. Assuming a 100 basis point drop in the estimated average rate, we would be exposed to a $10.1 million reduction in interest income for the year. The following table illustrates this impact on a quarterly basis:
(dollars in millions) QUARTER ENDING ------------------------------------------------------------------------ MARCH 2000 JUNE 2000 SEPTEMBER 2000 DECEMBER 2000 TOTAL ------------ ------------ ------------ ------------ ------------ Estimated average investments $ 912.3 $ 1,083.3 $ 988.2 $ 905.5 N/A Estimated average interest earned at the estimated average rate of 5.1% for the year ended December 31, 1999 $ 11.6 $ 13.8 $ 12.5 $ 11.5 $ 49.4 Estimated impact of interest rate drop $ 2.3 $ 2.7 $ 2.5 $ 2.3 $ 9.8
Our outstanding long-term debt consists principally of long-term, fixed rate notes, not subject to interest rate fluctuations. 12 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Allegiance Telecom, Inc.: We have audited the accompanying consolidated balance sheets of Allegiance Telecom, Inc. (a Delaware corporation) and subsidiaries (the "Company") as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the years ended December 31, 1999 and 1998, and for the period from inception (April 22, 1997), to December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 Allegiance Telecom, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of its operations and its cash flows for the years ended December 31, 1999 and 1998, and for the period from inception (April 22, 1997), to December 31, 1997, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Dallas, Texas, January 26, 2000 (except with respect to the matters discussed in Note 12, as to which the date is March 1, 2000) 13 ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of December 31, 1999 and 1998 (in thousands, except share and per share data)
ASSETS 1999 1998 ----------- ----------- CURRENT ASSETS: Cash and cash equivalents $ 502,234 $ 262,502 Short-term investments 23,783 143,390 Short-term investments, restricted 25,518 25,543 Accounts receivable (net of allowance for doubtful accounts of $7,800 and $577, at December 31, 1999 and 1998, respectively) 30,344 6,187 Prepaid expenses and other current assets 1,770 1,242 ----------- ----------- Total current assets 583,649 438,864 PROPERTY AND EQUIPMENT: Property and equipment 435,526 153,875 Accumulated depreciation and amortization (58,113) (9,015) ----------- ----------- Property and equipment, net 377,413 144,860 DEFERRED DEBT ISSUANCE COSTS (net of accumulated amortization of $2,610 and $734, at December 31, 1999 and 1998, respectively) 21,668 16,078 LONG-TERM INVESTMENTS, RESTRICTED 13,232 36,699 OTHER ASSETS 37,913 1,373 ----------- ----------- Total assets $ 1,033,875 $ 637,874 =========== =========== Liabilities and stockholders' equity CURRENT LIABILITIES: Accounts payable $ 44,805 $ 20,982 Accrued liabilities and other current liabilities 28,868 24,847 ----------- ----------- Total current liabilities 73,673 45,829 LONG-TERM LIABILITIES 2,154 1,329 LONG-TERM DEBT 514,432 471,652 REDEEMABLE WARRANTS -- 8,634 COMMITMENTS AND CONTINGENCIES (see note 9) Stockholders' equity: Preferred stock, $.01 par value, 1,000,000 shares authorized, no shares issued or outstanding at December 31, 1999 and 1998, respectively -- -- Common stock, $.01 par value, 150,000,000 shares authorized, 97,459,677 and 75,512,331 shares issued and 97,434,365 and 75,512,331 shares outstanding at December 31, 1999 and 1998, respectively 975 755 Common stock in treasury, at cost, 25,312 and no shares at December 31, 1999 and 1998, respectively (5) -- Common stock warrants 3,719 -- Additional paid-in capital 940,120 416,479 Deferred compensation (13,573) (14,617) Deferred management ownership allocation charge (6,790) (26,225) Accumulated deficit (480,830) (265,962) ----------- ----------- Total stockholders' equity 443,616 110,430 ----------- ----------- Total liabilities and stockholders' equity $ 1,033,875 $ 637,874 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 14 ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended December 31, 1999 and 1998, and for the period from inception (April 22, 1997), to December 31, 1997 (in thousands, except share and per share data)
1999 1998 1997 ------------ ------------ ------------ REVENUES $ 99,061 $ 9,786 $ -- OPERATING EXPENSES: Network 62,542 9,529 151 Selling, general and administrative 140,745 46,089 3,426 Depreciation and amortization 55,822 9,003 13 Management ownership allocation charge 18,789 167,312 -- Noncash deferred compensation 7,851 5,307 210 ------------ ------------ ------------ Total operating expenses 285,749 237,240 3,800 ------------ ------------ ------------ Loss from operations (186,688) (227,454) (3,800) OTHER INCOME (EXPENSE): Interest income 31,354 19,918 112 Interest expense (59,404) (38,952) -- ------------ ------------ ------------ Total other income (expense) (28,050) (19,034) 112 ------------ ------------ ------------ NET LOSS (214,738) (246,488) (3,688) ACCRETION OF REDEEMABLE PREFERRED STOCK AND WARRANT VALUES (130) (11,972) (3,814) ------------ ------------ ------------ NET LOSS APPLICABLE TO COMMON STOCK $ (214,868) $ (258,460) $ (7,502) ============ ============ ============ NET LOSS PER SHARE, basic and diluted $ (2.37) $ (7.02) $ (11,740.22) ============ ============ ============ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, basic and diluted 90,736,461 36,825,519 639 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 15 ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) For the years ended December 31, 1999 and 1998, and for the period from inception (April 22, 1997), to December 31, 1997 (in thousands, except share and per share data)
PREFERRED STOCK COMMON STOCK ----------------- ------------ NUMBER NUMBER OF SHARES AMOUNT OF SHARES --------- ------ ---------- Balance, April 22, 1997 (date of inception) -- $ -- -- Issuance of common stock at $.15 per share -- -- 639 Accretion of redeemable preferred stock and warrant values -- -- -- Deferred compensation -- -- -- Amortization of deferred compensation -- -- -- Net loss -- -- -- ------ ------ ---------- Balance, December 31, 1997 -- -- 639 Accretion of redeemable preferred stock and warrant values -- -- -- Initial public offering -- -- 15,000,000 Conversion of redeemable preferred stock -- -- 60,511,692 Deferred compensation -- -- -- Amortization of deferred compensation -- -- -- Net loss -- -- -- ------ ------ ---------- Balance, December 31, 1998 -- -- 75,512,331 Issuance of stock under the Employee Stock Purchase Plan (see Note 11) -- -- 145,574 Acquisition of treasury stock -- -- -- Exercise of employee stock options -- -- 200,170 Accretion of redeemable warrant values -- -- -- Reclassification of common stock warrants (see Note 6) -- -- -- Conversion of common stock warrants -- -- 560,502 Secondary offering of common stock -- -- 21,041,100 Deferred compensation -- -- -- Amortization of deferred compensation -- -- -- Net loss -- -- -- ------ ------ ---------- Balance, December 31, 1999 -- $ -- 97,459,677 ====== ====== ==========
The accompanying notes are an integral part of these consolidated financial statements. 16
COMMON STOCK TREASURY STOCK ------------ ------------------------ ADDITIONAL COMMON PAID-IN NUMBER STOCK AMOUNT CAPITAL OF SHARES AMOUNT WARRANTS ---------- ---------- ---------- ---------- ---------- BALANCE, April 22, 1997 (date of inception) $ -- $ -- -- $ -- $ -- Issuance of common stock at $.15 per share -- -- -- -- -- Accretion of redeemable preferred stock and warrant values -- -- -- -- -- Deferred compensation -- 3,008 -- -- -- Amortization of deferred compensation -- -- -- -- -- Net loss -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- Balance, December 31, 1997 -- 3,008 -- -- -- Accretion of redeemable preferred stock and warrant values -- -- -- -- -- Initial public offering 150 137,607 -- -- -- Conversion of redeemable preferred stock 605 65,201 -- -- -- Deferred compensation -- 210,663 -- -- -- Amortization of deferred compensation -- -- -- -- -- Net loss -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- Balance, December 31, 1998 755 416,479 -- -- -- Issuance of stock under the Employee Stock Purchase Plan (see Note 11) 2 1,466 -- -- -- Acquisition of treasury stock -- -- (25,312) (5) -- Exercise of employee stock options 2 563 -- -- -- Accretion of redeemable warrant values -- -- -- -- -- Reclassification of common stock warrants (see Note 6) -- -- -- -- 8,764 Conversion of common stock warrants 6 5,043 -- -- (5,045) Secondary offering of common stock 210 510,408 -- -- -- Deferred compensation -- 6,161 -- -- -- Amortization of deferred compensation -- -- -- -- -- Net loss -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- Balance, December 31, 1999 $ 975 $ 940,120 (25,312) $ (5) $ 3,719 ========== ========== ========== ========== ========== DEFERRED MANAGEMENT OWNERSHIP DEFERRED ALLOCATION ACCUMULATED COMPENSATION CHARGE DEFICIT TOTAL ------------ ---------- ----------- ---------- BALANCE, April 22, 1997 (date of inception) $ -- $ -- $ -- $ -- Issuance of common stock at $.15 per share -- -- -- -- Accretion of redeemable preferred stock and warrant values -- -- (3,814) (3,814) Deferred compensation (3,008) -- -- -- Amortization of deferred compensation 210 -- -- 210 Net loss -- -- (3,688) (3,688) ---------- ---------- ---------- ---------- Balance, December 31, 1997 (2,798) -- (7,502) (7,292) Accretion of redeemable preferred stock and warrant values -- -- (11,972) (11,972) Initial public offering -- -- -- 137,757 Conversion of redeemable preferred stock -- -- -- 65,806 Deferred compensation (17,126) (193,537) -- -- Amortization of deferred compensation 5,307 167,312 -- 172,619 Net loss -- -- (246,488) (246,488) ---------- ---------- ---------- ---------- Balance, December 31, 1998 (14,617) (26,225) (265,962) 110,430 Issuance of stock under the Employee Stock Purchase Plan (see Note 11) -- -- -- 1,468 Acquisition of treasury stock -- -- -- (5) Exercise of employee stock options -- -- -- 565 Accretion of redeemable warrant values -- -- (130) (130) Reclassification of common stock warrants (see Note 6) -- -- -- 8,764 Conversion of common stock warrants -- -- -- 4 Secondary offering of common stock -- -- -- 510,618 Deferred compensation (6,807) 646 -- -- Amortization of deferred compensation 7,851 18,789 -- 26,640 Net loss -- -- (214,738) (214,738) ---------- ---------- ---------- ---------- Balance, December 31, 1999 $ (13,573) $ (6,790) $ (480,830) $ 443,616 ========== ========== ========== ==========
17 ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 1999 and 1998, and for the period from inception (April 22, 1997), to December 31, 1997 (in thousands)
1999 1998 1997 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(214,738) $(246,488) $ (3,688) Adjustments to reconcile net loss to cash used in operating activities-- Depreciation and amortization 55,822 9,003 13 Provision for uncollectible accounts receivable 7,496 577 -- Accretion of investments (4,145) (3,427) -- Accretion of Series B 11 3/4% notes 34,107 28,333 -- Amortization of deferred debt issuance costs 1,876 734 -- Amortization of management ownership allocation charge and deferred compensation 26,640 172,619 210 Changes in assets and liabilities-- Increase in accounts receivable (31,224) (6,760) (4) Increase in prepaid expenses and other current assets (385) (998) (245) Increase in other assets (3,138) (1,202) (171) Increase in accounts payable 31,412 4,704 275 (Decrease) increase in accrued liabilities and other current liabilities (6,176) 22,208 1,667 --------- --------- --------- Net cash used in operating activities (102,453) (20,697) (1,943) --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (273,015) (113,539) (21,926) Purchases of subsidiaries, net of cash acquired (35,478) -- -- Purchases of investments (62,313) (291,262) -- Proceeds from sale of investments 209,559 89,058 -- --------- --------- --------- Net cash used in investing activities (161,247) (315,743) (21,926) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt -- 443,212 -- Proceeds from issuance of redeemable warrants -- 8,184 -- Proceeds from issuance of common stock, net 512,655 137,757 -- Deferred debt issuance costs (7,929) (16,812) -- Proceeds from issuance of redeemable preferred stock -- -- 5,000 Proceeds from redeemable capital contributions -- 20,875 24,595 Purchase of treasury stock (5) -- -- Payments on capital lease obligations (1,285) -- -- Other (4) -- -- --------- --------- --------- Net cash provided by financing activities 503,432 593,216 29,595 --------- --------- --------- INCREASE IN CASH AND CASH EQUIVALENTS 239,732 256,776 5,726 CASH AND CASH EQUIVALENTS, beginning of period 262,502 5,726 -- --------- --------- --------- CASH AND CASH EQUIVALENTS, end of period $ 502,234 $ 262,502 $ 5,726 ========= ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $ 37,233 $ 9,384 $ -- ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 18 ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998, and 1997 (dollars in thousands, except share and per share data) 1. GENERAL: Allegiance Telecom, Inc., a competitive local exchange carrier (CLEC), was incorporated on April 22, 1997, as a Delaware corporation, for the purpose of providing voice, data and Internet services to business, government and other institutional users in major metropolitan areas across the United States. Allegiance Telecom, Inc. and its subsidiaries are referred to herein as the Company. The Company's business plan is focused on offering services in 36 of the largest metropolitan areas in the United States. As of December 31, 1999, the Company is operational in 19 markets: Atlanta, Baltimore, Boston, Chicago, Dallas, Detroit, Fort Worth, Houston, Long Island, Los Angeles, New York City, Northern New Jersey, Oakland, Orange County, Philadelphia, San Diego, San Francisco, San Jose and Washington, D.C.; and is in the process of deploying networks in two other markets: Denver and St. Louis. Until December 16, 1997, the Company was in the development stage. Since its inception on April 22, 1997, through December 31, 1997, the Company's principal activities included developing its business plans, procuring governmental authorizations, raising capital, hiring management and other key personnel, working on the design and development of its local exchange telephone networks and operations support systems (OSS), acquiring equipment and facilities, and negotiating interconnection agreements. Also, the Company initiated resale services to customers in the Dallas market in December 1997. During 1998, the Company began providing facilities-based services to customers in its markets. The Company has concentrated its effort during 1999 and 1998 on deploying its network throughout the markets it is currently operating in, as well as developing future markets. Accordingly, the Company has incurred substantial operating losses and substantial capital expenditures. The Company's success will be affected by the problems, expenses and delays encountered in connection with the formation of any new business, and the competitive environment in which the Company intends to operate. The Company's performance will further be affected by its ability to assess potential markets, implement expanded interconnection and collocation with the facilities of incumbent local exchange carriers (ILECs), lease adequate trunking capacity from and otherwise develop efficient and effective working relationships with ILECs and other carriers, obtain peering agreements with Internet service providers, collect interexchange access charges, purchase and install switches in additional markets, implement efficient OSS and other back office systems, develop a sufficient customer base and attract, retain and motivate qualified personnel. The Company's networks and the provisioning of telecommunications services are subject to significant regulation at the federal, state and local levels. Delays in receiving required regulatory approvals or the enactment of new adverse regulation or regulatory requirements may have a material adverse effect upon the Company. Although management believes that the Company will be able to successfully mitigate these risks, there is no assurance that the Company will be able to do so or that the Company will ever operate profitably. Expenses are expected to exceed revenues in each market in which the Company offers service until a sufficient customer base is established. It is anticipated that obtaining a sufficient customer base will take several years, and positive cash flows from operations are not expected in the near future. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: CONSOLIDATION--The accompanying financial statements include the accounts of Allegiance Telecom, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. CASH AND CASH EQUIVALENTS--The Company includes as cash and cash equivalents, cash, marketable securities and commercial paper with original maturities of three months or less at the date of purchase. 