U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For Fiscal Year Ended: December 31, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934.
For the transition period from ____________ to ___________.
Commission file number 0-27580
AvTel Communications, Inc.
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(Name of Registrant in Its Charter)
Delaware 87-0378021
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
501 Bath Street, Santa Barbara, CA 93101
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(Address of Principal Executive Offices) (Zip Code)
(805) 685-0355
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Act: None.
Securities registered under Section 12(g) of the Act:
Common Stock Par Value $0.01
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(Title of class)
Indicated by check mark whether the issuer (1) filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained in this form herein, and will not be
contained, to the best of registrant'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. [ ]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant was approximately $29,173,500, computed at the
average bid and asked price of such Common Stock as of March 13, 1998.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
As of March 15, 1998, there were 9,522,247 shares of the Registrant's
Common Stock, par value $0.01, issued and outstanding, excluding treasury stock.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III (Items 10, 11, 12 and 13) of Form 10-K
is incorporated by reference to the Registrant's definitive Proxy Statement
relating to its annual meeting of stockholders to be held on or about May 28,
1998, which will be filed with the Commission within 120 days after the end of
the Registrant's fiscal year.
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TABLE OF CONTENTS
Item Number Page Number
PART I
1. Business 3
2. Properties 12
3. Legal Proceedings 12
4. Submission of Matters to a Vote of Security Holders 12
PART II
5. Market for Common Equity and Related Stockholder Matters 13
6. Selected Financial Data 14
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
7A. Quantitative and Qualitative Disclosures about
Market Risk 22
8. Financial Statements and Supplementary Data 22
9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 22
PART III
10. Directors and Executive Officers of the Registrant 22
11. Executive Compensation 22
12. Security Ownership of Certain Beneficial Owners and
Management 23
13. Certain Relationships and Related Transactions 23
14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 23
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PART I
ITEM 1. BUSINESS
INTRODUCTORY STATEMENT
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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 (THE
"SECURITIES ACT") AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED (THE "EXCHANGE ACT"). FORWARD-LOOKING STATEMENTS ARE STATEMENTS OTHER
THAN HISTORICAL INFORMATION OR STATEMENTS OF CURRENT CONDITION AND RELATE TO
FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY.
FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS
OF THE COMPANY'S STRATEGIES, PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND
INTENTIONS. SOME FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY USE OF SUCH
TERMS AS "BELIEVES," "ANTICIPATES," "INTENDS" OR "EXPECTS." THE COMPANY'S ACTUAL
RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY
UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW
INFORMATION, FUTURE EVENTS OR OTHERWISE. THE CAUTIONARY STATEMENTS MADE IN THIS
ANNUAL REPORT SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING
STATEMENTS WHEREVER THEY APPEAR IN THIS ANNUAL REPORT.
BACKGROUND
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General
AvTel Communications, Inc. (the "Company" or "AvTel") is a provider of
broadband network services integrating voice, data and video solutions for
individuals and corporate customers. The Company sells and markets a broad range
of telecommunications and advanced network services through independent value
added resellers and internal direct sales professionals. The Company targets
mid-size corporations, small-office home-office professionals and select
residential market segments.
The Company was formerly a Utah corporation. On December 1, 1997, the
Company merged with and into its wholly-owned Delaware subsidiary, thus
effecting the Company's reincorporation in Delaware (the "Reincorporation
Merger"). The conversion of the Company's stock in the Reincorporation Merger
resulted in an effective one-for-four reverse stock split, which was effective
on December 1, 1997 (the "Reverse Stock Split"). All share and option numbers
and prices set forth herein have been adjusted to reflect the Reverse Stock
Split.
History
The Company was incorporated on October 31, 1981, but did not commence its
current business until February, 1995 when it acquired, through a subsidiary, an
80% interest in The Friendly Net, LLC ("TFN") a Utah limited liability company.
TFN is a Utah-based Internet Service Provider ("ISP"). The remaining 20%
interest in TFN was acquired by the Company in March 1997.
Prior to October 23, 1996, the Company conducted operations under the name
"Hi, Tiger International, Inc.". The name change was effected in connection with
the Company's acquisition of AvTel Holdings, Inc., a California corporation
("AHI") on that date. As a result of the acquisition of AHI, the Company
implemented a complete change in its Board of Directors and executive
management, began to pursue several acquisitions and strategic alliances and
started development of a sales and operational strategy to position the Company
as a telecommunications carrier providing a comprehensive array of broadband
voice and data network services.
The acquisition of AHI was effected pursuant to the merger of a
wholly-owned subsidiary of the Company with and into AHI (the "AHI Merger") as a
result of which the Company acquired 100% of the issued and outstanding capital
stock of AHI in exchange for 1,063,127 shares of the Company Common Stock,
representing approximately 61% of the issued and outstanding Company Common
Stock after giving effect to the AHI Merger, and 250,000 shares of newly
authorized shares of the Company's Series A Convertible Preferred Stock. For
accounting purposes, the acquisition was treated as a reverse acquisition with
AHI as the acquirer.
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In November, 1996, the Company acquired Silicon Beach Communications, Inc.
("SBC"), a privately held California corporation that serves as an ISP and
provides software development services. In February, 1997, the Company acquired
all the issued and outstanding capital stock of WestNet Communications, Inc.
("WNI"), a Ventura, California ISP. Following completion of this acquisition,
the Company began to integrate the customer bases, network facilities and other
operations of SBC and WNI in order to achieve desired efficiencies and economies
of scale.
On December 1, 1997, the Company acquired Matrix Telecom, Inc., a
privately-held Texas corporation ("Matrix") by means of a share for share
exchange (the "Share Exchange"). Matrix is a provider of long distance telephone
services. See "Background - Acquisition of Matrix" below. The Reincorporation
Merger and the Reverse Stock Split were conditions to the closing of the Share
Exchange.
Acquisition of Matrix.
AvTel and Matrix entered into a Stock Exchange Agreement dated April 29,
1997, and subsequently amended (the "Exchange Agreement"), pursuant to which the
persons or entities who owned the issued and outstanding common stock of Matrix
("Matrix Stockholders") would transfer to AvTel all of their Matrix stock and,
in exchange, AvTel would issue to the Matrix Stockholders shares of the AvTel's
Common Stock (the "Share Exchange"). The Share Exchange was completed pursuant
to the terms of the Exchange Agreement on December 1, 1997. Following the Share
Exchange, the former Matrix Stockholders now own approximately 81% of the issued
and outstanding Common Stock of the Company. For accounting purposes, the
acquisition was treated as a reverse acquisition with Matrix as the acquirer.
In connection with the completion of the Share Exchange, the Matrix Stock
Holders and the Company entered into a Registration Rights and Lockup Agreement
dated December 1, 1997 (the "Registration Rights and Lockup Agreement").
Pursuant to the Registration Rights and Lockup Agreement, certain persons and
entities who hold an aggregate of 67.4% of the outstanding Matrix Common Stock
(85.2% of the outstanding Matrix Common Stock, excluding the shares held by New
Best Connections Inc., a wholly-owned subsidiary of Matrix; "Best") agreed, for
a two-year period commencing on the closing of the Share Exchange, not to offer,
pledge, sell, or otherwise dispose of any shares of the Company issued to them
pursuant to the terms of the Exchange Agreement. The Matrix Stockholders who
have agreed to this two-year lockup period are Ronald L. Jensen, his adult
children (James J. Jensen, Jami J. Jensen, Janet Jensen Krieger, Jeffrey J.
Jensen, and Julie J. Jensen), and United Group Association, Inc. and UA Plus,
Inc. (which are controlled by Mr.
Jensen and his adult children).
The Registration Rights and Lockup Agreement requires that the Company use
its best efforts to become listed on the NASDAQ SmallCap Market or the NASDAQ
National Market and to file a shelf registration statement providing for the
sale by the Matrix Stockholders of all securities issued to them in connection
with the Exchange Agreement, subject to the two-year holding restriction imposed
on certain of the Matrix Stockholders described above. Under the Registration
Rights and Lockup Agreement, the Company is obliged to use its reasonable
efforts to keep the shelf registration statement effective on a continuous basis
for a period described in the Registration Rights and Lockup Agreement. If the
Company's securities are not listed on the NASDAQ SmallCap Market or the NASDAQ
National Market within six months following the Closing or if the Company is
unable to qualify for use of a shelf registration statement within such period,
the Matrix Stockholders (other than those subject to the two-year restriction)
are entitled to demand that the Company register the AvTel Common Stock received
by them in connection with the Share Exchange on any registration statement then
available to the Company. The Matrix Stockholders may also require the Company
to undertake up to two additional demand registrations of their securities. All
costs and expenses of both shelf and demand registrations (excluding any
underwriting discounts and fees of counsel to the Matrix Stockholders) will be
borne by the Company.
Pursuant to the terms of the Exchange Agreement, Barry A. Peters and Frank
Dziuba resigned as directors of the Company immediately prior to the completion
of the Share Exchange. Also pursuant to the terms of the Exchange Agreement, on
December 1, 1997, John E. Allen, Ronald W. Howard and Gregory T. Mutz were
appointed to fill vacancies on the Company's Board of Directors.
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BUSINESS OF THE COMPANY
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As noted above, the Company is a provider of broadband network services
integrating voice, data and video solutions for individuals and corporate
customers. The Company sells and markets a broad range of telecommunications and
advanced network services through independent value added resellers and internal
direct sales professionals. The Company targets mid-size corporations,
small-office home-office professionals and select residential market segments
through two primary business units; Business Network Services ("BNS") and
Consumer Markets.
Business Network Services
BNS targets mid-size corporate customers for their broadband data and voice
network needs. Leading this sales strategy, the Company's objective is to become
the underlying telecommunications carrier for the transport of data, voice and
video traffic over various wide area network configurations and protocol.
Through a value-added sales process, BNS designs, provisions and manages its
customers' networks. BNS will provide a host of additional value added services
assisting its customers create enhanced intranet and extranet applications. The
Company believes its strategy to focus on the corporate customer for wide-area
network ("WAN") and global-area network ("GAN") needs offers significant
opportunity. BNS cross-markets to its customer base a variety of traditional
telecommunications products and services such as long distance telephone
service, executive calling cards and wireless paging.
Industry. Information technology is fast becoming the driving force in
telecommunications. The Company's BNS strategy is driven by corporate end users'
needs for network connectivity as a result of new software applications and
technology advancements developed in the information technology arena. This is
becoming a critical element in the ability of businesses, professional and other
organizations to improve productivity and lower costs. This can be accomplished
through the use of a variety of telecommunications services, including branch
office, remote office and telecommuter networking ("intranets") as well as
providing network access to customers, vendors, financial institutions
("extranets") and the Internet. While management expects that these factors will
result in an increased market demand for these services, there are no assurances
regarding the size of such demand or that the Company will be selected to
provide its services in response to such demand.
Strategy. The implementation of this strategy involves the creation and
marketing of products and services designed for business applications under BNS.
BNS is developing and implementing sales and marketing strategies which result
in monthly, recurring revenues from networking customers under multi-year term
agreements. The group's primary sales channel is an agent program through which
BNS distributes its services through value added resellers ("VARs") of
information technology products. BNS leverages the existing customer
relationships of these channel partners gaining more immediate access to a wider
group of prospective customers and greater credibility in the sales process.
Additionally, this VAR channel becomes the service organization for BNS
customers requiring on-site repair and maintenance visits. BNS also deploys a
direct sales force, targeting specific niche industries. However, this strategy
is in its formative stages and the Company is recruiting, hiring, training and
developing the personnel resources necessary to manage and staff the sales and
marketing efforts. Delays or other difficulties in these recruitment and other
activities could adversely affect the Company's ability to timely and
effectively implement these revenue-generating objectives.
Internetworking. At an increasing rate, business, professional and other
organizations are seeking to inter-network their local area networks ("LANs")
and WANs to share information and computing resources for applications such as
e-mail, transaction processing, the sharing of databases, multi-site engineering
and product development and electronic image transfer. The communications
traffic of many organizations has grown steadily during the past two decades
leading to enterprise-wide networks facilitating rapid and efficient data
communications between work groups, departments and branch locations.
Additionally, a shift to enterprise-wide remote access has occurred due to
increased business mobility, increased telecommuting, reduced cost of WAN
services and widespread adoption of remote access standards. Internet and remote
access devices extend the organization network beyond the branch office,
bringing remote users closer to the enterprise and permitting connection to the
corporate LAN so users can work anywhere, any time. Users can access e-mail,
databases and servers as if they were in the corporate office.
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The Company believes that, as a result of these shifts, internetworking,
the method used for interconnecting networks, has been undergoing rapid growth
over the past ten years. This is reflected in the significant growth in sales
and distribution of routers, remote access servers, intranet software and other
various components that enable internetworking. As the computing paradigm
migrates to client-server architectures, enterprise-wide networks allow those
technologies to be implemented. The Company's strategy recognizes the
opportunity to bridge the gap between telecom and computer providers and
simplify networking complexities by becoming a single point of contact.
Connectivity and Bandwidth. The Company believes that communications
requirements such as bandwidth availability and network design are replacing
computer requirements such as processor speed, memory or operating systems as
the delimiting factors for business applications. Video conferencing, remote
patient diagnostics with medical imaging and telecommuting are all business
applications in which the success of the deployment is defined by the available
bandwidth. The ultimate realization of this trend is the World-Wide Web ("WWW")
and applications developed with Internet-specific tools such as SUN
Microsystems' Java. These Web applications are computer platform and operating
system independent but depend entirely upon connectivity and bandwidth for
successful deployment and execution.
As a result, connectivity is becoming one of the most important factors in
enhancing business productivity and customer service. Large corporations have
historically created private wide area networks through leased dedicated data
lines. However, dedicated point-to-point facilities have several deficiencies:
leased lines are very expensive; remote offices and telecommuters are omitted;
and leased lines are not suited for unscheduled and asynchronous communications.
Accordingly, small and medium size companies that have sought the benefits of
internetworking have been required to use modems and dial-up telephone lines
which are generally too slow to handle today's applications.
Growing demands for high speed capabilities have given way to the emergence
of new carrier-based data communication services to overcome the deficiencies of
both dedicated leased and dial-up lines. WAN solutions vary substantially
depending on an organization's size and communications needs. Traditionally,
wideband digital transmission circuits (such as T1 and DS-1) were leased from
public carriers to provide voice, fax and data communications links between
larger offices and low speed leased lines (such as DS-O) for branch office
connectivity. For some applications, however, this has proven expensive and
inefficient because the entire bandwidth capacity is dedicated 24 hours per day,
whether or not it is used.
The birth of "packet" based services such as X.25 were developed to address
the issue of allocation and utilization. Today, "fast packet" networking
technologies such as Frame Relay and Asynchronous Transfer Mode ("ATM") have
emerged as an integrated, cost-effective, flexible WAN solution. These networks
allow for "bandwidth on demand" between any two endpoints on a WAN.
Consumer Markets
The Company's Consumer Markets group targets home-based office
professionals and select residential customers primarily for domestic and
international long distance telephone services, wireless paging, 800 numbers and
calling cards. This group sells its portfolio of services through third party
distributors such as agent organizations and affiliate groups. These products
and services are marketed under the MatrixTM brand name and provided through the
Company's wholly owned subsidiary, Matrix.
Additionally, the Consumer Markets group sells and markets Internet
services to business and residential customers in select geographic locations.
Through the Company's Internet service subsidiaries, the Company services the
areas of San Luis Obispo, Santa Barbara and Ventura counties in California and
Salt Lake City, Utah. The Company's Internet service subsidiaries cross-market a
variety of products and services including WAN connectivity, software, Web
development and long distance telephone service.
The Consumer Markets group provides long distance telephone and other
services to customers in 49 states. The Company is fully certified or registered
in all states where required and operates under Section 214 authority from
Federal Communications Commission ("FCC"). The Company, through a wholly owned
subsidiary has a national-deployed Carrier Identification Code ("CIC"). The CIC
permits the Company to market to subscribers of other carriers by having the
customer dial the CIC directly, a process, which is known in the industry as
"casual calling."
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MatrixTM services are primarily marketed through direct mail, outbound
telemarketing and a network of over 6,000 independent agents. Sales consist of
both long distance telephone service, for which the customer must select Matrix
as its long distance carrier, and casual calling. Products consist of services
which have fixed charges for either "peak" and "off peak" periods, or a "flat
rate" which is the same 24 hours a day, 7 days a week. Products which follow the
"peak-off peak" structure generally have slightly higher charges during the day,
and lower charges during the nights and weekends, than "flat rate" products, and
are often more attractive to residential subscribers who place the majority of
their long distance calls during "off peak" periods.
The Consumer Markets group sells through agent distributors with a niche
orientation such as ethnic focus and home based professionals. These independent
agent groups are provided with a variety of value-added support services which
include: in-house multi-lingual Customer Service department open 24 hours a day,
7 days a week; direct electronic provisioning to local exchange carriers
("LECs"); and custom billing and management reports.
Operations and Support
Customer Service Center. The Company's inbound customer service center is
designed to provide the Company's customer base with a high-level of service and
support. Customer Service Representatives ("CSRs") are available 24 hours a day,
7 days a week in order to answer inquiries generated by the Company's marketing
campaigns, as well as to support existing customers. CSRs are trained to answer
a broad range of inquiries from prospective customers relating to service,
pricing, and optional features. In addition to competitive rates and a wide
variety of products, the Company is able to offer business customers a highly
specialized direct bill summary package that includes call summaries by account
code, department, employee, project, client, area code, country code, and
time-of-day. Customer call management reports are available in a variety of
media formats.
The Company's call centers are equipped with state-of-the-art computer and
telecommunications technology. Incoming calls are managed with the help of an
automatic call distributor and an automated attendant. Such a system allows for
management of call queue time, the formation of distinct work groups for
different projects, and on-line monitoring of customer service calls for quality
assurance purposes. Bilingual CSRs are available during day and evening shifts.
Billing and Information Systems. The Company has dedicated substantial
resources to its management information systems. The Company's information
systems enable the Company to (i) monitor and respond to the evolving needs of
its customers by developing new and customized services; (ii) provide
sophisticated billing information that can be tailored to meet the requirements
of its customer base;(iii) provide high quality customer service; (iv) detect
and minimize fraud; (v) verify payables to suppliers; and (vi) integrate
additions to its customer base. In addition, the Company has complete facilities
for rating, formatting and distributing direct bills to its larger commercial
subscribers. Small business customers may receive either a direct or a LEC bill,
depending upon the services provided to the customer.
Through its wholly-owned Matrix subsidiary, the Company has invested in
call rating, billing, and customer service infrastructure. In addition, the
Company holds billing and collection agreements with LECs, including all of the
Regional Bell Operating Companies ("RBOCs"), and Independent Local Exchange
Companies ("ILECs"). These billing agreements permit the Company to include its
billing on the customer's local telephone bill. The Company's billing
information systems and services also allows it to provide direct bills to
customers.
Strategic Alliances and Carrier Agreements. The Company has executed
strategic alliances with Sprint for its underlying voice carrier services, LCI
International for data carrier services and GST for Internet backbone services.
As noted above, the Company holds billing and collection agreements with all of
the RBOCs and ILEC's. The Company has also executed a development agreement with
Prosoft I-Net Solutions to develop a specialized training agreement designed to
educate value-added resellers of the Company's services on the integration of
data, voice and video products.
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ACE Certified Engineer Training Program. On March 16, 1998 the Company
announced the availability of its ACE Certified Engineering training program.
The ACE program has been designed specifically for value added resellers in the
telecommunications industry. The ACE program provides a complete curriculum over
a broad range of courses. The program includes four tracks: 1) a general
overview of the telecommunications industry and technologies; 2) voice equipment
and network design; 3) data communications and network design; and 4) the
integration of voice, video and data, traffic design and network engineering.
Each track is a technical course focusing on how to use, engineer and integrate
proven and leading-edge voice, video and data networking technologies. The
complete program requires 128 hours of in-depth course work and labs.
Regulation
The services which the Company provides, either directly or through its
subsidiaries, are subject to varying degrees of federal, state and local
regulation. The FCC exercises jurisdiction over all facilities of, and services
offered by, telecommunications common carriers to the extent that they involve
the provision, origination or termination of jurisdictionally interstate or
international communications. The state public service commissions ("PSCs")
retain jurisdiction over jurisdictionally intrastate communications. The FCC and
relevant PSCs have the authority to regulate interstate and intrastate rates,
respectively, ownership of transmission facilities and the terms and conditions
under which Matrix's services are provided.
In general, neither the FCC nor the relevant state PSCs exercise direct
oversight over cost justification for the Company's services or the Company's
profit levels, but either or both may do so in the future. However, the Company
is required by federal and state law and regulations to file tariffs listing the
rates, terms and conditions of services provided. The Company generally is also
required to obtain certification from the relevant state PSC prior to the
initiation of certain intrastate service, and is required to maintain a
certificate issued by the FCC in connection with the provision of certain
international services. Any failure to maintain proper federal and state tariffs
or certification or any difficulties or delays in obtaining required
authorization could have a material adverse effect on the Company.
Competition
The telecommunications industry is highly competitive and affected by rapid
regulatory and technological change. The Company believes that the principal
competitive factors in its business include pricing, customer service, network
quality, service offerings and the flexibility to adapt to changing market
conditions. The Company's future success will depend in part upon its ability to
compete with AT&T, MCI, Sprint and other carriers (including the RBOCs when
approved to enter the long distance market) and other long distance providers,
and America On-Line and other national and local ISPs, many of which have
considerably greater financial and other resources than the Company.
Intellectual Property
The Company uses several unregistered trademarks as part of its networking
business, including PointStreamTM and FrameLinkTM, which it may seek to
register. Matrix has registered several trademarks for use in its marketing
materials. The logo used by Matrix to market its long distance service is a
registered trademark of Matrix. While the Company believes its trademarks are
important to its business, the Company does not believe that failure to register
its trademarks poses any material risk of infringement on its rights to use such
trademarks.
Employees
As of March 15, 1998, the Company, including its subsidiaries, had
approximately 140 full-time employees. Approximately 76% of these employees were
leased from United Group Service Center, an entity affiliated with certain of
the Company's principal stockholders. (See Note 6 of the Notes to Consolidated
Financial Statements). None of the employees of the Company are represented by a
union. The Company supplements its work force from time to time with
contractors, administrative personnel through employment agencies, and part time
employees. The Company believes that it has good relations with its employees.
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RECENT DEVELOPMENTS
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Board of Directors
On January 5, 1998, Ronald W. Howard tendered his resignation from the
Company's Board of Directors. On January 9, 1998, the Board accepted Mr.
Howard's resignation and elected Jeffrey J. Jensen to fill the vacancy created
by Mr. Howard's resignation.
Application for Listing on Nasdaq SmallCap Market
On March 2, 1998, the Company filed an application to have its Common Stock
listed on the Nasdaq SmallCap Market. The Company is currently pursuing its
application and believes that it will be successful in such listing. However,
there can be no assurance that Nasdaq will accept the Common Stock for listing.
RISK FACTORS
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IN EVALUATING THE COMPANY, ITS BUSINESS, OPERATIONS AND FINANCIAL POSITION, THE
FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY, IN ADDITION TO THE OTHER
INFORMATION CONTAINED IN THIS FORM 10-K. THE FOLLOWING FACTORS, AMONG OTHERS,
COULD AFFECT THE COMPANY'S ACTUAL FUTURE OPERATING RESULTS AND COULD CAUSE SUCH
RESULTS TO DIFFER FROM THE RESULTS DISCUSSED IN ANY FORWARD-LOOKING STATEMENTS
MADE BY OR ON BEHALF OF THE COMPANY.
Operating Results Subject to Significant Fluctuations
The Company's quarterly operating results are difficult to forecast with
any degree of accuracy because a number of factors subject these results to
significant fluctuations. As a result, the Company believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as indications of future performance.
Factors Influencing Operating Results, Including Revenues, Costs and Margins.
The Company's revenues, costs and expenses have fluctuated significantly in
the past and are likely to continue to fluctuate significantly in the future as
a result of numerous factors. The Company's revenues in any given period can
vary due to factors such as call volume fluctuations; the addition or loss of
major customers, whether through competition, merger, consolidation or
otherwise; the loss of economically beneficial routing options for the
termination of the Company's traffic; pricing pressure resulting from increased
competition; and technical difficulties with or failures of portions of the
network used by the Company that impact the Company's ability to provide service
to or bill its customers. The Company's cost of services and operating expenses
in any given period can vary due to factors such as fluctuations in rates
charged by carriers to terminate the Company's traffic; increases in bad debt
expense and reserves; compensation expense resulting from stock options granted
by the Company; changes in the Company's sales incentive plans; and costs
associated with changes in staffing levels of sales, marketing, technical
support and administrative personnel. In addition, the Company's operating
results can vary due to factors such as loss of favorable routing options;
actions by regulatory entities; and general economic and political conditions.
Risks Inherent in Acquisition Strategy
An important component of the Company's past growth has been to develop its
business through acquisitions. This growth strategy is dependent on the
continued availability of suitable acquisition candidates and subjects the
Company to a number of risks. Acquisitions may place significant demands on the
Company's financial and management resources, as the process for integrating
acquired operations presents a significant challenge to the Company's management
and may lead to unanticipated costs or a diversion of management's attention
from day-to-day operations. There can be no assurance that the
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Company will be able to successfully integrate any acquisitions made by the
Company in the future into Company operations. Additionally, the Company may
incur unknown liabilities despite management's efforts to investigate the
operations of the acquired business.
Potential Adverse Effects of Government Regulation
The Company's business is subject to various federal and state laws,
regulations, agency actions and court decisions. These laws, regulations,
actions and decisions may impose prior certification, notification, registration
and/or tariff requirements. Certificates of authority can generally be
conditioned, modified or revoked by state regulatory authorities for failure to
comply with state laws and regulations. Fines and other penalties, including
revocation of a certificate of authority, may be imposed. In addition, future
changes in any of these sources of regulation could have a material adverse
effect on the Company's business, operating results and financial condition.
Dependence on Key Personnel
The Company's success depends to a significant degree upon the efforts of
senior management personnel, in particular, Anthony E. Papa, the Company's
Chairman and Chief Executive Officer, and James P. Pisani, the Company's
President and Chief Operating Officer. The Company believes that its future
success will depend in large part upon its continuing ability to attract and
retain highly skilled personnel. Competition for qualified, high-level
telecommunications personnel is intense and there can be no assurance that the
Company will be successful in attracting and retaining such personnel. The loss
of the services of one or more of the Company's key individuals, or the failure
to attract and retain other key personnel, could materially adversely affect the
Company's business, operating results and financial condition.
Significant Competition
The telecommunications industry is intensely competitive and subject to
rapid change. The Company's competitors include facilities-based and
non-facilities-based providers, many of which have substantially more resources
than the Company. Providers compete on the basis of price, customer service,
transmission quality, breadth of service offerings and value-added services.
Additionally, the telecommunications industry is in a period of rapid
technological evolution, marked by the introduction of competitive product and
service offerings, such as the utilization of the Internet for international
voice and data communications. The Company is unable to predict which
technological development will challenge its competitive position or the amount
of expenditures will be required to respond to a rapidly changing technological
environment. The Company believes that competition will continue to increase,
placing downward pressure on prices. Such pressure could adversely affect the
Company's gross margins if the Company is not able to reduce its costs
commensurate with such price reductions.
Need for Additional Capital to Finance Growth and Capital Requirements
In the past, the Company's cash flow from operations has been sufficient to
meet its working capital and capital expenditure requirements. However, there
can be no assurance that such cash from operation will continue to meet the
Company's requirements, particularly if the Company obtains one or more
attractive opportunities to purchase the business or assets of another company.
In such event, the Company will need to raise additional capital from equity or
debt sources. There can be no assurance that the Company will be able to raise
such capital on favorable terms or at all.
Volatility of Stock Price
To date the Common Stock has been traded on Nasdaq's Electronic Bulletin
Board; its trading volume has been variable, but generally low. As a result,
relatively small trades may significantly affect the market price of the Common
Stock. The market price of the shares of Common Stock has been highly volatile
since the public announcement of the Share Exchange, and may be significantly
affected by factors such as actual or anticipated fluctuations in the Company's
operating results, the announcement of potential acquisitions by the Company,
changes in regulations, activities of the largest domestic
10
<PAGE>
providers, industry consolidation and mergers, conditions and trends in the
telecommunications market, adoption of new accounting standards affecting the
telecommunications industry, changes in recommendations and estimates by
securities analysts, general market conditions and other factors. In addition,
the stock market has from time to time experienced significant price and volume
fluctuations that have particularly affected the market prices for the shares of
emerging growth companies like the Company. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock.
Year 2000 Computer Program Failure
A significant percentage of the software that runs most of the computers in
the United States relies on two-digit date codes to perform computations and
decision-making functions. Commencing on January 1, 2000, these computer
programs may fail from an inability to interpret date codes properly,
misinterpreting "00" as the year 1900 rather than 2000. The Company is in the
process of confirming its belief that the Company's billing, credit and call
tracking systems are Year 2000 compliant and do not use programs with the
two-digit date code flaw. At the same time, a number of the computers of the
Company's vendors that interface with the Company's systems may run on programs
that have Year 2000 problems and may disrupt the Company's billing, credit and
tracking systems. Failure of any of the computer programs integral to the
Company's vendors could adversely affect the Company's business, operating
results and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Forward-looking Statements
Certain statements contained in this Form 10-K, including without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects" and words of similar import, constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, those set
forth above. GIVEN THESE UNCERTAINTIES, THE STOCKHOLDERS OF THE COMPANY ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS.
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<PAGE>
ITEM 2. PROPERTIES
The Company does not own any real property. The Company's new corporate
headquarters location is approximately 7,000 square feet and is located at 501
Bath Street Santa Barbara, CA 93101. The Company leases these facilities under a
five-year lease expiring in March 2003 (subject to certain renewal options held
by the Company). The current monthly rent under the lease is approximately
$12,000, on a "triple-net" basis. Matrix currently leases approximately 24,050
square feet of space for its offices at 8721 Airport Freeway in Fort Worth,
Texas, pursuant to a lease agreement expiring on June 30, 2000. The monthly rent
(not including electricity) is currently approximately $19,888. TFN's office
location is approximately 1,100 square feet and is located at 350 West Broadway,
Suite 111, Salt Lake City, UT 84101. TFN's office lease is rented on a
month-to-month basis at a monthly rate of $1,400. SBC's office location is
approximately 3,441 square feet and is located at 104 West Anapamu, Suite C,
Santa Barbara 93101. SBC leases this space under a five-year lease, expiring in
September 2001, at a monthly rate of $4,645. The Company currently plans to
relocate SBC's operations and consolidate them in the Company's new corporate
headquarters location in May 1998. The Company believes that it will be able to
terminate its obligations with respect to SBC's current space without the
payment of additional consideration. The Company and its subsidiaries also
operate points-of-presence for the purpose of creating local access points to
its network backbone.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any material legal proceedings. The
Company is not aware of proceeding against the Company contemplated by any
governmental authority.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a special meeting of its stockholders on November 20, 1997,
for the purposes of approving (i) the Exchange Agreement and the acquisition of
Matrix by means of the Share Exchange, and (ii) the Agreement and Plan of Merger
that effectuated the Reincorporation Merger and the Reverse Stock Split
(including approval of the Company's Delaware Certificate of Incorporation and
Bylaws). Present at the meeting were approximately 81.2% of the shares of the
Company's Common Stock and 100% of the shares of the Company's Series A
Preferred Stock outstanding as of the record date for the meeting. Both measures
were approved with 1,449,656 shares of the Common Stock (representing 81.2% of
the Common Stock then outstanding) and all shares of the Series A Preferred
Stock voting for, no shares of the Common Stock voting against, and 375 shares
of the Common Stock abstaining. (The numbers of shares of Common Stock in such
tally have been adjusted to reflect the Reverse Stock Split). There were no
broker non-votes.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded over-the-counter on the NASD's
Electronic Bulletin Board (the "Bulletin Board") under the trading symbol
"AVCO". There is no established public trading market for the Company's
Preferred Stock. The following high and low bid information for the Company's
Common Stock was provided by various market makers and on-line quote reporting
services. The quotations provided reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions. All
prices have been adjusted to reflect the Reverse Stock Split.
Year ending December 31, 1996 High Bid Low Bid
- ------------------------------- -------- -------
First Quarter $ 3.50 $ 2.00
Second Quarter $ 5.75 $ 3.00
Third Quarter $ 4.00 $ 4.00
Fourth Quarter $ 5.50 $ 2.00
Year ending December 31, 1997 High Bid Low Bid
- ------------------------------- -------- -------
First Quarter $ 3.50 $ 2.00
Second Quarter $18.00 $ 3.13
Third Quarter $19.00 $ 9.75
Fourth Quarter $19.00 $ 7.00
The number of shareholders of record of the Company Common Stock as of
February 28, 1998, was 190. At that date there were two record holders of the
Company's Preferred Stock.
The Company has applied to The Nasdaq Stock Market for inclusion of the
Common Stock on The Nasdaq SmallCap Market. While management believes that the
Company size, shareholder base and other factors will enable it to be included
on The Nasdaq SmallCap Market, there are no assurances that this will occur, in
which event the trading in the Company's Common Stock will continue to be
reported on the Bulletin Board.
The Company has not paid any cash dividends to date and does not anticipate
paying dividends in the foreseeable future. It is the present intention of
management to utilize all available funds for the development of the Company's
business. The terms of the Company's Series A Convertible Preferred Stock
prevent the payment of any dividend on the Company's Common Stock unless (i) all
cumulative dividends on the Series A Convertible Preferred Stock have been fully
paid, and (ii) the holders of at least 50% of the outstanding shares of the
Series A Convertible Preferred Stock have approved such dividend.
On December 1, 1997, the Company issued 9,582,493 shares of its Common
Stock, which were not registered under the Securities Act, in connection with
the Share Exchange; 1,999,997 of such shares are currently held by a subsidiary
of the Company as treasury stock. No underwriters were used in this transaction
and none of such shares were issued publicly. The Company relied on the
exemptions from registration provided by Section 4(2) of the Securities Act and
Rule 506 of Regulation D promulgated thereunder. The person receiving shares
were the 23 former Matrix shareholders. The Company also issued options for
22,338 shares of Common Stock to three former Matrix optionholders with an
exercise price of $2.24 per share. These persons were and are believed by the
Company to possess the requisite level of financial sophistication and
experience in order to qualify for such exemptions. The Company made available
to the recipients of such Common Stock all material information with respect to
the Company and the Share Exchange. Each such person
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<PAGE>
signed an Exchange Statement containing appropriate investment representations
and covenants. The specific details of the issuances were disclosed in the
Company's definitive Proxy Statement dated October 31, 1997, and as part of
relevant Form 8-K and Form 10-KSB filings.
In July 1997, New Best Connections, Inc. ("Best"), a subsidiary of Matrix,
issued options to purchase Matrix Common Stock to __ individuals in recognition
of their past services to Best, Matrix and related companies (and in
satisfaction of certain obligations of Best to shareholders of Matrix who had
contributed shares of Matrix stock to Best). As a result of the Share Exchange,
the shares of Matrix Common Stock subject to such options have been converted
into 247,500 shares of the Company's Common Stock. The exercise price for such
options is $1.50 per share. These options have fully vested in the respective
optionees; however, upon exercise the shares will be subject to certain
significant restrictions on transfer. None of such options has been exercised as
of March 31, 1998. No underwriters were or will be used in this connection with
these options and none of the shares issuable upon exercise will be issued
publicly. The Company has relied and will rely on the exemptions from
registration provided by Section 4(2) of the Securities Act and Rule 506 of
Regulation D promulgated thereunder. The options are believed by the Company to
possess the requisite level of financial sophistication and experience in order
to qualify for such exemptions. The Company made available, and will make
available, to the recipients of such Common Stock all material information with
respect to the Company.
In June 1997, Best awarded options to purchase shares of Matrix Common
Stock to members of its outside sales force in recognition of their past
services to Best, Matrix and related companies (and in satisfaction of certain
obligations of Best to shareholders of Matrix who had contributed shares of
Matrix stock to Best). As a result of the Share Exchange, the shares of Matrix
Common Stock subject to such options have been converted into 1,292,000 shares
of the Company's Common Stock. The exercise price for such options will be $1.50
per share. The Company will be required to register such shares of its Common
Stock before such options can become exercisable.
ITEM 6. SELECTED FINANCIAL DATA
For accounting purposes, the Share Exchange is treated as a reverse acquisition
of AvTel by Matrix. Accordingly, the Company's results of operations reflect the
operations of Matrix prior to December 1, 1997 and reflect the combined
operations of AvTel and Matrix subsequent to December 1, 1997. The following
selected operations data of the Company for the years ended December 31, 1997,
1996, 1995 and 1994 and balance sheet data as of December 31, 1997, 1996, 1995
and 1994 have been derived from the Company's (or Matrix's) audited financial
statements. The selected operations data of the Company for the year ended
December 31, 1993, and balance sheet data as of December 31, 1993, have been
derived from unaudited financial statements of Matrix. These selected financial
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
notes thereto included elsewhere herein.
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<PAGE>
<TABLE>
Statement of Operations Data:
<CAPTION>
Years ended December 31,
1997 1996 1995 1994 1993
------------ ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Revenues $ 51,389,080 71,558,295 64,289,718 59,551,307 40,568,307
Operating income (loss) (10,757,960) 4,091,034 2,422,393 604,109 (397,804)
Net income (loss) (10,191,720) 2,566,734 (2,440,493) 643,200 (474,797)
Proforma net loss per common
share-basic and diluted (1.23) N/A N/A N/A N/A
Cash dividends per common
share -- -- -- -- N/A
</TABLE>
<TABLE>
Balance Sheet Data:
<CAPTION>
As of December 31,
1997 1996 1995 1994 1993
------------ ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Working capital (deficit) $ 5,570,657 6,066,620 206,071 (140,741) (326,746)
Total assets 18,724,850 20,338,404 17,580,694 14,957,279 11,167,630
Long term debt -- -- -- -- --
Stockholders' equity 7,809,048 7,861,883 3,539,522 2,372,333 1,729,133
</TABLE>
N/A - not applicable
Notes to Selected Financial Data of Matrix
(1) Matrix was originally formed May 29, 1990 as a Texas general partnership.
The partners consisted of Matrix Communications, Limited ("MCL") a Texas limited
liability partnership and Onward and Upward, Inc. ("OUI"). Effective January 1,
1994, the partnership was dissolved. Prior to the dissolution, cash
distributions were made to OUI in satisfaction of its partnership interest.
Concurrent with the dissolution, all remaining tangible and intangible assets
and liabilities of Matrix then owned by MCL were transferred to Matrix Telecom,
Inc., a Texas corporation. Effective June 30, 1995, MCL was liquidated and its
sole asset (Matrix capital stock) was distributed to MCL's partners in
proportion to their ownership interests.
