<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 7, 1996.
REGISTRATION STATEMENT NO. 333-05857
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
PRE-EFFECTIVE AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------------
TELCO COMMUNICATIONS GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
VIRGINIA 4813 54-1674283
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
INCORPORATION OR CODE NUMBER)
ORGANIZATION)
4219 LAFAYETTE CENTER DRIVE
CHANTILLY, VIRGINIA 20151
(703) 631-5600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
DONALD A. BURNS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
TELCO COMMUNICATIONS GROUP, INC.
4219 LAFAYETTE CENTER DRIVE
CHANTILLY, VIRGINIA 20151
(703) 631-5600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
MORRIS F. DEFEO, JR. DENNIS J. BLOCK
SWIDLER & BERLIN, CHARTERED AKIKO MIKUMO
3000 K STREET, N.W., SUITE 300 WEIL, GOTSHAL & MANGES LLP
WASHINGTON, D.C. 20007 767 FIFTH AVE.,
(202) 424-7500 NEW YORK, N.Y. 10153
(212) 310-8000
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
----------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
TELCO COMMUNICATIONS GROUP, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM
NUMBER FORM S-1 CAPTION PROSPECTUS LOCATION OR CAPTION
------ ---------------- ------------------------------
<C> <C> <S>
1. Forepart of the Registration
Statement and Outside Front Cover
Page of Prospectus.................. Outside Front Cover Page; Inside
Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus................. Inside Front Cover Page; Table of
Contents
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges.. Prospectus Summary; Risk Factors;
Business
4. Use of Proceeds...................... Use of Proceeds
5. Determination of Offering Price...... Outside Front Cover Page;
Underwriting
6. Dilution............................. Dilution
7. Selling Security Holders............. Principal and Selling Shareholders
8. Plan of Distribution................. Outside Front Cover Page;
Underwriting
9. Description of Securities to be
Registered........................... Outside Front Cover Page; Dividend
Policy; Description of Capital
Stock
10. Interests of Named Experts and
Counsel.............................. Not Applicable
11. Information with Respect to the
Registrant........................... Inside Front Cover Page;
Prospectus Summary; Risk
Factors; Use of Proceeds;
Dividend Policy; Dilution;
Capitalization; Selected
Consolidated Historical and Pro
Form Consolidated Financial
Statements; Management's
Discussion and Analysis of
Financial Condition and Results
of Operations; Business;
Management; Certain
Transactions; Principal
and Selling Shareholders;
Description of Capital Stock;
Shares Eligible for Future Sale;
Consolidated Financial
Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities......................... Not Applicable
</TABLE>
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of Prospectus: (i) one to be
used in connection with an offering of the registrant's Common Stock in the
United States and Canada (the "U.S. Prospectus") and (ii) the other to be used
in a concurrent offering of the registrant's Common Stock outside the United
States and Canada (the "International Prospectus" and, together with the U.S.
Prospectus, the "Prospectuses"). The International Prospectus will be
identical to the U.S. Prospectus except that it will have a different front
cover page and back cover page. The U.S. Prospectus is included herein and is
followed by the alternate pages to be used in the International Prospectus.
Such alternate pages for the International Prospectus included herein are
labeled "Alternate Page for International Prospectus." If required pursuant to
Rule 424(b) of the General Rules and Regulations under the Securities Act of
1933, ten copies of the final form of each Prospectus will be filed with the
Securities and Exchange Commission.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED AUGUST 7, 1996
PROSPECTUS
8,700,000 SHARES
[LOGO OF TELCO COMMUNICATIONS GROUP APPEARS HERE]
COMMON STOCK
-----------
Of the 8,700,000 shares (the "Shares") of Common Stock offered hereby,
6,100,000 shares will be sold by Telco Communications Group, Inc. ("Telco" or
the "Company") and 2,600,000 shares will be sold by the Selling Shareholders.
The Company will not receive any of the proceeds from the sale of the shares
being sold by the Selling Shareholders. See "Principal and Selling
Shareholders."
A total of 6,960,000 shares (the "U.S. Shares") are being offered in the
United States and Canada (the "U.S. Offering") by the U.S. Underwriters and
1,740,000 shares (the "International Shares") are being offered outside the
United States and Canada (the "International Offering") by the Managers. The
initial public offering price and the underwriting discounts and commissions
are identical for both the U.S. Offering and the International Offering
(collectively, the "Offerings").
Prior to the Offerings, there has been no public market for the Common Stock.