19 SHORT-TERM INVESTMENTS--Short-term investments consist primarily of commercial paper with original maturities between three and 12 months at the date of purchase. Such short-term investments are carried at their accreted value, which approximates fair value. RESTRICTED INVESTMENTS--Restricted investments consist primarily of U.S. government securities purchased in connection with the issuance of the Company's outstanding 12 7/8% Notes (see Note 6) to secure the first six scheduled payments of interest on the 12 7/8% Notes. Such investments are stated at their accreted value, which approximates fair value, and are classified as both current and other noncurrent assets based upon the maturity dates of each of the securities at the balance sheet date. Restricted investments also include $900 and $787, at December 31, 1999 and 1998, respectively, in certificates of deposit held as collateral for letters of credit issued on behalf of the Company. PREPAID EXPENSES AND OTHER CURRENT ASSETS--Prepaid expenses and other current assets consist of prepaid rent, prepaid insurance and refundable deposits. Prepayments are expensed on a straight-line basis over the corresponding life of the underlying agreements. PROPERTY AND EQUIPMENT--Property and equipment includes network equipment, leasehold improvements, software, office equipment, furniture and fixtures, and construction-in-progress. These assets are stated at cost, which includes direct costs and capitalized interest and are depreciated over their respective useful lives using the straight-line method. During the years ended December 31, 1999 and 1998, $6,019 and $2,798, respectively, of interest expense was capitalized related to construction-in-progress. No interest expense was capitalized during the period ended December 31, 1997. Repair and maintenance costs are expensed as incurred. Property and equipment at December 31, 1999 and 1998, consist of the following:
USEFUL LIVES 1999 1998 (IN YEARS) --------- --------- ------------ Network equipment $ 266,727 $ 67,304 5-7 Leasehold improvements 52,980 24,483 5-10 Software 26,169 7,840 3 Office equipment and other 11,073 4,384 2 Furniture and fixtures 6,061 2,420 5 --------- --------- Property and equipment, in service 363,010 106,431 Less: Accumulated depreciation (58,113) (9,015) --------- --------- Property and equipment, in service, net 304,897 97,416 Construction-in-progress 72,516 47,444 --------- --------- Property and equipment, net $ 377,413 $ 144,860 ========= =========
REVENUE RECOGNITION--Revenues for voice, data and other services to end users are recognized in the month in which the service is provided. Revenues for carrier interconnection and access are recognized in the month in which the service is provided, except for reciprocal compensation generated by calls placed to Internet service providers connected to the Company's network. The ability of CLECs (such as the Company) to earn local reciprocal compensation generated by calls placed to Internet service providers is the subject of numerous regulatory and legal challenges. Until this issue is ultimately resolved, the Company has adopted a policy of recognizing this revenue only when realization is certain, which in most cases will be upon receipt of cash. COMPREHENSIVE INCOME--In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 established reporting and disclosure requirements for comprehensive income and its components within the financial statements. The Company's comprehensive income components were not material as of December 31, 1999 and 1998, and the Company had no comprehensive income components as of December 31, 1997. Therefore, comprehensive income/loss is the same as net income/loss for all periods presented. 20 STOCK SPLITS--In connection with its initial public offering of common stock (IPO) on July 7, 1998, (see Note 7) the Company effected a 426.2953905-for-one stock split and subsequent to December 31, 1999, the Company effected a three-for-two stock split (see Note 12). All references to the number of common shares and per share amounts have been restated to reflect both stock splits for all periods presented. Treasury shares were not affected by the stock splits. LOSS PER SHARE--The Company calculates net loss per share under the provisions of SFAS No. 128, "Earnings per Share." The net loss applicable to common stock includes the accretion of redeemable cumulative convertible preferred stock and warrant values of $130 and $11,972 for the years ended December 31, 1999 and 1998, respectively, and $3,814 for the period from inception (April 22, 1997), to December 31, 1997. The securities listed below were not included in the computation of diluted loss per share, as the effect from the conversion would be antidilutive.
December 31, ------------------------------------ 1999 1998 1997 ---------- ---------- ---------- Redeemable Cumulative Convertible Preferred Stock -- -- 40,498,062 Common stock warrants 413,318 973,872 -- 1997 Nonqualified Stock Option Plan 1,086,341 1,340,309 282,663 1998 Stock Incentive Plan 6,394,661 593,653 -- Employee Stock Discount Purchase Plan 31,935 66,936 --
RECOGNITION OF THE COST OF START-UP ACTIVITIES--On April 3, 1998, the American Institute of Certified Public Accountants issued Statement of Position No. 98-5, "Reporting on the Costs of Start-up Activities" (SOP 98-5). SOP 98-5 requires start-up activities and organization costs to be expensed as incurred and that start-up costs capitalized prior to the adoption of SOP 98-5 be reported as a cumulative effect of a change in accounting principle. The Company adopted SOP 98-5 during the second quarter of 1998. Adoption of SOP 98-5 did not have an effect on the Company, inasmuch as the Company had previously expensed all such costs. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133 requires that all derivatives be recognized at fair value as either assets or liabilities. SFAS 133 also requires an entity that elects to apply hedge accounting to establish the method to be used in assessing the effectiveness of the hedging derivatives and the measurement approach for determining the ineffectiveness of the hedge at the inception of the hedge. The methods chosen must be consistent with the entity's approach to managing risk. The Company adopted SFAS 133 at the beginning of the fourth quarter of 1998. Adoption of SFAS 133 did not have an effect on the Company, as the Company has historically not invested in derivatives or participated in hedging activities. SEGMENT REPORTING--In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131 establishes how public enterprise businesses determine operating segments and the financial and descriptive information required to be disclosed relating to a company's operating segments. The adoption of SFAS 131 has no material impact on the Company's current disclosures of its one operating segment, providing telecommunications services. USE OF ESTIMATES IN FINANCIAL STATEMENTS--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 expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS--Certain amounts in the prior period's consolidated financial statements have been reclassified to conform with the current period presentation. 21 3. ACQUISITIONS: During 1999, the Company acquired 100% of the outstanding stock of the Internet service providers ConnectNet, Inc. and Kivex, Inc. and certain assets of ConnecTen, L.L.C. for cash. Summary information regarding the acquisitions is as follows:
Business Name Acquisition Date Purchase Price - ------------- ---------------- -------------- ConnecTen, L.L.C. April 1, 1999 $ 750 ConnectNet, Inc. April 28, 1999 2,500 Kivex, Inc. June 30, 1999 34,545
Each of the acquisitions was accounted for using the purchase method of accounting and, accordingly, the net assets and results of operations of the acquired companies have been included in the Company's consolidated financial statements since the acquisition dates. The purchase price of the acquisitions was allocated to assets acquired, including intangible assets and liabilities assumed, based on their respective fair values at the acquisition dates. The Company's purchase price allocation of these acquisitions is preliminary and may be adjusted as additional information is obtained. The following presents the unaudited pro forma results of operations of the Company for the periods ended December 31, 1999, 1998, and 1997, as if the acquisition of Kivex, Inc. had been consummated at the beginning of each of the periods presented. The pro forma results of operations are prepared for comparative purposes only and do not necessarily reflect the results that would have occurred had the acquisition occurred at the beginning of the periods presented or the results which may occur in the future. The pro forma results of operations for ConnecTen, L.L.C. and ConnectNet, Inc. are not included in this table as the results would not have been material to the Company's results of operations.