(2) Matrix original stock issuance consisted of 100 common shares. Effective
December 31, 1994, a 10 for 1 stock split was declared. Concurrent with the
dissolution of MCL on June 30, 1995, Matrix's then outstanding 1,000 shares of
common stock were canceled and 100,000 shares were distributed to the prior MCL
partners in proportion to the ownership
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<PAGE>
interest in MCL. Effective March 10, 1997, a 18 for 1 stock split was declared
resulting in 3,484,260 shares being then outstanding. On December 1, 1997, the
Company effected the Reverse Stock Split as part of the Reincorporation Merger,
and then acquired Matrix through the issuance of 9,582,493 shares of Common
Stock (including 1,999,997 shares now held as treasury stock). All share amounts
have been restated to reflect the stock splits and share exchanges.
(3) In October 1995, Matrix issued 2,405,499 shares of its common stock valued
at $3,607,682 in exchange for all of the outstanding common stock of DNS
Communications, Inc., a Houston based long distance reseller. Subsequent to the
acquisition, the operations of DNS generated substantial losses. DNS's customer
churn rate and bad debts as well as projected cash flows were evaluated and as
of December 31, 1995 it was determined that the remaining investment in the DNS
acquired customer base totaling approximately $4,462,000 should be written off.
See note 2 to the Company's financial statements included elsewhere herein.
(4) Per share amounts are not reflected for 1996, 1995 and 1994 due to the
recapitalization of the Company as a result of the reverse acquisition in 1997.
During 1993 the Company operated as a partnership.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BACKGROUND
- ----------
The following information should be read in connection with the
consolidated financial statements of the Company and related notes included
elsewhere in this report.
Share Exchange
As described above under "Business -- Background -- Acquisition of Matrix,"
on December 1, 1997, AvTel and Matrix completed the Share Exchange. For
accounting purposes, the Share Exchange was treated as a reverse acquisition of
AvTel by Matrix. AvTel was the legal acquirer and accordingly, the Share
Exchange was effected by the issuance of AvTel Common Stock in exchange for all
of the common stock then outstanding of Matrix. In addition, holders of Matrix
outstanding stock options received non-qualified stock options of AvTel. The
following discussion of results of operations reflects the operations of Matrix
prior to December 1, 1997 and reflects the combined operations of AvTel and
Matrix subsequent to December 1, 1997. Accordingly, references to the Company
refer to operations of Matrix prior to the Share Exchange and the combined
operations of Matrix and AvTel subsequent to the Share Exchange.
The reverse acquisition of AvTel by Matrix was accounted for using the
purchase method of accounting. In order to value the consideration given in the
Share Exchange, the market price of AvTel's common stock for a period
immediately preceding the announcement of the Share Exchange was used. As of the
date of acquisition, the Company determined the fair value of the net tangible
and intangible assets and liabilities acquired. The underlying fair value of
AvTel's net assets was substantially less than the indicated market value of
AvTel's common and preferred stock. Accordingly, the Company recorded a charge
to income of $9.1 million immediately subsequent to the reverse
acquisition.
Acquisition of New Best Connections, Inc.
Effective July 1, 1997, Matrix acquired New Best Connections, Inc., a Texas
corporation ("Best"), an affiliate of Matrix through substantially similar
common ownership, by means of a share-for-share exchange. Best's primary assets
were cash of $211,000, ownership of shares of Matrix common stock (subsequently
exchanged for 1,999,997
16
<PAGE>
shares of AvTel Common Stock in the Share Exchange), and Best's relationships
with the field force of sales agents. The assets and liabilities of Best were
recorded at their historical cost, which approximated the fair value of such
assets as of July 1, 1997.
Acquisition and Disposition of DNS Communications, Inc.
In October 1995, Matrix issued shares of its common stock valued at $3.6
million in exchange for all of the outstanding common stock of DNS
Communications, Inc. ("DNS"), a Houston-based long distance reseller. The
transaction was accounted for under the purchase method. The purchase price in
excess of the book value of DNS net assets was pushed down to DNS and was
allocated based upon the estimated fair value of the assets and liabilities
acquired at the date of acquisition.
Subsequent to the acquisition, the operations of DNS generated substantial
losses. DNS's customer churn rate and bad debts as well as projected cash flows
were evaluated and as of December 31, 1995 it was determined that the remaining
investment in the DNS acquired customer base totaling approximately $4.4 million
should be written off.
In June 1996, Matrix sold the customer base acquired in the DNS acquisition
in addition to certain blocks of customers acquired during 1995 and 1996
together with related assets to a former officer of Matrix and a former
shareholder of DNS for approximately $5.2 million. Matrix recorded a gain on
this sale of approximately $3.2 million.
Due to the timing of the acquisition and subsequent decision to sell the
operations of DNS, Matrix has recorded its interest in DNS operations using the
equity method of accounting.
RESULTS OF OPERATIONS
- ---------------------
Year Ended December 31, 1997 compared with Year Ended December 31, 1996
Revenue
Revenue for the year ended December 31, 1997, decreased 28.1 % or $20.1
million to $51.4 million from $71.5 million for the year ended December 31,
1996. The decrease in revenue resulted primarily from decreases in sales from
three significant sales channels, all of which were affiliated with the Company
through substantially common ownership. These sales channels were a distributor
selling via telemarketing, a distributor focusing on the casual or dial-around
customer, and a DNS distributor of long distance services. The relationship with
the DNS distributor was terminated resulting from the sale of the DNS customer
bases in June of 1996.
The Company in 1997 chose to reduce its focus on the promotion of the
casual or dial-around customer due to the significant costs of direct mailing
and bad debt associated with this product. Reduced sales from the telemarketing
distributor resulted from the erosion of the retail pricing in the market for
the residential consumer. Pricing continued to decline during 1997, and
attrition from a maturing customer base resulted in losing customers on higher
gross margin products. Attrition rates associated with long distance products
are a normal industry occurrence; however, methods of calculation differ within
the industry.
The Company has sought to reduce its risk from reliance on a small group of
distributors, and has refocused to obtain multiple revenue sources external to
the Company. New distributors have significantly contributed to the mix in 1997.
1997 sales from sources other than the Company's primary 1996 distributors have
increased more than 20%.
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<PAGE>
Additionally, the combination of AvTel and Matrix has added significant
growth opportunities for the Company in 1998. AvTel sells and markets a broad
range of telecommunications and advanced network services through independent
value added resellers and internal direct sales professionals. AvTel
capabilities include the provisioning of broadband network services integrating
voice, data and video solutions. The Company has positioned itself to be a fully
integrated telecom provider focusing on the mid-size corporations in addition to
continuing to provide value added services to small business owners and
residential consumers in niche marketing areas. Revenue from prior AvTel
operations has been included in the Company's financial results only since
December 1, 1998. AvTel revenues for the eleven months ended November 30, 1997
were approximately $2.6 million.
Gross margin
Gross margin decreased $8.7 million in 1997, to $15.1 million for the year
ended December 31, 1997 from $23.8 million for the year ended December 31, 1996.
As a percentage of net sales gross margin decreased 3.9% to 29.5% for the year
ended December 31, 1997 from 33.4% for the year ended December 31, 1996. Two
primary factors contributed to the decrease in gross margin in 1997.
First, due to increasing competitive market demands, the Company was forced
to continue decreasing its retail rates in 1997 to meet the competitive rate
reductions; however, the underlying carrier costs to the Company did not change
due to contractual commitments. Accordingly, cost of network as a percentage of
revenue increased reflecting a lower gross margin in 1997 over 1996. The Company
believes that its network costs will decrease in 1998 due to new carrier
contracts negotiated since the end of 1997.
Second, bad debt as a percentage of revenue increased approximately 2% in
1997, primarily resulting from increased bad debt associated with the casual or
dial-around product. The majority of the Company's revenues are billed and
collected from the Local Exchange Carriers ("LECs"), with which the Company has
agreements. Collection policies and aggressiveness in collection procedures
differ among the LECs. The Company experienced significant sales growth in a
geographical location in which the LECs' bad debt percentages were significantly
higher than other LECs. The LECs bad debt percentages are typically higher than
those experienced by the Company's internal collectors for those customers being
direct billed. The Company anticipates its percentage of customers billed on a
direct basis to increase in 1998, as the Company attempts to decrease its costs
related to bad debts.
Selling, general, and administrative costs
The Company's selling, general, and administrative costs decreased $2.6
million in 1997 from 1996. As a percentage of revenue, such costs increased 5.1%
to 31.4% for the year ended December 31, 1997 compared to 26.3% for the year
ended December 31, 1996. This increase resulted primarily from the decrease in
revenues causing the expense as a percentage of revenue to increase. Certain
changes are more fully described below.
Certain selling, general, and administrative costs related to the addition
of AvTel operations to Matrix subsequent to the effective date of the Share
Exchange, December 1, 1997, amounted to approximately $286,000, accounting
for.56% of the increase as a percentage of revenues in 1997 over 1996. Selling
costs related to direct mailing to the casual or dial-around customer (which
were absorbed by the sales distributor in 1996) were approximately $605,000 in
1997, accounting for 1.18% of the increase as a percentage of revenues in 1997
over 1996. Salary expenses increased approximately $651,000 between the years,
or 3.76% as a percentage of revenues in 1997 over 1996, resulting primarily from
integration of AvTel employees subsequent to the Share Exchange and certain
sales and marketing personnel in 1997.
Billing and collection fees and distributor commissions decreased
approximately $3.9 million, or 1.82% as a percentage of revenues. Most of the
new products sold in 1997 were direct billed. As the percentage of direct billed
customers increase, billing and collection fees have decreased. Similarly, as
sales of certain products having a higher commission structure have declined,
commission expense has also declined.
18
<PAGE>
Certain regulatory and professional services increased approximately
$266,000, or 1.22% as a percentage of revenues in 1997 over 1996. Carrier fees
specific to telecommunication providers upon reaching certain thresholds of
customers were met in the last half of the year in 1996; therefore, increased
fees in 1997 resulted from being charged the fees for a full year. Professional
fees increased in 1997 over 1996 for two primary reasons. First, due to
increased market demands for information systems programmers, the Company was
forced to secure external contractors. Second, certain telemarketing and
verification costs associated with the sales process increased in 1997 primarily
resulting from the sales distributor absorbing these costs in 1996. Other
selling, general and administrative costs decreased approximately $213,000 in
1997. As a percentage of revenue, these costs increased .81% in 1997 over 1996
due to decreasing revenues.
Acquisition-related writeoff
The $9.1 million write off relates to the Share Exchange and is discussed
under "Background" above.
Depreciation and Amortization
Depreciation and amortization expense decreased approximately $314,000 for
the year ended December 31, 1997, compared to the year ended December 31, 1996,
resulting primarily from older assets becoming fully depreciated.
Interest expense and other income, net
Interest expense decreased $219,000 to $12,000 for the year ended December
31, 1997 from $231,000 for the year ended December 31, 1996. The decrease
resulted from reduced borrowings in 1997 compared to 1996. The Company had
sufficient cash from operations to meet operating expenses and capital
expenditures. Other income net of other expenses increased more than 11% for
1997 over 1996 primarily resulting from increases in interest earned from cash
investments.
Income taxes
The Company recognized a tax benefit of $276,000 for the year ended
December 31, 1997 compared to a tax expense of $1.7 million for the year ended
December 31, 1996. The tax benefit in 1997 resulted from the loss from
operations for the year 1997.
Year Ended December 31, 1996 compared with Year Ended December 31, 1995
Revenues
Revenues for the year ended December 31, 1996 increased 11.3% or $7.3
million to $71.6 million from $64.3 million for the year ended December 31,
1995. The increase was due in part to increases in revenues from a significant
affiliated distributor of the casual or dial around product. Prior to 1996,
marketing for the casual or dial around product was limited to the state of
California; however, in 1996 direct mailing of this service was expanded to
eleven additional states increasing total revenues in 1996 over 1995 by more
than $2.8 million. Additional revenues were also driven from the resale of
certain long distance products. This sales program was implemented at the end of
1995 and increased total sales over 1995 by approximately $3 million. Finally,
new distributors not actively selling products in 1995 increased revenues in
1996 by approximately $1.5 million.
Gross margin
Gross margin increased $2.5 million to $23.8 million for the year ended
December 31, 1996 from $21.3 million for the year ended December 31, 1995. As a
percentage of net revenues, gross margin increased to 33.4% for the year ended
December 31, 1996 from 33.2% for the year ended December 31, 1995. The slight
change in gross margin resulted from a percentage increase in the cost of
network accounting which was more than offset by a percentage decrease in bad
debt expense.
19
<PAGE>
Network cost for the year ended December 31, 1996 increased $5.5 million to
$46.1 million for the year ended December 31, 1996 from $40.6 million for the
year ended December 31, 1995. Primarily, the increase resulted from the increase
in revenues. As a percentage of revenue, network cost increased 1.3% in 1996
over 1995. The primary reason for the increase was increased revenues from
distributors whose products are being sold at lower retail rates than in the
prior year in response to the competitive demand of the industry; thus,
decreasing the Company's product margins.
Bad debt as a percentage of revenue decreased 1.5% for the year 1996 over
1995. The majority of the Company's revenues are billed and collected from the
LECs, with which the Company has agreements. The Company records bad debt as a
percentage of revenue based on the percentage being reserved by the LEC plus or
minus any true ups to actual amounts by the LEC. Collection policies and
aggressiveness in collection procedures differ among the LECs. Collection
percentages for the LECs were significantly higher in 1996 over 1995.
Additionally, travel card fraud was significantly less in 1996 compared to 1995
resulting primarily from changing its travel card vendor to one providing real
time fraud monitoring.
Selling, general and administrative expenses
Selling, general and administrative expenses increased 5.1% or $910,000 to
$18.8 million for the year ended December 31, 1996 from $17.9 million for the
year ending December 31, 1995. As a percentage of revenue, selling general and
administrative expenses decreased 1.5% to 26.3% for the year ended December 31,
1996 from 27.8% for the year ended December 1995. The decrease resulted
primarily from the rise in revenues causing the expense as a percentage of
revenue to decrease.
As a percentage of revenue, commission expense decreased approximately 1.7%
in 1996 over 1995. The change was due to the growth of an internal revenue base
in 1996 for which commissions are not paid; therefore, commission as a
percentage of revenues declined as this particular revenue continued to grow.
Professional and legal expense as a percentage of revenues decreased
approximately .5% in 1996 over 1995 primarily from 1995 accruals for contingent
liabilities. Salary expense as a percentage of revenues increased in 1996 over
1995 approximately .4% resulting primarily from the addition of key employee
positions and certain other positions among operational groups to provide
carrier services to other companies.
Depreciation and Amortization
Depreciation and amortization expense for 1996 decreased by an immaterial
amount from that for 1995.
Interest expense and other income, net
Interest expense increased to approximately $231,000 for the year ended
December 31, 1996 from $6,000 for the year ended December 31, 1995. The Company
increased its borrowing for use in operations in 1996; however this borrowing
was extinguished by the end of the second quarter in 1996. Other income
increased to approximately $271,000 for the year ended December 31, 1996 from
$166,000 for the year ended December 1995. The increase resulted primarily from
income from cash investments and income from contract services provided to other
companies.
Income taxes
Income taxes increased approximately $605,000 to $1.7 million for the year ended
December 31, 1996 from $1.1 million for the year ended December 31, 1995 due to
increased operating income. The effective tax rate was 40.8% and 41.8% for the
years ended December 31, 1996 and 1995, respectively.
20
<PAGE>
Equity in net income (loss) of DNS
Equity in DNS increased approximately $4.1 million for the year ended
December 31, 1996 from a loss of $3.9 million for the year ended December 31,
1995. In June 1996, the Company sold the customer base acquired in the DNS
acquisition in addition to certain blocks of customers acquired during 1995 and
1996 together with related assets for approximately $5.2 million. The Company
recorded a gain on this sale of approximately $3.2 million. This gain offset the
loss from operations of DNS prior to its sale of $3.1 million.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The primary sources of operating cash flow for the Company are revenues
derived from the resale of domestic and international long distance services to
the public. Minor sources of revenues are received for the provision of back
office support to affiliated and non-affiliated companies and for earnings from
investment income. The primary uses of cash are payments to underlying network
vendors for provisioning long distance facilities, to sales distributors for
soliciting long distance sales, and to the major LECs for billing and collecting
directly from the long distance end user. To date, the Company has financed its
growth, including its capital expenditures, primarily through funds provided by
operations. Net cash provided from operations totaled $1.7 million for the year
ended December 31, 1997, $1.0 million for the year ended December 31, 1996, and
$5.1 million for the year ended December 31, 1995.
The Company's accounts receivable decreased to $6.9 million at December 31,
1997 from $10.5 million at December 31, 1996. The decrease was primarily due to
a corresponding decrease in sales described elsewhere in this discussion.
Current liabilities decreased to $9.7 million as of December 31, 1997 from
$11.5 million as of December 31, 1996. The decrease in current liabilities is
due to a corresponding decrease in sales. Sales and excise taxes included in
current liabilities decreased to $736,000 for the year ended December 31, 1997,
from $1.7 million for the year ended December 31, 1996, largely as a result of
the decrease in sales and an adjustment for prior overaccruals.
Prior to the Share Exchange, the Company loaned $2.0 million to an
affiliated company, Core Marketing, LLC, during 1997, of which $201,111 was
repaid prior to December 31, 1997. The remainder of the loan is due on or before
September 1, 1998. Additionally, the Company had loans outstanding from DNS for
$1.6 million at December 31, 1995; all of which were paid in 1996.
AvTel's operations for the twelve months ended September 30, 1997 (its last
full fiscal year prior to the completion of the Share Exchange) resulted in
revenues of approximately $2.3 million and a net loss of approximately $2.4
million. These losses primarily resulted from costs associated with the
commencement of AvTel's operations and an impairment loss of approximately $1.4
million recorded in connection with the AHI Merger. There is no assurance that
these operations will produce operating income in 1998.
The Company has been able to finance its capital expenditures, which have
consisted primarily of property and equipment, from funds generated from
operations. Cash received in acquisitions totaled $478,643 during 1997. An
important component of the Company's past growth has been to develop its
business through acquisitions, including the Share Exchange. The Company intends
to continue this strategy, and has retained Van Kasper & Company to advise it in
connection with this strategy.
Although cash provided by operations has provided sufficient cash to fund
its growth to date, the Company anticipates that future growth strategies in
1998 (including possible acquisitions) will require funding from other sources.
The Company is evaluating its financing alternatives. In addition to debt
financing, the Company may utilize its capital stock for acquisitions under
appropriate circumstances.
21
<PAGE>
INFLATION
- ---------
The Company does not believe that the relatively moderate rates of
inflation over the past three years have had a significant effect on its net
sales or its profitability.
YEAR 2000 COMPLIANCE
- --------------------
The Company has made an effort to insure that the software components of
its information and billing systems are Year 2000 compliant. Management is in
the process of confirming that all of such systems are Year 2000 compliant. Upon
such confirmation, management believes that, after January 1, 2000, the Company
will be able to continue to accurately track and bill calls. At the same time,
it is likely that the operations of a number of the Company's vendors rely on
software that is not Year 2000 compliant.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company and supplementary data are included
beginning immediately following the signature page to this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 1, 1997, the Company engaged KPMG Peat Marwick LLP to audit its
financial statements for fiscal 1997. This and certain other changes in the
Company's accountants were previously reported in Forms 8-K filed on November 7,
1997, and December 9, 1997.
There are no, and have not been, any disagreements between the Company and
its accountants on any matter of accounting principles, practices or financial
statements disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1998 Annual Meeting of Stockholders under the
captions "Election of Directors" and "Compliance with Section 16(a) of the
Securities Exchange Act of 1934."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1998 Annual Meeting of Stockholders under the
caption "Executive Compensation."
22
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1998 Annual Meeting of Stockholders under the
captions "Stock Ownership" and "Principal Shareholders."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1998 Annual Meeting of Stockholders under the
captions "Certain Relationships and Transactions."
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The index to the financial statements and financial statement schedules
filed as part of this report is set forth immediately following the signature
page.
(b) The index to the exhibits filed as part of this report is set forth
immediately following the financial statements.
(c) During the quarter ended December 31, 1997, the Company filed the
following Current Reports on Form 8-K:
(i) Amendment to Current Report on Form 8-K/A filed on October 20,
1997, amending a Current Report on Form 8-K filed by Hi, Tiger International,
Inc. (a predecessor corporation) on November 7, 1996. Amending Item 7 to file
financial statements and pro forma financial information with respect to the
acquisition of AvTel Holdings, Inc.
(ii) Amendment to Current Report on Form 8-K/A filed on October 23,
1997, amending a Current Report on Form 8-K filed on March 6, 1997. Amending
Item 7 to file financial statements and pro forma financial information with
respect to the acquisition of WestNet Communications, Inc.
(iii) Current Report filed on November 7, 1997. Item 4 - regarding
dismissal of AvTel's prior independent auditor.
(iv) Current Report filed on December 9, 1997 (subsequently amended by
Amendment to Current Report on Form 8-K/A filed on February 9, 1998.) Items 1,
2, 4 and 7. Completion of the Reincorporation Merger and the Share Exchange,
engagement of KPMG Peat Marwick LLP as independent auditors and change in fiscal
year.
23
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has caused this report to be signed on it behalf by the undersigned, thereunto
duly authorized.
AVTEL COMMUNICATIONS, INC.
Dated: April 10, 1998 By /S/ ANTHONY E. PAPA
------------------------
Anthony E. Papa,
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Dated: April 10, 1998 By /S/ JAMES P. PISANI
------------------------
James P. Pisani,
President, Chief Operating Officer and
Chief Financial Officer
(Principal Financial Officer)
Dated: April 10, 1998 By /S/ VIRGINIA A. BAKER
------------------------
Virginia A. Baker
Controller and Chief Accounting Officer
(Principal Accounting Officer)
24
<PAGE>
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities
indicated on this 10th day of April, 1998.
AVTEL COMMUNICATIONS, INC.
By /S/ ANTHONY E. PAPA
------------------------
Anthony E. Papa,
Chairman of the Board and Chief Executive Officer
By /S/ JAMES P. PISANI
------------------------
James P. Pisani,
President, Chief Operating Officer and
Chief Financial Officer, Director
By /S/ VIRGINIA A. BAKER
-------------------------
Virginia A. Baker
Controller and Chief Accounting Officer
By /S/ JOHN E. ALLEN
-------------------------
John E. Allen
Director
By /S/ JEFFREY J. JENSEN
--------------------------
Jeffrey J. Jensen
Director
By /S/ GREGORY T. MUTZ
--------------------------
Gregory T. Mutz
Director
25
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
AvTel Communications, Inc.:
We have audited the accompanying consolidated balance sheets of AvTel
Communications, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997. In
connection with our audits of the consolidated financial statements, we also
have audited the accompanying financial statement schedule. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AvTel
Communications, Inc. and subsidiaries at December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ KPMG Peat Marwick LLP.
Dallas, Texas
March 24, 1998
F-1
<PAGE>
<TABLE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
<CAPTION>
Assets 1997 1996
------ ------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents ......................................... $ 4,807,441 4,622,395
Accounts receivable, net .......................................... 6,961,953 10,507,580
Due from affiliates ............................................... 2,127,771 1,212,414
Federal and state income tax receivable ........................... 598,970 --
Other current assets .............................................. 861,950 2,200,751
------------ -----------
Total current assets ................................ 15,358,085 18,543,140
Property and equipment, net .......................................... 1,791,682 1,621,355
Other assets, net .................................................... 1,575,083 173,909
------------ -----------
Total assets ........................................ $ 18,724,850 20,338,404
============ ===========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable and other accrued expenses ....................... $ 1,546,762 1,888,026
Accrued network service costs ..................................... 4,319,198 4,863,663
Sales and excise taxes payable .................................... 736,012 1,676,677
Due to affiliates ................................................. 2,719,417 2,597,559
Other current liabilities ......................................... 466,039 554,596
------------ -----------
Total current liabilities ........................... 9,787,428 11,580,521
Deferred income taxes ................................................ 498,712 --
Other liabilities .................................................... 50,782 --
Common stock subject to put option (note 4) .......................... 578,880 896,000
------------ -----------
Total liabilities ................................... 10,915,802 12,476,521
------------ -----------
Stockholders' equity:
Series A convertible preferred stock, cumulative as to 8%
dividends. Authorized 1,000,000 shares, $0.01 par value,
207,700 shares issued and outstanding. (Liquidation
preference of $919,000 including dividends in arrears.) ......... 2,077 --
Common stock, Authorized 20,000,000 shares. At
December 31, 1997, $0.01 par value; 11,437,056
shares issued, including 385,920 shares subject to put options ..
At December 31, 1996, no par value; 8,819,054 shares
issued, including 482,400 shares subject to put options ......... 110,511 7,532,026
Additional paid in capital ........................................ 17,138,739 --
Retained earnings (accumulated deficit) ........................... (9,422,729) 769,441
Treasury stock, 1,999,997 shares in 1997 and 171,548 shares in 1996 (20,000) (439,584)
------------ -----------
Total stockholders' equity .......................... 7,809,048 7,861,883
Commitments and contingencies
Total liabilities and stockholders' equity .......... $ 18,724,850 20,338,404
============ ===========
See accompanying notes to consolidated financial statements.
</TABLE>
F-2
<PAGE>
<TABLE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1997, 1996 and 1995
<CAPTION>
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Revenues (note 6) .......................................... $ 51,389,080 71,558,295 64,289,718
Cost of revenues (note 6) .................................. 36,227,507 47,674,396 42,980,127
------------ ----------- -----------
Gross margin ................................ 15,161,573 23,883,899 21,309,591
------------ ----------- -----------
Operating expenses:
Selling, general and administrative (note 6) ...... 16,141,132 18,798,925 17,888,856
Acquisition related write off ..................... 9,098,545 -- --
Depreciation and amortization ..................... 679,856 993,940 998,342
------------ ----------- -----------
25,919,533 19,792,865 18,887,198
------------ ----------- -----------
Operating income (loss) .................... (10,757,960) 4,091,034 2,422,393
Interest expense (note 6) .................................. (11,692) (230,922) (6,299)
Other income, net .......................................... 301,580 271,171 165,616
------------ ----------- -----------
Income (loss) before income
tax expense and equity in net
income (loss) of DNS .................. (10,468,072) 4,131,283 2,581,710
Income tax expense (benefit) ............................... (276,352) 1,686,876 1,081,726
------------ ----------- -----------
(10,191,720) 2,444,407 1,499,984
Equity in net income (loss) of DNS ......................... -- 122,327 (3,940,477)
------------ ----------- -----------
Net income (loss) ........................ $(10,191,720) 2,566,734 (2,440,493)
============ =========== ===========
Proforma net loss per common share - basic
and diluted ............................................. $ (1.23)
============
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
<TABLE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995
<CAPTION>
Retained
Preferred Stock Common Stock Additional earnings Treasury Stock
--------------- ------------ paid in (accumulated --------------
Shares Amount Shares Amount capital deficit) Shares Amount Total
------- ------ ----------- ------------ ---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1994 . -- $ -- 4,467,384 $ 1,729,133 -- 643,200 -- $ -- 2,372,333
Acquisition of DNS
Communications, Inc. -- -- 2,405,499 3,607,682 -- -- -- -- 3,607,682
Net loss ......... -- -- -- -- -- (2,440,493) -- -- (2,440,493)
------- ------ ----------- ------------ ---------- ----------- ---------- ----------- -----------
Balances at
December 31, 1995 . -- -- 6,872,883 5,336,815 -- (1,797,293) -- -- 3,539,522
Purchase of
common stock .... -- -- -- -- -- -- (171,548) (439,584) (439,584)
Issuance of
common stock .... -- -- 1,463,771 2,195,211 -- -- -- -- 2,195,211
Net income ....... -- -- -- -- -- 2,566,734 -- -- 2,566,734
------- ------ ----------- ------------ ---------- ----------- ---------- ----------- -----------
Balances at
December 31, 1996 -- -- 8,336,654 7,532,026 -- 769,441 (171,548) (439,584) 7,861,883
Acquisition of Best
(note 2) ........ -- -- 934,987 3,361,208 -- -- (1,999,997) (3,317,940) 43,268
Share for share
exchange between
AvTel and Matrix
(note 2): Reverse
acquisition of
AvTel ........... 207,700 2,077 1,839,563 18,396 9,129,040 -- -- -- 9,149,513
Reflect new
capitalization
of Company ..... -- -- (171,548) (10,802,234) 7,064,710 -- 171,548 3,737,524 --
Issuance of
common stock
for exercise
of options ...... -- -- 15,000 150 52,350 -- -- -- 52,500
Expired put
options (note 4) -- -- 96,480 965 143,755 -- -- -- 144,720
Stock compensation
earned (note 7) . -- -- -- -- 748,884 -- -- -- 748,884
Net loss ......... -- -- -- -- -- (10,191,720) -- -- (10,191,720)
------- ------ ----------- ------------ ---------- ----------- ---------- ----------- -----------
Balances at
December 31, 1997 . 207,700 $2,077 11,051,136 $ 110,511 17,138,739 (9,422,729) (1,999,997) $ (20,000) 7,809,048
======= ====== =========== ============ ========== =========== ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
<CAPTION>
1997 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ..................................... $(10,191,720) 2,566,734 (2,440,493)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization ...................... 679,856 993,940 998,342
Amortization of advanced commissions ............... 1,355,492 618,791 --
Acquisition related write off ...................... 9,098,545 -- --
Provision for bad debts ............................ 1,829,770 1,461,471 1,955,842
Deferred income taxes .............................. (80,377) (321,678) 530,885
Stock compensation earned .......................... 748,884 -- --
Equity in (income) loss of DNS ..................... -- (122,327) 3,940,477
Changes in certain operating assets and liabilities:
Accounts receivable .............................. 1,969,332 (1,971,970) (2,170,807)
Due from affiliates .............................. (915,357) 345,336 630,395
Federal and state income tax receivable .......... (598,970) -- 631,183
Other current assets ............................. 1,787,672 (393,781) (96,791)
Accounts payable and accrued liabilities ......... (2,877,789) (1,397,160) 526,850
Due to affiliates ................................ (1,138,568) (742,663) 591,889
------------ ---------- ----------
Net cash provided by operating activities .. 1,667,770 1,036,693 5,097,772
------------ ---------- ----------
Cash flows from investing activities:
Cash received in acquisitions ......................... 477,643 -- --
Loans to affiliate .................................... (2,000,000) -- --
Payments received on loans to affiliates .............. 201,111 -- --
Purchase of property and equipment .................... (212,421) (701,718) (529,805)
Purchase of customer base ............................. -- -- (103,970)
Repayments from (to) DNS, net ......................... -- 1,577,432 (1,577,432)
Other ................................................. 2,749 (14,482) 52,173
------------ ---------- ----------
Net cash provided by (used in)
investing activities ..................... (1,530,918) 861,232 (2,159,034)
------------ ---------- ----------
Cash flows from financing activities:
Principal payments on capital leases .................. (4,306) -- --
Cash received for exercise of options ................. 52,500 -- --
Purchase of common stock for treasury ................. -- (439,583) --
------------ ---------- ----------
Net cash provided by (used in) ............ 48,194 (439,583) --
------------ ---------- ----------
financing activities
Net increase in cash and cash equivalents ................ 185,046 1,458,342 2,938,738
Cash and cash equivalents at beginning of year ........... 4,622,395 3,164,053 225,315
------------ ---------- ----------
Cash and cash equivalents at end of year ................. $ 4,807,441 4,622,395 3,164,053
============ ========== ==========
(Continued)
</TABLE>
F-5
<PAGE>
<TABLE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
<CAPTION>
1997 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
Cash paid (received) during the year for:
Interest .............................................. $ 11,594 212,404 6,300
============ ========== ==========
Income taxes, net of refunds .......................... $ 925,161 1,482,103 (475,177)
============ ========== ==========
Noncash financing activities:
Common stock issued for DNS acquisition ............... $ -- -- 3,607,682
============ ========== ==========
Common stock issued for advanced commissions .......... $ -- 2,195,211
============ ==========
Common stock issued for receivable from
major shareholder ................................... $ -- 723,600 --
============ ========== ==========
Common stock issued for Best acquisition .............. $ 3,361,208 --
============ ==========
Treasury stock acquired with Best acquisition ......... $ (3,317,940) --
============ ==========
Common and preferred stock issued in AvTel reverse
acquisition ......................................... $ 9,149,513 -- --
============ ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies
(a) Business and Background
On December 1, 1997, AvTel Communications, Inc. ("AvTel") and Matrix
Telecom, Inc. ("Matrix") completed a share for share exchange pursuant
to a stock exchange agreement dated April 29, 1997 as subsequently
amended ("Share Exchange"). For accounting purposes, the Share
Exchange was treated as a reverse acquisition of AvTel by Matrix.
AvTel was the legal acquiror and accordingly, the Share Exchange was
effected by the issuance by AvTel of 9,582,493 shares of common stock
in exchange for all of the common stock then outstanding of Matrix. In
addition, holders of outstanding Matrix stock options received 22,338
non-qualified stock options of AvTel. The purchase method of
accounting was used, with Matrix being treated as the acquiror for
accounting purposes. The results of operations reported in these
consolidated financial statements reflect the operations of Matrix
prior to December 1, 1997 and reflect the combined operations of AvTel
and Matrix subsequent to December 1, 1997. References to the "Company"
refer to operations of Matrix prior to the Share Exchange and the
combined operations of Matrix and AvTel subsequent to the Share
Exchange. As a result of the Share Exchange, Matrix became a wholly
owned subsidiary of AvTel. (See note 2).
The Share Exchange provided that each Matrix shareholder would receive
2.4819 AvTel common shares for each common share of Matrix then issued
including treasury shares held by Matrix. For periods prior to the
December 1, 1997 Share Exchange, all share amounts have been restated
to reflect the Share Exchange as a 2.4819 for one stock split. In
addition, on March 10, 1997 Matrix declared an 18 for one stock split.
All share amounts have been restated to also reflect this stock split.
AvTel was formed to be a provider of broadband network services
integrating voice, data and video solutions for individuals and
corporate customers. The Company sells and markets a broad range of
telecommunications and advanced network services through independent
value added resellers and internal direct sales professionals. The
Company targets mid-size corporations, small-office home-office
professionals and select residential market segments. To date AvTel
has generated revenues primarily through the provisioning of data
networking and internet service.
F-7
(Continued)
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Matrix provides long distance telephone service in forty-nine states over
intercity facilities provided by fully certified dominant domestic and
international carriers. Matrix resells to both residential and commercial
customers; however, the primary focus is to the small business owner and select
residential customers. Matrix is fully certified by the Federal Communications
Commission and certified to operate in all states requiring such certification.
Matrix holds billing and collection agreements with all regional bell operating
companies, GTE, and other independent telephone companies.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
(c) Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
demand deposits, time deposits, and other highly liquid investments
with a remaining maturity at date of purchase of less than ninety days
to be cash equivalents.
(d) Commissions
Commissions to sales agents are paid and expensed based on a
percentage of billings as incurred.
Commissions paid in advance of $221,000 and $1,576,000 as of December
31, 1997 and 1996, respectively, included in other current assets, are
being expensed over a period of eighteen months based on estimated
billings of the customers for which the commissions were paid.
(e) Revenue Recognition
Long distance, frame relay and internet service revenues are
recognized as service is provided. Amounts paid in advance are
recorded as deferred revenue.
(f) Property and Equipment
Property and equipment are recorded at cost. Maintenance and repairs
are charged against income as incurred, while renewals and major
replacements are capitalized. The cost and related accumulated
depreciation of assets sold or retired are removed from the accounts,
and any resulting gain or loss is reflected in operations. The Company
provides depreciation on fixed assets using the straight-line method
over the estimated useful lives of the respective assets.
F-8
(Continued)
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(g) Income Taxes
The Company utilizes the asset and liability method for accounting for
income taxes. Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
(h) Use of Estimates
Management of the Company has made a number of estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(i) Concentrations of Credit Risk
The Company's subscribers are primarily small business owners and
residential subscribers and are not concentrated in any specific
geographic region of the United States. The Company has agreements
with Local Exchange Companies, which provide billing and collection
services to the majority of the Company's subscribers. A significant
portion of the Company's accounts receivable is due from these
Companies.
(j) Accounts Receivable
Accounts receivable are net of allowances for doubtful accounts and
other provisions of $982,000 and $627,000 as of December 31, 1997 and
1996, respectively. The Company establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of
subscribers, historical trends and other information.
(k) Financial Instruments
The Company's financial instruments include cash, receivables,
payables and accrued expenses. The carrying amount of such financial
instruments approximates fair value because of the short maturity of
these instruments.
F-9
(Continued)
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(l) Acquired Customer Base
Acquired customer base of $1,575,083, which is net of accumulated
amortization of $8,000, at December 31, 1997, included in other assets, is
being amortized on a straight-line basis over five years. The Company
assesses the recoverability of this intangible asset by determining whether
the acquired customer base balance can be recovered through undiscounted
future operating cash flows of the acquired operations. The amount of
impairment, if any, is measured based on projected discounted cash flows.
The assessment of the recoverability of the acquired customer base will be
impacted if estimated future operating cash flows are not achieved.
(2) Acquisitions
Matrix Telecom, Inc. -- On December 1, 1997, AvTel and Matrix completed the
Share Exchange. For accounting purposes the Share Exchange was treated as a
reverse acquisition of AvTel by Matrix. AvTel was the legal acquiror and,
accordingly, the Share Exchange was effected by the issuance of AvTel
common stock in exchange for all of the common stock then outstanding of
Matrix. In addition, holders of outstanding Matrix stock options received
non-qualified stock options of the Company. After the Share Exchange the
former shareholders of Matrix held approximately 84% of the then
outstanding common stock of the Company.
The consummation of the Share Exchange was subject to the satisfaction of
several conditions by AvTel. These included the reincorporation of AvTel
(then a Utah corporation; "AvTel Utah") in Delaware by way of a merger (the
"Reincorporation Merger") with and into AvTel Communications, Inc., a
Delaware corporation, a wholly-owned subsidiary formed for the sole purpose
of this merger. As part of the merger, AvTel (the surviving Delaware
corporation) issued to its stockholders one share of new Delaware Common
Stock for each four shares of AvTel-Utah's Common Stock outstanding
immediately prior to the Reincorporation Merger. AvTel's Series A
Convertible Preferred Stock and its outstanding options were similarly
adjusted. Accordingly, the Reincorporation Merger essentially effected a
one for four reverse stock split of AvTel's shares.
In connection with the reverse acquisition of AvTel by Matrix, the
following assets were acquired, liabilities assumed, and common and
preferred stock issued.