It is currently anticipated that the initial public offering price will be
between $15.00 and $17.00 per share. See "Underwriting" for a discussion of the
factors considered in determining the initial public offering price.
The Common Stock has been approved for trading on the Nasdaq National Market
under the symbol "TCGX," subject to official notice of issuance.
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OFCERTAIN RISKS
ASSOCIATED WITH AN INVESTMENT IN THE SHARES.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS SELLING
PUBLIC COMMISSIONS(1) TO COMPANY(2) SHAREHOLDERS(2)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share....... $ $ $ $
- ------------------------------------------------------------------------------
Total (3)....... $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) See "Underwriting" for indemnification arrangements with the U.S.
Underwriters and the Managers.
(2) Before deducting expenses payable by the Company, estimated at $1,012,000.
(3) The Company has granted the U.S. Underwriters and the Managers 30-day
options to purchase in the aggregate up to 1,305,000 additional shares of
Common Stock solely to cover over-allotments, if any. If the options are
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, and Proceeds to Company will be $ , $ , and $ , respectively.
See "Underwriting."
-----------
The U.S. Shares are offered by the several U.S. Underwriters subject to prior
sale, when, as and if delivered to and accepted by them and subject to certain
conditions, including the approval of certain legal matters by counsel. The
U.S. Underwriters reserve the right to withdraw, cancel or modify the U.S.
Offering and to reject orders in whole or in part. It is expected that the
delivery of the U.S. Shares will be made against payment therefor on or about
, 1996, at the offices of Bear, Stearns & Co. Inc., 245 Park Avenue, New
York, New York 10167.
-----------
BEAR, STEARNS & CO. INC. SALOMON BROTHERS INC
, 1996
<PAGE>
[GRAPHICS TO BE INSERTED]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information, including risk factors and
consolidated financial statements and notes thereto, appearing elsewhere in
this Prospectus. Unless otherwise indicated, the information in this Prospectus
(i) assumes an estimated initial public offering price equal to $16 (the
midpoint of the range shown on the cover page of this Prospectus) and that the
U.S. Underwriters' and the Managers' over-allotment options are not exercised,
(ii) has been adjusted to give effect to a 425- for-1 stock split to occur
immediately prior to the consummation of the Offerings (the "Stock Split") and
(iii) reflects the consummation of the "Reorganization" as defined below and
described in "Management's Discussion and Analysis of Financial Condition and
Results of Operations--The Reorganization." References in this Prospectus to
the "Company" and "Telco" refer to Telco Communications Group, Inc. and its
subsidiaries, except where the context otherwise requires.
THE COMPANY
Telco is a rapidly growing switch-based provider of domestic and
international long distance telecommunication services primarily to residential
customers in the United States. Substantially all of the Company's customers
access its network by dialing a unique carrier identification code ("CIC Code")
before dialing the number they are calling. Using a CIC Code to access the
Company's network is known as "casual calling" because customers can use the
Company's services at any time without changing their existing long distance
carrier. The Company markets its long distance services under two brands, each
with a unique CIC Code: Dial & Save (CIC Code 10457) and the Long Distance
Wholesale Club (CIC Code 10297), and prices its services at a discount to the
basic "1 plus" rates offered by the three major long distance carriers: AT&T
Corp. ("AT&T"), MCI Communications Corporation ("MCI") and Sprint Corporation
("Sprint"). During May 1996, the Company provided long distance services to
approximately 2.6 million customers (switched access lines) in 37 states and
the District of Columbia. The Company plans to expand its marketing efforts in
these states and to offer service in one additional New England and 10
additional western states during 1996. Since the Company began operations in
November 1993, its revenues and net income have grown to approximately $215.4
million and $10.8 million, respectively, for the year ended December 31, 1995,
and to $91.9 million and $3.3 million, respectively, for the three months ended
March 31, 1996.
Although casual calling has been in existence since the mid-1980s, only
recently have companies such as Telco begun to aggressively pursue this market
opportunity. The Company markets its services primarily through direct mail and
inbound telesales and marketing, and believes that this marketing strategy
enables the Company to attract residential customers in a cost effective
manner. Because casual calling customers are not required to cancel or change
their presubscribed long distance carrier, the Company believes that aggressive
"win-back" and other customer acquisition programs prevalent in the residential
long distance market have a limited impact on the Company's business. See "Risk
Factors--Response Rates; Customer Attrition."