1999 1998 1997 --------- --------- ----------- Revenue $ 102,999 $ 13,300 $ 1,467 Net loss applicable to common stock (225,594) (277,580) (17,464) Net loss per share, basic and diluted (2.49) (7.54) (27,330.20)
4. OTHER ASSETS: Other assets consisted of the following:
December 31, -------------------- 1999 1998 -------- -------- Goodwill $ 34,211 $ -- Other acquired intangibles 5,705 -- Long-term deposits 2,143 1,373 Other 2,616 -- -------- -------- Total other assets 44,675 1,373 Less: Accumulated amortization (6,762) -- -------- -------- Other assets, net $ 37,913 $ 1,373 ======== ========
Goodwill and other acquired intangibles were obtained in connection with the acquisitions made in 1999 (see Note 3). These assets are being amortized over their estimated useful lives of three years using the straight-line method. 22 5. ACCRUED LIABILITIES AND OTHER CURRENT LIABILITIES: Accrued liabilities and other current liabilities consisted of the following:
DECEMBER 31, ----------------------- 1999 1998 ---------- ---------- Accrued employee expenses $ 4,709 $ 1,387 Accrued access charges 7,896 988 Accrued taxes 3,823 1,935 Accrued interest 3,449 3,470 Other 8,991 17,067 ---------- ---------- Accrued liabilities and other current liabilities $ 28,868 $ 24,847 ========== ==========
6. LONG-TERM DEBT: Long-term debt consisted of the following:
DECEMBER 31, ----------------------- 1999 1998 ---------- ---------- Series B 113/4% Notes, face amount $445,000 due February 15, 2008; effective interest rate of 12.21%; at accreted value $ 304,393 $ 270,526 12 7/8% Senior Notes, face amount $205,000 due May 15, 2008; effective interest rate of 13.24%; at accreted value 201,259 201,019 Capital lease obligations 8,780 107 ---------- ---------- Long-term debt $ 514,432 $ 471,652 ========== ==========
SERIES B 11 3/4% NOTES DUE 2008--On February 3, 1998, the Company raised gross proceeds of approximately $250,477 in an offering of 445,000 Units (Unit Offering), each of which consists of one 11 3/4% Senior Discount Note due 2008 of the Company (11 3/4% Notes) and one warrant to purchase 2.18847599262 shares of Common Stock (Redeemable Warrants) at an exercise price of $.01 per share, subject to certain antidilution provisions. Of the gross proceeds, $242,294 was allocated to the 11 3/4% Notes and $8,184 was allocated to the Redeemable Warrants. The Redeemable Warrants became exercisable in connection with the IPO (see Note 7) in July 1998. A registration statement on Form S-4 (File No. 333-49013) registering the 11 3/4% Notes, and offering to exchange (Exchange Offer) any and all of the outstanding 11 3/4% Notes for Series B 11 3/4% Notes due 2008 (Series B Notes), was declared effective by the Securities and Exchange Commission on May 22, 1998. The Exchange Offer terminated on June 23, 1998, after substantially all of the outstanding 11 3/4% Notes were exchanged. The terms and conditions of the Series B Notes are identical to those of the 11 3/4% Notes in all material respects. The Series B Notes have a principal amount at maturity of $445,000 and an effective interest rate of 12.21%. The Series B Notes mature on February 15, 2008. From and after February 15, 2003, interest on the Series B Notes will be payable semi-annually in cash at the rate of 11 3/4% per annum. The Company is required to make an offer to purchase the Redeemable Warrants for cash at the relevant value upon the occurrence of a repurchase event. A repurchase event is defined to occur when (i) the Company consolidates with or merges into another person if the common stock thereafter issuable upon exercise of the Redeemable Warrants is not registered under the Securities Exchange Act of 1934, as amended (Exchange Act) or (ii) the Company sells all or substantially all of its assets to another person, if the common stock thereafter issuable upon the exercise of the Redeemable Warrants is not registered under the Exchange Act, unless the consideration for such a transaction is cash. The relevant value is defined to be the fair market value of the common stock as determined by the trading value of the securities if publicly traded or at an estimated fair market value without giving effect to any discount for lack of liquidity, lack of registered securities or the fact that the securities represent a minority of the total shares outstanding. 23 Through March 31, 1999, the Company was recognizing the potential future redemption value of the Redeemable Warrants by recording accretion of the Redeemable Warrants to their estimated fair market value at February 3, 2008, using the effective interest method. Accretion recorded in the three months ended March 31, 1999, and year ended December 31, 1998, was $130 and $451, respectively. Effective April 1, 1999, the Company determined that accreting the Redeemable Warrants to a future potential redemption value was no longer applicable, as the redemption of the Redeemable Warrants for cash is no longer beyond the control of the Company, and the redemption date and amount are not reasonably determinable. Accordingly, the accreted value of the Redeemable Warrants at April 1, 1999, was reclassified to stockholders' equity as common stock warrants (Warrants), and no further accretion will be recorded. If a repurchase event occurs in the future or becomes probable, the Company will adjust the Warrants to the estimated redemption value at that time. The Series B Notes are redeemable by the Company, in whole or in part, anytime on or after February 15, 2003, at 105.875% of their principal amount at maturity, plus accrued and unpaid interest, declining to 100% of their principal amount at maturity, plus accrued and unpaid interest on and after February 15, 2006. In addition, at any time prior to February 15, 2001, the Company may, at its option, redeem up to 35% of the principal amount at maturity of the Series B Notes in connection with one or more public equity offerings at 111.750% of the accreted value on the redemption date, provided that at least $289,250 aggregate principal amount at maturity of the Series B Notes remains outstanding after such redemption. 12 7/8% SENIOR NOTES DUE 2008--On July 7, 1998, the Company raised approximately $200,919 of gross proceeds from the sale of its 12 7/8% Senior Notes due 2008 (12 7/8% Notes) of which approximately $69,033 was used to purchase U.S. government securities, which were placed in a pledged account to secure and fund the first six scheduled payments of interest on the notes (see Note 2). The 12 7/8% Notes have a principal amount at maturity of $205,000 and an effective interest rate of 13.24%. The 12 7/8% Notes mature on May 15, 2008. Interest on the 12 7/8% Notes is payable semi-annually in cash at the rate of 12 7/8% on May 15 and November 15 of each year. As of December 31, 1999 and 1998, the Company has recorded accrued interest associated with the 12 7/8% Notes of $3,299 and $3,470, respectively, which is included in other current liabilities. The 12 7/8% Notes are redeemable by the Company, in whole or in part, at any time on or after May 15, 2003, at 106.438% of their principal amount, declining to 100% of their principal amount, plus accrued interest, on or after May 15, 2006. In addition, prior to May 15, 2001, the Company may redeem up to 35% of the aggregate principal amount of the 12 7/8% Notes with the proceeds of one or more public offerings (as defined in the indenture relating to the 12 7/8% Notes) at 112.875% of their principal amount, plus accrued interest, provided, however, that after any such redemption at least 65% of the aggregate principal amount of the 12 7/8% Notes originally issued remain outstanding. Upon a change of control, the Company is required to make an offer to purchase the 12 7/8% Notes at a purchase price of 101% of the principal amount thereof, together with accrued interest, if any. $225 MILLION REVOLVING CREDIT FACILITY--On April 1, 1999, the Company completed a $225 million