Current assets other than cash $ 258,041
Fixed assets 577,836
Customer base 1,583,000
Goodwill 9,098,545
Current liabilities (1,945,526)
Long-term liabilities (688,854)
Common and preferred stock issued (9,149,513)
-----------
Cash acquired $ 266,471
===========
F-10
(Continued)
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The reverse acquisition of AvTel by Matrix was accounted for using the
purchase method of accounting. In order to value the consideration given in
the Share Exchange the market price of AvTel's common stock for a period
immediately preceding the announcement of the Share Exchange was used. As
of the date of acquisition, the Company determined the fair value of the
net tangible and intangible assets acquired and liabilities assumed.
Concurrently, the Company determined that the carrying amount of recorded
goodwill was not recoverable. Accordingly, the Company recorded a charge to
income of $9,098,545 immediately subsequent to the reverse acquisition.
Proforma results of operations of the Company as if the Share Exchange had
occurred as of the beginning of the periods presented is as follows except
that the acquisition related loss is reflected as of January 1, 1997, for
comparative purposes:
Year ended
December 31,
------------
1997 1996
-------------- ----------
Revenue $ 54,094,095 73,512,954
Net income (loss) (12,634,346) 2,289,495
Proforma net loss per share $ (1.11) --
Best Connections, Inc. ("Best") -- Effective July 1, 1997, shareholders of
Best, an affiliate of Matrix through substantially common ownership,
contributed their ownership of Best to Matrix in exchange for 934,987
shares of Matrix common stock. Best's primary assets were 1,999,997 shares
of Matrix common stock and cash of $211,000. The assets and liabilities of
Best were recorded at their historical cost which approximated the fair
value of such assets as of July 1, 1997. As a result of the combination,
Matrix assumed the obligation to grant up to 1,999,997 stock options to
agents of Best, certain employees of affiliated companies and potentially
others. Such option grants relate to services, including sales promotion
activities, to be performed by the recipients on behalf of the Company.
Accordingly, the fair value of such options will be charged to expense by
the Company as the related services are provided.
In connection with the Matrix and Best combination, the following assets
were acquired, liabilities assumed and common stock issued:
Fixed assets $ 15,137
Current liabilities (183,014)
Common stock issued 3,361,208
Treasury stock acquired (3,317,940)
-----------
Cash acquired $ 211,172
===========
F-11
(Continued)
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Results of operations for 1997 and 1996 would not have been significantly
different had the Best and Matrix combination occurred as of the beginning
of the respective years.
DNS Communications, Inc. ("DNS") -- In October 1995, Matrix issued
2,405,499 shares of its common stock valued at $3,607,682 in exchange for
all of the outstanding common stock of DNS, a Houston based long distance
reseller. The transaction was accounted for under the purchase method. The
purchase price in excess of the book value of DNS net assets was allocated
based upon the estimated fair value of the assets acquired and liabilities
assumed at the date of acquisition and included the following:
Current assets $ 1,978,262
Acquired customer base 6,351,131
Other noncurrent assets 114,384
Accounts payable and accrued expenses (2,346,102)
Deferred tax liability (2,489,993)
-----------
Value assigned to common stock issued $ 3,607,682
===========
Summarized results of operations of DNS is as follows:
Period from
Year Ended October 1, 1995 to
December 31, 1996 December 31, 1995
----------------- -----------------
Revenue $ 11,027,000 $ 4,277,000
Net income (loss) 122,000 (3,940,000)
Subsequent to the acquisition, the operations of DNS generated substantial
losses. DNS's customer churn rate and bad debts as well as projected cash
flows were evaluated and as of December 31, 1995 it was determined that the
remaining investment in the DNS acquired customer base totaling
approximately $4,462,000 should be written off. Such amount net of related
deferred taxes is included in the loss of DNS reflected above for 1995.
In June 1996, Matrix sold the customer base acquired in the DNS acquisition
in addition to certain blocks of customers acquired during 1995 and 1996
together with related assets to a former officer of Matrix and a former
shareholder of DNS for approximately $5,270,000. Matrix recorded a gain on
this sale of approximately $3,221,000. This gain is included in equity in
net income (loss) of DNS in the 1996 statement of operations.
F-12
(Continued)
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Due to the timing of the acquisition and subsequent decision to sell the
operations of DNS, Matrix has recorded its interest in DNS operations using
the equity method of accounting.
(3) Property and Equipment
Property and equipment consisted of the following:
Estimated December 31
-----------
useful life 1997 1996
----------- ---------- ---------
Communications system 2-5 years $1,318,326 1,328,679
Office furniture and equipment 1-7 years 2,945,795 2,815,451
Leasehold improvements lease term 416,220 416,220
---------- ----------
4,680,341 4,560,350
(2,888,659)(2,938,995)
---------- ---------
$1,791,682 1,621,355
========== =========
Depreciation expense was $632,000, $877,000 and $882,000 for 1997, 1996 and
1995, respectively.
(4) Stockholders' Equity
The preferred shareholders are entitled to receive cumulative annual
dividends at a rate of 8% and are entitled to a preference in liquidation
in the amount of $4 per share plus unpaid dividends. There were $88,000
cumulative preferred stock dividends in arrears at December 31, 1997. The
preferred stock is convertible, on a one-for-one basis, into shares of
Company common stock. The Company has 1,000,000 preferred shares
authorized.
In October 1995, the Company issued 2,405,499 shares of its no par value
common stock valued at $3,607,682 for 100% of the outstanding shares of DNS
Communications, Inc. ("DNS"), a Houston based long distance reseller.
In December 1996, the Company issued 1,463,771 shares of its no par value
common stock for future commissions due to affiliates as of October 31,
1996. A value of $1.50 per share was used in determining the number of
shares to issue in settlement of the $2,195,211 obligation. Of this amount,
$1,355,000 and $619,000 was expensed as commission expense in 1997 and
1996, respectively.
During 1996, the Company sold to certain employees 482,400 shares of common
stock at $1.50 per share. As of December 31, 1996, the Company had recorded
a $723,600 receivable for such shares, which was subsequently collected.
Proceeds used to repay the $723,600 receivable were loaned to
F-13
(Continued)
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
the employees by a major shareholder of the Company. As of December 31,
1997 and 1996, the shares subject to this agreement could be put to the
Company at the option of the employee at approximately $1.50 and $1.86 per
share ($578,880 and $896,000), respectively. Such amounts have been
included in other liabilities. Activity in common stock outstanding related
to shares subject to put follows:
Shares Amount
-------- ---------
Sale of common shares subject to put 482,400 $ 723,600
Increase in share value subject to put charged
to expense -- 172,400
-------- --------
Balance, December 31, 1996 482,400 896,000
Decrease in share value subject to put recorded
as a reduction to expense -- (172,400)
Vested shares no longer subject to put (96,480) (144,720)
Balance, December 31, 1997 385,920 $ 578,880
======== ========
Under certain circumstances (e.g., employee termination) the Company has a
call at amounts discussed above.
During May 1996, the Company purchased 171,548 shares of its no par common
stock as treasury stock for $439,584. As further discussed in note 8 in
connection with the Best and Matrix combination effective July 1, 1997,
Matrix acquired an additional 1,999,997 shares of its common stock as
treasury stock. As a part of the recapitalization done in connection with
the AvTel reverse acquisition, Matrix retired the 171,548 shares of its
common stock discussed above and the Company recorded the remaining
treasury stock at par value.
(5) Federal and State Income Taxes
The provision for income taxes consisted of the following:
1997 1996 1995
---- ---- ----
Current tax expense (benefit):
Federal $ (234,899) 1,751,047 480,736
State and local (41,453) 257,507 70,105
-------- --------- -------
(276,352) 2,008,554 550,841
-------- --------- -------
F-14
(Continued)
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Deferred tax expense (benefit):
Federal -- (254,350) 424,708
State and local -- (67,328) 106,177
-------- ---------- ---------
-- (321,678) 530,885
-------- ---------- ---------
$ (276,352) 1,686,876 1,081,726
======== ========== =========
Income tax expense differs from the amounts computed by applying the U.S.
federal income tax rate of 34 percent to pretax income as a result of the
following:
1997 1996 1995
----------- --------- ---------
Computed "expected" tax expense (benefit) $(3,559,144) 1,404,637 870,502
State and local taxes, net of federal income
tax effect (27,359) 125,518 116,346
Nondeductible acquisition related write off 3,093,522 -- --
Losses not providing tax benefit 330,190 -- --
Other (113,561) 156,721 94,878
----------- --------- ---------
$ (276,352) 1,686,876 1,081,726
=========== ========= =========
Deferred income taxes as of December 31, 1997 and 1996 reflect the impact
of temporary differences between financial statement carrying amounts and
tax bases of assets and liabilities. The tax effects of temporary
differences that give rise to significant portions of the net deferred tax
assets at December 31, 1997 and 1996 are presented below:
December 31
1997 1996
----------- -------
Deferred tax assets:
Net operating loss carryover $ 814,425 --
Compensation related items 299,554 --
Contingent liabilities and other items 204,978 134,288
----------- -------
Gross deferred tax asset 1,318,957 134,288
Less valuation allowance (1,184,669) --
----------- -------
Net deferred tax asset 134,288 134,288
Deferred tax liabilities:
Customer base intangible (633,000) --
----------- -------
Net deferred tax asset (liability) $ (498,712) 134,288
=========== =======
F-15
(Continued)
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The valuation allowance for deferred tax assets increased $1,184,669 during
1997, $854,479 of which relates to temporary differences of AvTel as the
date of the acquisition.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected
future taxable income and prior taxes paid in making this assessment. Based
upon its evaluation of these factors, management believes that it is more
likely than not that the Company will realize the benefits of these
deductible differences, net of the valuation allowance, at December 31,
1997. At December 31, 1997, the Company has net operating loss
carryforwards for federal tax purposes of approximately $2,400,000 which
had been generated by AvTel prior to the reverse acquisition which are
available on a limited basis to offset future federal taxable income, if
any, through 2012. When realized such benefit will first be utilized to
reduce long term intangible assets recorded in the reverse acquisition of
AvTel by Matrix.
(6) Related Party Transactions
The Company has had transactions in the normal course of business with
various companies which are affiliated with shareholders of the Company.
Pacific Gateway Exchange, Inc. ("PGE"), an affiliated company, provides the
Company with significant domestic and international transmission services.
Common shareholders hold an interest in both PGE and the Company.
Affiliates of the Company also act as agents for the Company in the
solicitation of new customers. A significant number of the Company's
employees are leased from United Group Service Center, an affiliate, who
provides such services to a number of affiliated companies. The Company
provides long distance service to a number of affiliated companies.
Balances with affiliates related to operating activities are settled
monthly. In addition, the Company has made both interest bearing and
noninterest bearing advances to affiliated companies.
F-16
(Continued)
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Due from affiliates consists of the following:
December 31
1997 1996
---------- ---------
Core Marketing - note receivable due September 1, 1998 $1,798,889 --
United Membership Marketing Group (long distance
services) 44,888 --
Specialized Card Services (long distance services) 20,564 --
UICI Administrators (long distance services) 28,965 --
Excell Agent Services (long distance services) -- 193,285
Interactive Media Works (IMW) (long distance services) 25,263 525
Core Marketing (long distance services) 111,280 134,652
Other receivables from various affiliates 97,922 160,352
Receivable from major shareholder for stock issued -- 723,600
---------- ---------
$2,127,771 1,212,414
========== =========
Due to affiliates consists of the following:
1997 1996
---------- ---------
PGE (network transmission services) $2,335,787 2,244,411
Group Association (UGA) and
Core Marketing (commissions) 134,618 144,612
Other payables to various affiliates 249,012 208,536
---------- ---------
$2,719,417 2,597,559
========== =========
Significant services and transactions incurred in the normal course of
operations with affiliated companies are summarized as follows:
1997 1996 1995
---------- --------- ---------
Revenues include the following:
U.S. Teleco-billing and collection services,
customer service and accounting services $ 200,370 -- --
Long distance revenues from affiliates: UGA,
UICI, IMW, and Core Marketing 3,351,375 5,445,903 3,180,302
---------- --------- ---------
$3,551,745 5,445,903 3,180,302
========== ========= =========
F-17
(Continued)
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cost of revenues includes the following:
Network transmission services - PGE $15,917,688 20,527,236 17,195,182
=========== ========== ==========
Selling, general and administrative includes the following:
Expenses paid on behalf of PGE for access
services, for which the Company was reimbursed $ 3,534,154 5,040,051 3,142,222
Expenses incurred for leasing employees from
United Group Service Center 4,395,820 4,542,007 3,655,712
Sales commissions to affiliates: TravelCom 800,
Core Marketing, UICI, UGA and
Best Connections 990,533 5,335,233 6,314,878
Overhead expenses reimbursed to/from
UGA Divisions 110,761 77,231 105,007
Core Marketing - casual mailings 603,742 -- --
----------- ---------- ----------
$ 9,635,010 14,994,522 13,217,819
=========== ========== ==========
Interest expense includes the following:
Interest paid to shareholder $ -- 173,380 6,299
=========== ========== ==========
</TABLE>
During 1996, the Company obtained loans of $4,900,000 from a significant
shareholder for working capital and other purposes. Such amount was repaid
during 1996.
(7) Stock Compensation
AvTel options -- Prior to the Share Exchange AvTel adopted a 1997 Incentive
Stock Option Plan (the "AvTel 1997 Plan") for option grants to officers and
key employees. The AvTel 1997 Plan authorizes grants of options to purchase
up to 250,000 shares of authorized but unissued common stock and 125,000
shares of restricted common stock. Stock options are to be granted with an
exercise price greater than or equal to the stock's fair market value at
the date of grant. Options generally vest 25% after one year and 25% each
year thereafter until fully vested. Such options typically expire after ten
years. In addition, AvTel had other options which had been granted prior to
the adoption of the AvTel 1997 Plan. After the Share Exchange all
outstanding options became obligations of the Company.
Matrix options -- Periodically, the Board of Matrix approved stock options
for certain officers and employees. Stock option transactions of Matrix
prior to the Share Exchange are reflected in the table below. At the time
of the Share Exchange, Matrix had 22,338 options outstanding to purchase
its common stock. In connection with the Share Exchange, the Company
reissued these stock options and they vested immediately. These reissued
options expire in December 2002.
F-18
(Continued)
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The per share weighted average fair value of stock options granted during
1995 was $1.67 on the date of the grant using the Black Scholes option -
pricing model with the following weighted-average assumptions: risk-free
interest rate of 7.0%, and an expected life of 20 years.
The Company applies APB Opinion No. 25 in accounting for the AvTel 1997
Plan and the Matrix options discussed above; and, accordingly, no
compensation cost has been recognized for its stock options issued to
employees in the financial statements. For stock options granted to
nonemployees, the Company accounts for such options in accordance with the
requirements of SFAS No. 123. Had the Company determined compensation cost
based on the fair value at the grant date for stock options issued to
employees under SFAS No. 123, the Company's net loss in 1997 and 1995 would
have been increased by approximately $5,000 and net income in 1996 would
have been decreased by approximately $5,000.
Best Connections, Inc. options -- As discussed in note 2 as a result of the
Matrix combination with Best, Matrix assumed the obligation to issue stock
options to Best's agents under Best's 1997 Option Plan. Effective as of the
date of combination, July 1, 1997, 1,292,000 options to purchase Matrix
common shares were granted to Best agents at $1.50 per share which will
result in aggregate commission expense of approximately $764,000 over the
vesting period. The option price per share was $1.50. The agents' options
become exercisable no later than December 31, 1999 and may be exercised
earlier based on qualified billings of long distance customers generated by
the agents during six month measurement periods. After the Share Exchange
such options became obligations of the Company. As of December 31, 1997,
421,343 options have been earned under the Plan and the Company recorded
expense totaling approximately $249,000 related to such options based on
qualified billings for 1997. In January 1998, 311,985 of such options
became exercisable. Options generally expire two years from the date they
become exercisable or sixty days subsequent to termination of employment.
The per share weighted average fair value of stock options granted on July
1, 1997 was $.59 on the date of the grant using the Black Scholes option -
pricing model with the following weighted-average assumptions: expected
volatility of 30%, risk-free interest rate of 6.0%, and an expected life of
3.5 years.
Best Connections, Inc. options and restricted stock agreements -- As
discussed in note 2 as a result of the Matrix combination with Best, Matrix
assumed the obligation to issue stock options, consisting of Matrix common
shares owned by Best, to employees of affiliated companies. Effective July
15, 1997, the Company issued 247,500 options to purchase an equal number of
shares of its common stock, at $1.50 per share subject to the provisions of
a Restricted Stock Agreement. The stock options expire if unexercised after
December 15, 2002. The Restricted Stock Agreement includes a call provision
by the Company that lapses ten percent each six months beginning December
15, 1997 through June 15, 2002
F-19
(Continued)
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
or fully lapses in the event of death or permanent disability of the option
holder. The call price is equal to the initial purchase price of $1.50 plus
the aggregate amount of net income or loss per share for each fiscal
quarter beginning after December 15, 1997. In no event will the call price
be less than the initial purchase price. The Company is recognizing expense
over the life of the options in accordance with the provisions of SFAS No.
123 and, during 1997, the Company recorded expense of $499,000. At December
31, 1997, no options had been exercised and therefore no shares were
subject to the terms of the Restricted Stock Agreement.
The per share weighted average fair value of stock options granted on
December 15, 1997 was $6.88 on the date of the grant using the Black
Scholes option - pricing model with the following weighted-average
assumptions: expected volatility of 30%, risk-free interest rate of 6.0%,
and an expected life of five years.
Stock option activity is as follows:
Weighted average
Exercise
Options Price
---------- ---------
Outstanding at December 31, 1994 -- $ --
Granted 53,607 2.24
---------
Outstanding at December 31, 1995 53,607 2.24
Canceled (31,269) 2.24
---------
Outstanding at December 31, 1996 22,338 2.24
AvTel options outstanding at time of
Share Exchange 255,109 4.52
Granted 1,539,500 1.50
Exercised (15,000) 3.50
---------
Outstanding at December 31, 1997 1,801,947 1.78
========== =========
Exercisable at December 31, 1995 -- $ --
Exercisable at December 31, 1996 3,574 2.24
Exercisable at December 31, 1997 349,972 2.21
Total expense recorded for stock based awards during 1997 was $748,884.
The following table summarizes certain information about the Company's
stock options at December 31, 1997.
F-20
(Continued)
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
average Weighted
Range of Number of remaining average Number of Weighted average
exercise prices options contractual life exercise price options exercisable exercise price
--------------- --------- ---------------- -------------- ------------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 1.00 - 3.00 1,756,674 3.8 years $ 1.64 310,949 $ 1.56
4.00 - 6.00 28,097 6.4 4.89 21,847 4.86
8.00 5,429 9.1 8.00 5,429 8.00
12.00 11,747 8.8 12.00 11,747 12.00
</TABLE>
(8) Proforma Net Loss per Common Share
In February 1997, the Financial Accounting Standards Board issued SFAS
128, Earnings per Share. SFAS 128 supersedes the earnings per share
calculation methods of APB 15, effective for annual and interim
periods ending after December 15, 1997. In accordance with this
standard, the net loss per share amount presented on the Company's
Consolidated Statement of Operations for 1997 have been calculated
using the measurement provisions of SFAS 128.
The following data show amounts used in computing net loss per share
under the provisions of SFAS 128.
1997
------------
Net loss $(10,191,720)
Less preferred dividends 5,540
------------
Loss applicable to common shareholders $(10,197,260)
============
Proforma weighted average number of common shares
used in basic and diluted net loss per common share 8,267,296
Net loss per common share -
Basic and diluted $ (1.23)
============
Per share amounts are not reflected for 1996 and 1995 due to the
recapitalization of the Company as a result of the reverse acquisition
in 1997.
F-21
(Continued)
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the period prior to the reverse acquisition, the number of shares
outstanding of Matrix multiplied by the exchange ratio was used to
calculate the weighted average number of shares outstanding for pro forma
purposes. Basic and diluted proforma net loss per common share are equal as
assuming conversion of potentially dilutive securities would be
antidilutive. At December 31, 1997, the Company has 509,947 outstanding
options at a weighted-average exercise price per share of $2.49 (note 7)
and 207,700 shares of preferred stock which are convertible into an equal
number of shares of common stock (note 4). The potentially dilutive effect
of these securities has not been considered in the computation of diluted
net loss per common share since their effect would be antidilutive.
(9) Leasing Activities and Other Commitments
The Company leases office space and various equipment under operating
leases expiring in various years through 2001. In the normal course of
business, operating leases are generally renewed or replaced by other
leases. Total rental expenses were $245,000 in 1997, $325,000 in 1996 and
$239,000 in 1995. Future minimum lease payments under noncancelable
operating leases (with initial or remaining lease terms in excess of one
year) and future minimum capital lease payments as of December 31, 1997
are: 1998 - $353,000; 1999 - $353,000; 2000 - $329,000 and 2001 - 68,000.
Substantially all of the Company's switching and transmission facilities
have been provided by two suppliers under negotiated contractual
agreements. The Company purchases long distance services at certain
per-minute rates, which vary depending on the time and type of call. At
December 31, 1997, there are outstanding contractual agreements committing
the Company to $6,773,000 minimum usage for 1998.
(10) Contingencies
The Company presently has contingent liabilities relating to various
lawsuits and other matters related to the conduct of its business. On the
basis of information furnished by counsel and others, management believes
these contingencies upon resolution will not materially affect the
financial condition or results of operations of the Company.
F-22
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
Years ended December 31, 1997, 1996, and 1995
Balance at Balance at
beginning end of
Description of period Additions (a) Deductions (b) period
Allowance for doubtful
accounts - year ended
December 31, 1997 $ 627,000 1,829,770 1,474,770 982,000
========== ========= ========= =======
Allowance for doubtful
accounts - year ended
December 31, 1996 $ 730,000 1,461,471 1,564,471 627,000
========== ========= ========= =======
Allowance for doubtful
accounts - year ended
December 31, 1995 $ 789,000 1,955,842 2,014,842 730,000
========== ========= ========= =======
(a) Charged to costs and expense
(b) Accounts written off
F-23
<PAGE>
EXHIBIT INDEX
Exhibit
Number Title of Document Page Number
- ---- --------------------------------------------------- -----------
2.1 Acquisition Agreement, dated as of August 30, 1996, by
and among Hi-Tiger International, Inc., a Utah
corporation, AvTel Communications, Inc., a Utah
corporation, and AvTel Holdings, Inc., a California
corporation. (Incorporated by reference to Exhibit A to
Registrant's Information Statement on Schedule 14C dated
October 2, 1996).
2.2 Amendment No.1 to Acquisition Agreement, dated October
22, 1996, among Hi-Tiger International, Inc., AvTel
Communications, Inc. and AvTel Holdings, Inc.
(Incorporated by reference to Exhibit 2.2 to Registrant's
Current Report on Form 8-K dated October 23, 1996).
2.3 Agreement and Plan of Reorganization, dated November 20,
1996 between the Registrant and Silicon Beach
Communications, Inc. (Incorporated by reference to
Exhibit 10.04 to Registrant's Annual Report on Form 10-KSB
for the year ended September 30, 1996).
2.4 Stock Purchase Agreement, dated as of February 1, 1997,
by and among the Registrant, Hi, Tiger, Inc., WestNet
Communications, Inc., Theodore E. Padova, Howard M.
Tamaroff and Christiana G. Bryson, Hallas Color Photo
Lab, Inc., dba Image Source, Inc., Joseph P. and Lisa
Gerardin, James D. Hennigan, Kathleen Sweeney Jonsson
and Alan J. Noelle. (Incorporated by reference to
Exhibit 2.1 to Registrant's Current Report on Form 8-K
dated February 21, 1997).
2.5 Stock Exchange Agreement, dated as of April 29, 1997, by
and between the Registrant and Matrix Telecom, Inc.
(Incorporated by reference to Exhibit 2 to Registrant's
Current Report on Form 8-K dated April 30, 1997).
2.6 Amendment to Stock Exchange Agreement, dated as of August
25, 1997, by and between AvTel Communications, Inc. and
Matrix Telecom, Inc. (Incorporated by reference to
Exhibit 2 to Registrant's Current Report on Form 8-K dated
August 25, 1997).
2.7 Agreement and Plan of Merger, dated as of October 3,
1997, between AvTel Communications, Inc., a Delaware
corporation and AvTel Communications, Inc., a Utah
corporation. (Incorporated by reference to
Exhibit 2.7 to Registrant's Annual Report on Form 10-KSB
for the year ended September 30, 1997).
<PAGE>
3.1 Certificate of Incorporation of the Registrant. (Incorporated by reference
to Exhibit 3.1 to Registrant's Annual Report on Form 10-KSB for the year
ended September 30, 1997).
3.2 Bylaws of the Registrant. (Incorporated
by reference to Exhibit 3.2 to Registrant's Annual Report on Form 10-KSB
for the year ended September 30, 1997).
10.1 Rights Agreements dated October 23, 1996, between the Registrant and
holders of the Registrant's Series A Convertible Preferred Stock.
(Incorporated by reference to Exhibit 4.2 to Registrant's Current Report on
Form 8-K dated October 23, 1996).
10.2 Employment Agreement, dated as of August 1, 1996, between the Registrant
and Anthony E. Papa. (Incorporated by reference to Exhibit 10.01 to
Registrant's Annual Report on Form 10-KSB for the year ended September 30,
1996).
10.3 Employment Agreement, dated as of August 1, 1996, between the Registrant
and James P. Pisani. (Incorporated by reference to Exhibit 10.01 to
Registrant's Annual Report on Form 10-KSB for the year ended September 30,
1996).
10.4 Employment Agreement, dated as of November 20, 1996, between the Registrant
and Frank Dziuba. (Incorporated by reference to Exhibit 10.4 to
Registrant's Annual Report on Form 10-KSB for the year ended September 30,
1997).
10.5 Employment Agreement, dated as of January 27, 1997, between the Registrant
and D. Stephen DeWindt, as amended. (Incorporated by reference to Exhibit
10.5 to Registrant's Annual Report on Form 10-KSB for the year ended
September 30, 1997).
10.6 1997 Stock Incentive Plan. (Incorporated by reference to Exhibit A to the
Registrant's definitive Proxy Statement on Schedule 14A dated January 8,
1997.)
10.7 Registration Rights and Lockup Agreement dated December 1, 1997, between
the Registrant and Matrix Telecom, Inc., on behalf of the stockholders of
Matrix, (Incorporated by reference to Exhibit 4 to Registrant's Current
Report on Form 8-K dated December 1, 1997).
10.8 Triple Net Real Property Lease (Multi-Tenant Building) dated as of February
16, 1998, by and between Bath Street Partners, a California limited
partnership and the Company.
10.9 Commercial Lease Agreement dated February 28, 1995,
Matrix Telecom, Inc. and Ameritas Life Insurance Corp.,
as amended by Lease Modification Agreement dated March 2,
1995.
<PAGE>
10.10 Resale Solutions Switched Services Agreement dated March 12,
1998, between Matrix Telecom, Inc. and Sprint Communications
Company L.P.
10.11 IXplus License Agreement dated as of April 23, 1991, between Matrix
Telecom and Electronic Data Systems Corporation, as amended by Amendment
Number One dated as of October 1, 1992.
21 List of Subsidiaries.
23 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule.
<PAGE>
EXHIBIT 10.8
TRIPLE NET REAL PROPERTY LEASE
(Multi-Tenant Building)
THIS TRIPLE NET REAL PROPERTY LEASE (this "Lease"), dated for reference
purposes only as of February 16, 1998, is made and entered into by and between
BATH STREET PARTNERS, a California limited partnership (the "Landlord"), and
AVTEL COMMUNICATIONS, INC., a Delaware corporation (the "Tenant"), who,
intending to be legally bound, agree as follows:
1. LEASED PREMISES
Landlord leases to Tenant, and Tenant leases from Landlord, those certain
premises identified as the entire first floor of the building located at 505
Bath Street, Santa Barbara, California (the "Building"), as depicted on the Plot
Plan attached as Exhibit A (the "Premises"), together with all fixtures
presently located in the Premises, upon the terms and conditions set forth
below. Landlord and Tenant acknowledge and agree that the Premises consist of
6,978 square feet. The Premises do not include approximately 1,317 square feet
on the first floor of the Building comprised of the stair and elevator wells,
pump rooms, back reception area, the electric room, and the mail room.
1.1 Acceptance of Condition. Landlord shall remove all of the prior
tenant's furnishings prior to the Commencement Date. The Premises are accepted
"AS IS" by Tenant, after Tenant's inspection, in the condition in which they
exist as of the execution of this Lease. Tenant acknowledges that there are no
warranties, express or implied, made by Landlord with regard to the Premises.
1.2 Parking. Tenant shall have the nonexclusive right, in common with the
other tenants of the Building, to use parking spaces used by all tenants of the
Building. Prior to the Commencement Date, Landlord shall cause all existing
reserved spaces for the Building to be relocated or eliminated.
1.3 Phone Room. Landlord shall have reasonable access to the main phone
room in the Premises with 24 hours' prior notice except in the event of an
emergency. Tenant may relocate the other tenant's phone and computer equipment
from this room at Tenant's expense and with Landlord's prior approval of the
relocation site.
1.4 New Address. Tenant shall, within ninety (90) days from the
Commencement Date, take such actions as may be necessary to obtain a separate
street address for the Premises. From and after the date that a separate street
address is obtained for the Premises, the Premises shall be deemed to refer to
such new street address.
2. TERM
2.1 Initial Term. The term of this Lease (the "Term") shall commence thirty
(30) days from the execution of this Lease by Landlord and Tenant (the
"Commencement Date"). The Term shall expire upon the passage of five (5) years
from that date, unless sooner terminated as provided in this Lease.
2.2 Options to Extend. Landlord hereby grants to Tenant, on the terms and
conditions set forth below, one (1) conditional option (the "Option") to extend
the term of this Lease for an additional period of five (5) years (the "Renewal
Term"). The Renewal Term shall be subject to all of the provisions of this
Lease. Landlord has no duty whatsoever to advise or remind Tenant of its rights
hereunder. The right of Tenant to exercise the Renewal Term to extend the
<PAGE>
term of the Lease is subject to the satisfaction of the following conditions
precedent:
2.2.1 The Lease shall be in effect at the time notice of exercise is
given and on the last day of the expiring term of the Lease;
2.2.2 Landlord shall not, in good faith, have at any time served
Tenant with a three-day notice to pay rent or quit under California Code of
Civil Procedure Section 1161 during the preceding term of the Lease;
2.2.3 Tenant shall not be in default at the time notice of
exercise is given or on the last day of the then-expiring term of the Lease; and
2.2.4 Tenant shall have given notice of exercise of its Option
pursuant to this Section 2.2 not less than one hundred eighty days, nor more
than two hundred ten days, prior to the expiration of the then-expiring term of
this Lease.
3. RENT
Commencing thirty days from the Commencement Date (the "Rent Commencement
Date"), Tenant shall pay to Landlord the minimum monthly rent provided in
Section 3.1, all Operating Costs provided in Section 3.2, and any other payments
required under the terms of this Lease, without set-off or reduction. All such
sums owing under this Lease shall be considered additional rent ("Rent") and
shall be payable at Landlord's office identified on the signature page of this
Lease. Minimum monthly rent and all additional Rent shall be payable in advance,
commencing on the Rent Commencement Date, and continuing on the first day of
each month thereafter during the term of this Lease, without reduction or
set-off (except as otherwise expressly provided in Section 3.5). Upon execution
of this Lease, Tenant shall prepay the first month's minimum monthly rent that
would otherwise be due on the Rent Commencement Date. Should the Rent
Commencement Date be a date other than the first day of a month, then the rent
due on the Rent Commencement Date shall be prorated, on the basis of a
thirty-day month, for the number of days between the Rent Commencement Date
(including the Commencement Date) and the end of the month in which the Rent
Commencement Date occurs.
3.1 Minimum Monthly Rent.
3.1.1 The minimum monthly rent payable from the Rent Commencement Date
through the expiration of the first twelve (12) months of the Term shall be One
Dollar and Seventy Cents ($1.70) per square foot, or Eleven Thousand Eight
Hundred Sixty-Two Dollars and Sixty Cents ($11,862.60).
3.1.2 The minimum monthly rent shall be adjusted upon the expiration
of the first year of the Term and each year thereafter. Commencing on the first
day of the thirteenth month of the Term (the "Adjustment Date"), the parties
shall ascertain from the official Consumer's Price Index for Urban Wage Earners
and Clerical Workers, All Items, for the Los Angeles, Anaheim-Riverside area,
1982-1984=100 Base, as published by the United States Department of Labor,
Bureau of Labor Statistics (the "Index") the Index figure for the month four
months preceding the Commencement Date (the "Base Index"), and for the
corresponding month prior to the Adjustment Date (the "Adjustment Index"). The
minimum monthly rent payable from each Adjustment Date until the next date upon
which minimum monthly rent is adjusted as provided in this Lease shall be
determined by multiplying the minimum monthly rent payable at the Rent
Commencement Date by a fraction, the numerator of which shall be the Adjustment
Index, and the denominator of which shall be the Base Index. Notwithstanding the
preceding, in no event will the adjusted minimum monthly rent be less than two
percent (2%) more than the minimum monthly rent in effect prior to the
Adjustment Date, nor more than five percent (5%) more than the minimum monthly
rent in effect prior to the Adjustment Date.
<PAGE>
A. If the Index is no longer published on the Adjustment Date,
then appropriate reference figures for the Base Index and the Adjustment Index
shall be derived from any successor or comparable index mutually agreed by the
parties to be authoritative. If the parties are unable to agree, then the
substituted index shall be selected by the then-presiding judge of the Santa
Barbara County, California Superior Court upon the application of either party.
B. The parties acknowledge that the Adjustment Index may not be
available on the Adjustment Date. In such event, the minimum monthly rent in
effect immediately prior to the Adjustment Date shall continue in effect until
the appropriate Index figure is available. At that time, an appropriate
adjustment shall be made (retroactive to the Adjustment Date) between Landlord
and Tenant with respect to the minimum monthly rent payable by Tenant. Any
amounts then determined to be owing by Tenant to Landlord shall be paid by
Tenant within ten (10) days following Landlord's delivery to Tenant of written
notice of the appropriate adjustment. No delay by Landlord in the delivery of
any such notice shall constitute a waiver by Landlord of the right to receive
any rent owing.
3.1.3 The minimum monthly rent payable during the first year of the
Renewal Term shall be the greater of (a) the Fair Market Rental of the Premises
upon the commencement of any such Renewal Term, or (b) the minimum monthly rent
in effect immediately prior to the expiration of the immediately preceding
Initial Term. Such Fair Market Rental shall be determined in accordance with the
provisions of this Section 3.1.3.
A. The following definitions shall apply for the purposes of this
Section 3.1.3:
(1) "Fair Market Rental" means the price at which a willing
landlord and a willing tenant would rent the Premises, or similar first class
premises having comparable visibility, parking, access and location that the
Premises have, neither being under abnormal pressure to rent. For the purposes
of determining such Fair Market Rental, it shall be assumed that the Tenant will
not require that any tenant improvements be made to the Premises in connection
with its occupancy. The Fair Market Rental shall be determined by giving
appropriate consideration to rental rates per rentable square foot, the type of
escalation clauses contained in leases for comparable premises, the length of
the Renewal Term, the fact that this Lease is a Triple Net Lease, the location
of the Premises being leased and other generally applicable terms and conditions
of leases for comparable premises.
(2) "Qualified Appraiser" shall mean a State certified
general real estate appraiser qualified for commercial lease rental appraisals
of the type of property and the improvements then comprising the Premises with
at least five years' full-time commercial appraisal experience in Santa Barbara
County.
B. Commencing six months prior to the expiration of the Initial
Term, if Tenant has properly exercised its Option for the Renewal Term, Landlord
and Tenant shall attempt to agree upon the Fair Market Rental for the Premises
within fifteen days. If Landlord and Tenant are able to agree on such Fair
Market Rental, the amount so agreed upon shall become the Fair Market Rental
upon the commencement of the Renewal Term.
C. If Landlord and Tenant fail to agree upon the Fair Market
Rental within the fifteen-day period set forth in Subsection B, above, then
within ten days following the expiration of such fifteen-day period Landlord
shall appoint a Qualified Appraiser, at its sole cost and expense, to appraise
the Fair Market Rental of the Premises within thirty days following the
appointment of the appraiser. Following such determination, Landlord shall give
notice to Tenant of the appraised Fair Market Rental of the Premises. If Tenant
does not dispute such appraised Fair Market Rental, it shall be the Fair Market
<PAGE>
Rental upon the commencement of the Renewal Term. If Tenant disputes such
appraised Fair Market Rental, then within ten days after the delivery of notice
of such Fair Market Rental delivered by Landlord, Tenant shall appoint a
Qualified Appraiser, at its sole cost and expense, to appraise the Fair Market
Rental of the Premises within thirty days following the appointment of the
second appraiser. Within ten days following the completion of the second
appraisal, the two appraisers so appointed shall endeavor to agree upon a Fair
Market Rental for the Premises.
D. If such two appraisers are able to agree as to the Fair Market
Rental of the Premises within ten days after the second appraisal has been
completed, then the appraisers shall so inform Landlord and Tenant of their
decision, and such agreed upon Fair Market Rental shall become the Fair Market
Rental upon the commencement of the Renewal Term. If such appraisers are unable
to agree on the Fair Market Rental for the Premises within such ten-day period,
then the appraisers shall, within five days of the expiration of such ten-day
period, designate a third Qualified Appraiser and give written notice to
Landlord and Tenant of their inability to agree and the Fair Market Rental
proposed by each appraiser. Such notice shall also specify the third Qualified
Appraiser designated by such two appraisers. Either Landlord or Tenant may
appoint such designated third Qualified Appraiser to assist in the determination
of Fair Market Rental by delivering written notice of such election to the other
within five days of the expiration of such ten-day period without an agreement
as to the Fair Market Rental by the two Qualified Appraisers. If a third
Qualified Appraiser is appointed, then the fees and costs of the third appraiser
shall be borne equally by Landlord and Tenant.
E. Upon appointment of the third Qualified Appraiser, the three
appraisers shall meet and attempt to reach agreement upon the Fair Market Rental
for the Premises for the Renewal Term within the ten-day period following the
appointment of the third Qualified Appraiser. If the three Qualified Appraisers
are able to reach unanimous agreement regarding the Fair Market Rental, the
agreed upon Fair Market Rental shall become the Fair Market Rental upon the
commencement of the Renewal Term. If the three Qualified Appraisers are unable
to agree upon the Fair Market Rental, then the Third Qualified Appraiser shall
appraise the Fair Market Rental of the Premises within thirty days following the
expiration of such ten-day period. On or prior to the expiration of such
thirty-day period, the three Qualified Appraisers shall give Landlord and Tenant
written notice of their inability to agree and the Fair Market Rentals proposed
by each appraiser. If the highest appraised Fair Market Rental is more than one
hundred five percent (105%) of the middle appraised Fair Market Rental, then the
highest appraised Fair Market Rental shall be disregarded. If the lowest
appraised Fair Market Rental is less than ninety-five percent (95%) of the
middle appraised Fair Market Rental, then the lowest appraised Fair Market
Rental shall be disregarded. If there is then only one remaining appraised Fair
Market Rental, it shall be the Fair Market Rental upon the commencement of the
Renewal Term. If there is then more than one remaining appraised Fair Market
Rental, the remaining appraised Fair Market Rentals shall be averaged and the
average of such appraised Fair Market Rentals shall be the Fair Market Rental
upon the commencement of the Renewal Term.