The Company bills its casual calling customers through local exchange carrier
("LEC") billing and collection agreements which enable the Company to place its
charges on the monthly local phone bills of its residential casual calling
customers. The Company has entered into billing and collection agreements with
LECs, including all of the Regional Bell Operating Companies ("RBOCs"), that
cover approximately 96% of the switched access lines in the United States. The
Company believes that these billing arrangements are the most effective
mechanism for billing its residential customers, because of the convenience to
its customers of receiving one bill for both local and long distance service
and the benefits derived from the LECs' extensive collections infrastructure.
The Company's billing information systems and services are provided by Tel
Labs, Inc. ("Tel Labs"), a telecommunications billing company organized in 1991
by Telco's Chairman of the Board. During May 1996, Tel Labs processed
approximately 98 million call records for 17 telecommunications companies,
including Telco. Concurrently with the completion of the Offerings, Telco will
acquire all of the outstanding
3
<PAGE>
capital stock of Tel Labs. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--The Reorganization."
To increase its volume of call traffic, Telco has begun to sell its excess
daytime capacity on a wholesale basis to other long distance carriers and has
created a Commercial Division to target business customers. Because the
Company's existing customer base is primarily residential, the majority of the
Company's current calls are handled during off-peak evening and weekend
periods.
The Company's switch-based network currently consists of six Digital Switch
Corporation ("DSC") DEX 600S, 600 and 600E switches located in Washington,
D.C.; Fort Lauderdale, Florida; Davenport, Iowa; Chattanooga, Tennessee; and
Austin, Texas, with one DEX 600E switch which recently became operational in
Las Vegas, Nevada. Additionally, the Company has made a committment to install
a DEX 600E switch in the New York City metropolitan area by the first quarter
of 1997. The Company's state-of-the-art digital switching and cross-connect
systems are designed to optimize traffic routing and provide for automatic
traffic re-routing in the event of a network failure. The Company leases
transmission lines from a variety of facilities-based long distance service
providers. The Company's sophisticated switch-based network (i) enables it to
control proprietary information such as customer call records and (ii)
positions it to take advantage of competitive rates for local access from
Competitive Local Exchange Carriers ("CLECs"), such as MFS Communications
Company, Inc. ("MFS") and Teleport Communications Group, Inc. ("Teleport").
The Company's strategy is to achieve continued growth by providing a broad
array of competitively priced long distance services. The Company's primary
objectives in pursuing this strategy are to (i) continue to increase the number
of its casual calling distribution channels and further establish brand loyalty
through remarketing activities in its existing markets and expansion into new
markets; (ii) target business customers to more fully utilize its network's
daytime capacity by developing a direct sales force as part of its Commercial
Division; (iii) expand the Company's network while continuing to focus on
providing low cost nationwide origination and termination capabilities; and
(iv) offer innovative products and services to new and existing customers by
leveraging the Company's network and operating infrastructure and billing and
information systems.
The address of the Company's principal place of business is 4219 Lafayette
Center Drive, Chantilly, Virginia 20151, and its phone number is (703) 631-
5600.
4
<PAGE>
THE OFFERINGS
Common Stock to be sold by the Company:
<TABLE>
<S> <C>
U.S. Offering.................. 4,880,000 shares
International Offering......... 1,220,000 shares
-----------------
Total........................ 6,100,000 shares
Common Stock to be sold by Selling Shareholders(1):
U.S. Offering.................. 2,080,000 shares
International Offering......... 520,000 shares
-----------------
Total........................ 2,600,000 shares
Common Stock to be Outstanding
after the Offerings............. 34,273,411 shares(2)
Use of Proceeds.................. To repay outstanding indebtedness and for
working capital and other general corporate
purposes, including expansion of the
Company's Commercial Division. The Company
will not receive any proceeds from the sale
of Common Stock by the Selling Shareholders.
Nasdaq National Market Symbol.... TCGX
</TABLE>
- --------
(1) Includes 682,082 shares to be sold by one of the Selling Shareholders,
Signet Media Capital Group, which will be purchased by it immediately prior
to sale in the Offerings through the exercise in full of an outstanding
warrant to purchase such shares for a nominal exercise price (the "Signet
Warrant"). See "Description of Capital Stock--The Signet Warrant."