senior secured revolving credit facility maturing December 31, 2005 (Revolving Credit Facility). Availability under the Revolving Credit Facility is subject to satisfaction of certain terms and conditions. The Revolving Credit Facility is intended to provide purchase money financing for the acquisition, construction and improvement of telecommunications assets. Initial borrowings under the Revolving Credit Facility will not be available until certain financial and operating objectives are met. Further borrowings will only be available to the extent certain further objectives are met and certain other financial ratios and covenants are maintained. The Revolving Credit Facility is secured by substantially all of the Company's assets. Interest rates under the Revolving Credit Facility are determined based upon the level of long-term debt compared to consolidated EBITDA (earnings before interest, income taxes, depreciation and amortization, management ownership allocation charge and deferred compensation) and are initially expected to be the London Interbank Offered Rate (LIBOR), plus 3.75%. The quarterly commitment fee is a maximum 1.50% of the total average daily unused portion of the Revolving Credit Facility the preceding quarter, with step-downs based on utilization. 24 A net deferred debt issuance cost of $7,170 related to the Revolving Credit Facility is included in the consolidated balance sheet at December 31, 1999. This cost will be expensed upon termination of the Revolving Credit Facility (see below). The Company has made no borrowings under the Credit Facility as of December 31, 1999. $500 MILLION CREDIT FACILITY--In February 2000, the Company completed $500 million of senior secured credit facilities (Credit Facilities), which replace the Revolving Credit Facility. The Credit Facilities consist of a $350 million seven-year revolving credit facility and a $150 million two-year delayed draw term loan facility. The Credit Facilities will be available, subject to satisfaction of certain terms and conditions, to provide purchase money financing for network build-out, including the cost to develop, acquire and integrate the necessary operations support and back office systems, as well as for additional dark fiber purchases and central office collocations. Interest on amounts drawn is variable based on the Company's leverage ratio and is initially expected to be LIBOR plus 3.25%. The initial commitment fee on the unused portion of the Credit Facilities will be 1.5% and will step down based upon usage. The Revolving Credit Facility, the Series B Notes and the 12 7/8% Notes carry certain restrictive covenants that, among other things, limit the ability of the Company to incur indebtedness, create liens, engage in sale-leaseback transactions, pay dividends or make distributions in respect of their capital stock, redeem capital stock, make investments or certain other restricted payments, sell assets, issue or sell stock of certain subsidiaries, engage in transactions with stockholders or affiliates, effect a consolidation or merger and require the Company to maintain certain operating and financial performance measures. However, these limitations are subject to a number of qualifications and exemptions (as defined in the indentures relating to each series of notes and the credit agreement relating to the Revolving Credit Facility). The Company was in compliance with all such restrictive covenants at December 31, 1999. CAPITAL LEASE OBLIGATIONS--On May 29, 1998, the Company entered into a capital lease agreement for optical fiber rings, with an initial term of ten years at a total cost of $3,485. During 1998, the Company paid $871 under the agreement. The remainder of the obligation will be paid in 2000 and is not reflected in the financial statements, since the remaining payment is contingent upon the timing of completion of network segments. On December 4, 1998, the Company entered into a capital lease agreement for 12 optical fibers configured in two separate rings, with an initial term of 15 years. Total costs associated with the capital lease were dependent upon the timing of completion of connectivity of the optical fibers with the Company's network, which was completed in two phases. The Company incurred recurring monthly charges of $29 after the completion of phase one. After completion of phase two, the Company paid a one-time fee of $77 and the recurring monthly charge increased to $77. A capital lease obligation of $7,421 is recorded in the financial statements at December 31, 1999. This capital lease was not reflected in the financial statements as of December 31, 1998, since the total cost and timing of payments were contingent upon the timing of completion of the phases. On June 8, 1999, the Company signed a capital lease agreement for 12 dedicated optical fibers, with an initial term of 15 years. Total costs associated with the capital lease are dependent upon the timing of completion of connectivity of the optical fibers with the Company's network, which is to be completed in two phases. The Company will incur recurring monthly charges of $5 per fiber until acceptance of all fibers. Upon acceptance of all fibers, the Company will pay a recurring monthly charge of $55. A capital lease obligation of $600 is included in the financial statements at December 31, 1999. This obligation represents the present value of future minimum lease payments related only to the fibers accepted to date. The remaining fibers are not reflected in the financial statements as of December 31, 1999, since the total cost and timing of payments is contingent upon the timing of completion of connectivity of the fibers. On December 30, 1999, the Company signed a capital lease agreement for optical fiber capacity in 12 of the U.S. markets served by the Company, with an initial term of 20 years. Total cost associated with the capital lease is dependent upon the timing of completion of connectivity of the optical fibers with the Company's network, which is to be completed as 11 product orders. The Company will incur variable monthly charges contingent on the number of fibers accepted. Upon acceptance of all fibers, the Company will pay a recurring monthly charge of $538. A separate capital lease obligation will be recognized for each product order upon its respective commencement date. The first order is scheduled to commence in April 2000. On December 30, 1999, the Company signed a capital lease agreement for use of a fiber optic communications system in various metropolitan areas, for an initial term of 20 years. An initial payment to pre-fund design, planning and engineering of $4,949 will be made in January 2000. Upon acceptance of each segment, the Company will pay a scheduled fee and will not incur any monthly recurring charges thereafter. Total remaining fees under this lease are approximately $15 million. 25 At December 31, 1999, future obligations related to capital leases reflected in these consolidated financial statements, and included in long-term debt, are as follows: 2000 $ 2,960 2001 2,114 2002 1,007 2003 973 2004 and thereafter 10,252 ------------ Total minimum lease payments 17,306 Amounts representing interest (6,495) ------------ Present value of minimum lease payments 10,811 Current Portion (2,031) ------------ Long-term capital lease obligations $ 8,780 ============