F. If the appraisal proceedings provided for in this Section are
not complete prior to the commencement of the Renewal Term, then Tenant shall
pay the minimum monthly rent in effect immediately prior to such Renewal Term
until the appraisal proceedings have been completed and a new minimum monthly
rent is determined. Once the new minimum monthly rent has been determined, a
retroactive adjustment to such rent shall be made, effective as of the
commencement date of the Renewal Term. Within ten days after the date on which
the new minimum monthly rent has been determined, (1) Tenant shall pay any
deficiency owing to Landlord, and (2) Landlord and Tenant shall enter into a
written agreement setting forth the minimum monthly rent upon the commencement
of the Renewal Term.
<PAGE>
G. Following the establishment of the minimum monthly rent upon
the commencement of the Renewal Term, such minimum monthly rent shall be
adjusted as provided herein. The adjustment shall be made in accordance with the
provisions of Section 3.1.2, with the following modifications: (1) all
references to the "Initial Term" shall be deemed to refer to the Renewal Term;
(2) the term "Commencement Date" shall refer to the first day of the Renewal
Term; and (3) the term "Rent Commencement Date" shall be deemed to refer to the
first day of such Renewal Term.
3.2 Common Area Expenses; Operating Costs.
3.2.1 In addition to any other payments due under this Lease, Tenant
shall pay to Landlord, as additional rent, Tenant's monthly proportionate share
of Landlord's estimated total Operating Costs. Such payments shall commence on
the Rent Commencement Date and continue thereafter through the end of the Term.
For the purposes of this Lease, the term "Operating Costs" shall mean all costs
and expenses whatsoever incurred or accrued by Landlord in connection with the
ownership, operation, maintenance, repair and improvement of the Premises, the
common areas, the Building and the land upon which the Building is situated
(collectively, the "Property"), except as otherwise specifically provided in
this Lease. Tenant's proportionate share of the total Operating Costs (the
"Tenant's Proportionate Share") shall be forty-three percent (43%). Landlord
estimates that Tenant's Proportionate Share of the Operating Costs will be $0.50
per square foot per month. In no event shall Tenant's Proportionate Share of the
Operating Costs for the calendar year 1998 exceed $0.60 per square foot per
month. After the calendar year 1998, the foregoing limitation of Tenant's
Proportionate Share of the Operating Costs shall not apply.
A. Operating Costs for any portion of Landlord's accounting
period not included within the Term, or occurring prior to the Rent Commencement
Date, shall be prorated on the basis of a 360-day year.
B. The accounting period for determining Landlord's total
Operating Costs shall be the calendar year, except that the first accounting
period shall commence on the Rent Commencement Date and the last accounting
period shall end on the date the Term expires or Lease otherwise terminates.
3.2.2 Tenant shall pay Tenant's Proportionate Share of Operating Costs
as additional rent owing in the manner provided in this Section 3.2.2.
A. Landlord may furnish to Tenant, on the Rent Commencement Date
and at the commencement of each accounting period, an estimate of the Operating
Costs reasonably anticipated by Landlord for the ensuing accounting period or
the remainder of such accounting period, and Tenant's Proportionate Share
thereof, calculated on a monthly basis. If Tenant's Proportionate Share of the
actual Operating Costs for the preceding accounting period exceeds the estimated
payments made by Tenant, then Tenant shall pay any deficiency to Landlord within
ten (10) days after Tenant's receipt of Landlord's statement. Should the
estimated payments made by Tenant during the preceding accounting period exceed
Tenant's Proportionate Share of the Operating Costs, Landlord shall credit
Tenant the excess through reductions to the subsequent accounting period's
payments of Tenant's Proportionate Share of Operating Costs due from Tenant.
B. Alternatively, Landlord may bill Tenant for Tenant's
Proportionate Share of the actual Operating Costs incurred by Landlord. Any such
bill shall be made in arrears for Operating Costs incurred during the preceding
month, and shall be due and payable within ten (10) days following delivery of
such bill. The expiration of the Term shall not affect Tenant's obligation to
pay its Proportionate Share of Operating Costs accrued during the last month of
the Term.
<PAGE>
3.2.3 As used herein, the term "Operating Costs" shall include,
without limitation, all amounts paid or incurred by Landlord for: real property
taxes and assessments, as provided in Section 4, and other taxes and assessments
of any nature levied and assessed against Landlord on account of, and/or against
the, Property; repair, remodeling, renovation, replacement, improvement and
operation of the Property, including, without limitation, wiring, machinery and
equipment, plumbing, sewers, the roof, load bearing exterior walls, joists,
supports, subflooring, gutters, downspouts, heating, ventilating and
air-conditioning, glass and doors, and reasonable reserves pertaining thereto;
Landlord's reasonable costs of supervision and administration, including the
costs of any property manager engaged by Landlord; attorneys' fees and costs not
relating to a particular tenant or lease; maintenance of the Property,
including, without limitation, costs of resurfacing and repainting, costs of
security, cleaning, sweeping, and other services, supplies, policing, purchase,
construction, location, and maintenance of refuse receptacles, maintaining and
operating the heating, ventilating, and air-conditioning equipment and related
distribution facilities and controls providing climatic control of the common
areas, the Building and the Premises, planting and relandscaping, maintaining
directional signs and other markers and lighting; premiums and deductible
amounts payable on insurance purchased by Landlord as provided herein; and all
costs of utilities used in connection with the maintenance, operation and
management of the Property that are not separately metered and billed to
particular tenants.
3.2.4 Landlord shall keep at its principal place of business, full,
accurate and separate books of account showing Landlord's Operating Costs. The
statements of Landlord to Tenant shall accurately reflect the total Operating
Costs shown on such books of account. These books of account shall be retained
by Landlord for at least six (6) months after the close of each accounting
period. Tenant shall have the right at reasonable times during the Term to
inspect these books of account.
3.2.5 Notwithstanding the foregoing, Landlord reserves the right to
bill Tenant promptly for any surcharge or penalty incurred by Landlord as a
result of utilities in the Premises or the Building in which the Premises are
located. If such surcharge or penalty pertains to the Premises, Tenant shall pay
all of such penalty or surcharge. If such surcharge or penalty relates to the
Building or common area, Tenant shall pay its pro rata portion. Such payment
shall be payable in full prior to the expiration of thirty (30) days from the
date Landlord delivers such a statement of the amount of the surcharge to
Tenant.
3.3 Late Payment Charges. If Tenant fails to make any payment of rent
within five (5) days of the date when such payment first becomes due, or if any
check tendered to Landlord by Tenant is returned to Landlord by Tenant's bank
for insufficient funds, then Tenant shall pay to Landlord, in addition to such
payment, a late charge in the amount of five percent (5%) of the rent or other
payment due. The parties agree this late payment charge is a reasonable estimate
of the amount necessary to reimburse damages and additional costs not
contemplated by this Lease that Landlord will incur as a result of the
delinquent payment or returned check, including processing and accounting
charges and late charges that may be imposed on Landlord by its lender. Upon
notice of nonpayment given by Landlord to Tenant, the entire amount then due,
including such late charge, shall thereafter bear interest at the highest rate
permitted by law on the due date for such payment, until paid in full.
Landlord's acceptance of any payment shall not constitute waiver of any late
charges or interest which may be due.
3.4 Security Deposit. On execution of this Lease, Tenant shall deposit with
Landlord Eleven Thousand Eight Hundred Sixty-Two Dollars and Sixty Cents
($11,862.60), as a security deposit (the "Security Deposit") for the performance
by Tenant of the provisions of this Lease. If Tenant is in default, Landlord may
use the Security Deposit, or any portion of it, to cure the default or to
compensate Landlord for all damage sustained by Landlord resulting from Tenant's
<PAGE>
default. Tenant shall immediately on demand pay to Landlord any amounts required
to maintain the Security Deposit in the amount required to be deposited with
Landlord. Upon the adjustment of any minimum monthly rent owing, Tenant shall
deposit with Landlord such sum as necessary to maintain the Security Deposit in
the same proportion to the minimum monthly rent then owing as the original
Security Deposit bore to the initial minimum monthly rent. Landlord's
obligations with respect to the Security Deposit are those of a debtor and not a
trustee. Landlord may maintain the Security Deposit separate and apart from
Landlord's general funds or may commingle the Security Deposit with Landlord's
general and other funds. Landlord shall not be required to pay Tenant interest
on the Security Deposit. In the event of bankruptcy or other debtor-creditor
proceedings against Tenant, the Security Deposit shall be offset against any
unpaid rent. If Tenant is not in default at the termination of this Lease, and
after Tenant has vacated the Premises, then Landlord shall return the Security
Deposit, less any damages, to Tenant (or at Landlord's option, to the last
assignee, if any, of Tenant's interest).
3.5 Temporary Rent Abatement. Provided that Tenant is not in default of its
obligations under this Lease, minimum monthly rent shall abate for the first six
(6) months for which rent is payable in the amount of Four Thousand Six Hundred
Fifty-Two Dollars ($4,652) per month, for total rent abatement of Twenty-Seven
Thousand Nine Hundred Twelve Dollars ($27,912) (i.e., 6,978 square feet x $4.00
per square foot).
4. PROPERTY TAXES AND ASSESSMENTS
4.1 Personal Property Taxes. Tenant shall pay before delinquency all taxes
assessed against any personal property of Tenant installed or located in or upon
the Premises and that are attributable to any period included within the Term,
whether or not such taxes are actually payable during the Term.
4.2 Real Property Taxes. In addition to all other rent payable by Tenant,
Tenant agrees to pay as additional rent Tenant's Proportionate Share of real
property taxes levied and assessed against the Property. Such payments shall be
made as a part of Tenant's payments of Tenant's Proportionate Share of Operating
Costs, as provided above. Real property taxes for any fractional portion of a
fiscal year included in the Term shall be prorated on the basis of a 360-day
year.
4.3 Taxes Defined; Special Assessments. The term "real property taxes"as
used in this Section shall include, without limitation, all taxes, assessments,
improvement bonds, levies and other governmental charges, general and special,
ordinary and extraordinary, of any kind and nature whatsoever, levied or
assessed against the Property, or against Landlord as a result of its ownership
thereof, including but not limited to, assessments for public improvements or
benefits that are levied or assessed against the Property, and any changes in
taxes resulting from a change in ownership or other reassessment, but excluding
franchise, estate, inheritance, succession, capital levy, transfer, income or
excess profits tax imposed upon Landlord. If at any time during the Term, under
the laws of California, or any political subdivision thereof in which the
Premises are situated, a tax or excise on rents or other tax, however described,
is levied or assessed against Landlord on account of the rent expressly reserved
hereunder, in addition to or as a substitute in whole or in part for taxes
assessed or imposed by California or such political subdivision on land and/or
buildings, such tax or excise shall be included within the definition of "real
property taxes", but only to the extent of the amount thereof which is lawfully
assessed or imposed as a direct result of Landlord's ownership of leases related
to the Property, or of the rental accruing under such leases. With respect to
any assessment which may be levied against or upon the Property, and which,
under the laws then in force, may be evidenced by improvement or other bonds, or
may be paid in installments, Tenant shall be required to pay each year only the
amount of such installments as Landlord is required to pay during such year
(with appropriate proration for any partial year) and shall have no
<PAGE>
obligation to continue such payments after the expiration of the Term.
5. UTILITIES
Tenant shall pay when due all utility charges when separately billed to
Tenant because of separate installation or connection of service by Tenant. Any
utility, including, without limitation, refuse disposal, for which no separate
installation or connection can be made for Tenant, shall be paid as prorated in
Landlord's discretion among Tenants of the Building based on either percentage
of leased space or estimated usage, as reasonably determined by Landlord. Tenant
shall comply with all applicable laws and regulations and rules regarding
utilities. The suspension or interruption in utility services to the Property
for reasons beyond Landlord's ability to control shall not constitute a default
by Landlord or entitle Tenant to any reduction or abatement of rent.
6. LANDLORD'S MANAGEMENT OF THE BUILDING
6.1 Management of the Building. Landlord shall have the right, at its sole
cost and expense, which will be reimbursed by Tenant as an Operating Cost:
6.1.1 To close the common areas when and to the extent necessary for
maintenance or renovation purposes or to prevent a dedication of any part
thereof or the accrual of any rights therein in favor of the public or any third
person;
6.1.2 To make changes to the common areas, including, without
limitation, changes in the location or nature of entrances and exits;
6.1.3 To remodel or renovate the Property and, in connection
therewith, to install pipes, supports, utilities, conduits, ducts and similar
fixtures beneath or through the Premises, provided that such remodeling or
renovation does not substantially change the size, dimension, configuration or
nature of the Premises or unreasonably interfere with Tenant's use thereof; and
6.1.4 To change the plan of the Building to the extent necessary for
its expansion, or the remodeling or renovation thereof, so long as the changes
do not substantially interfere with ingress to and egress from the Premises.
6.2 Other Tenants. Landlord reserves the right to effect such other
tenancies in the Building as Landlord, in the exercise of its sole business
judgment, determines will best promote Landlord's interests. Tenant acknowledges
that Tenant does not rely on the fact, and Landlord does not represent, that any
specific tenant, or number or type of tenants, shall occupy any space in the
Building.
6.3 Rules and Regulations. Landlord shall have the right, from time to
time, to promulgate, amend and enforce against all occupants of the Building,
reasonable rules and regulations for the safety, care and cleanliness of the
Building, or for the preservation of good order. All such rules and regulations
shall apply without discrimination to all occupants and tenants in the Building.
Tenant agrees to conform to and abide by such rules and regulations. A violation
of any of them shall constitute a default by Tenant under this Lease.
6.4 Tenant's Use of Premises. Tenant agrees that the Premises shall be used
and occupied only for general office use, and for no other purpose whatsoever
without Landlord's prior written consent. No exclusive rights regarding use are
granted. Tenant shall neither engage in nor permit others to engage in any
activity or conduct that will cause the cancellation of or an increase in the
premium for any fire or other insurance maintained by Landlord.
6.5 Compliance with Law. Tenant shall, at Tenant's sole cost and
<PAGE>
expense, comply promptly and at all times with all laws, requirements,
ordinances, statutes, and regulations of all municipal, state or federal
authorities, or any board of fire insurance underwriters, or other similar
bodies, now in force, or which may hereafter be in force, pertaining to the
Building and the Premises and the occupancy thereof, including, without
limitation, any law that requires alteration, maintenance or improvement of the
Premises as the result of Tenant's use.
6.6 Waste, Nuisance. Tenant shall not commit, or suffer to be committed,
any waste of the Premises, or any nuisance, annoyance or other unreasonable
annoyance which may disturb the quiet enjoyment of other portions of the
Building or the common areas by the owners or occupants.
7. CARE AND MAINTENANCE
7.1 Landlord's Maintenance. Except as otherwise provided in this Lease,
Landlord agrees to maintain in good condition and repair (1) the structural
components of the Building, which structural components are limited to the
foundation and the exterior walls; (2) the common areas and the exterior of the
Building; and (3) any heating, ventilating and air conditioning systems
furnished by Landlord to the common areas or to the Building. All such costs,
whether related to repairs, replacements or improvements, shall be Operating
Costs.
7.2 Tenant's Maintenance. Except as otherwise provided in this Lease,
Tenant, at its own cost and expense, agrees:
7.2.1 To maintain throughout the Term in good and sanitary order,
condition and repair, all portions of the Premises, including, without
limitation, (1) the interior of the Premises, including flooring, exposed
plumbing and wiring, paint and finish; (2) any windows, lights or skylights; (3)
any storefront or portion of the Premises fronting on any common area or the
exterior of the Building; (4) any heating, ventilating and air conditioning
which serves only the Premises; and (5) any personal property of Tenant situated
in or upon the Premises;
7.2.2 To notify Landlord promptly of any damage to the Premises
resulting from or attributable to the acts or omissions of Tenant, its invitees
or its authorized representatives, or any other party and thereafter to promptly
repair all such damage; and
7.2.3 To keep the front of the Premises adjacent to any property line
or common area, any area adjacent thereto, and the refuse area used by Tenant
clean and neat at all times, and to remove immediately therefrom any litter,
debris or other unsightly or offensive matter placed or deposited thereon by
Tenant's agents or customers.
8. IMPROVEMENT TO LEASED PREMISES
Any improvements to the Premises shall be constructed by Tenant, or its
designated agent, at Tenant's sole cost and expense. Tenant shall pay, prior to
delinquency, absolutely all costs for such improvements.
8.1 Conditions to Commencement of Construction. Before construction of the
improvements is commenced on the Premises, and before any building materials
have been delivered thereto by or pursuant to the authority or request of
Tenant, Tenant shall comply with the following conditions, or obtain Landlord's
prior written waiver thereof:
8.1.1 Tenant shall prepare and deliver to Landlord for approval a
complete set of all preliminary and final plans and specifications to be
utilized by Tenant for the purpose of constructing the new improvements. Tenant
must obtain the written approval of Landlord to the final plans and
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specifications prior to the commencement of any construction work. Tenant will
reimburse Landlord for Landlord's architect's or contractor's charges to review
these plans. Landlord shall not unreasonably withhold approval of the plans and
specifications. No review, inspection or approval by Landlord, or its architect,
shall relieve Tenant of any liability or create any obligation or responsibility
for Landlord.
8.1.2 Tenant shall give Landlord at least fifteen (15) days' written
notice prior to (a) the commencement of construction of any tenant improvements,
or (b) the delivery of any building materials to the site. Landlord, or, upon
request, Tenant, as the agent of Landlord, shall post on and affix to the
Premises a "Notice of Non-Responsibility" in the name and on behalf of Landlord,
as provided in Sections 3094 and 3129 of the California Civil Code, and shall
cause such Notice to be recorded promptly following posting in the Santa Barbara
County Recorder's Office.
8.1.3 Tenant shall purchase and maintain in effect, until a Notice of
Completion is filed and recorded, insurance coverage for all-risk "Builders'
Risk" or "Course of Construction" insurance and "Worker's Compensation"
insurance covering all persons employed in connection with the construction of
the improvements and with respect to whom claims could be asserted against
Landlord, the Building or the Premises. Tenant shall furnish to Landlord
certificates of such insurance, and evidence of the payment of premiums
therefor, and for any other insurance required by the provisions of this Lease
to be furnished by Tenant.
8.1.4 Tenant shall pay, when due, all claims for labor or materials
furnished or alleged to have been furnished to or for Tenant. Landlord reserves
the right to require Tenant to deliver to Landlord payment and performance bonds
in an amount equal to one hundred fifty percent (150%) of the estimated cost of
the work undertaken by Tenant pursuant hereto. Tenant promptly shall cause the
elimination and removal of any mechanic's, materialmen's or other liens arising
out of any improvements performed, materials furnished or obliga-
tions incurred by or on behalf of Tenant in connection with any tenant
improvements in accordance with Section 9.2.
8.2 Construction of Improvements. Tenant warrants and covenants to Landlord
that:
8.2.1 The improvements shall be of good quality and the development
and construction work shall be performed in a good and workmanlike manner,
consistent with and comparable to standards of practice in the area in which the
Building is located for similar space of first-class construction;
8.2.2 Tenant shall secure or cause to be secured all permits and
licenses necessary for the proper construction and completion of the
improvements, and shall assume full responsibility for the compliance of Tenant
and the improvements with all governmental laws, codes, ordinances, regulations
and standards applicable thereto; and
8.2.3 The improvements shall be constructed in accordance with the
plans and specifications. All such improvements shall be completed by Tenant and
a certificate of occupancy for the Premises shall be obtained by Tenant on or
before the Commencement Date. Tenant shall give notice to Landlord of the
imminent completion of the improvements not less than ten (10) days prior to
their expected completion. Promptly upon completion of the improvements, Tenant
shall cause a "Notice of Completion" as described in Section 3093 of the
California Civil Code, to be filed and recorded in the manner provided by such
Section.
8.3 Cooperation by Landlord. Landlord agrees, upon the request of Tenant,
to join with Tenant to execute and deliver such documents and instruments
<PAGE>
as may be necessary or proper for applying for or obtaining any permits,
licenses, approvals or records as may be necessary or appropriate to the
construction of the improvements and operation of the Premises. Landlord shall
incur no expense and no liability as a result of such cooperation. Landlord
shall have the right to approve any conditions imposed by any governmental
agency in connection with obtaining any such permits, or other documents or
approvals, which may impact the Premises separate and apart from Tenant's
occupancy thereof, which approval shall not be withheld unreasonably.
8.4 Ownership of Improvements. All of Tenant's improvements constructed
hereunder, and all subsequent additions and alterations thereto and replacements
thereof, shall be deemed affixed to, become and remain a part of the Premises
and shall not be removed, encumbered, transferred or materially altered except
as provided by this Lease. Upon the expiration of the Term, or upon the sooner
termination of this Lease, all of the improvements other than Tenant's personal
property, removable trade fixtures and equipment, shall become the property of
Landlord without further obligation to Tenant.
9. ALTERATIONS; LIENS
9.1 Changes by Tenant. Following the completion of the improvements
contemplated by Section 8, if any, any alterations, additions, improvements or
changes, including any remodeling or redecorating, that Tenant may desire to
make in, to or upon the Premises, shall be made at Tenant's sole cost and
expense. Prior to undertaking any such alterations, Tenant shall first submit
the plans and specifications therefor to Landlord and obtain the consent of
Landlord thereto in writing. The parties' rights and obligations with respect to
such alterations, additions, improvements or changes shall be identical to those
rights and remedies concerning Tenant's construction of improvements, as set
forth in Section 8. Should Landlord so elect, any such alterations, additions,
improvements or changes shall become a part of the Premises at the expiration or
sooner termination of the Lease, and shall be surrendered to Landlord upon the
expiration of the Term or the sooner termination of this Lease. Alternatively,
at any time prior to the ten (10) days following the expiration or sooner
termination of this Lease, Landlord may elect to have Tenant remove any such
alterations, additions or improvements. In such case, Tenant shall so remove
such items within ten (10) days following Tenant's receipt of Landlord's notice
of election, and shall restore the Premises to the condition in which they
existed prior to the completion of the work that Landlord specifies should be
removed.
9.2 Mechanic's Liens. Tenant agrees to keep the Premises, and any
improvements thereon, at all times free of mechanic's liens and other liens for
labor, services, supplies, equipment or material purchased by or directly or
indirectly furnished to Tenant. Tenant, however, shall have the right to contest
the validity or amount of any such lien as filed upon posting a bond in an
amount equal to one hundred fifty percent (150%) of the dollar amount sufficient
to discharge the lien. Upon the final determination of any such contest, Tenant
shall immediately pay and discharge any judgment rendered, together with all
costs and charges incidental thereto, and shall cause the lien thereof to be
released from the Premises. If Tenant fails, within thirty (30) days after
notice of the filing of any such lien, to discharge or cause the release of such
liens or charges or to contest the same and post bond as above provided for,
then Landlord, at Landlord's option, may satisfy such liens by payment. In such
event, the amount of such payment, together with interest thereon at the maximum
rate permitted by law, from the time the payment is so made until repayment the-
reof, shall be payable by Tenant at the time installment of rent shall be due
and payable. Tenant shall reimburse Landlord, within ten days following written
demand, for all costs and expenses, including, without limitation, attorneys'
fees, incurred by Landlord in connection with addressing any mechanic's liens or
similar claims related to Tenant's occupancy of the Premises.
<PAGE>
10. TENANT'S PERSONAL PROPERTY
10.1 Installation of Property. Landlord shall have no interest in any
removable equipment, furniture or trade fixtures owned by Tenant or installed in
or upon the Premises solely at the cost and expense of Tenant. Prior to creating
or permitting the creation of any lien or security or reversionary interest in
any removable personal property to be placed in or upon the Premises, Tenant
shall obtain the written agreement of the party holding such lien or interest to
make such repairs required by the removal of such property as may be necessary
to restore the Premises to good condition and repair, excepting only reasonable
wear and tear, in the event such property is thereafter removed from the
Premises by such party, or by any agent or representative thereof or purchaser
therefrom, without any cost or expense to Landlord.
10.2 Removal of Personal Property. Tenant shall have the right to remove at
its own cost and expense upon the expiration of this Lease all removable
equipment, furniture or trade fixtures owned by or installed at the expense of
Tenant on the Premises during the Term. All such personal property shall be
removed prior to the close of business on the last day of the Term. Tenant shall
make such repairs required by the removal of such property and any damage
resulting therefrom as may be necessary to restore the Premises to good
condition and repair, excepting only reasonable wear and tear. Any such property
not so removed shall be deemed to have been abandoned or, at the option of
Landlord, shall be removed and placed in storage for the account and at the cost
and expense of Tenant.
11. WAIVER AND INDEMNITY
This Lease is made upon the express condition that Landlord is to be free
from all liability and claims for damages by reason of any injury to any person
and damage to any property (including Tenant's), resulting from any cause
whatsoever while in, upon, about, or in any way connected with the Premises or
the Building in which the Premises is located, during the Term. In no event
shall Landlord be liable for events that occur in the common areas, or for
damage or injury caused by fire, utility outage or interruption, pipe or
sprinkler leakage, or similar causes. Tenant waives all claims against Landlord
for, and agrees to defend with counsel acceptable to Landlord, and to indemnify
and hold Landlord harmless from, any loss or liability, and all costs or
expenses, including attorneys' fees and costs of defense, arising from or
attributable to any such injury or damage from any cause at any time related in
any way to the Premises during the term hereof, other than those caused by the
gross negligence or willful misconduct of Landlord, to the extent of such gross
negligence or willful misconduct. This Section 11 shall survive the termination
of the Lease.
12. INSURANCE, PUBLIC LIABILITY AND PROPERTY DAMAGE
12.1 Insurance Coverage. Tenant agrees to maintain in force throughout the
Term, at Tenant's sole cost and expense, comprehensive general liability
insurance with a broad form general liability endorsement insuring against any
liability to the public for any claim for damages due to death, bodily injury or
property damage related to the use of or resulting from any accident occurring
in or about the Premises, with single limit coverage of not less than $1,000,000
for any loss and $3,000,000 for any policy period.
12.1.1 Such policy shall insure the contingent liability of Landlord
and the performance by Tenant of its indemnity obligations under this Lease.
Landlord shall be named as an additional insured in such policy, and such policy
shall contain a cross-liability endorsement.
12.1.2 Tenant further agrees that the amount of the insurance coverage
shall be reviewed every three (3) years, at least sixty (60) days before the
expiration of a three-year period. If the parties are unable to agree upon
<PAGE>
the amount of such coverage, Tenant shall be required to maintain for the next
three-year period (or prior to the expiration of the Term, whichever is less)
the amount of coverage recommended in writing by an insurer selected by
Landlord.
12.2 Tenant's Property Insurance. Tenant, at its own cost, shall maintain
on all of its personal property and removable fixtures and equipment situated
in, on or about the Premises, a policy of standard fire and extended coverage
insurance, with vandalism and malicious mischief endorsements (and sprinkler
leakage and earthquake sprinkler leakage endorsements, if the Building has
sprinklers), to the extent of at least one hundred percent (100%) of their
actual replacement cost. The proceeds of any such policy that become payable due
to damage, loss or destruction of such property shall be used by Tenant for the
repair or replacement of such property.
12.3 Miscellaneous Insurance Provisions.
12.3.1 Each policy of insurance required of Tenant by this Lease shall
be a primary policy, issued by an insurance company reasonably satisfactory to
Landlord, and shall contain an endorsement requiring thirty (30) days' written
notice from the insurer to Landlord before cancellation or change in the nature,
scope or amount of coverage. Each policy of insurance maintained by Tenant shall
be primary and noncontributing with any policy maintained by Landlord. Each
policy, or a certificate of the policy, together with evidence of the payment of
premiums, shall be deposited with Landlord at the commencement of the Term of
this Lease and prior to any expiration of any such policy.
12.3.2 Landlord and Tenant each release the other, and their
respective agents and representatives, from any claims for damage to any person
or to the Premises and to the fixtures and personal property situated therein,
resulting from or attributable to any risk insured under any insurance policies
carried by the parties and in force at the time of the damage. Each party shall
cause any insurer providing insurance to it pursuant to this Lease to waive all
rights or recovery by way of subrogation against either party by virtue of the
payment of any loss under such insurance. Such waiver shall be effective as long
as such insurance is required under the provisions of this Lease.
12.4 Casualty Insurance; Damage or Destruction. Landlord shall, at all
times during the Term, keep the Building and improvements in which the Premises
are situated insured against loss or damage by fire and the perils covered by a
combined single limit bodily injury and broad form property damage insurance
policy, extended coverage, or an "all risk" insurance, with inflation guard,
vandalism and malicious mischief endorsements, zoning ordinance coverage, and
any other endorsements selected by Landlord. Landlord, at its discretion, may
purchase (a) an earthquake policy of insurance and zoning ordinance coverage, in
any amount sufficient to prevent either Landlord or Tenant from becoming a
co-insured under the provisions of the policies, (b) a policy of rental value or
rent continuation insurance for a period of one year, and (c) any other
insurance that may be required from time to time by Landlord's lender. In
addition, Landlord may purchase any other insurance which it, in its sole
discretion, deems necessary or desirable. All such insurance shall be payable to
Landlord and the holder of any encumbrances on the Property as their interests
may appear. All of the costs and expenses and deductible amounts of such
insurance shall be an Operating Cost.
12.5 Insurable Casualty Loss.
12.5.1 Except as provided in Section 12.5.2, in the event the
Premises, or the Building in which the Premises are situated, is damaged or
destroyed as the result of any risk required to be insured against by this
Section 12, then Landlord shall forthwith restore the Premises or the Building
to substantially the same condition as existed immediately prior to such damage
or destruction. Any insurance proceeds remaining after the completion of such
<PAGE>
work shall belong to Landlord. Except as otherwise provided in Section 12.5.2,
below, any amount by which the cost of such repair and the deductible amount
required by such insurance policies exceeds the amount of such insurance
proceeds shall be deemed an Operating Cost pursuant to Section 3.2.
12.5.2 If at any time during the Term, the Premises are totally
destroyed, or are sufficiently damaged to render them unusable without
substantial repair or reconstruction, due to a casualty required to be insured
against as provided herein, or should then applicable laws or zoning ordinances
preclude the restoration or repair of the Premises, or should the costs of
restoration exceed five percent (5%) of the amount of the insurance proceeds,
then Landlord shall have the option, exercisable by giving at least ten (10)
days' prior written notice to Tenant within one hundred twenty (120) days after
the occurrence of any such casualty, to terminate this Lease.
12.6 Uninsured Casualty Loss.
12.6.1 If, during the Term, the Premises or the Building are damaged
or partially destroyed from a risk not required to be insured against by this
Section 12, Landlord shall restore the Premises to substantially the same
condition as existed immediately prior to such damage or destruction.
12.6.2 If the costs of repair or restoration necessitated by an
uninsured casualty loss exceed five percent (5%) of the then replacement value
of the Premises, then Landlord shall have the option, exercisable by giving at
least ten (10) days' prior written notice to Tenant within one hundred twenty
(120) days after the occurrence of any such casualty, to terminate this Lease.
12.7 Termination; Abatement of Rent. This Lease shall not be terminated by
any damage to or destruction of the Premises or other improvements of which the
Premises are a part, unless notice of termination is given by Landlord to Tenant
as provided by this Section 12. Tenant waives the provisions of Section 1932(2)
and 1933(4) of the California Civil Code with respect to any such damage or
destruction.
12.7.1 Should the Premises be damaged or destroyed at any time during
the Term, there shall be an abatement or reduction of the minimum monthly rent,
between the date of destruction and the date of completion of restoration, based
on the extent to which the destruction interferes with Tenant's use of the
Premises.
12.7.2 Should it be determined by Landlord that then-applicable laws
or zoning ordinances would preclude the restoration or replacement of the
Premises in a manner that will result in the approximate functional equivalent
of the Premises, then Landlord shall have the right to terminate this Lease
within ninety (90) days of such determination by giving written notice of
termination to Tenant.
12.8 Notice; Tenant's Right to Terminate. Notwithstanding any provision of
this Lease to the contrary, if Landlord determines in good faith that the repair
and restoration of the Premises to be made by Landlord pursuant to this Section
12 reasonably cannot be made within eighteen (18) months following the
occurrence of any casualty, Landlord shall give written notice of such
determination to Tenant within ninety (90) days following the occurrence of the
casualty. Tenant may terminate this Lease only by written notice given to
Landlord within thirty (30) days after receipt by Tenant of Landlord's notice of
such determination.
13. CONDEMNATION
13.1 Entire Premises. Should title or possession of the whole of the
<PAGE>
Premises or the Building be taken by duly constituted authority in condemnation
proceedings under the exercise of the right of eminent domain, or should a
partial taking render the remaining portion of the Premises wholly unacceptable
for occupation, then this Lease shall terminate upon the vesting of title or
taking of possession.
13.2 Partial Taking.
13.2.1 Landlord shall have the right to terminate this Lease upon such
thirty (30) days' notice if title to a portion of the Premises is taken in
connection with, or by deed in lieu of, any condemnation proceedings under the
exercise of the right of eminent domain, and is such as to prevent Tenant from
using the Premises, or the remaining portion, in substantially the same manner
as they were used prior to such taking. If Landlord does not terminate this
Lease as provided herein, then this Lease shall remain in full force and effect.
In such event, Landlord shall promptly make any necessary repairs or restoration
at the cost and expense of Landlord. The minimum monthly rent from and after the
date of the taking shall be reduced in the proportion that the value of the area
of the portion of the Premises taken bears to the total value of the Premises
immediately prior to the date of such taking or conveyance.
13.2.2 Each party waives the provisions of Code of Civil Procedure
Section 1265.130 allowing either party to petition the Superior Court to
terminate this Lease in the event of a partial taking of the Premises. Any
dispute between the parties concerning the extent to which a partial taking by
eminent domain interferes with the use and occupancy of the Premises by Tenant
shall be settled by arbitration in the city in which the Premises are located,
in accordance with the rules of the American Arbitration Association then in
effect.
13.3 Conveyance Under Threat of Condemnation. Any sale or conveyance by
Landlord to any person or entity having the power of eminent domain, either
under threat of condemnation or while condemnation proceedings are pending,
shall be deemed to be a taking by eminent domain under this Section 13.
13.4 Awards and Damages. All payments made on account of any taking by
eminent domain shall be made to Landlord, except that Tenant shall be entitled
to any payment or award made for or attributable to the reasonable removal and
relocation costs of any removable property that Tenant has the right to remove,
or for loss and damage to any such property that Tenant elects or is not
required to remove.
14. ASSIGNING, MORTGAGING, SUBLETTING OR CHANGE IN OWNERSHIP
14.1 Limitation. Tenant shall not transfer, assign, sublet, mortgage,
hypothecate, share rights in this Lease or Tenant's interest in the Premises, or
permit any other person or entity to use the Premises (collectively, a
"Transfer"), without first procuring the written consent of Landlord, which
consent shall not be unreasonably withheld. Any attempted Transfer without
Landlord's written consent shall be void and shall constitute a material default
under this Lease. Tenant agrees to reimburse Landlord for Landlord's attorneys'
fees (if any) incurred in connection with any requested Transfer by Tenant of
Tenant's rights hereunder.
14.2 Deemed Transfer. If Tenant is a nonpublicly traded corporation, or an
unincorporated association or partnership, any direct or indirect cumulative
transfer, assignment or hypothecation of any stock or interest in such
corporation, association or partnership in the aggregate in excess of thirty
percent (30%) of the beneficial ownership thereof (or, in the case of a
partnership, of the beneficial ownership thereof or of the general partner
<PAGE>
interest thereof) shall be deemed a Transfer within the meaning and provisions
of this Section 14 and subject to its provisions.
14.3 Standard for Consent. If Tenant desires at any time to assign this
Lease or to sublease the Premises, or any portion thereof, it shall first notify
Landlord of its desire to do so and shall submit in writing to Landlord: (a) the
name of the proposed subtenant or assignee and the proposed guarantors of such
subtenant's or assignee's obligations; (b) the nature of the proposed
subtenant's or assignee's business to be carried on in the Premises; (c) the
terms and provisions of the proposed sale, transfer or sublease of Tenant's
business and leasehold interest, including the price, rent and terms of payment;
and (d) any other information required by Landlord. Landlord shall not
unreasonably withhold its consent provided: (i) the use of the Premises remains
the same as provided in this Lease (unless Landlord, for reasonable cause,
decides that the use and/or the location of the use is incompatible with
Landlord's present or future plans for operation of the Property); (ii) the
proposed subtenant or assignee and their respective guarantors demonstrate that
it is financially responsible by submission to Landlord of such reasonable
information as Landlord may request concerning the proposed subtenant or
assignee, including, but not limited to, a balance sheet of the proposed
subtenant or assignee as of a date within ninety (90) days of the request for
Landlord's consent, and statements of income or profit and loss of the proposed
subtenant or assignee and guarantor for the two-year period preceding the
request for Landlord's consent; (iii) the proposed subtenant or assignee
demonstrates a record of successful experience in operating the same type of
business by submission to Landlord of such reasonable information as Landlord
may request concerning the proposed subtenant or assignee, including, but not
limited to, a written statement in reasonable detail as to the business
experience of the proposed subtenant or assignee during the five (5) years
preceding the request for Landlord's consent; and (iv) the proposed subtenant or
assignee has a reputation for honesty and is of good moral character. No
subletting or assignment, even with the consent of Landlord, shall relieve
Tenant of its obligation to pay the rent and to perform all of the other
obligations to be performed by Tenant hereunder.