(2) Includes 593,334 shares of Common Stock to be issued concurrently with the
consummation of the Offerings in exchange for all of the outstanding common
stock of Tel Labs and the 5,102,125 shares of Common Stock which were
issued during the second quarter of 1996 in exchange for the remaining
minority interest in Long Distance Wholesale Club ("LDWC") (such exchanges
are collectively referred to as the "Reorganization"). See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
The Reorganization." Also includes 649,198 shares of Common Stock issued
pursuant to the exercise of options on June 21, 1996 at a weighted average
exercise price of $0.44 per share, 112,996 shares of Common Stock to be
issued pursuant to options that will be exercised concurrently with the
Offerings at a weighted average exercise price of $2.12 per share and
169,575 shares to be issued concurrently with the consummation of the
Offerings upon the exercise of options by Natalie J. Marine-Street at an
exercise price of $1.76 per share (which shares will not be sold in the
Offerings). Excludes 2,693,560 shares of Common Stock issuable upon the
exercise of currently outstanding options of which options for 1,004,163
shares of Common Stock are currently exercisable. Immediately prior to the
Offerings, the Company intends to grant to approximately 30 non-executive
employees options to purchase up to an aggregate of 600,000 shares of
Common Stock at an exercise price equal to the initial public offering
price per share, which options will vest in one-third increments on the
first, second and third anniversaries of the date of grant. See
"Description of Capital Stock--Stock Option Plan" and "Management--Amended
and Restated 1994 Stock Option Plan."
5
<PAGE>
SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
INCEPTION(1) ------------------------------ ----------------------------
THROUGH HISTORICAL PRO FORMA, HISTORICAL PRO FORMA,
DECEMBER 31, ----------------- AS ADJUSTED ---------------- AS ADJUSTED
1993 1994 1995 1995(2) 1995 1996 1996(2)
------------ ------- --------- ----------- ------- -------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER MINUTE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues, net........... $ 1,135 $44,707 $ 215,376 $217,011 $45,277 $ 91,928 $ 92,392
Cost of services....... 993 27,736 133,728 134,384 28,079 54,730 55,005
Gross margin............ 142 16,971 81,648 82,627 17,198 37,198 37,387
Selling, general and
administrative........ 1,310 12,018 55,936 56,118 10,186 27,863 27,605
Depreciation and
amortization.......... 54 496 3,326 5,006 452 1,433 1,856
Operating income
(loss)................. (1,222) 4,457 22,386 21,503 6,560 7,902 7,926
Interest expense....... 25 897 2,952 -- 591 1,066 --
Other income
(expense)............. -- 15 (92) (68) 4 13 57
Provision for income
taxes................. -- 1,432 7,531 9,046 2,326 3,135 3,743
Minority interest...... -- 137 1,046 -- 109 433 --
Net income (loss)....... $(1,247) $ 2,006 $ 10,765 $ 12,389 3,538 3,281 4,240
Net income (loss) per
share(3)(4)............ $ (0.05) $ 0.07 $ 0.38 $ 0.38 $ 0.12 $ 0.12 $ 0.13
Weighted average number
of shares outstanding
(in thousands)(3)(4)... 26,149 27,129 28,442 32,752 28,434 28,502 32,812
BALANCE SHEET DATA (AT
PERIOD END):
Cash and cash
equivalents............ $ 140 $ 475 $ 937 $ 1,300 $ 37,564
Total assets............ 2,051 33,533 87,124 108,928 191,147
Total debt (including
capital lease
obligations)........... 1,559 18,884 44,410 54,437 --
Minority interest....... -- 137 1,183 1,617 --
Shareholders' equity
(deficit).............. (376) 1,655 12,420 15,701 153,519
OTHER OPERATING DATA:
Minutes of use (in
thousands)(5).......... 1,384,300 653,123
Revenue per minute of
use(6)................. $ 0.156 $ 0.141
Cost of services per
minute of use(7)....... $ 0.097 $ 0.084
</TABLE>
- --------
(1) The Company was incorporated in Virginia on July 21, 1993, and commenced
operations in November 1993.
(2) Adjusted to give pro forma effect to (a) the Offerings and the application
of the proceeds therefrom and (b) the Reorganization. See "Use of
Proceeds," "Pro Forma Consolidated Financial Statements" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
The Reorganization."
(3) Historical net income per share and weighted average number of shares
outstanding give effect to the 425-for-1 stock split, an offering price of
$16 per share, which price is used to measure the potentially dilutive
effect of options granted since June 13, 1995, and the issuance of
5,102,125 shares of Common Stock in connection with the acquisition of all
outstanding shares of LDWC (excluding shares held by the Company). The
consolidated financial statements of the Company included elsewhere in this
document assume an offering price of $15. See "Description of Capital
Stock--Stock Option Plan" and "Management--Amended and Restated 1994 Stock
Option Plan."