The current portion of capital lease obligations of $2,031 is included in accrued liabilities at December 31, 1999. 7. CAPITALIZATION: STOCK PURCHASE AGREEMENT AND SECURITYHOLDERS AGREEMENT--On August 13, 1997, the Company entered into a stock purchase agreement with Allegiance Telecom, L.L.C. (Allegiance LLC) (see Note 8). Allegiance LLC purchased 40,498,062 shares of 12% redeemable cumulative convertible preferred stock (Redeemable Preferred Stock), par value $.01 per share, for aggregate consideration of $5,000. Allegiance LLC agreed to make additional contributions as necessary to fund expansion into new markets (Subsequent Closings). In order to obtain funds through Subsequent Closings, the Company submitted a proposal to Allegiance LLC detailing the funds necessary to build out the Company's business in a new market. Allegiance LLC was not required to make any contributions until it approved the proposal. The maximum commitment of Allegiance LLC was $100,000. No capital contributions were required to be made after the Company consummated an initial public offering of its stock (which occurred on July 7, 1998). Allegiance LLC contributed a total of $50,133 prior to the Company's IPO. Each security holder in Allegiance LLC had the right to require Allegiance LLC to repurchase all of the outstanding securities held by such security holder at the greater of the original cost (including interest at 12% per annum) for such security or the fair market value, as defined in the securityholders agreement, at any time and from time to time after August 13, 2004, but not after the consummation of a public offering or sale of the Company. If repurchase provisions had been exercised, the Company had agreed, at the request and direction of Allegiance LLC, to take any and all actions necessary, including declaring and paying dividends and repurchasing preferred or common stock, to enable Allegiance LLC to satisfy its repurchase obligations. Because of the redemption provisions, the Company recognized the accretion of the value of the Redeemable Preferred Stock to reflect management's estimate of the potential future fair market value of the Redeemable Preferred Stock payable in the event the repurchase provisions were exercised. Amounts were accreted using the effective interest method assuming the Redeemable Preferred Stock was redeemed at a redemption price based on the estimated potential future fair market value of the equity of the Company in August 2004. The accretion was recorded each period prior to the IPO as an increase in the balance of Redeemable Preferred Stock outstanding and a noncash increase in the net loss applicable to common stock. REDEEMABLE CUMULATIVE CONVERTIBLE PREFERRED STOCK--In connection with the IPO, the Redeemable Preferred Stock was converted into the Company's common stock (Common Stock), on a one-for-one basis, subject to certain antidilution provisions, and the amounts accreted were reclassified as a component of additional paid-in capital. In addition, the redemption provisions and the obligation of Allegiance LLC to make additional contributions to the Company (and the obligation of the members of Allegiance LLC to make capital contributions) have terminated. No dividends were declared in 1998 or 1997. In 1998, prior to the conversion of the Redeemable Preferred Stock, the Company recorded accretion of $11,521. Accretion recorded in the period ended December 31, 1997, was $3,814. 26 Capital contributed in the Subsequent Closings occurring in October 1997 and January 1998 and other capital contributions totaled approximately $45,133. In February and March 1998, the Company issued 273,362 shares of Redeemable Preferred Stock for aggregate consideration of $337. In connection with the consummation of the IPO, the outstanding shares of the Redeemable Preferred Stock were converted into 60,511,692 shares of Common Stock. Upon the conversion of the Redeemable Preferred Stock, the obligation of the Company to redeem the Redeemable Preferred Stock also terminated and, therefore, the accretion of the Redeemable Preferred Stock value recorded to the date of the IPO, $15,335 was reclassified to additional paid-in capital along with $50,470 proceeds from the issuance of the Redeemable Preferred Stock and redeemable capital contributions. PREFERRED STOCK--In connection with the IPO, the Company authorized 1,000,000 shares of preferred stock (Preferred Stock) with a $.01 par value. At December 31, 1999 and 1998, no shares of Preferred Stock were issued and outstanding. COMMON STOCK--On July 7, 1998, the Company raised $150,000 of gross proceeds in the Company's IPO. The Company sold 15,000,000 shares of its Common Stock at a price of $10 per share. In connection with the IPO, the outstanding shares of Redeemable Preferred Stock were converted into 60,511,692 shares of Common Stock and the Company increased the number of authorized Common Stock to 150,000,000. In April 1999, the Company received $533,041 of gross proceeds from the sale of the Company's Common Stock (Secondary Equity Offering). The Company sold 21,041,100 shares at a price of $25.33 per share. Net proceeds from the Secondary Equity Offering were $510,618. At December 31, 1999 and 1998, 97,459,677 and 75,512,331 shares were issued and 97,421,709 and 75,512,331 were outstanding, respectively. Of the authorized but unissued Common Stock, 19,902,712 and 10,498,455 shares were reserved for issuance upon exercise of options issued under the Company's stock option, stock incentive and stock purchase plans (see Note 11) and 413,370 and 973,872 shares were reserved for issuance, sale and delivery upon the exercise of warrants (see Note 6) at December 31, 1999 and 1998, respectively. WARRANTS--During 1999, 256,139 Warrants, formerly referred to as Redeemable Warrants (see Note 6), were exercised to purchase 560,502 shares of Common Stock. Fractional shares are not issued, cash payments are made in lieu thereof, according to the terms of the Warrant Agreement. At December 31, 1999 and 1998, 188,861 and 445,000 Warrants, respectively, were outstanding. The Warrants will expire on February 3, 2008. DEFERRED COMPENSATION--During 1998 and 1997, certain management investors (Management Investors) acquired membership units of Allegiance LLC at amounts less than the estimated fair market value of the membership units, consequently, the Company recognized deferred compensation of $10,090 and $978 at December 31, 1998 and 1997, respectively, of which $2,767, $2,726, and $41 has been amortized to expense at December 31, 1999, 1998, and 1997, respectively. In connection with the IPO, the Redeemable Preferred Stock was converted into Common Stock and Allegiance LLC was dissolved. The deferred compensation charge is amortized based upon the period over which the Company has the right to repurchase certain of the securities (at the lower of fair market value or the price paid by the employee) in the event the Management Investor's employment with the Company is terminated. Deferred compensation also includes stock options granted at an exercise price less than market value (see Note 11). DEFERRED MANAGEMENT OWNERSHIP ALLOCATION CHARGE--On July 7, 1998, in connection with the IPO, certain venture capital investors (Fund Investors) and certain Management Investors owned 95.0% and 5.0%, respectively, of the ownership interests of Allegiance LLC, which owned substantially all of the Company's outstanding capital stock. As a result of the successful IPO, Allegiance LLC was dissolved and its assets (which consisted almost entirely of such capital stock) were distributed to the Fund Investors and Management Investors in accordance with the Allegiance LLC's Limited Liability Company Agreement (LLC Agreement). The LLC Agreement provided that the equity allocation between the Fund Investors and the Management Investors be 66.7% and 33.3%, respectively, based upon the valuation implied by the IPO. The Company recorded the increase in the value of the assets of Allegiance LLC allocated to the Management Investors as a $193,537 increase in additional paid-in capital, of which $122,476 was recorded as a noncash, nonrecurring charge to operating expenses and $71,061 was recorded as a deferred management ownership allocation charge. The deferred charge was amortized at $18,789 and $44,836 as of December 31, 1999 and 1998, and will be further amortized at $6,615, and $175 during the years 2000 and 2001, respectively, which is the period over which the Company has the right to repurchase certain of the securities (at the lower of fair market value or the price paid by the employee) in the event the Management Investor's employment with the Company is terminated. During 1999, the Company repurchased 25,312 shares from terminated Management Investors. A remaining deferred charge of $646 related to these shares was reversed to additional paid-in-capital upon the repurchase of the shares. 