14.4 Conditions. Each Transfer to which there has been consent shall be by
an instrument in writing, in a form satisfactory to Landlord. Such instrument
shall be executed by the transferor, assignor, sublessor, hypothecator or
mortgagor and the transferee, assignee, sublessee, mortgagee or other person or
entity, as the case may be. Each transferee, assignee, sublessee, mortgagee or
other person or entity shall agree in writing for the benefit of Landlord to
assume, to be bound by, and to perform the terms, covenants and conditions of
this Lease to be performed by Tenant, including the payment of all amounts due,
or to become due, under this Lease. In addition, as conditions precedent to
Landlord's consent to any Transfer of this Lease, Landlord may require any or
all of the following:
14.4.1 Tenant shall provide Landlord with evidence reasonably
satisfactory to Landlord that the value of Landlord's interest under this Lease
will not thereby be diminished or reduced, which evidence shall include, but not
need be limited to, evidence respecting the relevant business experience and
financial responsibility and status of the third party concerned;
14.4.2 If the Transfer provides for the receipt by, on behalf of, or
on account of Tenant of any consideration or any kind whatsoever (including, but
not by way of limitation, a premium rental for the sublease or lump sum payment
for an assignment) in excess of the rent due Landlord under this Lease, Tenant
shall pay seventy-five percent (75%) of such excess, less Tenant's reasonable
costs (not to exceed twenty five percent (25%) of such excess) to Landlord,
which payment(s) to Landlord shall be made upon receipt of any such payment(s)
by Tenant;
<PAGE>
14.4.3 Tenant shall not be then in default hereunder in any
respect;
14.4.4 Tenant shall deliver to Landlord one executed copy of all
written instruments evidencing or relating to Tenant's assignment, transfer or
sharing of the Premises; and
14.4.5 Tenant shall provide a written agreement from any third party
concerned that, in the event Landlord gives such third party notice that Tenant
is in default under this Lease, such third party shall thereinafter make all
payments otherwise due Tenant directly to Landlord. Any such payments will be
received by Landlord without the imposition of any liability on Landlord, except
to credit such payments against those due under the Lease. Any such third party
shall agree to attorn to Landlord, or its successors and assigns, should this
Lease be terminated for any reason; provided, however, that in no event shall
Landlord, or its successors or assigns, be obligated to accept such attorn-
ment.
14.5 Limitation on Consent.
14.5.1 Tenant agrees and acknowledges that the conditions permitted to
be imposed upon Landlord's grant of its consent hereunder are reasonable.
Landlord's imposition of such conditions shall under no circumstances impair or
limit Landlord's rights and remedies under California Civil Code Section 1951.4
or any successor statute.
14.5.2 Landlord's consent to Tenant's Transfer on any one occasion
shall apply only to the specific transaction thereby authorized. Such consent
shall not be construed as a waiver of the duty of Tenant, or any transferee, to
obtain Landlord's consent to any other or subsequent Transfer, or as modifying
or limiting Landlord's rights hereunder in any way. Landlord's acceptance of
rent, or any other payment directly from any third party, shall not be construed
as a waiver of any of Landlord's rights or as Landlord's agreement to accept the
attornment of any third party, in the event of a termination of this Lease. In
no event shall Landlord's enforcement of any provision of this Lease against any
third party be deemed a waiver of Landlord's right to enforce any provision of
this Lease against Tenant or any other person.
14.6 Applicability to Successors. If Landlord gives consent to a Transfer,
such third party in respect of which such consent was given may in turn apply to
Landlord for its consent to subsequent Transfers. In such case, the provisions
of this Section 14 shall apply as fully as possible to such third party
(including this Section 14.5 in the case of more remote transfers). Any such
transfer shall be subject to all the terms and conditions of this Lease, and
each such successive transfer shall be made only upon like conditions. Tenant,
and each successor to Tenant's interest in the Premises, shall agree to remain
fully responsible to Landlord for the performance of all of Tenant's obligations
under this Lease.
15. DEFAULT BY TENANT; LANDLORD'S REMEDIES
15.1 Events of Default. Each of the following shall constitute a
material
default and breach by Tenant under this Lease:
15.1.1 If Tenant is at any time in default of its obligations to pay
any rent or other charges, and such default continues for more than five (5)
days after the date upon which the obligation to pay is due;
15.1.2 If Tenant is in default in the prompt and full performance of
any other of its obligations under this Lease and such default continues more
than thirty (30) days after Landlord's delivery of written notice
<PAGE>
specifying the particulars of such default, unless such default cannot be cured
within thirty (30) days, in which case Tenant shall be in default if Tenant (a)
does not commence the cure of such default within such thirty-day period, and
(b) actually cures such default within sixty (60) days of Landlord's delivery of
written notice of such default;
15.1.3 If Tenant vacates or abandons the Premises or otherwise fails
to occupy and operate the Premises in accordance with the terms of this Lease;
15.1.4 If Tenant or any guarantor of this Lease makes a general
assignment or general arrangement for the benefit of creditors; or if a petition
for adjudication of bankruptcy or for reorganization or rearrangement is filed
by or against Tenant or any guarantor and is not dismissed within thirty (30)
days; or if a trustee or receiver is appointed to take possession of
substantially all of Tenant's assets located at the Premises or of Tenant's
interest in this Lease and possession is not restored to Tenant within sixty
(60) days; or if substantially all of Tenant's assets located at the Premises or
Tenant's interest in this Lease is subjected to attachment, execution or other
judicial seizure which is not discharged within sixty (60) days. If a court of
competent jurisdiction determines that any of the acts described in this Section
15.1.4 is not a default under this Lease and a trustee is appointed to take
possession of Tenant's assets or if Tenant remains a debtor in possession and
such trustee or Tenant transfers Tenant's interest in this Lease, then Landlord
shall receive, as additional rent, the excess, if any, of the rent (or any other
consideration) paid in connection with such assignment or sublease over the rent
payable by Tenant hereunder; or
15.1.5 If any guarantor of the Lease revokes or otherwise terminates,
or purports to revoke or otherwise terminate, any guaranty of all or any portion
of Tenant's obligations under the Lease.
15.2 Remedies Upon Breach of Lease. On the occurrence of any breach of this
Lease by Tenant, Landlord may, at any time thereafter, with or without notice or
demand and without limiting Landlord in the exercise of any right or
remedy which Landlord may have:
15.2.1 Terminate Tenant's right to possession of the Premises and
re-enter the Premises by any lawful means. In such case, Tenant shall
immediately surrender possession of the Premises to Landlord. If Landlord
reenters the Premises under the provisions of this Section, Landlord shall not
be deemed to have terminated this Lease, or the liability of Tenant to pay any
rent or other charges that are due or thereafter accruing, or Tenant's liability
for damages under any of the provisions of this Lease. In the event of any such
entry or taking possession of the Premises, Landlord shall have the right, but
not the obligation, to remove from the Premises any personal property located
therein and to place it in storage at a public warehouse at Tenant's expense and
risk;
15.2.2 Maintain Tenant's right to possession of the Premises, in which
case this Lease shall continue in effect whether or not Tenant has abandoned the
Premises. In such event, Landlord shall be entitled to enforce all of Landlord's
rights and remedies under this Lease, including the right to recover the rent as
it becomes due, and Landlord shall have the right to occupy or relet the whole
or any part of the Premises for the account of Tenant; or
15.2.3 Pursue any other remedy now or hereafter available to Landlord
under the laws or judicial decisions of the State of California.
15.3 Termination. Notwithstanding any other term or provision hereof
to
the contrary, this Lease shall terminate on the occurrence of any act which
<PAGE>
affirms Landlord's intention to terminate this Lease as provided in this Section
15.3, including the filing of an unlawful detainer action against Tenant. Acts
of maintenance or preservation, efforts to relet the Premises, or the
appointment of a receiver at the initiative of Landlord shall not constitute a
termination of Tenant's right to possession unless written notice of termination
is given. On any such termination, Landlord's damages for default shall include
all costs and fees, including reasonable attorneys' fees, incurred by Landlord
in connection with filing, commencing, pursuing or defending any action in any
bankruptcy court or other court with respect to the Lease, obtaining relief from
any stay in bankruptcy restraining any action to evict Tenant or pursuing any
action with respect to Landlord's right to possession of the Premises. All such
damages suffered (apart from minimum monthly rent and other rent payable
hereunder) shall constitute pecuniary damages which must be reimbursed to
Landlord prior to assumption of the Lease by Tenant or any successor to Tenant
in any bankruptcy or other proceeding.
15.4 Cumulative Rights. The rights and remedies given to Landlord in this
Section shall be in addition and supplemental to all other rights or remedies
which Landlord may have under the laws in force when the default occurs.
Landlord's exercise of any right or remedy shall not prevent it from exercising
any other right or remedy.
15.5 Landlord's Damages.
15.5.1 If Landlord elects to terminate this Lease and Tenant's rights
to possession of the Premises in accordance with the provisions of this Lease,
Landlord may recover from Tenant as damages all of the following:
A. The worth at the time of award of any unpaid rent and
other charges which has been earned at the time of such termination; plus
B. The worth at the time of award of the amount by which the
unpaid rent and other charges which would have been earned after termination
until the time of award exceeds the amount of such rental loss Tenant proves
Landlord could have reasonably avoided; plus
C. The worth at the time of award of the amount by which the
unpaid rent and all other charges which Tenant would have paid for the balance
of the term of the Lease after the time of award exceeds the amount of such
rental loss that Tenant proves Landlord could have reasonably avoided; plus
D. Any other amount necessary to compensate Landlord for all of
the detriment proximately caused by Tenant's failure to perform its obligations
under this Lease or which in the ordinary course of things would be likely to
result therefrom, including, without limitation, any costs or expenses incurred
by Landlord in (a) maintaining or preserving the Premises after such default,
(b) recovering possession of the Premises, including reasonable attorneys' fees
therefor; (c) expenses of reletting the Premises to a new tenant, including
necessary renovations or alterations of the Premises, reasonable attorneys' fees
incurred, and leasing commission incurred; plus
E. Such other amounts in addition to or in lieu of the foregoing
as may be permitted from time to time by the laws of the State of California.
15.5.2 As used in Subsections A and B, above, the "worth at the time
of award" is computed by allowing interest on unpaid amounts at the rate of ten
percent (10%) per annum. As used in Subsection C, above, the "worth at the time
of award" is computed by discounting such amount at the discount rate of the
Federal Reserve Bank located nearest to the Building in effect at the time of
award, plus one percent (1%).
<PAGE>
15.5.3 For purposes of this Section 15, all rent other than minimum
monthly rent shall, for purposes of calculating any amount due under the
provisions of Subsection C, above, be computed on the basis of the average
monthly amount of rent, other than minimum monthly rent, payable by Tenant
during the immediately preceding thirty-six-month period, except that if it
becomes necessary to compute such rental before such thirty-six-month period has
expired, then such rent shall be computed on the basis of the average monthly
amount of rent payable during such shorter period.
15.6 No Waiver. The waiver by Landlord of any breach by Tenant of any
provision, covenant or condition contained in this Lease shall not be deemed to
be a waiver of such provision, covenant or condition, of any subsequent breach
thereof, or of any other provision, covenant or condition of this Lease.
15.6.1 The subsequent acceptance of rent hereunder by Landlord shall
not be deemed to be a waiver of any preceding breach by Tenant of any provision,
covenant or condition of this Lease or of any right of Landlord to a forfeiture
of the Lease by reason of such breach, regardless of Landlord's knowledge of
such preceding breach at the time of acceptance of such rent. No provision,
covenant or condition of this Lease shall be deemed to have been waived by
Landlord unless such waiver is in writing and signed by Landlord.
15.6.2 Landlord is entitled to accept, receive and cash or deposit any
payment made by Tenant for any reason or purpose or in any amount whatsoever,
and apply the same at Landlord's option to any obligation of Tenant and the same
shall not constitute payment of any amount owed, except that to which Landlord
has applied the same. No endorsement or statement on any check or letter of
Tenant shall be deemed an accord and satisfaction or otherwise recognized for
any purpose whatsoever. The acceptance of any such check or payment shall be
without prejudice to Landlord's right to recover any and all amounts owed by
Tenant hereunder and Landlord's right to pursue any other available remedy.
15.7 Power of Receiver. Upon a default by Tenant, Landlord shall have the
right to obtain the appointment of a receiver to take possession of the Premises
and/or to collect the rents or profits. Tenant irrevocably agrees that any such
receiver may, if necessary or convenient in order to collect such rents and
profits, conduct the business then being carried on by Tenant on the Premises
and that the receiver may take possession of any personal property belonging to
Tenant and used in the conduct of such business, and may use the same in
conducting such business on the Premises without compensation to Tenant for such
use. Neither the application for nor the appointment of such a receiver shall be
construed as an election on Landlord's part to terminate this Lease unless a
written notice of such intention is given by Landlord.
15.8 Landlord's Right to Cure Defaults. Landlord, at any time after Tenant
commits a default in the performance of any of Tenant's obligations under this
Lease, shall be entitled (but is not obligated) to cure such default, or to
cause such default to be cured, at the sole cost and expense of Tenant. If, by
reason of any default by Tenant, Landlord incurs any expense or pays any sum, or
performs any act requiring Landlord to incur any expense or to pay any sum,
including reasonable fees and expenses paid or incurred by Landlord in order to
prepare and post or deliver any notice permitted or required by the provisions
of this Lease, or otherwise permitted or contemplated by law, then the amount so
paid or incurred by Landlord shall be immediately due and payable to Landlord by
Tenant as additional Rent. Tenant hereby authorizes Landlord to deduct such sums
from any Security Deposit held by Landlord. If there is no Security Deposit,
such sums shall be paid by Tenant immediately upon demand by Landlord, and shall
bear interest at the rate of ten percent (10%) per annum, or such greater sum as
may be permitted by law from the date of such demand until paid in full.
15.9 Assumption of Lease. If Tenant becomes a Debtor under Chapter 7
<PAGE>
of
the Bankruptcy Code ("Code"), or a petition for reorganization or adjustment of
debts is filed concerning Tenant under Chapters 11 or 13 of the Code, or a
proceeding is filed under Chapter 7 and is transferred to Chapters 11 or 13 of
the Code, the Trustee or Tenant, as Debtor and as Debtor-In-Possession, may not
elect to assume this Lease unless, at the time of such assumption, the Trustee
or Tenant has:
15.9.1 Cured or provided Landlord "Adequate Assurance" (as defined
below) that: (a) within ten days from the date of such assumption the Trustee or
Tenant will cure all monetary defaults under this Lease and compensate Landlord
for any actual pecuniary loss resulting from any existing default, including,
without limitation, Landlord's reasonable costs, expenses, late charges and
accrued interest as set forth in this Lease, and attorneys' fees incurred as a
result of the default; (b) within thirty (30) days from the date of such
assumption, the Trustee or Tenant will cure all nonmonetary defaults under this
Lease; and (c) the assumption will be subject to all of the provisions of this
Lease.
15.9.2 For purposes of Sections 15.9 and 15.10, Landlord and Tenant
acknowledge that, in the context of a bankruptcy proceeding of Tenant, at a
minimum, "Adequate Assurance" shall mean: (a) the Trustee or Tenant has and will
continue to have sufficient unencumbered assets after the payment of all secured
obligations and administrative expenses to assure Landlord that the Trustee or
Tenant will have sufficient funds to fulfill the obligations of Tenant under
this Lease, and to keep the Premises properly staffed with sufficient employees
to conduct a fully-operational, actively promoted business in the Premises; (b)
the Bankruptcy Court shall have entered an order segregating sufficient cash
payable to Landlord and/or the Trustee, or Tenant shall have granted a valid and
perfected first lien and security interest and/or mortgage in property of
Trustee or Tenant acceptable as to value and kind to Landlord, to secure to
Landlord the obligation of the Trustee or Tenant to cure the monetary and/or
nonmonetary defaults under this Lease within the time periods set forth above;
and (c) the Trustee or Tenant at the very least shall deposit a sum equal to one
month's minimum monthly rent to be held by Landlord (without any allowance for
interest thereon) to secure Tenant's future performance under the Lease.
15.10 Assignment of Lease. If the Trustee or Tenant has assumed the Lease
pursuant to the provisions of Sections 15.9 and 15.10, for the purpose of
assigning Tenant's interest hereunder to any other person or entity, such
interest may be assigned only after the Trustee, Tenant or the proposed assignee
has complied with all of the provisions, covenants and conditions of Section 14.
Landlord and Tenant acknowledge that such provisions, covenants and conditions
are commercially reasonable in the context of a bankruptcy proceeding of Tenant.
Any person or entity to which this Lease is assigned pursuant to the provisions
of the Code shall be deemed without further act or deed to have assumed all of
the obligations arising under this Lease on and after the date of such
assignment. Any such assignee shall upon request execute and deliver to Landlord
an instrument confirming such assignment.
15.11 Adequate Protection. Upon the filing of a petition by or against
Tenant under the Code, Tenant, as Debtor and as Debtor-in-Possession, and any
Trustee who may be appointed agree to adequately protect Landlord as follows:
15.11.1 To perform each and every obligation of Tenant under this
Lease until such time as this Lease is either rejected or assumed by order of
the Bankruptcy Court;
15.11.2 To pay all monetary obligations required under this Lease,
including, without limitation, the payment of minimum monthly rent, and such
other additional rent charges payable hereunder which are considered reasonable
compensation for the use and occupancy of the Premises;
<PAGE>
15.11.3 To provide Landlord a minimum thirty days' written notice,
unless a shorter period is agreed to in writing by the parties, of any
proceeding relating to any assumption of this Lease or any intent to abandon the
Premises, which abandonment shall be deemed a rejection of this Lease; and
15.11.4 To perform to the benefit of Landlord otherwise required under
the Code.
The failure of Tenant to comply with the above shall result in an
automatic rejection of this Lease.
15.12 Cumulative Rights. The rights, remedies and liabilities of Landlord
and Tenant set forth in Sections 15.9, 15.10 and 15.11 shall be in addition to
those which may now or hereafter be accorded, or imposed upon, Landlord and
Tenant by the Code.
16. DEFAULTS BY LANDLORD
If Landlord fails to perform any covenant, condition or agreement contained
in this Lease within thirty (30) days after receipt of written notice from
Tenant specifying such failure (or if such failure cannot reasonably be cured
within thirty (30) days, if Landlord does not commence to cure the failure
within that thirty-day period), then such failure shall constitute a default by
Landlord. In such case, Landlord shall be liable to Tenant for any damages
sustained by Tenant as a result of Landlord's default.
16.1 Liability Limitation. Tenant and Landlord expressly agree that if
Tenant obtains a money judgment against Landlord resulting from any default or
other claim arising under this Lease, that judgment shall be satisfied only out
of the rents, issues, profits, and other income, including insurance proceeds,
if any, actually received on account of Landlord's right, title and interest in
the Property. No other real, personal or mixed property of Landlord (or of any
of the partners which comprise Landlord, or of partners or principals of such
partners comprising Landlord, if any, or of the officers, shareholders or
directors, if any, of any such entity) wherever situated, shall be subject to
levy, attachment or execution, or otherwise used to satisfy any such judgment.
Tenant hereby waives any right to satisfy a judgment against Landlord except
from the rents, issues, profits and other income, including insurance proceeds,
if any, actually received on account of Landlord's right, title and interest in
the Property.
16.2 Cure. If, after notice to Landlord of default, Landlord fails to cure
the default as provided below, then subject to the provisions of this Lease,
Tenant shall have the right to cure that default at Landlord's expense. In such
case, Landlord shall pay the reasonable cost of such cure promptly following
receipt of a bill from Tenant itemizing the cost of such cure. Tenant shall not
have the right to terminate this Lease or to withhold, reduce or offset any cost
of such cure against any payments of rent or other charges due and payable to
Landlord under this Lease, except as otherwise specifically provided in this
Lease.
16.3 Waiver of Code Provisions. Tenant hereby agrees that Civil Code
Sections 1932(2), 1933(4), 1941 and 1942 shall not be applicable to this Lease
and Tenant hereby waives any right it may have under any of such Civil Code
Sections.
17. ENVIRONMENTAL MATTERS
Landlord does not have actual knowledge of the presence of any Hazardous
Substances, as defined below, on the Property not in conformance with applicable
law. Tenant has had sufficient opportunity to satisfy itself of the condition of
the Premises prior to the execution hereof.
<PAGE>
17.1 Compliance. Tenant shall at all times and in all respects comply with
all federal, state and local laws, ordinances and regulations (collectively,
"Hazardous Substances Laws") relating to industrial hygiene, environmental
protection or the use, analysis, generation, manufacture, storage, disposal or
transportation of any oil, hydrocarbons, flammables, explosives, asbestos,
radioactive materials or wastes or other hazardous, toxic, contaminating or
polluting materials, substances or wastes, including, without limitation, any
hazardous substances which are the subject of any laws, ordinances or
regulations intend to protect the environment or health, safety and welfare
(collectively, the "Hazardous Substances").
17.2 Licenses and Permits. Tenant shall, at its own expense, procure,
maintain in effect, and comply with all conditions of any and all permits,
licenses and other governmental and regulatory approval required for Tenant's
use of the Premises, including, without limitation, discharge of appropriately
treated materials or wastes which may be discharged into or through any sanitary
sewer serving the Premises. Tenant shall, in all respects, deal with the
Hazardous Substances in conformity with the Hazardous Substances Laws.
17.3 Indemnification. Tenant shall indemnify, defend, by counsel reasonably
acceptable to Landlord, protect, and hold Landlord and each of Landlord's
partners, employees, agents, attorneys, successors and assigns, free and
harmless from and against any and all claims, liabilities, penalties,
forfeitures, losses or expenses (including attorneys' fees), damages or death of
or injury to any person or damage to any property whatsoever, arising from or
caused in whole or in part, directly or indirectly, by Tenant's failure to
comply with any Hazardous Substances Law, or other environmental, health or
safety law, regulation or ordinance. Tenant's obligations hereunder shall
include, without limitation, and whether foreseeable or unforeseeable, all costs
of any kind whatsoever related in any way to the repair, clean-up or remediation
of the Premises, and the preparation and implementation of any closure, remedial
action or other required plans. Tenant's obligations hereunder shall survive the
expiration or earlier termination of the Term. For purposes of this indemnity
provision, any acts or omission of Tenant, or by employees, agents, assignees,
contractors or subcontractors of Tenant, or others acting for or on behalf of
Tenant (whether or not they are negligent, intentional, willful or unlawful)
shall be strictly attributable to Tenant.
18. SUBORDINATION OF LEASE
18.1 Subordination Agreement. Tenant agrees to execute, acknowledge and
deliver to Landlord within ten days following Landlord's written request, such
documents and instruments that may be necessary to subordinate this Lease to (a)
any mortgages or trust deeds that now exist or may hereafter be placed upon the
Premises by Landlord, (b) to any and all advances made or to be made thereunder,
(c) to the interest on all obligations secured thereby, (d) to all renewals,
modifications, consolidations, replacements and extensions thereof, and (e) any
easements, covenants, conditions or restrictions executed by Landlord provided
that they do not materially interfere with Tenant's use, enjoyment and occupancy
of the Premises. In each case the mortgagee or beneficiary named in any such
mortgage or trust deed shall agree in writing that, as long as Tenant performs
its obligations under this Lease, no foreclosure or deed in lieu of foreclosure,
or sale under the encumbrance or other procedures to enforce the rights incident
thereto, shall affect Tenant's rights under this Lease.
18.2 Attornment. Tenant shall attorn to any purchaser at any
foreclosure
sale or to any grantee or transferee designated in any deed given in lieu of
foreclosure.
18.3 Estoppel Certificate. Within ten (10) days after receipt of a
written request therefor, Tenant shall deliver in recordable form a written
<PAGE>
statement certifying (if such is the case) that this Lease is in full force and
effect and that there are no defenses or offsets thereto, or stating those
claimed to exist and such other information as Landlord may reasonably request
be included in such statement. The failure of Tenant to deliver such certificate
within such time period shall constitute conclusive affirmation by Tenant for
the benefit of Landlord, its lender, mortgagee or assignee, and their respective
successors in interest, that this Lease is in full force and effect and has not
been modified except as may be represented by Landlord in its written request
for such statement.
19. LANDLORD'S ENTRY ON PREMISES
19.1 Right of Entry. Landlord and its authorized representatives shall have
the right without liability and without abatement of rent to enter the Premises
at all reasonable times for, without limitation, any of the following purposes:
19.1.1 To determine whether the Premises and/or the Building are in
good condition, and whether Tenant is complying with its obligations under this
Lease;
19.1.2 To do any necessary maintenance, repairs, restoration or
remodeling to the Premises and/or the Building that Landlord has the right or
obligation to perform;
19.1.3 To serve, post, or keep posted any notices required or allowed
under the provisions of this Lease, including "for rent" or "for lease" notices
during the last six months of this Lease, or during any period while Tenant is
in default, and any notices provided by law for the protection of Landlord's
interest in the Premises;
19.1.4 To shore the foundations, footings and walls of the Building,
and to erect scaffolding and protective barricades around and about the
Building, but not so as to prevent entry to the Premises, and to do any other
act or thing necessary for the safety or preservation of the Premises or the
Building; and
19.1.5 To show the Premises and/or the Building to prospective
purchasers, lenders, tenants, brokers and others for business purposes, and for
such other purposes as Landlord may deem appropriate.
19.2 Exercise of Right. Landlord shall exercise its rights of entry in a
manner that will not interfere unreasonably with Tenant's use and occupancy of
the Premises; provided that Landlord's entry and activities do not result from
Tenant's default. Landlord shall not be liable in any other manner for any
inconvenience, disturbance, loss of business, nuisance, or other damage arising
out of Landlord's entry on the Premises as provided herein, except damage
resulting from the acts or omissions of Landlord or its authorized represent-
atives.
20. SALE OR TRANSFER OF PREMISES
If Landlord sells or transfers all or any portion of the Premises, the
Building, or the improvements and land of which the Premises and the Building
are a part, then Landlord shall be released from any liability thereafter
accruing under this Lease upon (a) the consummation of such sale or transfer,
and (b) Landlord accounting to any such transferee for any Security Deposit and
prepaid rent of Tenant.
21. SURRENDER ON TERMINATION; HOLDING OVER
<PAGE>
21.1 Surrender. On the last day of the Term, or upon sooner termination of
this Lease, Tenant shall surrender to Landlord the Premises and all Tenant's
improvements and alterations (except for improvements and alterations that
Tenant has the right or is obligated to remove under the provisions of this
Lease), broom clean, maintained and repaired in accordance with the terms
hereof, and otherwise in the same condition as when received, except for
reasonable wear and tear. Any damage to or deterioration of the Premises will
not be deemed reasonable wear and tear if the same could have been prevented by
good maintenance practices of Tenant. Tenant shall also remove all of its
personal property on or prior to such last day. Tenant shall promptly repair any
physical damage to the Premises arising as a result of Tenant's vacation of the
Premises. Landlord may elect to retain or dispose of in any manner any
improvements or alterations or Tenant's personal property that Tenant does not
remove from the Premises on expiration or termination of the Term as allowed or
required by this Lease by giving at least ten days' written notice to Tenant.
Title to any such improvements or alterations or Tenant's personal property that
Landlord elects to retain or dispose of on expiration of the ten-day period
shall vest in Landlord. Tenant waives all claims against Landlord for any damage
to Tenant resulting from Landlord's retention or disposition of any such
alterations or Tenant's personal property.
21.2 Holding Over. If Tenant, with Landlord's consent, remains in
possession of the Premises after expiration or termination of the Term, or after
the date in any notice given by Landlord to Tenant terminating this Lease, such
possession by Tenant shall be deemed to be a month-to-month tenancy terminable
on thirty (30) days' notice given at any time by either party. The minimum
monthly rent for any such tenancy shall be equal to double the aggregate of the
monthly minimum rent in effect on the date of such expiration. Such minimum rent
shall be subject to adjustment as provided in this Lease. Such tenancy shall
otherwise be subject to all of the terms and conditions of this Lease, except
those pertaining to Term and Option(s) to extend, if any. Any holding over
without Landlord's consent shall not give Tenant tenure.
22. GENERAL PROVISIONS
22.1 Notices. Any and all notices by Landlord to Tenant, or by Tenant to
Landlord, shall be in writing and delivered personally or by U.S. certified
mail, return receipt requested, addressed to the parties at the addresses
specified on the signature page of this Lease. Either party may, at any time,
change the address by written notice to the other party in accordance with this
Section. If notice is mailed, it shall be deemed received on the third business
day following the date on which it is mailed.
22.2 Binding Effect; Complete Agreement. Landlord and Tenant agree that
each of the provisions, conditions and obligations of this Lease shall extend to
and bind, or inure to the benefit of (as the case may require), the respective
parties hereto, and each and every one of their respective heirs, executors,
administrators, representatives, successors and assigns. This Lease, and the
exhibits hereto, constitute the entire agreement between the parties and may not
be altered, amended, modified or extended, except by an instrument in writing
signed by all parties. The parties respectively acknowledge and agree that
neither has made any representations or warranties to the other not expressly
set forth in this Lease. This Lease supersedes any proposals regarding the
leasing of the Premises, whether written or oral. Any such proposals will be
terminated, and of no force or effect, effective upon the execution of this
Lease.
22.3 Attorneys' Fees. If any legal action is instituted by either of the
parties hereto to enforce or construe any of the provisions, conditions or
covenants of this Lease, or the validity thereof, the party prevailing in any
such action shall be entitled to recover from the other party all court costs
and
<PAGE>
reasonable attorneys' fees to be set by the court, and the costs and fees
incurred in enforcing any judgment entered. Attorneys' fees and costs, whenever
mentioned in this Lease, shall include those incurred with respect to
arbitration proceedings, if any.
22.4 Partial Invalidity. If any term or provision, in whole or in part, of
this Lease or the application thereof to any person or circumstance shall, to
any extent, be invalid, unenforceable, or inapplicable in the stated
circumstances or for stated purposes, in any jurisdiction, then the remainder of
this Lease, or the application of such term or provision to persons or
circumstances other than those to which it is held invalid, unenforceable or
inapplicable, shall not be affected. Each term and provision of this Lease shall
be valid and be enforceable to the fullest extent permitted by law.
22.5 Recordation; Quitclaim. Neither party shall record this Lease. Upon
the request of Landlord, in Landlord's sole discretion, Tenant shall execute and
acknowledge in recordable form a Memorandum of Lease in content agreeable to
Landlord. The reasonable costs and expenses, including attorneys' fees, incurred
by Landlord in preparing, filing and recording the Memorandum of Lease shall be
borne by Landlord. Concurrently with the execution of any Memorandum of Lease,
Tenant shall execute and deliver to Landlord for filing and recording, upon the
expiration or termination of this Lease, a quitclaim deed designating Landlord,
its successors and assigns, as the transferee of the Premises.
22.6 Broker. Landlord shall pay a leasing commission to Leider Commercial
Real Estate and Blair Hayes Commercial Real Estate in accordance with the terms
of a separate listing agreement between Landlord and Leider Commercial Real
Estate. Tenant represents and warrants to Landlord that Tenant has not engaged
any broker or finder other than Blair Hayes Commercial Real Estate and shall
indemnify, defend, and hold Landlord free and harmless from any and all claims
arising from this transaction brought by any other finder or broker.
22.7 Consent of Party. If this Lease requires the consent of a party
hereto, such consent shall not be unreasonably withheld or delayed.
22.8 Corporate Authority. If Tenant is a corporation, each individual
executing this Lease on behalf of such corporation represents and warrants that
he or she is duly authorized to execute and deliver this Lease on behalf of such
corporation, in accordance with a duly adopted resolution of the Board of
Directors, or in accordance with the Bylaws of such corporation; that this Lease
is binding upon such corporation in accordance with its terms; that Tenant is a
duly qualified corporation and all steps have been taken prior to the date
hereof to qualify Tenant to do business in the State in which the Premises are
situated, if Tenant is a foreign corporation; that all franchise and corporate
taxes have been paid to date; and that all future forms, reports, fees and other
documents necessary to comply with applicable laws will be filed when due.
22.9 Time. Time is of the essence of this Lease and each and every term,
covenant and condition.
22.10 Signs. Tenant shall install signs, at Tenant's sole expense, on the
Premises in accordance with the City of Santa Barbara sign ordinance and with
Landlord's prior approval. Tenant shall have the exclusive right to signage to
the main entrance to the Building, with the exception of the existing
wall-mounted tenant directory sign. The monument sign will be converted back to
building identification signage.
22.11 Financial Statements. Tenant shall deliver to Landlord copies of such
financial statements as are submitted to the Securities and Exchange Commission
with Tenant's Form 10-Q and 10-K within ten (10) business days of the filing
thereof.
<PAGE>
22.12 Confidentiality of Lease. Tenant acknowledges and agrees that the
terms of this Lease are confidential and constitute proprietary information of
Landlord. Disclosure of the terms hereof could adversely affect the ability of
Landlord to negotiate other leases with respect to the Building and impair
Landlord's relationship with other tenants of the Building. Tenant agrees that
it, its partners, officers, directors, employees and attorneys, shall not
disclose the terms and conditions of this Lease to any other person without the
prior written consent of Landlord. A breach of this covenant by Tenant shall
constitute a material default under this Lease that, by its nature, is not
susceptible to cure by Tenant. It is understood and agreed that damages, alone,
would be an inadequate remedy for the breach of this provision by Tenant.
Landlord therefore shall have the right to specific performance of this
provision and to injunctive relief to prevent its breach or continued breach, as
well as all other remedies available at law or in equity.
22.13 Security Measures. Tenant hereby acknowledges that Landlord shall
have no obligation whatsoever to provide guard service or other security
measures for the benefit of the Premises or the Building. Tenant assumes all
responsibility for the protection of Tenant and its agents, employees and
invitees, and the property of Tenant, and its agents, employees and invitees,
from acts of third parties. Nothing herein contained shall prevent Landlord, at
Landlord's sole option, from providing security protection for the Building or
any part thereof, in which event the cost thereof shall be included as an
Operating Cost.
22.14 Construction of Lease. The language in all parts of this Lease
shall
in all cases be construed as a whole according to its fair meaning and not
strictly for nor against Landlord or Tenant.
22.15 Negation of Joint Venture. Nothing in this Lease shall cause Landlord
in any way to be construed as an employer, employee, fiduciary, a partner, a
joint venturer, or otherwise associated in any way with Tenant in the operation
of the Premises. Nothing contained herein shall subject Landlord to any
obligation, loss, charge or expense connected with or arising from Tenant's
operation in or use of the Premises.
22.16 Triple Net Lease. The parties agree that the general intent and
purpose of this Lease is that this Lease shall be an absolute triple net lease
with respect to Landlord. Tenant shall pay its pro rata share of all Operating
Costs for the Premises, the common areas of the Building, the Building and the
land on which it is situated. Landlord and Tenant intend that the rental return
to Landlord shall not be reduced, offset or diminished directly or indirectly by
any cost, charge or expense due from Tenant and others in connection with the
Premises, Building or land upon which the Building is situated, nor subject to
suspension or termination for any reason. Landlord and Tenant agree that all
provisions of this Lease shall be interpreted in a manner consistent with and
subordinate to such general intent and purpose. Tenant further acknowledges that
all tenants of the Building may not be subject to triple net leases.
22.17 Liquidated Damages. BY INITIALING IN THE SPACES PROVIDED BELOW, THE
PARTIES AGREE THAT A LATE OPENING OF THE PREMISES, LATE OR INSUFFICIENT PAYMENT
OF RENT OR OTHER CHARGES PAYABLE HEREUNDER, OR TENANT'S HOLDING OVER, WILL CAUSE
LANDLORD TO INCUR COSTS NOT CONTEMPLATED BY THIS LEASE, THE EXACT AMOUNT OF SUCH
COSTS BEING EXTREMELY DIFFICULT AND IMPRACTICABLE TO ASCERTAIN. SUCH COSTS
INCLUDE ADMINISTRATIVE EXPENSES AND LOST GOOD WILL TO THE BUILDING. THEREFORE,
THIS LEASE PROVIDES FOR CERTAIN LATE CHARGES AND OTHER LIQUIDATED DAMAGES. SUCH
LATE CHARGES AND DAMAGES REPRESENT FAIR AND REASONABLE ESTIMATES OF THE COSTS
AND/OR DAMAGES THAT LANDLORD WILL INCUR UNDER THE CIRCUMSTANCES. ACCEPTANCE OF
ANY SUCH LATE CHARGE OR DAMAGES SHALL CONSTITUTE NEITHER A WAIVER OF TENANT'S
DEFAULT NOR AN ELECTION OF REMEDY.
<PAGE>
LANDLORD TENANT
(Signatures appear on the following page.)
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Lease on this 16 day of
February, 1998, at the location of the Premises.
"LANDLORD":
BATH STREET PARTNERS,
a California limited partnership
By /s/ ALEX N. PANANIDES
---------------------
Alex N. Pananides,
General Partner
Address:
3740 State Street
Santa Barbara, California 93105
"TENANT":
AVTEL COMMUNICATIONS, INC., a
Delaware corporation
By /s/ ANTHONY E. PAPA
-------------------
Anthony E. Papa, Chief Executive Officer
By /s/ JAMES P. PISANI
-------------------
James P. Pisani, Chief Operating Officer
Address:
Prior to the Commencement Date:
AvTel Communications, Inc.
130 Cremona Drive, Suite C
Santa Barbara, California 93117
After the Commencement Date:
AvTel Communications, Inc.
505 Bath Street*
Santa Barbara, California 93101
*subject to the provisions of
Section 1.4
<PAGE>
EXHIBIT 10.9
COMMERCIAL
LEASE AGREEMENT
This Lease Agreement is made and entered into this 28th day of February, 1995,
by and between Ameritas Life Insurance Corp. corporation (hereinafter called
"Lessor"), and Matrix Telecom, Inc., a Texas Corporation (hereinafter called
"Lessee").
WITNESSETH:
Lessor. In consideration of the rent to be paid and the covenants and agreements
to be performed by Lessee, as hereinafter set forth, does hereby lease, demise,
and let unto Lessee and Lessee accepts that certain office space containing
approximately 24,050 rentable square feet on the First & Second floor in the
building known as Northstar Plaza I (hereinafter called the "Building"), located
on that certain tract of land situated in the City of Fort Worth, County of
Tarrant, State of Texas, more particularly described in Exhibit "A" attached
hereto and made a part hereof (hereinafter called the "Land"). The area hereby
leased (hereinafter called "Leased Premises") in the Building is shown and
designated on the Floor Plan(s) attached hereto and made a part hereof as
Exhibit "B".
The Leased Premises are leased by Lessor to Lessee, are accepted, and are to be
used and possessed by Lessee upon and subject to the following terms,
provisions, covenants, agreements, and conditions:
1. TERM: Subject to and upon the conditions set forth below, including
without limitation subparagraph 34(d), the term of this Lease shall commence on
July 1, 1995 (the "Commencement Date") or, if such date is different from the
Commencement Date, the Completion Date as defined in subparagraph 34(d), which
Lessor shall use its best efforts to establish by the Commencement Date, and
shall terminate June 30, 2000 (60) months thereafter (plus the partial month in
which the Commencement Date or Completion Date occurs, if applicable). If lessee
takes possession of the Leased Premises before July 1, 1995 the monthly rental
for the first month shall be prorated based on Year 1 rent.