(4) The net proceeds from the sale of approximately 3,716,000 shares of Common
Stock offered by the Company hereby will be used to repay certain
indebtedness. Pro forma as adjusted net income per share is calculated
assuming that only these shares had been issued and the indebtedness repaid
as of the beginning of the period. Pro Forma as adjusted net income per
share also reflects the issuance of 593,334 shares of Common Stock in
connection with the acquisition of all outstanding shares of Tel Labs. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--The Reorganization."
(5) Represents billed minutes during the period indicated.
(6) Represents revenues, net, per minute of use for the period divided by
minutes of use for the period.
(7) Represents cost of services for the period divided by minutes of use for
the period.
6
<PAGE>
RISK FACTORS
Prospective investors should carefully review the information set forth
below prior to making an investment in the Common Stock.
RECENT RAPID GROWTH; ABILITY TO MANAGE GROWTH
Although the Company has experienced significant growth in a relatively
short period of time and intends to continue to grow rapidly, there can be no
assurance that the growth experienced by the Company will continue or that the
Company will be able to achieve the growth contemplated by its business
strategy. Implementation of the Company's growth strategy will place
additional demands upon the Company's management, operational and other
resources and will require additional long distance transmission capacity,
additional working capital, and billing and information systems. The Company's
ability to continue to grow may be affected by various factors, many of which
are not within the Company's control, including federal and state regulation
of the telecommunications industry, competition, the transmission capacity of
the Company's long distance carriers and adverse changes in customer
attrition, minute-usage patterns or response rates to direct mailings. While
the Company believes that its capital resources, network and infrastructure,
including the billing support provided by Tel Labs, provide a platform for
future growth, the Company's ability to continue to manage its growth
successfully will require it to further enhance its operational, management,
financial and information systems and controls and to expand, train and manage
its employee base. In addition, as the Company increases its service offerings
and expands its targeted markets, there will be additional demands on its
customer service support and sales, marketing and administrative resources.
There can be no assurance that the Company will successfully manage its
expanding operations and, if the Company's management is unable to manage
growth effectively, the Company's business, operating results, and financial
condition could be materially and adversely affected.
EXPANSION OF COMMERCIAL DIVISION
As part of its growth strategy, the Company will seek to further develop and
expand its Commercial Division which will offer presubscribed long distance
telephone service to business customers primarily using a direct sales effort.
Since the Company began operations in November 1993, it has focused primarily
on providing casual calling long distance telephone services to residential
customers and its marketing efforts have primarily relied upon direct mail
marketing and an inbound telesales and marketing system. The success of the
Company's Commercial Division will depend upon, among other things, the
Company's ability to build an effective direct sales force, including its
ability to attract, retain and train effective direct sales marketing
personnel, and to offer competitively-priced services attractive to business
customers. The Company expects to incur significant expenses and negative cash
flows for its Commercial Division as it expands its direct sales force and
builds its customer base. The start-up costs relating to its Commercial
Division are expected to reduce the Company's consolidated net income at least
through 1997. The success of the Company's Commercial Division will also
depend on various factors which are not within the Company's control,
including changes in general and local economic conditions, federal and state
regulation of the telecommunications industry and competition. Although
certain members of management have experience in direct sales marketing and
the commercial presubscribed long distance market, the Company itself does not
have experience in this distribution channel or market segment. There can be
no assurance that expansion costs will not exceed the Company's budgeted
amounts, that the Company will be able to successfully expand its Commercial
Division or that its Commercial Division will become profitable. In addition,
while the Company through Tel Labs, has extensive experience in producing
direct bills, and certain members of management have experience with respect
to collections from direct billed customers, the Company itself does not have
experience in collections from direct billed customers, and there can be no
assurance that the Company will be able to successfully develop such
collections infrastructure.
LIMITED OPERATING HISTORY
The Company was incorporated on July 21, 1993 and commenced its operations
in November 1993, and therefore has a limited operating history. There can be
no assurance that the Company's future operations will
7
<PAGE>
continue to generate operating or net income or that its business strategy
will be successful. See "Selected Consolidated Historical and Pro Forma
Financial Data," "Pro Forma Consolidated Financial Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
INCREASING COMPETITION
The U.S. long distance telecommunications industry is highly competitive and
is significantly influenced by the marketing and pricing decisions of the
larger industry participants. The industry has relatively insignificant
barriers to entry, numerous entities competing for the same customers and high
attrition rates (customer turnover), as customers frequently change long
distance providers in response to the offering of lower rates or promotional
incentives by competitors.