27 8. RELATED PARTIES: From inception (April 22, 1997), through July 7, 1998, the Company was a wholly owned subsidiary of Allegiance LLC. On July 7, 1998, the Fund Investors in Allegiance LLC and the Management Investors in Allegiance LLC owned 95.0% and 5.0%, respectively, of the ownership interest of Allegiance LLC, which owned substantially all of the Company's outstanding capital stock. As a result of the successful IPO (see Note 7), Allegiance LLC was dissolved and its assets (which consisted almost entirely of such capital stock) were distributed to the Fund Investors and the Management Investors in accordance with the LLC Agreement. As of July 7, 1998, Allegiance LLC had made aggregate capital contributions to the Company of approximately $50,133. During 1998, in connection with the Unit Offering (see Note 6), the IPO (see Note 7) and the 12 7/8% Notes (see Note 6), the Company incurred approximately $11,332 in fees to an affiliate of an investor in the Company. During 1999, in connection with the Revolving Credit Facility (see Note 6) and the Secondary Equity Offering (see Note 7), the Company incurred approximately $1,032 and $3,898, respectively in fees to an affiliate of an investor in the Company. 9. COMMITMENTS AND CONTINGENCIES: The Company has entered into various operating lease agreements, with expirations through 2009, for network facilities, office space and equipment. Future minimum lease obligations related to the Company's operating leases as of December 31, 1999, are as follows: 2000 $ 22,393 2001 20,495 2002 16,370 2003 14,218 2004 9,082 Thereafter 31,649
Total rent expense for the years ended December 31, 1999 and 1998, was $10,948 and $2,992 and for the period from inception (April 22, 1997), to December 31, 1997, was $212. In October 1997, the Company entered into an agreement with Lucent Technologies, Inc., including a three-year exclusivity commitment for the purchase of Class 3, 4, 5 central office switching equipment and related software. The agreement contains no minimum purchase requirements. 10. FEDERAL INCOME TAXES: The Company accounts for income tax under the provisions of SFAS No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 requires an asset and liability approach which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events which have been recognized in the Company's financial statements. The Company had approximately $222,753 and $53,573 of net operating loss carryforwards for federal income tax purposes at December 31, 1999 and 1998, respectively. The net operating loss carryforwards will begin to expire in the years 2012 and 2019 if not previously utilized. The Company has recorded a valuation allowance equal to the net deferred tax assets at December 31, 1999 and 1998, due to the uncertainty of future operating results. The valuation allowance will be reduced at such time as management is able to determine that the realization of the deferred tax assets is more likely than not to occur. Any reductions in the valuation allowance will reduce future provisions for income tax expense. 28 The Company's deferred tax assets and liabilities and the changes in those assets are:
1998 CHANGE 1999 -------- -------- -------- Start-up costs capitalized for tax purposes $ 812 $ (298) $ 514 Net operating loss carryforward 18,215 57,521 75,736 Amortization of original issue discount 9,664 8,170 17,834 Depreciation (2,393) (7,860) (10,253) Allowance for doubtful accounts -- 2,652 2,652 Accrued liabilities -- 1,767 1,767 Valuation allowance (26,298) (61,952) (88,250) -------- -------- -------- $ -- $ -- $ -- ======== ======== ========
Amortization of the original issue discount on the Series B Notes and 12 7/8% Notes as interest expense is not deductible in the income tax return until paid. Amortization of goodwill is not deductible in the income tax return; therefore, the effective income tax rate differs from the statutory rate. Under existing income tax law, all operating expenses incurred prior to a company commencing its principal operations are capitalized and amortized over a five-year period for tax purposes. 11. STOCK OPTION/STOCK INCENTIVE/STOCK PURCHASE PLANS: At December 31, 1999, the Company had three stock-based compensation plans, the 1997 Nonqualified Stock Option Plan (1997 Option Plan), the 1998 Stock Incentive Plan and the Employee Stock Discount Purchase Plan (Stock Purchase Plan). The Company applies the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and the related interpretations in accounting for the Company's plans. Had compensation cost for the Company's plans been determined based on the fair value of the options as of the grant dates for awards under the plans consistent with the method prescribed in SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net loss applicable to common stock and net loss per share would have increased to the pro forma amounts indicated below. The Company utilized the following assumptions in calculating the estimated fair value of each option on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for grants:
1999 1998 1997 ------------ ------------ ------------ Dividend yield --% --% --% Expected volatility 83.4% 89.1% 89.1% Expected life 3.5 6.0 6.0 Risk-free interest rate: 1997 Option Plan 5.70% 5.63% 6.06% 1998 Stock Incentive Plan 5.70% 4.70% --%
1999 1998 1997 ------------ ------------ ------------ Net loss applicable to common stock--as reported $ (214,868) $ (258,460) $ (7,502) Net loss applicable to common stock--pro forma (228,839) (259,797) (7,512) Net loss per share, basic and diluted--as reported (2.37) (7.02) (11,740.22) Net loss per share, basic and diluted--pro forma (2.52) (7.05) (11,755.87)
As the 1998 Stock Incentive Plan and the Stock Purchase Plan were adopted in 1998, the December 31, 1997 pro forma balances do not include expenses for these plans. 29 1997 OPTION PLAN AND 1998 STOCK INCENTIVE PLAN--Under the 1997 Option Plan, the Company granted options to key employees, a director and a consultant of the Company for an aggregate of 1,580,285 shares of Common Stock. The Company will not grant options for any additional shares under the 1997 Option Plan. Under the 1998 Stock Incentive Plan, the Company may grant options to certain employees, directors, advisors and consultants of the Company. The 1998 Stock Incentive Plan provides for issuance of the following types of incentive awards: stock options, stock appreciation rights, restricted stock, performance grants and other types of awards that the Compensation Committee of the Board of Directors (Compensation Committee) deems consistent with the purposes of the 1998 Stock Incentive Plan. The Company has 15,191,126 shares of Common Stock reserved for issuance under the 1998 Stock Incentive Plan at December 31, 1999. Options granted under both plans have a term of six years and vest over a three-year period and the Compensation Committee administers both option plans. A summary of the status of the 1997 Option Plan as of December 31, 1999, 1998, and 1997 is presented in the table below:
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997 -------------------------- -------------------------- ------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE ------------ -------------- ------------ -------------- ---------- -------------- Outstanding, beginning of period 1,340,309 $ 1.82 282,663 $ 1.65 -- $ -- Granted -- -- 1,297,622 1.84 282,663 1.65 Exercised (157,629) 1.84 -- -- -- -- Forfeited (96,339) 2.15 (239,976) 1.73 -- -- ------------ ------------ ---------- Outstanding, end of period 1,086,341 1.80 1,340,309 1.82 282,663 1.65 ------------ ------------ ---------- Options exercisable at period-end 521,343 66,722 -- ============ ============ ========== Weighted average fair value of options granted -- $ 1.88 $ 0.45 ============ ============ ==========