2. RENT: (a) Lessee agrees to pay monthly as base rental during the term of
this Lease the sum of ($ ), which amount shall be payable to Lessor at the
address shown below on the first day of the month. One monthly installment of
rent shall be due and payable on the date of execution of this Lease by Lessee
for the first month's rent and a like monthly installment shall be due and
payable on or before the first day of each calendar month succeeding the
Commencement Date or Completion Date during the demised term; provided, that if
the Commencement Date or the Completion date should be a date other than the
first day of a calendar month, the monthly rental set forth above shall be
prorated to the end of that calendar month, and all succeeding installments of
rent shall be payable on or before the first day of each succeeding calendar
month during the demised term.
(b) On the date of execution of this Lease by Lessee, there shall be due
and payable by Lessee a security deposit in an amount equal to one monthly
rental installment to be held for the performance by Lessee of Lessee's
covenants and obligations under this Lease, it being expressly understood that
the deposit shall not be considered an advance payment of rental or a measure of
<PAGE>
Lessor's damage in case of default by Lessee. Upon the occurrence of any event
of default by Lessee or breach by Lessee of Lessee's covenants under this Lease,
Lessor may, from time to time, without prejudice to any other remedy, use the
security deposit to the extent necessary to make good any arrears of rent and/or
any damage, injury, expense or liability caused to Lessor by the event of
default or breach of covenant, any remaining balance of the security deposit to
be returned by Lessor to Lessee upon termination of this Lease. Said security
deposit shall be placed in an interest bearing account and the interest shall be
credited to Lessee provided Lessee is not in default of an
(c) If any increase in the fire and extended coverage insurance premiums
paid by Lessor for the Building in which Lessor occupies space is caused by
Lessee's use and occupancy of the Leased Premises, or if Lessee vacates the
Leased Premises and causes an increase in such premiums, then Lessee shall pay
as additional rental the amount of such increase to Lessor.
(d) Other remedies for non-payment of rent notwithstanding, if the monthly
rental payment is not received by Lessor on or before the fifth day of the month
for which rent is due, or if any other payment due Lessor by Lessee is not
received by Lessor on or before the tenth day after an invoice or other demand
therefor has been sent to Lessee, a service charge of five percent (5%) of such
past due amount shall become due and payable in addition to such amounts owed
under this Lease.
(e) In the event the operating expenses as defined below (hereafter
"Operating Expenses") of Lessor relating to the Building, the Land and other
improvements on the Land shall, in any calendar year during the term of this
Lease, exceed the sum of $3.70 per rentable square foot, with the total rentable
square footage of the Building being 24,050 for the purpose of this calculation,
Lessee agrees to pay as additional rental Lessee's pro rata share (100%) of the
excess Operating Expenses. The increase in operating expenses will be limited to
a 5% increase above $3.70 per rentable square foot for the first year and a 5%
increase over the prior year operating expenses thereafter for the purpose of
calculating the Lessee's pro rata share. In the case of the calendar year during
which the Commencement Date or Completion Date occurs, the foregoing calculation
shall be made based upon a pro rata share (as the balance of the year after the
Commencement Date or Completion Dates bears to the entire year) of the Operating
Expenses for that calendar year for which additional rental is due under this
paragraph, invoice Lessee for the excess Operating Expenses. The invoice shall
include in reasonable detail all computations of the additional rental, and
Lessee agrees to make payment of the additional rental to Lessor within ten days
following receipt of the invoice. In the year in which this Lease terminates,
Lessor, in lieu of waiting until the close of the calendar year in order to
determine any excess Operating Expenses, has the option to invoice Lessee for
Lessee's pro rata share of the Operating Expenses based upon the previous year's
excess Operating Expenses; Lessor shall invoice Lessee under this option within
thirty days prior to the termination of this Lease increase the monthly rental
to an amount which reflects the Lessee's pro rata share of the Operating
Expenses based upon the previous year's excess Operating Expenses after giving
Lessee thirty days notice. Lessor shall provide Lessee thirty days notice.
(f) Operating Expenses include all expenses incurred with respect to the
maintenance and operation of the Building, the Land
<PAGE>
and other improvements on the Land, including, but not limited to, maintenance
and repair costs, fuel, water, sewer, gas and other utility charges, security,
window washing, janitorial services, trash removal, landscaping, pest control,
Lessor's managing agent whose duties are connected with the operation and
maintenance of the Building or other expenses on the Land, amounts paid to
management firm to supervise operation of the Building, amounts paid to
contractors or subcontractors for work or services performed in connection with
the operation of the Building or other expenses on the Land, and all services,
supplies, repairs, replacements or other expenses for maintaining and operating
the Building and other expenses on the land, including common areas and parking
area. Operating Expenses also include all real property taxes and all insurance
premiums which lessor is required to pay or deems advisable to pay, including
public liability insurance, with respect to the Building, the Land and other
improvements on the Land. Operating Expenses do not include any capital
improvement to the Building, nor shall it include repairs, restoration or other
work occasioned by fire, windstorm or other casualty, income and franchise taxes
of Lessor, expenses incurred in leasing to or procuring of tenants, leasing
commissions, advertising expenses, expenses for the renovating of space for new
tenants, interest or principal payments on any mortgage or other indebtedness of
Lessor or depreciation allowance or expense.
(g) Lessee will pay the electric bill for the entire property as received
from the utility company each month during the primary term and any renewal or
extension period.
3. SIGNS: (a) Lessor will furnish and install a suitable building directory
and establish suite numbers to facilitate locating and identifying Lessee's
premises. In order to effect uniformity, to control the graphics, and to
maintain dignified aesthetics, Lessor will also furnish and install at the
entrance door to Lessee's premises a uniform suite number plate and a name
plate. Signs, name plates or graphics which are wholly within the Leased
Premises and not visible from the exterior of the Building or from public spaces
within the Building will be permitted.
4. USAGE AND INSURANCE: Lessee represents to and agrees with Lessor that
the Leased Premises shall be used and occupied only for the purpose of general
office use. Lessee shall occupy the Leased Premises, conduct its business and
control its agents, employees, contractors, customers and invitees in such a
manner as is lawful, acceptable and will not create any nuisance or otherwise
interfere with, annoy or disturb any other tenant in its normal business
operations or Lessor in its management of the Building. Lessee shall not commit,
or suffer to be committed, any waste on the Leased Premises, nor shall Lessee
permit the Leased Premises to be used in any way which would, in the opinion of
Lessor, be extra hazardous on account of fire or otherwise which would in any
way increase or render void the fire insurance on the Leased Premises or
contents in the Building.
5. BUILDING SERVICES: Lessor shall furnish janitorial services five times
per week during the term of this Lease. Lessee shall pay for the cost of
cleaning services required by non-standard improvements or special operations.
Lessor shall furnish water for Lessee during the term of this lease. Lessee
shall pay all telephone charges. Lessor shall furnish Lessee hot and cold water
at those points of supply provided for general use of other tenants in the
Building, central heating and air conditioning (at times Lessor normally
furnishes these services to other tenants in
<PAGE>
the Building, and at temperatures and in amounts as are considered by Lessor to
be standard, routine maintenance, painting and electric lighting service for all
common areas of the Building in the manner and to the extent deemed by Lessor to
be standard. Failure by Lessor to any extent to furnish these defined services,
or any cessation thereof, resulting from causes beyond the control of Lessor
shall neither render Lessor liable in any respect for damages to either person
or property, be construed as an eviction of Lessee, work an abatement of rent
nor relieve Lessee from fulfillment of any covenant in this Lease. Should any of
the equipment or machinery break down, or for any cause cease to function
properly, Lessor shall use reasonable diligence to repair the same promptly, but
Lessee shall have no claim for rebate on account of any interruption in service
occasioned by the repairs, nor shall the same be construed as an eviction of
Lessee, nor relieve Lessee from fulfillment of any covenant in this Lease. Under
no circumstances will Lessor be liable for any indirect or consequential damages
caused by any interruption of building services.
6. REPAIR AND MAINTENANCE: Lessor will, at its own cost and expense, except
as may be provided elsewhere herein, make necessary repairs to the Building
corridors, lobby, and other common areas of the Building and other improvements
on the Land and to the structural parts of the Building and other improvements
on the Land, and to the lines and equipment used to provide the services
referred to herein up to the point of entry into the Leased Premises, unless any
such damage is caused by the negligent acts or omissions of Lessee, its agents,
employees, contractors, customers or invitees, in which event Lessee, its
agents, employees, contractors, customers or invitees, in which event Lessee
will bear the cost of such repair. Lessee will promptly give Lessor written
notice of repair required to be done by Lessor, as aforesaid, of which Lessee
may become aware. Lessor shall not be liable to Lessee, except as expressly
provided in this Lease, for any damage or inconvenience, and Lessee shall not be
entitled to any abatement or reduction of rent, by reason of any repairs,
alterations or additions made by Lessor under this Lease. All requests for
repairs or maintenance that are the responsibility of Lessor pursuant to any
provision of this Lease must be made in writing to Lessor at the address set
forth below and Lessor shall not be deemed in breach of its obligations unless
it fails to commence such repairs within ten (10) days after receipt thereof.
7. LESSEE'S REPAIRS AND ALTERATIONS: Lessee will not, in any manner,
deface, injure or damage the Leased Premises, the Building, or any improvements
on the Land, and will pay the cost of repairing any damage or injury done to the
Leased Premises, the Building or such other improvements by Lessee or Lessee's
agents, employees, contractors, customers or invitees. Lessee shall throughout
the term of this Lease take good care of the leased Premises and keep them free
from waste and nuisance of any kind. Lessee further agrees to keep the Leased
Premises, including all fixtures installed by lessee, any plate glass and any
mechanical lines and equipment within the Leased Premises, in good condition and
make all necessary repairs thereto except for those caused by fire, casualty, or
acts of God covered by Landlord's fire insurance policy covering the Building
and except for repairs to structural parts of the Building which are required to
be done by the Lessor. If Lessee fails to make such repairs within fifteen (15)
days after the occurrence of the damage or injury, Lessor may, at its option,
make such repair and Lessee shall, upon demand therefor, pay Lessor for the cost
thereof, plus a charge in the amount of 15% of the
<PAGE>
cost thereof to cover the overhead and administrative expenses of Lessor. Lessee
will not make or allow to be made any alterations or physical additions in or to
the Leased Premises without the prior written consent of Lessor. All
maintenance, repairs, alterations, additions, or improvements shall be conducted
only by contractors and subcontractors approved in writing by Lessor, it being
understood that Lessee shall procure and maintain, and shall cause such
contractors and subcontractors engaged by or on behalf of Lessee, to procure and
maintain, insurance coverage against such risks, in such amounts and with such
companies as Lessor may require in connection with any such maintenance, repair,
alteration, addition, or improvement. Upon termination of this Lease, Lessee
will surrender and deliver up the Leased Premises in the same condition, order
and repair as existed at the Commencement Date or Completion Date, excepting
ordinary wear and tear.
8. COMPLIANCE WITH LAWS, RULES AND REGULATIONS: Lessee shall comply with
all laws, ordinances, orders, rules and regulations of state, federal, municipal
or other agencies or bodies having jurisdiction relating to the use, condition
and occupancy of the Leased Premises. Lessee will comply with the rules of the
Building adopted by Lessor which are set forth on EXHIBIT C attached to this
Lease. Lessor shall have the right at all times to change the rules and
regulations of the Building or to amend them in any reasonable manner as may be
deemed advisable for the safety, care and cleanliness, and for the preservation
of good order, of the Leased Premises. All changes and amendments in the rules
and regulations of the Building will be sent by Lessor to Lessee in writing and
shall thereafter be carried out and observed by Lessee.
9. LESSOR IMPROVEMENTS: If construction is to be done by Lessor to the
Leased Premises prior to Lessee's occupancy, Lessor will, at its expense,
*commence and/or complete the construction of the improvements constituting the
Leased Premises, including partitions, in accordance with the floor plan set
forth on Exhibit B and the specifications agreed to by the parties and made a
part of this Lease by reference. Upon completion of the Building and other
improvements in accordance with the plans and specifications, Lessee agrees to
accept delivery of the Leased Premises and to execute and deliver to Lessor a
letter accepting delivery of the Leased Premises.
10. ALTERATIONS AND IMPROVEMENTS: Lessee shall not make or allow to be made
any alterations or physical additions in or to the Leased Premises without first
obtaining the written consent of Lessor. Any alterations, physical additions or
improvements to the Leased Premises made by Lessee shall at once become the
property of Lessor and shall be surrendered to Lessor upon the termination of
this Lease. Lessor, at its option, may require Lessee to remove any physical
additions and/or repair any alterations in order to restore the premises to the
condition existing prior to the time Lessee took possession, all costs of
removal and/or alterations to be borne by Lessee. This clause shall not apply to
moveable equipment or furniture owned by Lessee which may be removed by Lessee
at the end of the term of this Lease if Lessee is not then in default and if
such equipment and furniture is not then subject to any other rights, liens and
interests of Lessor, provided that Lessee repairs any damage caused by the
installation or removal thereof.
11. CONDEMNATION: (a) If, during the term (or any extension
or renewal) of this Lease, all or a substantial part of the Leased
<PAGE>
Premises are taken for any public or quasi-public use under any governmental
law, ordinance or regulation, or by right of eminent domain or by private
purchase in lieu thereof, and the taking would prevent or materially interfere
with the use of the Leased Premises for the purpose for which they are then
being used, this Lease shall terminate and the rent shall be abated during the
unexpired portion of this Lease effective on the date physical possession is
taken by the condemning authority. Lessee shall have no claim to the
condemnation award.
(b) In the event a portion of the Leased Premises shall be taken for any
public or quasi-public use under any governmental law, ordinance or regulation,
or by right of eminent domain or by private sale in lieu thereof, and this Lease
is not terminated as provided in the subparagraph above, Lessor may, at Lessor's
sole risk and expense, restore and reconstruct the Building and other
improvements on the Leased Premises to the extent necessary to make it
reasonably tenantable. The rent payable under this Lease during the unexpired
portion of the term shall be adjusted to such an extent as may be fair and
reasonable under the circumstances. Lessee shall have no claim to the
condemnation award.
12. FIRE AND CASUALTY: (a) If the Leased Premises should be totally
destroyed by fire, tornado or other casualty, or if the Leased Premises should
be so damaged so that rebuilding cannot reasonably be completed within one
hundred and eighty (180) working days after the date of written notification by
Lessee to Lessor of the destruction, this Lease shall terminate and the rent
shall be abated for the unexpired portion of the Lease, effective as of the date
of the written notification. In no event shall rent be paid by Lessee when the
building is not in an acceptable condition as it relates to the casualties
described in this paragraph.
(b) If the Leased Premises should be partially damaged by fire, tornado or
other casualty, and rebuilding or repairs can reasonably be completed within one
hundred and eighty (180) working days from the date of written notification by
Lessee to Lessor of the destruction, this Lease shall not terminate, but Lessor
may at its sole risk and expense proceed with reasonable diligence to rebuild or
repair the Building to substantially the condition in which they existed prior
to the damage. If the Leased Premises are to be rebuilt or repaired and are
untenantable in whole or in part following the damage, and the damage or
destruction was not caused or contributed to by act or negligence of Lessee, its
agents, employees, contractors, customers, invitees or others for whom Lessee is
responsible, the rent payable under this Lease during the period for which the
Leased Premises are untenantable shall be adjusted to such an extent as may be
fair and reasonable under the circumstances. In the event that Lessor fails to
complete the necessary repairs or rebuilding within one hundred and eighty (180)
working days from the date of written terminate this Lease by delivering written
notice of termination to Lessor, whereupon all rights and obligations under the
Lease shall cease to exist.
13. CASUALTY INSURANCE: Lessor shall at all times during the term of this
Lease maintain a policy or policies of insurance with the premiums paid in
advance, issued by and binding upon some solvent insurance company, insuring the
Building against loss or damage by fire, explosion or other hazards and
contingencies for the full insurable value; provided, that Lessor shall not be
obligated in any way or manner to insure any personal property (including, but
not limited to, any furniture, machinery, goods or supplies) of Lessee or which
Lessee may have upon or within the
<PAGE>
Leased Premises or any fixtures installed by or paid for by Lessee upon or
within the Leased Premises or any additional improvements which Lessee may
construct on the Leased Premises. Lessee shall at all times during the term of
this Lease maintain a policy or policies of insurance with the premiums paid in
advance, issued by and binding upon some solvent insurance company, insuring all
of Lessee's property at the Leased Premises against loss or damage by fire,
explosion or other hazards and contingencies for the full insurable value
thereof and shall provide to Lessor at all such times a certificate of such
insurance.
14. WAIVER OF SUBROGATION: Anything in this Lease to the contrary
notwithstanding, Lessor and Lessee hereby waive and release each other of and
from any and all rights of recovery, claim, action or cause of action, against
each other, their agents, officers and employees, for any loss or damage that
may occur to the Leased Premises, and any additional improvements thereto, the
Building or other improvements on the Land, or personal property (including
contents) within the Building, by reason of fire or other causes which are
covered by standard extended coverage hazard insurance regardless of cause or
origin, including negligence of Lessor or Lessee and their agents, officers and
employees. Because this paragraph will preclude the assignment of any claim
mentioned in it by way as subrogation (or otherwise) to an insurance company (or
any other person), each party to this Lease agrees immediately to give to each
insurance company which has issued to it policies of fire and extended coverage
insurance, written notice of the terms of the mutual waivers contained in this
paragraph, and to have the insurance policies properly endorsed, if necessary,
to prevent the invalidation of the insurance coverage by reason of the mutual
waivers contained in this paragraph.
15. HOLD HARMLESS: Lessor shall not be liable to Lessee, or to Lessee's
agents, employees, contractors, customers or invitees for any damage to person
or property caused by any act, omission or neglect of Lessee, its agents,
employees, contractors, customers or invitees, and Lessee agrees to indemnify
and hold Lessor harmless from all liability and claims for any such damage.
Lessee shall not be liable to Lessor, or to Lessor's agents, employees,
contractors, customers or invitees for any damage to person or property caused
by any act, omission or neglect of Lessor, its agents, employees, contractors,
customers or invitees and Lessor agrees to indemnify and hold Lessee harmless
from all claims for such damage. The provisions of this paragraph shall be
subject to the provisions of paragraph 14.
16. LIABILITY INSURANCE, INDEMNITY AND EXCULPATION:
(a) Lessee must procure and maintain throughout the term of this Lease and
any extensions or renewals of such term general commercial liability insurance
(including blanket contractual liability coverage), which shall cover any claims
for bodily injury, death and/or property damage occurring in or resulting from
any occurrence in or about the Leased Premises, including injury, death and/or
damage caused by the condition of or any defect in the Leased Premises. The
policies evidencing such insurance must be in broad form satisfactory to Lessor,
must name Lessor as an additional insured, must be issued by insurance companies
acceptable to Lessor, and must afford immediate protection to the limit of not
less than $1,000,000 per accident. With respect to each policy evidencing such
liability insurance, Lessee shall obtain any available endorsements required by
Lessor. Lessee shall also deliver the policy or a certificate evidencing the
same to
<PAGE>
Lessor prior to occupying the Leased Premises or commencing the construction of
any improvements therein, and Lessee shall deliver a certificate of renewal from
the applicable insurer at least ten days prior to the expiration of the policy.
In addition, Lessee shall obtain and deliver to Lessor a written obligation on
the part of each of its insurance companies to notify Lessor at least 10 days
prior to any cancellation of or material change to such insurance.
(b) Lessee shall indemnify and hold Lessor harmless from all fines, suits,
costs and liability of every kind, including without limitation, attorney fees
and costs in defense of any claim relating thereto, arising because of: (i) any
violation or nonperformance by Lessee of representation or covenant contained in
this Lease: (ii) any bodily injury, death and/or damage to property occurring in
or resulting from any occurrence in the Leased Premises during the term of this
Lease; and (iii) any bodily injury, death and/or property damage that is
incident to, arises out of, or is in any way caused by the acts or negligent
omissions of Lessee or any of its agents, employees, contractors, customers or
invitees. The indemnity set out in the preceding sentence will not be impaired
or affected by negligence on the part of Lessor or anyone acting for Lessor and
is not limited in any way to the amount of insurance required by the preceding
subparagraph (a).
(c) Lessee accepts responsibility for keeping all personal property and
equipment in the Leased Premises adequately insured and for maintaining adequate
business interruption insurance. Lessor will not be liable to Lessee, its
employees, agents, licensees, invitees or insurers for bodily injury, death or
property damage occasioned by the acts or omissions of any other tenant of the
Building or of other tenants, agents, employees, licensees, or invitees within
the Building. Further, Lessor will not be liable to Lessee for any property
damage, bodily injury or inconvenience caused by the condition, maintenance,
repair or alteration of the Building, or the failure to provide maintenance or
repairs, except to the extent caused by Lessor's gross negligence or willful
misconduct.
17. PEACEFUL ENJOYMENT: Lessor warrants that it has full right to execute
and to perform this Lease and to grant the estate demised and that Lessee, upon
payment of the required rents and performing the terms, conditions, covenants
and agreements contained in this Lease, shall peaceably and quietly have, hold
and enjoy the Leased Premises during the full term of this Lease as well as any
extension or renewal thereof.
18. LESSOR'S RIGHT OF ENTRY: Lessor shall have the right, at all reasonable
hours, to enter the Leased Premises for the following reasons: inspection;
cleaning or making repairs, or alterations or additions as Lessor may deem
necessary or desirable, whether to the Leased premises or to other portions of
the Building; determining Lessee's use of the Leased Premises or determining if
an act of default under this Lease has occurred; or showing the Leased Premises
to any existing or prospective mortgagee or purchaser of the Building.
19. ASSIGNMENT OR SUBLEASE: Lessor shall have the right to transfer and
assign, in whole or in part, its rights and obligations in the Building and
property that are the subject of this Lease. Lessee shall not assign this lease
or sublet all or any part of the Leased Premises without the prior written
consent
<PAGE>
of Lessor.* Lessor shall have the option, upon receipt from Lessee of written
request for Lessor's consent to subletting or assignment, to cancel this Lease
as of the date the requested subletting or assignment is to be effective. The
option shall be exercised, if at all, within fifteen (15) days following
Lessor's receipt of written notice by delivery to Lessee of written notice of
Lessor's intention to exercise the option. In the event of any assignment or
subletting, Lessee shall nevertheless at all times remain fully responsible and
liable for the payment of the rent and for compliance with all of its other
obligations under the terms, provisions and covenants of this Lease. Upon the
occurrence of an "event of default" as defined below, if all or any part of the
Leased Premises are then assigned or sublet, Lessor, in addition to any other
remedies provided by this Lease or provided by law, may, at its option, collect
directly from the assignee or subtenant all rents becoming due to Lessee by
reason of the assignment or sublease, and Lessor shall have a security interest
in all properties on the Leased Premises to secure payment of such sums. Any
collection directly by lessor from the assignee or subtenant shall not be
construed to constitute a novation or a release of Lessee from the further
performance of its obligations under this Lease.* Such consent shall not be
unreasonably withheld.
20. LANDLORD'S LIEN: In addition to and cumulative of any statutory
landlord's lien provided by law, as security for Lessee's payment of rent,
damages and all other payments required to be made by this Lease, Lessee hereby
grants to Lessor a lien upon all property of Lessee now or subsequently located
upon the Leased Premises. If Lessee abandons or vacates any substantial portion
of the Leased premises or is in default in the payment of any rentals, damages
or other payments required to be made by this Lease or is in default of any
other provision of this Lease, Lessor may enter upon the Leased Premises, by
changing locks if necessary, and take possession of all or any part of the
personal property, and may sell all or any part of the personal property at a
public or private sale, in one or successive sales, with or without notice, to
the highest bidder for cash, and, on behalf of Lessee, sell and convey all or
part of the personal property to the highest bidder, delivering to the highest
bidder all of Lessee's title and interest in the personal property sold to him.
The proceeds of the sale of the personal property shall be applied by Lessor
toward the reasonable costs and expenses of the sale, including attorney's fees,
and then toward the payment of all sums then due by Lessee to Lessor under the
terms of this Lease; any excess remaining shall be paid to Lessee or any other
person entitled thereto by law.
21. UNIFORM COMMERCIAL CODE: To the extent, if any, this Lease grants
Lessor any lien or lien rights greater than provided by the laws of Texas
pertaining to "Landlord's Liens", this Lease is intended as and constitutes a
security agreement within the meaning of the Uniform Commercial Code of Texas
and, Lessor, in addition to the rights prescribed in this Lease, shall have all
of the rights, titles, liens and interests in and to Lessee's property now or
hereafter located upon the Leased Premises which are granted a secured party, as
that term is defined, under the Uniform Commercial Code in Texas to secure the
payment to lessor of the various amounts provided in this Lease. Lessee will on
request execute and deliver to lessor a financing statement for the purpose of
perfecting Lessor's security interest under this Lease or Lessor may file this
Lease or a copy thereof as a financing statement.
22. MECHANIC'S LIENS: Lessee shall not permit the placing of any mechanic's
liens against the Building, the Land or other
<PAGE>
improvements on the Land caused by or resulting from any work performed,
materials furnished or obligation incurred by or at the request of (or at the
request of) Tenant. Nothing in this Lease or in any other agreement between
lessor and Lessee constitutes the consent or request of Lessor, express or
implied, to any contractor, subcontractors, laborer or materialman for the
performance of any labor or the furnishing of any materials for any specific
improvement alteration or repair to the Building, the Land or other improvements
on the Land. Nor does anything contained herein or in any other agreement made
by Lessor and Lessee concerning the Leased Premises give Lessee any right, power
or authority to contract for or permit the rendering of any services or the
furnishing of any materials that would give rise to the filing of any mechanic's
or other liens against the interest of Lessor in the Building, the Land or other
improvements on the Land. If any lien is filed against the interest of Lessor in
the Building or against the interest of Lessor in the Leased Premises because of
work performed, materials supplied or an obligation incurred by or at the
request of (or alleged request of) Lessee, then Lessee shall cause the same to
be discharged of record within 20 days after filing. If Lessee fails to
discharge the lien within such period, then, in addition to any other right or
remedy of Lessor, Lessor may, but will not be obligated to, discharge the same
either by paying the amount claimed to be due or by procuring the discharge by
deposit in court or bonding. Any amount paid by Lessor to discharge the lien,
and all reasonable legal and other expenses of Lessor, including reasonable
attorneys' fees, in defending any such action or in procuring the discharge of
the lien shall be repaid by Lessee on demand.
23. DEFAULT BY LESSEE: The following shall be deemed to be events of
default by Lessee under this Lease:
(a) Lessee shall fail to pay when due any installment of rent or any
other payment required pursuant to this Lease. Lessee shall have ten (10) days
to cure this default after receiving written notice of non-payment from Lessor;
(b) Lessee shall abandon any substantial portion of the Leased
Premises;
(c) Lessee shall fail to comply with any term, provision or covenant
of this Lease, other than the payment of rent, and the failure is not cured
within thirty (30) days after written notice to Lessee;
(d) Lessee shall file a petition or be adjudged bankrupt or insolvent
under the Federal Bankruptcy Act, as amended, or any similar law or statute of
the United States or any state; or a receiver or trustee shall be appointed for
all or substantially all of the assets of Lessee; or Lessee shall make a
transfer in fraud of creditors or shall make an assignment for the benefit of
creditors;
(e) Lessee shall do or permit to be done any act which results in a
lien being filed against the Leased Premises.
24. REMEDIES FOR LESSEE'S DEFAULT: Upon the occurrence of any event of
default set forth in this Lease Agreement, Lessor shall have the option to
pursue any one or more of the following remedies without any notice or demand:
(a) Terminate this Lease, in which event Lessee shall
<PAGE>
immediately surrender the Leased Premises to Lessor, and, if Lessee fails to
surrender the Leased Premises, Lessor may, without prejudice to any other remedy
which it may have for possession or arrearages in rent, enter upon and take
possession of the Leased Premises, by changing locks if necessary, and lock out,
expel or remove Lessee and any other person who may be occupying all or any part
of the Leased Premises without being liable for prosecution of any claim for
damages. Upon the termination of this Lease, in addition to all unpaid rentals
and other monetary obligations of Lessee to Lessor, Lessor will be entitled to
recover, not as rent or a penalty but as compensation for Lessor's loss of the
benefit of its bargain with Lessee, the difference between (i) an amount equal
to the present value of the rental and other sums that this Lease provides
Lessee will pay for the remainder of the term hereof and for the balance of any
then effective extension of the term hereof, and (ii) the present value of the
net future rentals for such period that will be or with reasonable efforts could
be collected by Lessor by reletting the Leased Premises. The foregoing present
values will be calculated by discounting at the rate of 8 percent per annum. For
purposes of determining what could be collected by Lessor by reletting under the
preceding sentence, it will be assumed that Lessor is not required to relet when
other comparable space in the Building is available for lease and that Lessor
will not be required to incur any cost to relet, other than customary leasing
commissions.
(b) Enter upon and take possession of the Leased Premises, by changing
locks if necessary, and lock out, expel or remove Lessee and any other person
who may be occupying all of any part of the Leased Premises without being deemed
guilty of trespass, without being liable for any claim for damages, and without
causing a termination of or forfeiture of this Lease or of Lessee's obligation
to pay rent and other charges, and may relet the Leased Premises on behalf of
Lessee and receive directly the rent by reason of the reletting, but the failure
to so relet shall not reduce Lessee's liability for rents and other charges or
for damages. Lessee agrees to pay Lessor on demand any deficiency that may arise
by reason of any reletting of the Leased Premises; further, Lessee agrees to
reimburse Lessor for any expenditures made by it for remodeling or repairing in
order to relet the Leased Premises. In connection with any such reletting,
Lessor will not be obligated to incur any cost to relet, other than customary
leasing commissions, will not be obligated to relet for less than the then
market value of the leased Premises or to relet the leased Premises when other
comparable rental space in the Building is available for lease, and may relet
the Leased Premises for a term to expire at the same time as, earlier than, or
subsequent to, the expiration of the term hereof and/or relet all or any portion
of the Leased Premises as a part of a larger area. Lessee may retain the excess,
if any, of the rent earned from reletting the Leased Premises over the rentals
specified in this Lease.
(c) Enter upon the Leased Premises, by changing locks if necessary,
without being liable for prosecution of any claim for damages, and do whatever
Lessee is obligated to do under the terms of this Lease. Lessee agrees to
reimburse Lessor on demand for any expenses which Lessor may incur in effecting
compliance with Lessee's obligations under this Lease; further, Lessee agrees
that Lessor shall not be liable for any damages resulting to Lessee from
effecting compliance with Lessee's obligations under this subparagraph caused by
the negligence of Lessor or otherwise.
(d) After an event of default by Lessee, Lessor may
<PAGE>
recover from Lessee from time to time and Lessee shall pay to Lessor upon
demand, whether or not Lessor has relet the Leased Premises or terminated this
Lease, (i) such expenses as Lessor may incur in recovering possession of the
Leased Premises, terminating this Lease, placing the Leased Premises in good
order and condition and altering or repairing the same for reletting; (ii) all
other costs and expenses (including brokerage commissions and legal fees) paid
or incurred by Lessor in exercising any remedy or as a result of the event of
default by Lessee; and (iii) any other amount necessary to compensate Lessor for
all the detriment proximately caused by Lessee's failure to perform Lessee's
obligations under this Lease or which in the ordinary course of things would be
likely to result from such failure.
(e) To the extent permitted by law, Lessee and Lessor agree that
paragraphs (a), (b), (c), (e) and (g) of Section 93.002 of the Texas Property
Code shall not apply to this Lease. However, as provided in Section 93.002(d) of
the Texas Property Code, Lessee will be presumed to have abandoned the Leased
Premises if goods, equipment, or other property, in an amount substantial enough
to indicate a probable intent to abandon the Leased Premises, is being or has
been removed from the Leased Premises and the removal is not within the normal
course of Lessee's business.
25. WAIVER OF DEFAULT OR REMEDY: Failure of Lessor to declare an event of
default immediately upon its occurrence or delay in taking any action in
connection with an event of default shall not constitute a waiver of the
default, but Lessor shall have the right to declare the default at any time and
take such action as is lawful or authorized under this Lease. Pursuit of any one
or more of the remedies set forth in the above paragraph shall not preclude
pursuit of any other of the remedies set forth in the above paragraph and/or any
one or more of the other remedies provided elsewhere in this Lease or provided
by law, nor shall pursuit of any remedy provided constitute a forfeiture or
waiver of any rent or damages accruing to Lessor by reason of the violation of
any of the terms, provisions or covenants of this Lease. Failure by Lessor to
enforce one or more of the remedies provided upon an event of default shall not
be deemed or construed to constitute a waiver of the default or of any other
violation or breach of any of the terms, provisions and covenants contained in
this Lease.
26. ACTS OF GOD: Lessor shall not be required to perform any covenant or
obligation in this Lease, or be liable in damages to Lessee, so long as the
performance or non-performance of the covenant or obligation is delayed, caused
by or prevented by an act of God or force majeure.
27. ATTORNEYS' FEES: In the event Lessee defaults in the performance of any
of the terms, covenants, agreements or conditions contained in this Lease and
Lessor places in the hands of an attorney the enforcement of all or any part of
this Lease, the collection of any rent or other sums due or to become due or
recovery of the possession of the Leased Premises, Lessee agrees to pay Lessor
reasonable attorneys' fees for the services of the attorney, whether suit is
actually filed or not. In no event shall the attorneys' fees be less than
fifteen percent of the outstanding balance owed by Lessee to Lessor.
28. HOLDING OVER: In the event of holding over by Lessee after the
expiration or termination of this Lease or any extension thereof, the holdover
shall be as a tenant at will and all of the
<PAGE>
terms and provisions of this Lease shall be applicable during that period,
except that Lessee shall pay Lessor as rental for the period of such holdover an
amount equal to one and A Quarter the rent which would have been payable by
Lessee had the holdover period been a part of the original or extended term of
this Lease. Additionally, Lessee shall be liable to Lessor for any damages
caused to Lessor by such holdover. Lessee agrees to vacate and deliver the
Leased Premises to Lessor upon Lessee's receipt of notice from Lessor on demand.
No holding over by Lessee, whether with or without consent of Lessor, shall
operate to extend this Lease except as otherwise expressly provided.
29. RIGHTS OF MORTGAGEE: Lessee accepts this Lease subject and subordinate
to any recorded mortgage, deed of trust or other lien presently existing upon
the Leased Premises. Lessee further agrees that this Lease is subject and
subordinate to any mortgage, deed of trust or other lien hereafter placed on the
Leased Premises, and, although this provision is self-operative, Lessee agrees
upon demand to execute additional instruments subordinating this Lease as Lessor
may require. If the interests of Lessor under this Lease shall be transferred by
reason of foreclosure or other proceedings for enforcement of any mortgage, deed
of trust or other lien on the Leased Premises, Lessee shall be bound to the
transferee (sometimes called the "Purchaser") under the terms, covenants and
conditions of this Lease for the balance of the term remaining, and any
extensions or renewals, with the same force and effect as if the Purchaser were
Lessor under this Lease, and Lessee agrees to attorn to and upon the request of
the Purchaser including the mortgagee or beneficiary under any such mortgage or
deed of trust if it be the Purchaser, as its lessor, the attornment to be
effective and self-operative without the execution of any further instruments
upon the Purchaser succeeding to the interest of Lessor under this Lease and
requiring such attornment. The respective rights and obligations of Lessee and
the Purchaser upon the attornment, to the extent of the then remaining balance
of the term of this Lease, and any extensions and renewals, shall be and are the
same as those set forth in this Lease. Notwithstanding that such attornment is
self-operative, Lessee agrees to execute such further agreements in confirmation
thereof as shall be reasonably requested by Lessor or such mortgagee or
beneficiary, and Lessee further agrees to include in such agreements such other
provisions as may be reasonably requested by Lessor or such mortgagee or
beneficiary, including without limitation provisions for notice of default and
opportunity to cure to such mortgagee or beneficiary and the non-liability of
such mortgagee or beneficiary for claims against the Lessor.
30. ESTOPPEL CERTIFICATES: Lessee agrees to furnish promptly, from time to
time, upon request of Lessor or Lessor's mortgagee or beneficiary or prospective
mortgagee or beneficiary or prospective purchaser, a statement certifying that:
Lessee is in possession of the Leased Premises: the Leased Premises are
acceptable; the Lease is in full force and effect, the Lease is unmodified;
Lessee claims no present charge, lien, or claim of offset against rent; the rent
is paid for the current month, but is not paid and will not be paid for more
than one month in advance; there is no existing default by reason of some act or
omission by Lessor; and such other matters as may be reasonably required by
Lessor or Lessor's mortgagee or beneficiary.
31. SUCCESSORS: This Lease shall be binding upon and inure to the benefit
of Lessor and Lessee and their respective heirs, personal representatives,
successors and assigns, and references
<PAGE>
herein to "Lessor" or "Lessee" shall include all of such heirs, personal
representatives, successors and assigns, but the foregoing does not detract in
any way from the provisions of Paragraph 19 hereof. It is hereby covenanted and
agreed that should Lessor's interest in the Leased Premises cease to exist for
any reason during the term of the Lease, then notwithstanding the happening of
such event this Lease nevertheless shall remain unimpaired and in full force and
effect and Lessee hereunder agrees to attorn to the then owner of the Leased
Premises.
32. RENT TAX: If applicable in the jurisdiction where the Leased Premises
are situated, Lessee shall pay and be liable for all rental, sales and use taxes
or other similar taxes, if any, levied or imposed by any city, state, county or
other governmental body having authority, such payments to be in addition to all
other payments required to be paid to Lessor by Lessee under the terms of this
Lease. Any such payment shall be paid concurrently with the payment of the rent
upon which the tax is based as set forth above.
33. NOTICE: (a) all rent and other payments required to be made by Lessee
shall be payable to Lessor at the address set forth below, or any other address
Lessor may specify from time to time by written notice delivered to Lessee.
(b) All payments required to be made by Lessor to Lessee shall be payable
to Lessee at the address set forth below, or at any other address within the
United States as Lessee may specify from time to time by written notice.
(c) Any notice or document required or permitted to be delivered by this
Lease shall be deemed to be delivered (whether or not actually required) when
deposited in the United States Mail, postage prepaid, certified mail, return
receipt requested, addressed to the parties at the respective addresses set out
below:
LESSOR: LESSEE:
Ameritas Life Insurance Corp. Matrix Telecom, Inc.
c/o The Centra Group, L.L.C. 8721 Airport Freeway
1901 Central Drive, Suite 212 North Richland Hills, TX 76180
Bedford, TX 76021
34. DEFINITIONS: These definitions apply to the terms defined as those
terms are used throughout this Lease.
(a) "Abandon" means the vacating of all or a substantial portion of
the Leased Premises by Lessee, whether or not Lessee is in default of the rental
payments due under this Lease.
(b) An "act of God" or "force majeure" is defined for the purpose of
this Lease as strikes, lockouts, sit-downs, material or labor restrictions by
any governmental authority, riots, floods, washouts, explosions, earthquakes,
fire, storms, acts of the public enemy, wars, insurrections and any other cause
not reasonably within the control of Lessor and which by the exercise of due
diligence Lessor is unable, wholly or in part, to prevent or overcome.
(c) The Commencement Date shall be the date set forth in paragraph 2.
The Commencement Date shall constitute the commencement of this Lease Agreement
for all purposes, whether or not Lessee has actually taken possession.
(d) The Completion Date shall be the date on which the
<PAGE>
improvements erected and to be erected upon the Leased Premises shall have been
completed in accordance with the plans and specifications described in paragraph
9. Lessor shall use its best efforts to establish the Completion Date as the
date set forth in paragraph 2. In the event that the improvements have not in
fact been completed as of that date, Lessee shall notify Lessor in writing of
its objections. Lessor shall have a reasonable time after delivery of the notice
in which to take such corrective action as may be necessary, and shall notify
Lessee in writing as soon as it deems such corrective action has been completed
so that the improvements are completed and ready for occupancy. Taking of
possession by Lessee shall be conclusively deemed to establish that the
improvements have been completed and that the Leased Premises are in good and
satisfactory condition, as of the date possession was so taken by Lessee, except
for latent defects, if any.
(e) "Real property tax" means all city, state and county taxes and
assessments including special district taxes or assessments.
(f) The captions appearing in this Lease are inserted only as a matter
of convenience and in no way define, limit, construe or describe the scope or
intent of such paragraph.
35. LIMITED LIABILITY OF LESSOR: All liability of Lessor for damages for
breach of any covenant, duty or obligation of Lessor hereunder may be satisfied
only out of the interest of Lessor in the Building existing at the time any such
liability if adjudicated in a proceeding as to which judgment adjudicating such
liability is non-appealable and not subject to further review. In no event will
Lessee be entitled to execution under any judgment against any assets of the
Lessor, or any partners, shareholders, policyholders, or other persons or
entities having an interest in the Lessor, except as to their interest in the
Building as set forth above, and no deficiency judgment or money judgment of any
kind shall be sought or entered against Lessor, Lessee agreeing that Lessor
shall have no personal liability hereunder. All obligations of Lessor hereunder
will be construed as covenants, not conditions.
36. SEVERABILITY: A determination that any term or provision of this Lease,
or the application thereof to any person or circumstance, is invalid or
unenforceable, shall not affect the remainder of this Lease or the application
of such term or provision to persons or circumstances other than those as to
which it is invalid or unenforceable.
37. BROKERAGE FEES INCURRED BY LESSEE: Lessee represents and agrees that
Lessor will not be responsible for and Lessee shall indemnify, defend and hold
Lessor harmless against, any brokerage or leasing commission or finder's fee
claimed by any party in connection with this Lease, except any such claim made
pursuant to a separate written agreement executed by Lessor and the party making
such claim.
38. JOINT AND SEVERAL LIABILITY: If Lessee consists of more than one person
or entity at any time, all such persons or entities are jointly and severally
liable hereunder for the obligations of Lessee.
39. TIME IS OF THE ESSENCE: Time is of the essence with respect to the
performance by Lessee of all of its obligations under this Lease.
<PAGE>
40. RECORDATION: Lessee agrees not to record this Lease or any memorandum
of this Lease without Lessor's consent.
41. ENTIRE AGREEMENT AND LIMITATION OF WARRANTIES: It is expressly agreed
by Lessee, as a material consideration for the execution of this Lease, that
this Lease, with the specific reference to written extrinsic documents, is the
entire agreement of the parties and that there are, and were, no verbal
representations, warranties, understandings, stipulations, agreements or
promises pertaining to this Lease or the expressly mentioned written extrinsic
documents not incorporated in writing in this Lease. Any representation of
Lessor's agents which is not incorporated in this Lease shall not be binding
upon Lessor and should be considered as unauthorized. Lessor and Lessee
expressly agree that there are and shall be no implied warranties of
merchantability, fitness or of any other kind arising out of this Lease. It is
likewise agreed that this Lease may not be altered, waived, amended or extended
except by an instrument in writing signed by both Lessor and Lessee.
42. OTHER PROVISIONS:
1) Exhibits A, B and C are attached hereto and made a part hereof.
2) This Lease Agreement is subject to Lessor's approval and will be a
valid Lease Agreement only when signed by the Lessor.
3) Lessor will enter into a license agreement with Lessee for
additional parking not to exceed fifty (50) spaces at 8713 Airport Freeway
Property (Northstar II). Lessee agrees to utilize the additional parking only on
an "as needed" basis. The license agreement will be subject to cancellation with
forty-five (45) days written notice from Lessor to Lessee if Owner of Northstar
II (8713 Airport Freeway) sells or otherwise transfers the property at 8713
Airport Freeway to another owner. This license agreement will also be subject to
cancellation with forty-five (45) days written notice from Lessor to Lessee if
Owner of 8713 Airport Freeway Property decides in its sole discretion that the
above-mentioned fifty (50) spaces are needed for any existing or future Tenant
of the 8713 Airport Freeway Property.
4) Lessor agrees to give Lessee one (1) five year option to renew this
Lease Agreement at the then existing market rate. This renewal will be
negotiated one hundred eighty (180) days prior to the expiration of the primary
term.
5) Lessor will use its best efforts to make Lessee aware of any space
in excess of 5,000 rentable square feet which comes available at the 8713
Airport Freeway Property as long as Lessor retains an ownership position at 8713
Airport Freeway Property during the term of this Lease Agreement.
LESSOR: LESSEE:
AMERITAS LIFE INSURANCE CORP. MATRIX TELECOM, INC.
By /s/ JOHN B. WEISBERG By /s/ CHARLES G. TAYLOR, JR.
<PAGE>
LEASE MODIFICATION AGREEMENT
THIS LEASE MODIFICATION is made this 2nd day of March 1995, by and
between American Life Insurance Corp. herein called "Lessor" and
Matrix Telecom, Inc. herein called "Lessee".
RECITALS
WHEREAS, by a lease dated February 28, 1995 Ameritas Life Insurance Corp. did
lease to Lessee 24,050 rentable square feet on the First and Second floor(s) in
that certain office building known as Northstar Plaza I, located at 8721 Airport
Freeway, Fort Worth, Texas. Said space consists of approximately 24,050 rentable
square feet, is shown in Exhibit "A" attached to said lease, and is herein
called the "premises".
WHEREAS, the term of such lease is scheduled to expire on June
20, 2000 and
WHEREAS, the parties desire to make certain changes to said lease.
AGREEMENT
NOW, THEREFORE, in consideration of mutual covenants contained herein and in
said lease, the parties hereto agree as follows:
1. Exhibit B. The last paragraph of Exhibit "B" which reads "Lessee
will have the right to cancel this Lease Agreement if the City of North
Richland Hills requires a fire sprinkler system to be installed in the
building during their plan review and prior to their issuance of a building
permit. This right to cancel will not be available to Lessee once a
building permit is issued and a contract for construction is signed.", is
hereby deleted in its entirety.
If Lessee is a division or subsidiary of a corporation, each
individual executing this Agreement on behalf of the division or subsidiary
represents and warrants that he or she is duly authorized to execute and deliver
this Agreement on behalf of the division or subsidiary, in accordance with a
duly adopted resolution of the Board of Directors or the parent corporation,
that this Agreement is binding upon the parent corporation (as well as the
division or subsidiary) in accordance with its terms, and that said division or
subsidiary shall, within thirty (30) days after request by Lessor, deliver to
Lessor a certified copy of a resolution of the Board of Directors of the parent
corporation authorizing or ratifying the execution of this Agreement.
If Lessee is a partnership, each individual executing this Agreement on
behalf of said partnership represents and warrants that he or she is duly
authorized to sign and deliver this Agreement on behalf of said partnership and
that this Agreement is binding upon said partnership in accordance with its
terms.
2. Miscellaneous:
a. The provisions of this Lease Modification Agreement shall remain in
full force and effect for the duration of the said lease.
b. Except as otherwise set forth herein, all of the
terms and conditions of said lease shall remain in full force and
<PAGE>
effect, and shall remain fully applicable to the premises, throughout the
duration of said lease. Said lease, as amended herein, constitutes the entire
agreement between the parties hereto, and no further modification of said lease
shall be binding unless evidenced by an agreement in writing signed by Lessor
and Lessee.
c. The captions and paragraph numbers appearing in this Agreement are
inserted only as a matter of convenience and in no way define, limit, construe,
affect or describe the scope or intent of the provisions in this Agreement.
IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease Modification
Agreement as of the day first above written.
<PAGE>
Ameritas Life Insurance Corp.
LESSOR
By: /s/ JOHN B. WEISBERG
Matrix Telecom, Inc.
LESSEE
By: /s/ CHARLES G. TAYLOR, JR.
DATE: 3/3/95
<PAGE>
EXHIBIT 10.10
RESALE SOLUTIONS SWITCHED SERVICES AGREEMENT
THIS AGREEMENT (the "Agreement") is entered into by and between
SPRINT COMMUNICATIONS COMPANY L.P. ("Sprint"), and MATRIX
TELECOM, INC. ("Customer"). Sprint and Customer are "Parties"
hereto.
In consideration of the mutual promises contained herein, the Parties agree as
follows:
1. DEFINITIONS. Capitalized terms appearing in bold print are
defined in Exhibit 1.
2. CONFIDENTIALITY. During the Term and thereafter, neither Party shall disclose
any terms of this Agreement, including pricing, or Proprietary Information of
the other Party. Proprietary Information shall remain the property of the
disclosing Party. A Party receiving Proprietary Information shall: (i) use or
reproduce such information only when necessary to perform this Agreement; (ii)
provide at least the same care to avoid disclosure or unauthorized use of such
information as it provides to protect its own Proprietary Information; (iii)
limit access to such information to its employees or agents who need such
information to perform this Agreement; and (iv) return or destroy all such
information, including copies, after the need for it has expired, upon request
of the disclosing Party, or upon termination of this Agreement.
The foregoing notwithstanding, Sprint agrees to allow AvTel Communications,
Inc., the corporate parent of Matrix ("AvTel") to disclose to the Securities and
Exchange Commission ("SEC") the minimum amount of information necessary to
insure AvTel's compliance with applicable filing requirements under the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended. In no event will any rates, charges, pricing, or other information in
any Attachment to the Agreement be disclosed to the SEC without the express
written consent of Sprint, which shall not be unreasonably withheld.
Because of the unique nature of Proprietary Information, a breach of this
paragraph may cause irreparable harm for which monetary damages may be
inadequate compensation. Accordingly, in addition to other remedies, a Party may
seek injunctive relief to enforce this paragraph.
3. TERM. Provided Customer executes this Agreement by March 13, 1998, the Term
will commence on February 14, 1998. The Term will continue after commencement
for the period specified in Attachment A.
4. TERMINATION FOR CAUSE.
4.1 A Party may terminate this Agreement upon the other Party's failure to cure
any of the following within 30 days following written notice thereof: (a) the
(i) insolvency, corporate reorganization, arrangement with creditors,
receivership or dissolution of the other Party; or (ii) institution of
bankruptcy proceedings by or against the other Party; (b) assignment or
attempted assignment of the Agreement or any interest therein, except as
permitted by Paragraph 24 hereof; (c) change in control of the defaulting Party
without the other Party's prior written
<PAGE>
consent, which consent shall not be unreasonably withheld; (d) a final order by
a government entity with appropriate jurisdiction that a Service or the
relationship hereunder is contrary to law or regulation; or (e) breach of any
material provision herein not otherwise referred to in Paragraph 4.
4.2 Sprint may terminate this Agreement immediately and without notice if
Customer fails to cure a breach as provided in Paragraph 8 or breaches a
provision of Paragraph 17 or 18.
4.3 Customer may terminate the Agreement upon 30 days written notice if special
rate adjustments exceed the maximum provided in Paragraph 16.
4.4 Upon termination of this Agreement a Party may recover from the other all
sums it is owed at the time of termination.
5. TERMINATION WITHOUT CAUSE: EARLY TERMINATION CHARGE.
5.1 Customer may terminate this Agreement at any time without cause upon 90 days
prior written notice to Sprint and payment to Sprint of the Early Termination
Charge in Subparagraph 5.2. Service will be discontinued the first business day
of the fourth month after such notice of termination.
5.2 Carrier Transport Base Rates and Promotional Discounts are based on
Customer's agreement to purchase Service for the entire Term. It is difficult if
not impossible to calculate Sprint's loss if Customer terminates the Agreement
pursuant to Subparagraph 5.1 prior to the end of the Term. Therefore, to
Compensate Sprint for such loss, and not as a penalty, Customer shall pay Sprint
an Early Termination Charge in the event of such termination. The Early
Termination Charge shall equal 50% of the sum of the Minimum Commitment for each
month remaining in the Term when Service is discontinued pursuant to
Subparagraph 5.1. The Early Termination Charge shall be paid within 30 days
after the notice provided pursuant to Subparagraph 5.1.
6. APPLICATION OF TARIFFS: INTERSTATE ADJUSTMENT
6.1 Interstate and international Service shall be provided pursuant to Tariff as
supplemented by this Agreement. In the event of a conflict between this
Agreement and any Tariff, the Tariff shall control.
6.2 Intrastate Service is provided pursuant to Tariff in every respect.
Promotional Discounts will not apply to intrastate Service. An Interstate
Adjustment may be applied based on intrastate usage as provided in Attachment D.
The Interstate Adjustment shall be based on intrastate usage at the Product
Hierarchy Level and will equal the difference between (a) such usage priced at
Tariff less Tariff discounts and (b) such usage priced at the Interstate
Adjustment Rate in Attachment D less Discount One discounts. The Interstate
Adjustment for a given month shall not exceed interstate billing for such month.
6.3 Customer shall pay all Tariff charges including, without limitation, fixed
charges, feature charges, enhanced 800 charges, access facility charges,
installation and other non-recurring charges except as noted in the Attachments
to this Agreement.
6.4 Sprint may modify or withdraw Tariffs from time to time, which may include
discontinuation of any Service without Sprint's
<PAGE>
liability.
7. RELATIONSHIP OF PARTIES. Neither this Agreement nor the provision of Service
creates a joint venture, partnership or agency between Sprint and Customer.
Customer is the service provider with respect to End Users. Sprint is merely a
supplier to Customer with no relationship to End Users.
8. USE OF NAME AND MARKS. This Agreement confers no right to use the name,
service marks, trademarks, copyrights, patents or CIC of either Party except as
expressly provided herein. Neither Party shall take any action which would
compromise the registered copyrights or service marks of the other.
Sprint's name is proprietary and nothing herein constitutes a general license
authorizing its use. Customer may not: (a) promote or advertise Sprint's name or
capabilities to End Users or prospective End Users; (b) attempt to sell its
service using Sprint's name; or (c) represent to End Users or prospective End
Users that they would be Sprint customers or that they may obtain Sprint service
from Customer.
Sprint shall provide Customer written notice of a breach of this paragraph.
Customer shall use its best efforts to immediately cure such breach, advising
Sprint of its actions. If, in Sprint's notice, then Sprint may, at its option,
terminate the Agreement pursuant to Subparagraph 4.2.
Sprint's provision of Network Extension Service may result in End Users being
notified by their LEC that Sprint is their designated PIC. Therefore, to avoid
confusion and potential "slamming" complaints, Sprint hereby authorizes Customer
to use Sprint's name under the following conditions to provide End Users from
whom Customer has obtained a PIC Authorization with a fulfillment piece
containing the following Notice (the "Notice"):
We want to affirm how ____ will provide your long distance service.
Although ____ will provide your invoice and customer service, we use major
national carriers to actually carry your long distance calls.
After subscribing to our service, you may receive a notice from your local
phone company which says that your long distance "Carrier of Choice" is
Sprint. ______ has selected Sprint as the long distance network provider it
will use to handle your calls. That selection was based on your quality and
price requirements. If you have any questions about your order, please call
our toll free customer service number, 1-800-____-_________.
If Customer subscribes to Sprint Express, calls placed by End Users to the
Sprint ITFS number will be answered "Sprint operator." This may cause confusion
if the End User does not know its calls are being carried on the Sprint network.
Therefore, to avoid such confusion, Sprint hereby authorizes Customer to provide
End Users who use Sprint Express with a fulfillment piece containing the
following notice (the "Sprint Express Notice"): "International call origination
may be provided by a Sprint operator." Sprint may withdraw consent to use the
Sprint Express Notice upon 10 days written notice.
Customer shall obtain Sprint's prior written approval of any fulfillment piece
in which the Notice or the Sprint Express
<PAGE>
Notice will appear.
9. SERVICE. Services provided hereunder are described in Exhibit 2.
10. LEGAL COMPLIANCE: REMEDIES FOR NON-COMPLIANCE.
10.1 Customer represents and warrants that (a) it has obtained all licenses and
regulatory authority necessary to operate as contemplated herein and (b) it will
not submit an End User ANI for activation without obtaining and maintaining a
proper PIC Authorization.
10.2 If, in Sprint's opinion, Customer breaches this paragraph, Sprint may (a)
terminate this Agreement pursuant to Subparagraph 4.1(e), (b) reject End User
ANIs submitted by Customer for placement under its account, and/or (c)
discontinue Promotional Discounts. If Sprint elects option (b) or (c), it will
resume accepting ANIs and/or reinstate Promotional Discounts only after Customer
produces evidence satisfactory to Sprint that it has cured its breach.
11. CUSTOMER RESPONSIBILITIES.
11.1 Customer shall not be relieved of any obligation hereunder by virtue of the
fact that Service is ultimately used by End Users.
11.2 Customer shall produce for Sprint's inspection, at Customer's expense, any
PIC Authorization within 48 hours after Sprint's oral or written request, or
within any shorter period required by a LEC or regulatory agency. If Customer
fails to comply with this subparagraph, then Sprint may (a) discontinue
Promotional Discounts and/or (b) refuse to activate additional ANIs under
Customer's account.
11.3 Customer shall reimburse Sprint for any charge assessed by a LEC for
processing a PIC request initiated by Customer and pay Sprint a PIC Assessment
Fee equal to 25% of such charge.
11.4 Customer shall be solely responsible for End User solicitation, service
requests, creditworthiness, customer service, billing and collection.
11.5 Customer shall be financially liable for usage generated by each End User
ANI activated by Sprint until such ANI is presubscribed to another IXC. Customer
may request Sprint to block Network Extension Service to an ANI upon the End
User's failure to pay Customer, subject to Customer's prior certification to
Sprint that it has given the End User any notice required by law. Customer shall
reimburse Sprint for expenses incurred to block an ANI.
11.6 Customer shall be solely liable for amounts it cannot collect from End
Users, and billing adjustments it grants End Users, including adjustments for
fraudulent charges, directory assistance or any other form of credit.
11.7 Customer shall comply with Sprint's network interface procedures when it
orders its own access facilities.
12. SERVICE ACTIVATION. Sprint will use reasonable efforts to provide switched
Service within 15 days, and dedicated Service
<PAGE>
within 30 days, following Customer's order, or the requested delivery date,
whichever is later. These deadlines will be extended by the time it takes to
address activation errors or obtain from Customer a complete and accurate order
or PIC Authorization. Customer shall reimburse Sprint for LEC imposed fees
resulting from a request to expedite Service.
13. PRICING; FORWARD PRICING; GENERAL CONDITIONS.
13.1 Pricing. Resale Solutions Base Rates and Promotional
Discounts are contained in the Attachments hereto.
13.2 Prices in Lieu of Other Discounts. Resale Solutions Base Rates and
Promotional Discounts are extended in lieu of any other Tariff or contractual
discount, special pricing, or discount term plan. Discounts upon discounts are
only permitted if expressly provided for herein.
13.3 Prices Contingent on Performance. Resale Solutions Base Rates and
Promotional Discounts are contingent on Customer's full performance of all terms
of the Agreement. If Customer fails to pay the undisputed portion of an invoice
pursuant to Paragraph 17, all Service for which payment is past due may, at
Sprint's option, be priced at Resale Solutions Base Rates.
13.4 Per Minute Charges. Resale Solutions Base Rates are
invoiced based on Per Minute Charges utilizing the Rate Periods
and Billing Increments in Attachment B.
13.5 Non-Bell Switched Origination, Termination and 800 Origination Charges.
Customer shall pay the charges specified in Attachment B for each originating
minute and each terminating minute of an interstate call that originates and/or
terminates in a Non-Bell Service Area.
13.6 Switched Origination, and Termination Charges. Customer shall pay the
charges specified in Attachment B for each originating minute and each
terminating minute of an interstate call.
13.7 Promotional Pricing Levels. Customer will receive Discount One and Discount
Two discounts applied only to Rate Elements as provided in Attachments C and D.
13.8 Forward Pricing. As a transition to the pricing hereunder, Discount Two
discounts may be based for a period of time on the grater of Customer's actual
Discount Two Monthly Volume of Service or a specified Forward Pricing Volume of
Service. The Forward Pricing Volume of Service and the period during which it
may be applied are specified in Attachment A.
13.9 Pricing Contingent on Primary Carrier Status. Pricing hereunder is
contingent on Customer utilizing Sprint as its Primary Carrier for the Primary
Carrier Services listed in Attachment A.
If 800 Service is a Primary Carrier Service then Customer shall (a) designate
Sprint as its Primary Carrier in the 800 Service Management System database for
all interstate 800 traffic that is not originated directly by Customer and (b)
maintain access facilities sufficient to send at least 80% of its traffic to
Sprint with no more than 2% blockage during the peak busy hour of Customer's
average business day.
<PAGE>
If Resale Connect One Plus is a Primary Carrier Service then 80% of all End User
ANIs under Customer's control shall be PICed to Sprint during the Term.
If Resale Direct Extension is a Primary Carrier Service then 80% of all
Dedicated Access End Users under Customer's control shall be placed on the
Sprint network during the Term.
If Resale Direct is a Primary Carrier Service then Customer shall maintain
access facilities sufficient to send to Sprint at least 99% of the traffic
Customer does not terminate itself.
Customer shall produce, within 30 days following Sprint's request, evidence
acceptable to Sprint that it is in compliance with this subparagraph. Failure to
maintain Sprint as Primary Carrier on any Primary Carrier Service will result in
Service being provided hereunder at Carrier Transport Base Rates for the
remainder of the Term. Customer may select a temporary back-up carrier for any
period during which it is affected by a Sprint network outage.
14. SURCHARGES.
14.1 Minimum Commitment Surcharge. Any month Customer fails to meet the Minimum
Commitment stated on Attachment A, Customer shall pay a surcharge for Service
provided during such month equal to 25% of the difference between the Minimum
Commitment and Customer's Net Usage. The Minimum Commitment shall not relieve
Customer of any credit or security obligation hereunder.
14.2 LEC Cap Surcharge. Any month Customer exceeds the Maximum Non-Bell Traffic
Percentage specified in Attachment B for any Service type, Customer shall pay
Sprint the per minute surcharge for such Service specified in Attachment B for
each minute above the Maximum Non-Bell Traffic Percentage that originates from
or terminates to a Non-Bell Service Area. Maximum Non-Bell Traffic Percentages
will be calculated independently for originating and terminating minutes at each
Product Hierarchy Level.
14.3 Minimum Average Time Requirement Surcharge. Any month Customer fails to
equal or exceed the Minimum Average Time Requirement specified in Attachment B
for Services specified in Attachment B, then Customer shall pay Sprint a per
minute surcharge on such usage equal to (a) the per minute surcharge specified
in Attachment B multiplied by (b) the difference between (i) the number of
minutes the Service was used and (ii) the number of calls using the Service
multiplied by the Minimum Average Time Requirement. This surcharge shall be
calculated at each Product Hierarchy Level.
14.4 Noncomplete Call Surcharge. Any month Customer exceeds the Maximum
Noncomplete 800 Call percentage for interstate Resale Direct Toll Free, Resale
Direct Toll Free Extension, and/or interstate Resale Connect Toll Free traffic
as stated on Attachment B, Customer shall pay Sprint a surcharge equal to the
amount stated in Attachment B for each Noncomplete 800 Call in excess of the
Maximum Noncomplete 800 Call Percentage. This surcharge shall be calculated at
each Product Hierarchy Level.
14.5 Minimum Port Usage Surcharge. Any month Customer fails to equal or exceed
the Minimum Port Usage per Active Resale Direct Port as stated on Attachment A,
Customer shall pay Sprint a surcharge on its Direct usage equal to the
difference between (a)
<PAGE>
Customer's actual Net Usage for Resale Direct Service and (b) the Minimum Port
Usage multiplied by the total number of Active Resale Direct Ports. This
surcharge shall be calculated at each Product Hierarchy Level.
15. SERVICE CHARGES. Customer shall pay Sprint a $25 service charge for each End
User ANI or 800 number Customer submits for activation (a) that sprint
determines lacks a proper PIC Authorization or (b) that requires Sprint to
disconnect or transfer such ANI or 800 number from Sprint's data base before
placing it within Customer's CTIS hierarchy. However, the service charge
provided for in 15(b) will be waived if such End User ANIs, or 800 numbers, do
not exceed 15% of the total ANIs, or 800 numbers, submitted by Customer during
the previous 90 days.
16. SPECIAL RATE ADJUSTMENTS.
16.1 Sprint may, after 15 days notice to Customer, adjust the price of Service
provided hereunder to reflect changes in international cost of service or
currency exchange rates.
16.2 Sprint will amend Attachment B switched origination and switched
termination access charges effective on the first day of January and July. The
adjustment will reflect increases and/or decreases in statewide average
per-minute originating and terminating interstate LEC access charges imposed on
Sprint. Customer will pay amended Attachment B charges beginning on the
effective date of the amendment until the effective date of the succeeding
amendment. Attachment B charges apply only to those Services identified in
Attachment B, paragraph B.13.6.
17. PAYMENT FOR SERVICE.
17.1 Payment Obligation. Customer shall pay Sprint for Service pursuant to the
terms of this Agreement and applicable Tariffs.
17.2 Call Detail. Sprint will provide Customer with a call detail media
containing Customer's Service usage. Sprint may, at it's option, and without
liability to Customer, modify the format of the call detail media following 30
days written notice to Customer.
17.3 Payment Procedure. Sprint will invoice Customer monthly for service
provided hereunder. Invoices shall be due and payable upon receipt. Undisputed
charges for Service that are not paid within 30 days after Customer's receipt of
the invoice shall be past due. Interest will be charged on past due amounts
beginning the 31st day following Customer's receipt of the invoice at a rate
equal to the lesser of 18% per annum or the maximum rate allowed by law.
The price of Service is exclusive of applicable taxes. Resale Solutions Base
Rates and Promotional Discounts are contingent on Customer providing Sprint with
certificates from appropriate taxing authorities exempting Customer from taxes
that would otherwise be invoiced hereunder.
17.4 BILLING DISPUTES. If Customer in good faith disputes any invoiced amount,
it shall submit to Sprint, within 60 days following receipt of the invoice, full
payment of the undisputed portion of the invoice and written documentation
identifying and substantiating the disputed amount. If the Parties, in good
<PAGE>
faith, cannot resolve the dispute within a reasonable period of time, then the
dispute shall be settled by arbitration pursuant to Paragraph 22.
18. PAYMENT SECURITY. Provision of Service is contingent on credit approval by
Sprint. Upon request by Sprint, Customer shall provide Sprint with financial
statements, or other indications of Customer's Financial circumstances. If
Customer's financial circumstances or payment history is or becomes unacceptable
to Sprint, then Sprint may require a deposit, irrevocable letter of credit or
other form of security acceptable to Sprint. Customer's failure to provide such
security within 10 days following Sprint's request shall constitute a default
under Subparagraph 4.2.
19. INDEMNIFICATION. Each Party (as "Indemnitor") shall indemnify, defend and
hold harmless the other party (as "Indemnitee") from and against any and all
liabilities, costs, damages, fines, assessments, penalties and expenses
(including reasonable attorneys' fees) resulting from (a) breach of any
provision in this Agreement by Indemnitor, its employees or agents, or (b) any
misrepresentation or illegal act of Indemnitor, its employees or agents, arising
out of the Indemnitor's performance hereunder.
Customer shall indemnify, defend and hold Sprint harmless from and against any
and all liabilities, costs and damages (including reasonable attorneys' fees)
resulting from any claim arising out of: (i) use of Service by Customer to
extend its service to End Users; (ii) use of Service by Customer or End Users;
(iii) libel, slander, or patent or trademark infringement arising from the
combination or use of Service with Customer provided service or facilities; or
(iv) Customer's marketing, advertising, sales or promotional activities.
20. LIMITATION OF LIABILITY. IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR
SPECIAL, INDIRECT, INCIDENTAL, CONSEQUENTIAL OR EXEMPLARY DAMAGES, INCLUDING
LOSS OF PROFITS, LOSS OF CUSTOMERS OR GOODWILL ARISING FROM THE RELATIONSHIP OR
CONDUCT OF BUSINESS HEREUNDER.
21. WARRANTIES. WARRANTIES AND REMEDIES SET FORTH IN THE AGREEMENT AND SPRINTS
TARIFFS ARE THE ONLY WARRANTIES AND REMEDIES WITH RESPECT TO THE SERVICE, AND
ARE IN LIEU OF ANY OTHER WARRANTY, WRITTEN OR ORAL, STATUTORY, EXPRESS OR
IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE.
22. ARBITRATION. Any dispute arising out of or relating to the Agreement will be
finally settled by arbitration in accordance with the rules of the American
Arbitration Association. The arbitration will be governed by the United States
Arbitration Act, 9 U.S.C. Sec. 1, et. seq., and judgment upon the award rendered
by the arbitrator(s) may be entered by any court with jurisdiction. The
arbitration will be held in the Kansas City, MO metropolitan area.
23. NOTICES. Notices, requests or other communications (excluding invoices)
hereunder shall be in writing and sent by certified mail addressed as follows:
If to Sprint: Sprint Communications Company
5420 LBJ Freeway, Suite 1700
<PAGE>
Dallas, TX 75240
Attention: Vice President-Wholesale Services
With copy to: Sprint Communications Company
8140 Ward Parkway
Kansas City, MO 64114
Attention: Vice President Law-
Marketing/Sales
If to Customer:______________________________
==============================
Attention:____________________
24. ASSIGNMENT. Neither this Agreement nor any right or obligation hereunder may
be assigned or delegated to any other entity without the prior written consent
of the other Party, which consent shall not be unreasonably withheld.
25. EXCUSABLE DELAY. In the event of an Excusable Delay the performance
obligations of the Parties hereunder shall be suspended and the Term shall be
extended for a period of time equal to the length of such delay; provided,
however, the affected Party shall promptly notify the other Party of the nature
of the delay and the estimated time that it will continue. If an Excusable Delay
continues for more than 90 days and has a material adverse impact on the other
Party, such other Party may, at its option and upon written notice to the other
Party, terminate this Agreement without liability other than payment for Service
provided prior to termination. Notwithstanding the foregoing, neither party may
invoke this paragraph with regard to any event listed in Paragraph 4 or to delay
performance of Paragraphs 17 or 18.
26. CAPTIONS. Captions of the paragraphs and subparagraphs herein are for
convenience only, are not part of the Agreement and shall not define or limit
any of the Agreement's terms.
27. CHOICE OF LAW. This Agreement shall be construed in
accordance with, and governed by, the laws of the State of
Kansas.
28. RULES OF CONSTRUCTION. No rule of construction requiring interpretation
against the draftsman shall apply in the interpretation of this Agreement.
29. ENTIRE AGREEMENT. This Agreement, together with the attached Exhibits and
Attachments, represents the entire agreement of the Parties with respect to the
subject matter hereof and supersedes all other agreements between the Parties
relating to the Service.
30. MODIFICATION OF AGREEMENT. This Agreement, including its Exhibits and
Attachments, may be amended, modified or supplemented only by a separate written
document executed by both Parties with the formality of this Agreement.
31. WAIVER OF TERMS. No term or provision herein shall be waived, and no breach
or default excused, unless such waiver or consent is in writing and signed by
the Party to which it is attributed. No consent by a Party to, or waiver of, a
breach or default by the other, whether express or implied, shall constitute a
consent to, or waiver of, any subsequent breach or
<PAGE>
default.
32. PARTIAL INVALIDITY. If any provision of this Agreement shall be invalid or
unenforceable, such invalidity or unenforceability shall not invalidate or
render the Agreement unenforceable, but rather the Agreement shall be construed
as if not containing the invalid or unenforceable provision. However, if such
provision is an essential element of this Agreement, the Parties shall promptly
attempt to negotiate a substitute therefor.
33. CUMULATIVE REMEDIES. Except as otherwise provided herein, the remedies
provided for in this Agreement are in addition to any other remedies available
at law or in equity.
34. EXPIRATION OF OFFER. Sprint's offer to enter into this Agreement shall be
withdrawn if the Agreement is not executed by both Parties within 45 days after
the Proposal Date stated on Attachment A.
EXECUTED and made effective as provided herein.
MATRIX TELECOM, INC. SPRINT COMMUNICATIONS COMPANY L.P.
By /s/ JAMES P. PISANI By /s/ PAGET ALVES
- ---------------------- ----------------------------------
President President, Wholesale Services Group
Date: March 12, 1998
<PAGE>
EXHIBIT 10.11
IXplus LICENSE AGREEMENT
THIS LICENSE AGREEMENT ("Agreement"), dated as of April 23, 1991, (the
"Effective Date"), is by and between ELECTRONIC DATA SYSTEMS CORPORATION, a
Texas corporation ("EDS") and MATRIX Telecom, a Texas general partnership
("Licensee").
WHEREAS, Licensee desires to use certain software
proprietary to EDS; and
WHEREAS, EDS is willing to license such software to Licensee upon the terms
and conditions set forth herein.
NOW, THEREFORE, EDS and Licensee hereby agree as follows:
ARTICLE I - GRANT
1.1 Grant of License to the Licensed Program. Subject to the terms and
conditions set forth in this Agreement, EDS grants to Licensee, a non-exclusive,
non-transferable license:
(a) to use (as provided in this Article I) on the equipment
designated by type, model and serial number on Schedule
1.1 hereto (the "Designated Equipment") and at the
location designated on Schedule 1.1 hereto (the
"Designated Location") one copy, in object code form,
of EDS' proprietary computer software program known as
the IXplus software, which software program is more
specifically described on Schedule 1.1 (such program,
including all new releases and modifications made
thereto which are provided to Licensee pursuant to this
Agreement, is referred to herein as the "Licensed
Program"); and
(b) to use (as provided in this Article I) one copy of the documentation
relating to the Licensed Program, including a user's guide and
examples of menu screens and reports, setting forth specifications for
the Licensed Program provided to Licensee by EDS (the
"Documentation").
1.2 Delivery. EDS shall deliver to Licensee the Licensed
Program [as modified pursuant to Section 3.1(a)] and the
Documentation at the Designated Location on or before the
Delivery Date. For the purposes of this Agreement, the
Delivery Date shall be the fifth working day after the date
on which the later of the following occurs: (a) the testing
of the modifications to the Licensed Program made pursuant
to Section 3.1(a) is completed, or (b) the improvements to
the Designated Location required in order to adequately
accommodate the Designated Equipment are completed.
1.3 Ownership. For purposes of Section 117 of the Copyright Act
of 1976, as amended, and for all other purposes, EDS shall
be considered the owner of the Licensed Program and
Documentation and all modifications made thereto, any copies
thereof, and of all copyright, trade secret, patent and
other intellectual or industrial property rights contained
or evidenced therein. Physical copies of the Licensed
Program (in diskette, tape or other form provided by EDS)
and Documentation shall remain the property of EDS and such
<PAGE>
copies shall be deemed to be on loan to Licensee during the License Term
(defined in Section 2.1 below).
1.4 Restrictions on Use.
(a) Data. The Licensed Program and Documentation shall be utilized only to
process Licensee's data and shall be operated only by Licensee's
employees.
(b) Designated Equipment and Location. Further, the Licensed
Program shall be operated only on the Designated
Equipment and at the Designated Location, unless Licensee
obtains EDS' prior written approval of a change in the
Designated Equipment (including a change in any one or
more of the following: the manufacturer, description,
model number or serial number of the Designated
Equipment) or the Designated Location, which approval
shall not be unreasonably withheld. EDS' approval
regarding a change in the Designated Equipment which
increases the processing capacity of the Designated
Equipment or which involves the replacement of the
Designated Equipment with different equipment which has
greater processing capacity than the Designated Equipment
shall be subject to payment by Licensee of the fees
described in Section 5.3. Any EDS-approved change in the
Designated Equipment or the Designated Location shall be
documented by amending Schedule 1.1 to reflect such
change.
(c) Temporary Backup. Licensee shall have the limited right
without obtaining EDS' prior written approval, in the
event that the Designated Equipment is inoperative due to
(i) malfunction or (ii) engineering changes or similar
occurrences, to temporarily use the Licensed Program on
backup equipment until the Designated Equipment is
restored to operative status. In such case, the backup
equipment shall, for all purposes hereunder, be deemed to
be the Designated Equipment. In no event shall
Licensee's right to temporarily use the Licensed Program
on backup equipment continue for a period exceeding
thirty (30) days, unless Licensee obtains EDS' prior
written approval, which approval shall not be
unreasonably withheld.
1.5 Confidentiality.
(a) Non-disclosure. The Licensed Program and Documentation
will be disclosed by EDS to Licensee in confidence, and
Licensee shall not cause or permit disclosure, display,
loan, publication, transfer of possession (whether by
sale, exchange, gift, operation of law or otherwise),
sublicensing or other dissemination of the Licensed
Program or Documentation, in whole or in part, to any
third party without the prior written consent of EDS.
Licensee shall limit use of and access to the Licensed
Program to such of Licensee's employees as are directly
involved in the utilization of the Licensed Program and
who are bound to comply, with the confidentiality
obligations set forth in this Agreement.
(b) Copying or Modifying. Licensee shall not reverse assemble, reverse
compile or otherwise copy, reproduce, recreate or modify the Licensed
Program. Licensee may
<PAGE>
make one copy of the Licensed Program to be used as a backup which
will be placed in archival storage. Licensee shall not copy or
reproduce the Licensed Program or Documentation except as expressly
provided for in this Agreement. Licensee may copy or reproduce the
Documentation for distribution only to those employees of Licensee who
are directly involved in the use of the Licensed Program and who are
bound to comply with the confidentiality obligations set forth in this
Agreement.
(c) Safeguards. Licensee shall exercise reasonable
precautions, no less vigorous than those Licensee uses to
protect its own confidential information, to safeguard
the Licensed Program and Documentation and to ensure that
no unauthorized persons have access to the Licensed
Program and Documentation, and to ensure that no persons
authorized to have such access shall take any action
which would be in violation of Sections 1.4 or 1.5 of
this Agreement if taken by Licensee. Licensee shall
promptly report to EDS any actual or suspected violation
of Sections 1.4 or 1.5 and Licensee shall, at its
expense, take such further steps as may reasonably be
requested by EDS to prevent or remedy any such violation
and shall reimburse EDS for all reasonable expenses EDS
incurs related to the remedy of such violation.