The following table sets forth the range of exercise prices and weighted average remaining contractual life at December 31, 1999 under the 1997 Option Plan:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------------------------------- --------------------------- WEIGHTED WEIGHTED WEIGHTED NUMBER AVERAGE AVERAGE NUMBER AVERAGE EXERCISE PRICE OF SHARES CONTRACTUAL LIFE EXERCISE PRICE OF SHARES EXERCISE PRICE -------------- --------- ---------------- -------------- --------- -------------- $ 1.65 850,049 4.1 $ 1.65 417,847 $ 1.65 2.31 236,292 4.3 2.31 103,496 2.31 --------- ------- 1,086,341 521,343 ========= =======
30 A summary of the status of the 1998 Stock Incentive Plan as of December 31, 1999 and 1998 is presented in the table below:
DECEMBER 31, 1999 DECEMBER 31, 1998 -------------------------- -------------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE ---------- -------------- ---------- -------------- Outstanding, beginning of period 593,653 $ 6.79 -- $ -- Granted 6,655,785 28.18 649,971 6.81 Exercised (42,541) 6.47 -- -- Forfeited (812,236) 24.68 (56,318) 6.98 ---------- ---------- Outstanding, end of period 6,394,661 26.78 593,653 6.79 ---------- ---------- Options exercisable at period-end 133,330 -- ========== ========== Weighted average fair value of options granted $ 20.71 $ 6.81 ========== ==========
The following table sets forth the exercise prices and weighted average remaining contractual life at December 31, 1999 under the 1998 Stock Incentive Plan:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ------------------------------------------------------------- ----------------------------- WEIGHTED WEIGHTED WEIGHTED EXERCISE NUMBER AVERAGE AVERAGE NUMBER AVERAGE PRICE OF SHARES CONTRACTUAL LIFE EXERCISE PRICE OF SHARES EXERCISE PRICE - ------------- ------------- ---------------- -------------- ------------- -------------- $ 0.67 495,000 5.1 $ 0.67 -- $ -- 5.58 309,948 5.8 5.58 73,816 5.58 8.08 337,250 5.0 8.08 -- -- 9.17 150,805 4.5 9.17 59,514 9.17 16.67 886,490 5.3 16.67 -- -- 35.08 3,274,696 5.8 35.08 -- -- 36.58 865,472 5.5 36.58 -- -- 50.00 75,000 5.9 50.00 -- -- ============= ============= 6,394,661 133,330 ============= =============
As the estimated fair market value of the Company's Common Stock (as implied by the IPO price) exceeded the exercise price of the options granted, the Company recognized deferred compensation of $7,635 and $2,031 at December 31, 1998 and 1997, respectively, of which $3,004, $2,581, and $169 has been amortized to expense at December 31, 1999, 1998, and 1997, respectively, over the vesting period of the options. In 1998, the Company reversed $599 of unamortized deferred compensation related to options forfeited. In February 1999, the Company granted employee stock options under the 1998 Stock Incentive Plan with an exercise price below market value at the date of grant. A deferred compensation charge of $6,807 was recognized, and $2,080 has been amortized to expense at December 31, 1999. 31 STOCK PURCHASE PLAN--The Company's Stock Purchase Plan is intended to give employees a convenient means of purchasing shares of Common Stock through payroll deductions. Each participating employee's contributions will be used to purchase shares for the employee's share account as promptly as practicable after each calendar quarter. The cost per share will be 85% of the lower of the closing price of the Company's Common Stock on the Nasdaq National Market on the first or the last day of the calendar quarter. The Company has 3,313,004 shares of Common Stock reserved for issuance under the Stock Purchase Plan at December 31, 1999. As of December 31, 1998, no shares had been issued under the Stock Purchase Plan. During 1999, 145,574 shares were issued under the Stock Purchase Plan for proceeds of $1,468. As of December 31, 1999, participants have contributed $1,053, which will be used to purchase 31,935 shares in January 2000. The Compensation Committee administers the Stock Purchase Plan. 12. SUBSEQUENT EVENTS: EQUITY OFFERING--On February 2, 2000, the Company raised $693,000 of gross proceeds from the sale of the Company's Common Stock. The Company sold 9,900,000 shares at a price of $70 per share. Net proceeds from this offering were $667,062. On February 29, 2000, the underwriters of this offering exercised an option to purchase an additional 803,109 shares of Common Stock, providing an additional $56,218 gross proceeds and $54,113 net proceeds to the Company. STOCK SPLIT--On February 28, 2000, a three-for-two stock split of the Company's Common Stock was effected in the form of a 50% stock dividend to shareholders of record on February 18, 2000. Par value will remain unchanged at $.01 per share. All references to the number of common shares and per share amounts have been restated to reflect the stock split for all periods presented. $500 MILLION CREDIT FACILITY--In February 2000, the Company completed the Credit Facilities consisting of a $350 million seven-year revolving credit facility and a $150 million two-year delayed draw term loan facility (see Note 6). The Credit Facilities replace the Revolving Credit Facility available at December 31, 1999. EX-21.1 11 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1
SUBSIDIARIES STATE OF INCORPORATION ------------ ---------------------- Allegiance Telecom Company Worldwide Delaware Allegiance Telecom International, Inc. Delaware Allegiance Telecom Service Corporation Delaware Internet Allegiance, Inc. Delaware Allegiance Telecom of Arizona, Inc. Delaware Allegiance Telecom of California, Inc. Delaware Allegiance Telecom of Colorado, Inc. Delaware Allegiance Telecom of the District of Columbia, Inc. Delaware Allegiance Telecom of Florida, Inc. Delaware Allegiance Telecom of Georgia, Inc. Delaware Allegiance Telecom of Illinois, Inc. Delaware Allegiance Telecom of Indiana, Inc. Delaware Allegiance Telecom of Maryland, Inc. Delaware Allegiance Telecom of Massachusetts, Inc. Delaware Allegiance Telecom of Michigan, Inc. Delaware Allegiance Telecom of Minnesota, Inc. Delaware Allegiance Telecom of Missouri, Inc. Delaware Allegiance Telecom of New Jersey, Inc. Delaware Allegiance Telecom of New York, Inc. Delaware Allegiance Telecom of North Carolina, Inc. Delaware Allegiance Telecom of Ohio, Inc. Delaware Allegiance Telecom of Pennsylvania, Inc. Delaware Allegiance Telecom of Texas, Inc. Delaware Allegiance Telecom of Virginia, Inc. Virginia Allegiance Telecom of Washington, Inc. Delaware Kivex, Inc. Delaware ConnectNet, Inc. Texas
EX-23.1 12 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Form 10-K of our report dated January 26, 2000, except with respect to the matters discussed in Note 12, as to which the date is March 1, 2000, into the Company's previously filed Registration Statements on Form S-8 File Nos. 333-70769 and 333-73453 and Form S-3 File Nos. 333-94021, 333-74771, and 333-69543. It should be noted that we have not audited any financial statements of the Company subsequent to December 31, 1999 or performed any audit procedures subsequent to the date of our report, except with respect to the matters discussed in Note 12. ARTHUR ANDERSEN LLP Dallas, Texas March 29, 2000 EX-27.1 13 FINANCIAL DATA SCHEDULE YEAR END 12/31/99
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1999 AND FROM THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENT. 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 502,234 23,783 38,144 7,800 0 583,649 435,526 58,113 1,033,875 73,673 505,652 0 0 975 442,641 1,033,875 0 99,061 0 62,542 82,462 7,397 59,404 (214,868) 0 (214,868) 0 0 0 (214,868) (2.37) (2.37)
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