1.6 Licensee's Responsibilities.
Licensee accepts responsibility, financial and otherwise, for (i) the
selection of the Licensed Program to achieve the desired result, (ii) the
acquisition of a license from CCMI/McGraw Hill for the Q-TEL 9000 software
and installation of such software prior to the Delivery Date and,
thereafter, for maintaining the license for such software during the
License Term (as defined in Section 2.1), (iii) the installation of the
Licensed Program [with assistance from EDS as provided pursuant to Section
3.1(b)], (iv) the use of the Licensed Program, and (v) the results obtained
from the Licensed Program.
1.7 Copyright. Licensee shall not alter or remove any copyright,
trade secret, patent, proprietary and/or other legal notices
contained on or in copies of the Licensed Program and
Documentation. Licensee shall include on all copies of the
Licensed Program or the Documentation which it may have in its
possession, or create, whatever type of designation EDS may
reasonably require to indicate that such material is the
proprietary property of EDS or another party.
1.8 Verification. At least twice each year during the License
Term (as defined in Section 2.1), Licensee shall permit EDS
access to Licensee's premises, computer systems and records
related to this Agreement and the use of the Licensed Program
and Documentation so that EDS may conduct, at EDS' expense,
an investigation to determine Licensee's compliance with the
terms of this Agreement. EDS shall notify Licensee at least
10 days prior to the date EDS desires such access, and
Licensee shall provide such access during Licensee's normal
business hours on the date indicated in the notice.
1.9 Injunctive Relief. Licensee acknowledges and agrees that the
Licensed Program and the Documentation are the valuable
property and trade secrets of EDS or other parties, that any
<PAGE>
violation by Licensee of the provisions of Article I would cause EDS or
such other parties irreparable injury for which they would have no adequate
remedy at law, and that, in addition to any other remedies which EDS may
have, it shall be entitled to preliminary and other injunctive relief
against any such violation.
1.10 Survival. Notwithstanding anything to the contrary herein, the restrictions
set forth in this Article I shall survive any termination of the License
Term, the Maintenance Service Term (as defined in Section 2.2) and any
Extension Period (as defined in Section 2.2) until the provisions of
Section 7.4 of this Agreement have been fully complied with or have been
waived in writing by EDS.
ARTICLE II - TERM
2.1 Term of License. The term of the license granted under this Agreement
pursuant to Section 1.1 shall commence on the Delivery Date and shall
continue in perpetuity, unless terminated pursuant to Article VII of this
Agreement (the "License Term").
2.2 Term of Maintenance Service. The term during which the
maintenance services described at Section 3.3 of this
Agreement shall be provided shall consist of two phases: the
Free Maintenance Service Period and the Maintenance Service
Term, unless earlier terminated pursuant to Article VII of
this Agreement. The Free Maintenance Service Period shall
commence on the Installation Date [as defined in Section
3.1(b)] and shall continue for six months after the
Installation Date. The Maintenance Service Term shall
commence on the first day of the seventh month after the
Installation Date (the first "Maintenance Service Fee Date")
and shall end on the fifth anniversary of the Maintenance
Service Fee Date; provided, however, the Maintenance Service
Term shall be automatically extended for additional one year
periods (each such one-year period is referred to herein as
an "Extension Period") unless either EDS or Licensee shall
have given written notice of its desire to not extend the
Maintenance Service Term at least thirty (30) days prior to
the end of the Maintenance Service Term or prior to the end
of any Extension Period.
ARTICLE III - CUSTOMIZATION, INSTALLATION, TRAINING AND
MAINTENANCE
3.1 Customization and Installation Assistance.
(a) Customization. EDS and Licensee shall jointly develop
and implement a plan ("Customization Plan") to modify the
Licensed Program in accordance with those requirements of
Licensee which are agreed upon by EDS. The Customization
Plan shall identify the tasks required to be performed by
each party in connection with the definition and analysis
of Licensee's requirements and the design, construction
and testing of the modifications to the Licensed Program.
To perform those tasks anticipated to be assigned to EDS
in the Customization Plan, the parties estimate that the
effort required will be 6 Person-Months (as defined in
Section 5.4); notwithstanding the foregoing, the parties
acknowledge and agree that such estimate was determined
<PAGE>
for planning purposes only and shall not be binding on
either party.
(b) Installation. Commencing on the Delivery Date and
continuing until the Installation Date (as defined
herein) , EDS shall provide to Licensee up to the number
of hours of installation assistance set forth on Schedule
3. 1; provided, however, EDS shall be relieved of its
obligation to provide installation assistance until and
unless Licensee has fulfilled its obligation to acquire
and install the Q-TEL 9000 software pursuant to Section
1.6(ii). For the purposes of this Agreement, the
"Installation Date" shall be the earlier of (i) the date
on which the first bills of Licensee are produced for
delivery or mailing using the Licensed Program (bills
produced for testing purposes only would not be
considered to be produced for delivery or mailing), or
(ii) the date on which the last hour of the amount of
installation assistance set forth on Schedule 3.1 is
expended. If Licensee requests that EDS provide
installation assistance in addition to the amount of
installation assistance set forth on Schedule 3.1, such
assistance would be provided as an Additional Service
pursuant to Section 3.4.
3.2 Training. EDS shall provide to Licensee up to the number of hours of
training set forth on Schedule 3.1 regarding the use and operation of the
Licensed Program. If Licensee requests that EDS provide additional
training, such training would be provided as an Additional Service pursuant
to Section 3.4.
3.3 Maintenance.
(a) Maintenance Service.
(i) During the Maintenance Service Term and any
Extension Period, EDS will use all reasonable
efforts to repair or replace the then current
release of the Licensed Program if it is not
performing substantially in accordance with the
Documentation, upon receiving written notice of the
nonperformance from Licensee in accordance with
Section 3.3(b). The methods and techniques for
resolving nonperformance will be at the sole
discretion of EDS. If the Designated Equipment can
be accessed remotely through dial-up capability or
otherwise, Licensee shall make such remote access
capability available to EDS for use in performing
maintenance services.
(ii) If after reasonable efforts to repair or replace the Licensed
Program which is not performing substantially in accordance with
the Documentation, EDS is unable to make such repairs or
replacement, Licensee's sole remedy shall be the refund of an
amount not to exceed the actual payments received by EDS from
Licensee pursuant to this Agreement.
(iii) EDS shall have no obligation to repair or replace the Licensed
Program if the nonperformance is found by EDS to have been caused
or contributed to by computer equipment malfunction, Licensee's
negligence or fault, Licensee's failure to follow
<PAGE>
instructions as set forth in the Documentation, improper or
unauthorized use of the Licensed Program, unauthorized hardware
changes, changes in any software not provided by EDS,
modifications made by or on behalf of Licensee, or any other
cause beyond the control of EDS. However, if requested by
Licensee, EDS will provide Licensee with assistance in resolving
any nonperformance resulting from such causes as an Additional
Service pursuant to Section 3.4.
(b) Notice. To obtain the maintenance services described
in Section 3.3(a), Licensee must provide EDS with the
following during the Maintenance Service Term and any
Extension Period: (i) written notice to the maintenance
service address set forth on Schedule 9.3 of the
operating problem which includes the information
described in this Section 3.3(b) or notice by telephone
to the maintenance service telephone number set forth on
Schedule 9.3 of the information described in this Section
3.3(b) which information is documented in a written
notice delivered to the maintenance service address by
facsimile transmission or overnight mail within 24 hours
after the telephone notice was given, (ii) a detailed
description of the failure to perform substantially in
accordance with the Documentation, (iii) a detailed
description of the operating conditions, including the
specific hardware/software configuration, under which
such failure to perform occurred, and (iv) a
representative sample of inputs and outputs for
replicating and analyzing such failure to perform.
(c) New Releases. From time to time, EDS may make updates,
improvements or changes to the Licensed Program in
separate releases to the Licensed Program which are
designed to enhance operating performance without
changing the basic functions of the Licensed Program.
During the Maintenance Service Term and any Extension
Period and in consideration of the Maintenance Service
Fee, EDS will make all new releases available to Licensee
which are generally made available to EDS 1, other
licensees of the Licensed Program and will provide
revisions to the Documentation necessary to reflect the
updates, improvements or changes included in such new
releases. EDS may discontinue maintenance services as
described in Section 3.3(a) for a prior release of the
Licensed Program replaced by a new release one hundred
eighty (180) days after the date such new release is
first made available. EDS will provide to Licensee
maintenance services as described in Section 3.3(a) for
prior releases of the Licensed Program which Licensee
elects to continue to use as an Additional Service
pursuant to Section 3.4, so long as Licensee continues to
pay for and receive maintenance services for the most
current release of the Licensed Program in anticipation
of eventually using the most current release.
(d) Requested Changes. Any changes to the Licensed Program or
Documentation requested by Licensee which EDS, in its sole discretion,
has not or does not intend to make part of a new release would be
provided as an Additional Service pursuant to Section 3.4.-3.4
Additional Services. Licensee may from time to time request that EDS
provide
<PAGE>
support or services which are beyond the scope or amount of the
support or services provided pursuant to this Agreement ("Additional
Services"). Any requested Additional Services will be provided by EDS
to Licensee on such terms as are mutually agreed upon by Licensee and
EDS and documented in writing, including without limitation the
description of the Additional Services to be provided, the price to be
paid, and any other appropriate terms and conditions.
ARTICLE IV - WARRANTY
4.1 Rights in Licensed Program. EDS hereby represents and warrants that from
the Effective Date until the expiration of the License Term it has all
rights, title, ownership interest and/or marketing rights necessary to
grant the rights and license to Licensee set forth herein.
4.2 Nonperformance of Licensed Program. EDS further warrants that on the
Delivery Date the Licensed Program shall be capable of performing
substantially in accordance with the Documentation. EDS shall resolve any
failure of the Licensed Program to perform substantially in accordance with
the Documentation pursuant to the terms and conditions of Section 3.3.
4.3 Limitation on warranty. EDS does not warrant that the
functions contained in the Licensed Program will meet
Licensee's requirements or that the operation of the Licensed
Program will be uninterrupted or error free. Further, EDS
shall have no responsibility with respect to Licensee's data
files. The remedies of Licensee set forth in Sections 3.3(a)
and in Section 8.1 shall be exclusive and EDS' liability for
all matters relating to the warranties set forth in this
Article IV shall be limited as provided in Sections 3.3(a),
8.1 and 8.2.
4.4 No Other Warranties. THE WARRANTIES CONTAINED IN THIS ARTICLE
IV ARE LIMITED WARRANTIES AND ARE THE ONLY WARRANTIES MADE BY
EDS. EDS MAKES AND LICENSEE RECEIVES NO OTHER WARRANTY
EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, WARRANTIES
OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. THE
STATED EXPRESS WARRANTIES ARE IN LIEU OF ALL LIABILITIES OR
OBLIGATIONS OF EDS FOR DAMAGES ARISING OUT OF OR IN
CONNECTION WITH THE DELIVERY, USE OR PERFORMANCE OF THE
LICENSED PROGRAM.
ARTICLE V - PAYMENTS TO EDS
5.1 License Fee. Licensee shall pay to EDS for the grant of the license
pursuant to Section 1.1 hereunder a license fee in the amount indicated on
Schedule 5.1 ("License Feel') payable as follows:
(a) Licensee shall pay to EDS one-half of the License Fee on
the Delivery Date, and
(b) Licensee shall pay to EDS one-half of the License Fee on the
Installation Date.
5.2 Maintenance Service Fee.
<PAGE>
(a) Amount of Fee. For each year during the Maintenance
Service Term and any Extension Period, Licensee shall pay
to EDS for the maintenance services provided pursuant to
Section 3.3 the applicable annual maintenance service fee
("Maintenance Service Fee") at the time for payment
indicated in Section 5.2(b). The applicable Maintenance
Service Fee shall be determined in accordance with the
following procedures:
(i) Fee for First Year. Subject to Section 5.3(b) the Maintenance
Service Fee applicable for the first year of the Maintenance
Service Term is indicated on Schedule 5.1.
(ii) Fee for Subsequent Years. Subject to Section 5.3(b), the
Maintenance Service Fee applicable for the remaining years of the
Maintenance Service Term and any Extension Periods shall be the
lesser of: (x) the amount of the Maintenance Service Fee
indicated on EDS' License and Maintenance Service Fee Schedule in
effect on the Maintenance Service Fee Date for the then current
year for the Designated Equipment in use on such date, or (y) the
sum of the amount of the Maintenance Service Fee indicated on EDS
License and Maintenance Service Fee Schedule in effect on the
Maintenance Service Fee Date for the prior year for the
Designated Equipment in use on the Maintenance Service Fee Date
for the then current year, plus 10% of such amount.
The License and Maintenance Service Fee Schedule in effect on the
Effective Date is attached to this Agreement as Schedule 5.2. The
License and Maintenance Service Fee Schedule may be amended or
replaced by a new schedule from time to time by EDS in its sole
discretion, which new schedule shall be deemed to amend and replace
the License and Maintenance Service Fee Schedule attached as Schedule
5.2. The new schedule shall be provided to Licensee at least 45 days
before the day the new rates are effective.
(b) Payment of Fee. Licensee shall pay the first annual Maintenance
Service Fee on the first Maintenance Service Fee Date, and subsequent
annual Maintenance Service Fees shall be paid each year on the
anniversary of the first Maintenance Service Fee Date (each such
anniversary is also referred to herein as a "Maintenance Service Fee
Date").
5.3 Upgrade in Designated Equipment.
(a) Upgrade Fee. If during the License Term Licensee
upgrades the Designated Equipment to increase its
processing capacity or replaces the Designated Equipment
with different equipment which has greater processing
capacity than the Designated Equipment, Licensee shall
pay to EDS on or before the upgrade or replacement of the
Designated Equipment occurs an upgrade fee ("Upgrade
Fee") in an amount equal to the difference resulting when
the amount of the License Fee paid by Licensee is
subtracted from the amount of the then current licensee
fee applicable to the upgraded or replaced Designated
<PAGE>
Equipment as indicated on EDS' License and Maintenance Service Fee
Schedule then in effect. The following illustrates the calculation of
the Upgrade Fee:
Then Current License
Fee Applicable to
Upgraded or Replaced - Amount of = Upgrade
Designated Equipment License Fee Fee
Per Schedule 5.2 Paid
As provided in Section 5.2, the License and Maintenance Service Fee
Schedule in effect on the Effective Date is attached to this Agreement
as Schedule 5.2, and may be amended from time to time by EDS in its
sole discretion.
(b) Change in Maintenance Service Fee. If the upgrade or
replacement of the Designated Equipment occurs on or
before the first Maintenance Service Fee Date, Licensee
shall pay on such date the Maintenance Service Fee
applicable for the upgraded or replaced Designated
Equipment as indicated on EDS' License and Maintenance
Service Fee Schedule in effect on the first Maintenance
Service Fee Date. If the upgrade or replacement of the
Designated Equipment occurs at any time after the first
Maintenance Service Fee Date, Licensee shall pay on the
next Maintenance Service Fee Date occurring on or after
the upgrade or replacement of the Designated Equipment,
the sum of (i) an amount equal to: the difference between
the amount of the Maintenance Service Fee paid on the
immediately previous maintenance Service Fee Date and the
Maintenance Service Fee applicable for the upgraded or
replaced Designated Equipment as indicated on EDS'
License and Maintenance Service Fee Schedule in effect at
the time the upgrade or replacement of the Designated
Equipment occurs, multiplied by the number of months
which would occur from the time the upgrade or
replacement until the next Maintenance Service Fee Date,
and divided by 12, as illustrated in the following
formula:
Months from
Then Current Maintenance upgrade to
Service Fee Applicable Maintenance Service Maintenance
to Upgraded/Replaced - Fee Paid X Service Fee
Designated Equipment Previously Date
Per Schedule 5.2 12
= Change Amount
plus (ii) the Maintenance Service Fee applicable for the upgraded or
replaced Designated Equipment as determined in accordance with
Sections 5.2(a)(i) and (ii). Subsequent Maintenance Service Fees shall
be determined in accordance with Section 5.2(a)(ii).
5.4 Customization Charge. In addition to the other fees described
in Article 5, Licensee shall pay to EDS a monthly charge
("Customization Charge") of $12,000 per Person-Month (as
defined herein) for the services performed by EDS pursuant to
Section 3.1(a). For the purposes of this Section 5.4, the
term "Person-Month" shall mean one person provided for that
number of working days which occur during the applicable
month. The Customization Charge for any partial month shall
<PAGE>
be prorated on a per them basis.
5.5 Out-of-Pocket Expenses. In addition to the other fees
described in Article 5, Licensee shall pay, or reimburse EDS
for, the reasonable out-of-pocket expenses incurred by EDS
with the approval of Licensee, including but not limited to,
the travel, meals and lodging expenses incurred by EDS
personnel performing the installation assistance, training,
maintenance service and any Additional Services described in
this Agreement.
5.6 Time for Payment. Except as otherwise provided herein, any
sum due EDS hereunder shall be due and payable within thirty
days after receipt by Licensee of an invoice from EDS. Any
sum due EDS hereunder that is not paid to EDS within thirty
calendar days after its due date shall thereafter bear
interest until paid at the lesser of (i) two percent per annum
more than the prime rate established from time to time by
Citibank N.A., New York, or (ii) the maximum rate of interest
allowed by applicable law.
5.7 Taxes. There will be added to any charges hereunder, and
Licensee shall pay to EDS, all taxes, assessments, duties,
permits and fees, however designated or levied, which are
based upon any charges under this Agreement, or upon this
Agreement or the Licensed Program, services or materials
provided hereunder, or their use, including without limitation
state and local privilege or excise taxes based on gross
revenue, sales and use taxes, and any taxes or amounts in lieu
thereof paid or payable by EDS in respect of the foregoing,
but excluding franchise taxes and taxes based on the net
income of EDS.
ARTICLE VI - ARBITRATION
6.1 Arbitration. In the event that the parties are not able to resolve any
dispute or controversy through informal discussions, the parties agree as
follows:
(a) Procedures. All disputes and controversies between the
parties of every kind and nature, including but not
limited to, those arising under or in connection with
this Agreement, including the creation, validity
interpretation, breach or termination of the License
Term, Maintenance Service Term or any Extension Period,
shall be submitted to arbitration using the following
procedure:
(i) Either party may demand arbitration in writing, stating the
nature of the controversy and naming the arbitrator selected by
it.
(ii) Within thirty days after such demand, the other
party shall name its arbitrator, and the two named
arbitrators shall, within sixty days thereafter,
select the third arbitrator to serve on the
arbitration panel. The two arbitrators named by the
parties may have prior relationships with the
naming party, which in a judicial setting would be
considered a conflict of interest. The third
arbitrator, selected by the first two, should be a
neutral participant, with no prior working
<PAGE>
relationship with either party.
(iii) The arbitration shall be governed by the Commercial Arbitration
Rules of the American Arbitration
Association.
(iv) The arbitration shall be conducted in Dallas, Texas.
(v) Each party shall bear its own arbitration costs and expenses;
provided, however, the arbitrators may modify the allocation of
fees, costs and expenses in the award in those cases where
fairness dictates other than an equal allocation between the
parties.
(vi) The arbitrators shall allow such discovery as is appropriate to
the purposes of arbitration in accomplishing fair, speedy and
cost effective resolution of disputes. The arbitrators shall
reference the rules of evidence of the Federal Rules of Civil
Procedure then in effect insetting the direction of such
discovery.
(vii) The award shall be final and binding on the parties, and judgment
on the award may be entered in and enforced by any court of
competent jurisdiction.
(b) Exclusive Remedy. Other than those matters involving
injunctive relief as a remedy, or any action necessary to
enforce the award of the arbitrators, the parties agree
that the provisions of this Section 6.1 are a complete
defense to any suit, action or other proceeding
instituted in any court or before any administrative
tribunal with respect to any dispute or controversy
arising out of or in connection with this Agreement. The
provisions of this Section 6.1 will survive termination
of the License Term, the Maintenance Service Term and any
Extension Period. Nothing in this Section prevents the
parties from exercising their rights to terminate the
License Term, the Maintenance Service Term or any
Extension Period as specified in this Agreement.
(c) Continued Performance. Unless EDS is bringing an action
under this Section for nonpayment by Licensee, EDS shall
continue to provide services, if applicable, under this
Agreement during the arbitration proceedings and Licensee
shall continue to make payments to EDS in accordance with
this Agreement. Any disputed payments shall be paid into
an interest-bearing escrow account, structured by
agreement of the parties, or as ordered by the
arbitrators if agreement can not be reached, for
distribution in accordance with the arbitrators' award.
If a disputed payment is paid into an escrow account on
or before its due date, the interest accruing on the
escrow account shall be paid to the party to whom the
arbitrators award the disputed amount.
ARTICLE VII - TERMINATION
7.1 Termination for Cause. If either party hereto materially defaults in the
performance of any of its obligations
<PAGE>
hereunder (other than a payment obligation) and if such default continues
for more than thirty (30) days after written notice specifying the default
is given to the defaulting party, then the other party may, by giving the
defaulting party written notice thereof, terminate the License Term and/or
the Maintenance Service Term or any Extension Period as of a date specified
in such notice of termination.
7.2 Termination for Adverse Change in Business. If (i) Licensee
ceases to carry on its business, (ii) a receiver or similar
officer is appointed for Licensee, (iii) Licensee makes an
assignment for the benefit of, or a composition with, its
creditors, or another arrangement of similar import, or (iv)
if proceedings under any bankruptcy or insolvency law are
commenced by or against Licensee, then in such event EDS may,
by giving Licensee written notice thereof, terminate the
License Term and/or the Maintenance Service Term or any
Extension Period as of a date specified in such notice of
termination.
7.3 Termination for Nonpayment.
(a) License Fees. In the event Licensee defaults in the payment when due
of the License Fee or the Upgrade Fee due to EDS hereunder and does
not cure such default within fifteen (15) days after being given
written notice of such default, then EDS may, by giving written notice
thereof to Licensee, terminate the License Term as of a date specified
in such notice of termination.
(b) Maintenance Service and Other Fees. In the event
Licensee defaults in the payment when due of any
Maintenance Service Fee or any other amount due to EDS
hereunder and does not cure such default within fifteen
(15) days after being given written notice of such
default, then EDS may, by giving written notice thereof
to Licensee, terminate the Maintenance Service Term or
any Extension Period as of a date specified in such
notice of termination.
7.4 Rights Upon Termination. Upon termination of the License Term
for any reason, then, in addition to any other rights which
either party may have, Licensee shall promptly return to EDS
all copies of the Licensed Program and the Documentation in
Licensee's possession and completely erase the Licensed
Program and all elements thereof from the Designated Equipment
and any other computer system of Licensee and upon EDS'
request, shall execute and deliver to EDS a written
certification that Licensee has complied with the provisions
of this Section and no longer retains any material relating to
the Licensed Program or the Documentation.
ARTICLE VIII - INDEMNIFICATION, REMEDIES AND LIABILITY
8.1 Infringement Indemnity.
(a) Defense of Claim. EDS will defend any action brought against Licensee
to the extent that such action is based on a claim that the Licensed
Program or Documentation used within the scope of the license granted
herein, in whole or in part infringes (i) a copyright perfected under
United States statute, (ii) a patent granted under
<PAGE>
United States law, or (iii) constitutes an unlawful disclosure, use or
misappropriation of another party's trade secret. EDS will bear the
expense of such defense and pay any costs and damages which are
finally awarded as a result of such claim, provided that Licensee
notifies EDS promptly in writing of the claim and that Licensee allows
EDS to fully direct the defense or settlement of such claim. EDS shall
not be responsible for any settlement or compromise made without its
consent.
(b) Continued Right to Use. Should the Licensed Program or
the Documentation become, or in EDS' opinion be likely to
become, the subject of a claim of infringement of a
copyright or patent, EDS will attempt to procure for
Licensee the right to continue using the Licensed Program
or Documentation, or replace or modify the Licensed
Program or Documentation to make its use hereunder
non-infringing. If with respect to the Licensed Program
neither option is reasonably available in EDS' judgment,
(i) Licensee shall return the Licensed Program and the
Documentation to EDS, and (ii) the License Term, the
Maintenance Service Term and any Extension Period and all
of the rights granted hereunder shall terminate.
(c) Infringement Caused by Licensee. EDS shall have no
liability to Licensee under this Section 8.1 or under any
other provision of this Agreement, if any claim of
infringement is based upon the use of the Licensed
Program or Documentation delivered hereunder in
combination with equipment, devices or software not
supplied by EDS, the use of the Licensed Program in an
application or environment for which it was not designed
or was not contemplated under this Agreement, or the
modification of the Licensed Program by anyone other than
EDS or its employees or agents. Further, Licensee shall
indemnify and hold EDS harmless from any liability, loss,
claim or damage to persons or property arising out of
Licensee's possession, operation, use or modification of
the Licensed Program or arising out of the fault or
negligence of Licensee, its employees or agents, and
shall indemnify EDS from any expense or cost incurred if
any such claims are made.
(d) Entire Obligation. This Section 8.1 states EDS' entire obligation to
Licensee regarding infringement.
8.2 Remedies and Limit of Liability. For all claims relating to
this Agreement, whether in contract or in tort, Licensee's
exclusive remedy shall be (i) for a breach of any warranty,
the correction of such breach at no charge to Licensee as
described in Section 4.3, and (ii) for any other claim,
including a claim of a failure to correct a breach of
warranty, the recovery of Licensee's actual, direct damages up
to, in the aggregate, an amount equal to the total amount of
all fees paid to EDS by Licensee under this Agreement. This
limitation will apply regardless of the form of action,
whether in contract or in tort, including negligence. EDS
shall have no liability for any punitive, indirect or
consequential damages, including lost profits, lost income or
lost savings, or for any claim against Licensee by any other
party [except as provided in Section 8.1(a)]. Further,
neither party may assert any cause of action against the other
<PAGE>
party which accrued more than two (2) years prior to the filing of a suit
alleging such cause of action. The limitations described in this Section
8.2 will not apply to the payment of costs and damages referred to in
Section 8.1(a).
8.3 Acknowledgement. The parties acknowledge that each of the
provisions of this Agreement including the fees for the
license and services were based in part on the limitations
contained in Section 8.2 and that each party fully understands
and accepts the obligations and limitations described in this
Agreement. The parties further acknowledge and agree that the
obligations and limitations described in Section 8.2 shall
survive the termination of the License Term, the Maintenance
Service Term and any Extension Period.
ARTICLE IX - MISCELLANEOUS
9.1 Other Confidential Information. In addition to the provisions
of Section 1.5, each party shall use the same means as it uses
to protect its own confidential information, but in any event
not less than reasonable means, to prevent the disclosure and
to protect the confidentiality of both (i) written information
received from the other party which is marked or identified as
confidential; and (ii) oral or visual information identified
as confidential at the time of disclosure. The information
described in the preceding sentence at (i) and (ii) shall be
referred to in this Agreement as "Confidential Information".
Each party shall use Confidential Information received from
the other party only in connection with the purposes of this
Agreement. The foregoing shall not prevent either party from
disclosing Confidential Information which belongs to such
party or is (i) already known by the recipient party without
an obligation of confidentiality; (ii) publicly known or
becomes publicly known through no unauthorized act of the
recipient party; (iii) rightfully received from a third party;
(iv) independently developed by the recipient party without
use of the other party's Confidential Information; (v)
disclosed without similar restrictions to a third party by the
party owning the Confidential Information; (vi) approved by
the other party for disclosure; or (vii) required to be
disclosed pursuant to a requirement of a governmental agency
or law so long as the disclosing party provides the other
party with notice of such requirement prior to any such
disclosure. The provisions of this Section 9.1 will survive
the expiration or termination of the Maintenance Service Term,
or if extended, the last Extension Period, for a period of
three years.
9.2 Assignment. This Agreement shall be binding on the parties hereto and their
successors and assigns, but Licensee may not assign this Agreement or the
license granted pursuant to this Agreement without the prior written
consent of EDS, which consent shall not be unreasonably withheld. The
parties acknowledge and agree that the following includes, without
limitation, circumstances in which it shall be reasonable for EDS to
withhold its consent to the proposed assignment of this Agreement: the
proposed assignment to a competitor of EDS or to an entity which is a
higher credit risk than Licensee. Notwithstanding the foregoing, EDS will
have the right to subcontract portions of the services to be performed by
it pursuant hereto; provided, however, no such subcontract will
<PAGE>
relieve EDS of any of its obligations hereunder.
9.3 Notice. Wherever under this Agreement one party is required
to give notice to the other, such notice shall be deemed given
if actually delivered or on the third day after mailing, if
mailed by United States mail, first-class, postage prepaid,
and addressed as provided on Schedule 9.3. Either party may at
any time change its address for notification purposes by
mailing a notice stating the change and setting forth the new
address.
9.4 Headings. The article and section headings and the table of contents used
herein are for reference and convenience only and shall not enter into the
interpretation hereof.
9.5 Relationship of Parties. EDS, in furnishing services to Licensee, is
providing services only as an independent contractor. EDS does not
undertake by this Agreement or otherwise to perform any obligation of
Licensee, whether regulatory or contractual.
9.6 Force Majeure. Each party hereto shall be excused from
performance hereunder (other than the performance of payment
obligations) for any period and to the extent that it is
prevented from performing pursuant hereto, in whole or in
part, as a result of delays caused by the other party or an
act of God, war, civil disturbance, court order, labor
dispute, third party nonperformance, or other cause beyond its
reasonable control, including failures, fluctuations or
non-availability of electrical power, heat, light, air
conditioning or telecommunications equipment, and such
nonperformance shall not be a default hereunder nor a ground
for termination of the License Term, Maintenance Service Term
or any Extension Period.
9.7 Severability. If any provision of this Agreement is declared
or found to be illegal, unenforceable or void (other than a
provision relating to a payment obligation) then both parties
shall be relieved of all obligations arising under such
provision, but if the remainder of this Agreement shall not be
affected by such declaration or finding, then each provision
not so affected shall be enforced to the extent permitted by
law.
9.8 Attorneys' Fee. If any legal action or other proceeding is
brought for the enforcement of this Agreement, or because of
an alleged dispute, breach, default or misrepresentation in
connection with any of the provisions of this Agreement, the
prevailing party shall be entitled to recover reasonable
attorneys' fees and other costs incurred in that action or
proceeding, in addition to any other relief to which it may be
entitled.
9.9 Media Releases. All media releases, public announcements and
public disclosures by Licensee or its employees or agents
relating to this Agreement or its subject matter, including
without limitation promotional or marketing material, but not
including any announcement intended solely for internal
distribution at Licensee or any disclosure required by legal,
accounting or regulatory requirements beyond the reasonable
control of Licensee, shall be coordinated with and approved by
EDS in writing prior to the release thereof, which approval
shall not be unreasonably withheld.
<PAGE>
9.10 No Third Party Beneficiary. Nothing in this Agreement may be relied upon or
shall benefit any party other than the parties hereto.
9.11 Waiver. No delay or omission by either party hereto to exercise any right
or power accruing upon any noncompliance or default by the other party with
respect to any of the terms of this Agreement shall impair any such right
or power or be construed to be a waiver thereof. A waiver by either of the
parties hereto of any of the covenants, conditions, or agreements to be
performed by the other shall not be construed to be a waiver of any
succeeding breach thereof or of any other covenant, condition or agreement
herein contained.
9.12 Entire Agreement. This Agreement constitutes the entire agreement between
the parties with respect to the subject matter hereof. There are no
understandings or agreements relative hereto which are not fully expressed
herein and, except as provided herein, no change, waiver or discharge
hereof shall be valid unless in writing and executed by the party against
whom such change, waiver or discharge is sought to be enforced.
9.13 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS, OTHER THAN CHOICE OF LAW RULES, OF THE STATE OF
TEXAS. IN WITNESS WHEREOF, EDS and Licensee have caused this Agreement to
be signed by their duly authorized representatives as of the Effective
Date.
ELECTRONIC DATA SYSTEMS MATRIX TELECOM
CORPORATION
By: /s/ BOB A. MCCLESKEY By: /s/ DENNIS L. MIGA
- -------------------------- -------------------------------
Bob A. McCleskey Dennis L. Miga
Regional Vice President Managing Partner
<PAGE>
AMENDMENT NUMBER ONE TO IXplus LICENSE AGREEMENT
BETWEEN
ELECTRONIC DATA SYSTEMS CORPORATION
AND
MATRIX TELECOM
THIS AMENDMENT NUMBER ONE, dated as of the 1st day of October, 1992, is
between Electronic Data Systems Corporation ("EDS") and MATRIX Telecom
("Licensee"), and is an amendment of that certain IXplus License Agreement
between EDS and Licensee dated as of April 23, 1991 (the "Agreement").
For and in consideration of the mutual agreements of the parties herein
contained and other good and sufficient consideration the receipt of which is
hereby acknowledged, EDS and Licensee agree as follows:
1. Effective as of the date of the Agreement and at no additional cost to
Licensee, Section 1.1(a) of the Agreement is amended to read in its
entirety as follows:
"to use (as provided in this Article I) on the equipment designated by type
and model on Schedule 1.1 hereto (the "Designated Equipment") and at the
location designated on Schedule 1.1 hereto (the "Designated Location")
multiple copies, in object and source code form, of EDS' proprietary
computer software program known as the IXplus software, which software
program is more specifically described on Schedule 1.1 (such program,
including all new releases and modification made thereto which are provided
to Licensee pursuant to this Agreement is referred to herein as the
"Licensed Program"); and"
2. Effective as of the date of this Amendment, Section 5.2 of the Agreement is
amended to read in its entirety as follows:
"Maintenance Service Fee. For each year during the Maintenance Service Term
and any Extension Period, Licensee shall pay to EDS for the right to
receive new releases to the Licensed Program pursuant to Section 3.3, a
maintenance service fee ("Maintenance Service Fee") equal to the total
aggregate number of billable messages processed by Licensee each month,
multiplied by $.00075 per Billable Message. A "Billable Message" shall mean
any group of data which represents the statistical nature of a single long
distance telephone call for the purpose of billing and/or reporting such
telephone calls on behalf of the company providing such long distance
telephone service to its customers, and can be identified with a valid
customer account, rated, taxed and presented to a customer for payment. The
monthly Maintenance Service Fee to be paid by Licensee shall be adjusted
bi-annually based on Licensee's highest Billable Message volume for any one
month during the prior six-month period, multiplied by $.00075 per Billable
Message. At the end of each six month period, Licensee shall provide EDS
with the actual number of Billable Messages processed by Licensee during
such period. Any overpayment or underpayment of the actual Maintenance
Service Fee during any such six-month period will be reflected as an
adjustment on the next monthly invoice payable by Licensee to EDS. During
the Maintenance Service Term, Licensee shall provide EDS with such reports
and
<PAGE>
information as EDS reasonably requests for the purpose of verifying the
number of Billable Messages processed by Licensee, including but not
limited to, a monthly rating summary report of all Billable Messages rated
through Licensee's system."
3. Effective as of the date of the Agreement, Section 5.3 of the Agreement
shall be deleted in its entirety. Furthermore, the parties acknowledge and
agree that the waiver of the Upgrade Fee shall apply to Licensee's current
use of the AS/400 equipment, Models E10, D35 and E50.
4. Effective as of the date of this Amendment, a new Section 1.11 is added to
the Agreement as follows:
"Licensee's Purchase Obligations. Licensee shall purchase its requirements
for any upgrades, replacements and/or additional IBM AS/400 equipment
through EDS. Upon notification from Licensee of its IBM equipment needs,
EDS will use commercially reasonable efforts to cause IBM to provide such
equipment to EDS on behalf of Licensee. Any IBM equipment purchased by EDS
on behalf of Licensee will be offered to Licensee at a price equal to EDS'
then current cost for such equipment, plus 10%."
5. Pursuant to Section 1.4(a), EDS and Licensee hereby acknowledge and agree
that, in addition to operation by Licensee's employees, the Licensed
Program shall be operated by EDS acting on behalf of Licensee.
6. The Agreement is hereby amended by deleting the Designated Equipment and
Designated Location Sections of Schedule 1.1 and substituting therefor the
Designated Equipment and Designated Located Sections set forth on Exhibit A
attached to this
Amendment.
Except as expressly provided by this Amendment, the Agreement remains in
full force and effect and except as expressly amended by this Agreement the
Agreement remains unchanged.
IN WITNESS WHEREOF, EDS and Licensee have executed and delivered this
Amendment to be effective as of the date set forth above.
ELECTRONIC DATA SYSTEMS
CORPORATION
By: /s/ ROY A. FREDERICKSON
- ---------------------------
Regional Vice President
MATRIX TELECOM
By: /s/ CHARLES G. TAYLOR, JR.
- ------------------------------
General Partner
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES
Name Jurisdiction of Incorporation
------------------------ -----------------------------
Matrix Telecom, Inc. Texas
Hi, Tiger, Inc. Utah
Silicon Beach Communications, Inc. California
Westnet Communications, Inc. California
The Friendly Net, LLC Utah
New Best Connections, Inc. Texas
AvTel Holdings, Inc. California
<PAGE>
EXHIBIT 23
Independent Auditors' Consent
The Board of Directors
AvTel Communications, Inc.
We consent to incorporation by reference in the Registration Statement (No.
333-30725) on Form S-8 of AvTel Communications, Inc. of our report dated March
24, 1998, relating to the consolidated balance sheets of AvTel Communications,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows and
related schedule, for each of the years in the three-year period ended December
31, 1997, which report appears in the annual report on Form 10-K of AvTel
Communications, Inc. for the fiscal year ended December 31, 1997.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Dallas, Texas
April 10, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE OF AVTEL COMMUNICATIONS, INC. AS OF DECEMBER 31, 1997 AND THE RELATED
STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE YEAR THEN ENDED AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4807
<SECURITIES> 0
<RECEIVABLES> 7944
<ALLOWANCES> 982
<INVENTORY> 0
<CURRENT-ASSETS> 15358
<PP&E> 4681
<DEPRECIATION> 2889
<TOTAL-ASSETS> 18725
<CURRENT-LIABILITIES> 9787
<BONDS> 0
2
0
<COMMON> 111
<OTHER-SE> 7696
<TOTAL-LIABILITY-AND-EQUITY> 18725
<SALES> 51389
<TOTAL-REVENUES> 51389
<CGS> 36228
<TOTAL-COSTS> 36228
<OTHER-EXPENSES> 25920
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12
<INCOME-PRETAX> (10468)
<INCOME-TAX> (276)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10191)
<EPS-PRIMARY> (1.23)
<EPS-DILUTED> 0
</TABLE>