Many of the Company's competitors are significantly larger, have
substantially greater financial, technical and marketing resources and larger
networks than the Company, control transmission lines and have long-standing
relationships with the Company's target customers. The Company's competitors
include AT&T, MCI and Sprint and numerous other long distance providers,
including long distance providers that have specifically targeted the casual
calling market by means of direct mail strategies.
In October 1995, the U.S. Federal Communications Commission (the "FCC")
reclassified AT&T as a "non-dominant" carrier for domestic interstate
services, substantially reducing the regulatory constraints on AT&T, which may
make it easier for AT&T to compete directly with the Company for long distance
subscribers. AT&T was reclassified as a "nondominant" carrier for
international services on May 14, 1996. The Company also currently competes
with the RBOCs and other LECs in the provision of "short haul" toll calls
completed within a local access and transport area ("LATA") (or intraLATA
calls). In addition, as a result of the Telecommunications Act of 1996, which
was enacted on February 8, 1996 (the "1996 Telecommunications Act"), the RBOCs
and the GTE Operating Companies ("GTOCs") will be allowed to compete for the
provision of interLATA ("long haul") toll calls, upon receipt of all necessary
regulatory approvals and the satisfaction of applicable conditions. For the
RBOCs to provide interLATA toll service within the same states in which local
exchange service also is provided ("in-region service"), FCC approval must be
obtained. FCC approval to provide "in-region" service is conditioned upon,
among other things, a showing by the RBOC that, in certain circumstances,
facilities-based competition is present in its market, and that it has entered
into interconnection agreements which satisfy a 14-point "checklist" of
regulatory requirements. In addition, the 1996 Telecommunications Act is
designed to facilitate the entry of any entity (including cable television
companies and utilities) into both the long distance and local
telecommunications market. As a result of the 1996 Telecommunications Act,
long distance companies such as AT&T, MCI and Sprint should be able to
facilitate their entry into the local telephone market. It is unknown at this
time what impact the 1996 Telecommunications Act will have on the Company.
Depending on the exact nature and timing of GTOC and RBOC entry into the long
distance market, such entry could have a material adverse effect on the
Company's business, results of operations and financial condition. Certain of
the RBOCs have already taken steps to provide interLATA long distance services
and the Company expects that most or all of the other RBOCs will file
applications for interLATA long distance service authority. See "Business--
Regulation."
The ability of the Company to compete effectively will depend upon, among
other factors, its continued ability to provide high quality services at
competitive prices, and there can be no assurance that the Company will be
able to compete successfully in the future. The Company's competitors may
reduce rates or offer incentives to existing and potential customers of the
Company, whether caused by general competitive pressures or the entry of the
RBOCs, GTOCs and other LECs into the long distance market. The Company's
casual calling services compete primarily on the basis of price as the Company
prices its services at a discount to the basic "1 plus" rates offered by AT&T,
MCI and Sprint. Because the Company believes that to maintain its competitive
position it must be able to reduce its prices in order to meet reductions in
rates by others, a decrease in the rates charged by others for long distance
services could have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, the Company must
generally price its toll services at
8
<PAGE>
levels equal to or below the retail rates established by the LECs for their
own short-haul and long-haul rates. To the extent the LECs are able to reduce
the margin between the access costs charged to the Company and the retail toll
prices charged by the LECs, either by increasing access costs or lowering
retail toll rates (or both), the Company will encounter adverse pricing and
cost pressures in competing against LECs in both short-haul and long-haul toll
markets. See "--Regulatory and Legislative Risks." The Company expects price
competition to continue to increase and has observed a recent increase in
competition in the casual calling market. A further increase in such
competition could have a material adverse effect on the Company's business,
financial condition and results of operations, including a reduction in the
Company's response rates and higher customer attrition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Competition."
DEPENDENCE ON EFFECTIVE INFORMATION SYSTEMS AND BILLING AND COLLECTION
AGREEMENTS
The Company must process millions of call detail records quickly and
accurately in order to produce customer bills. The Company's billing
information systems are provided by Tel Labs. While the Company believes that
its billing and information systems are competitive strengths and will be
capable of processing the increased amounts of data that will result from the
Company's growth, there can be no assurance that such systems will not require
enhancement or substantial investments in the future or that the Company will
not encounter difficulties in integrating new technology into the Company's
systems or in expanding its systems to meet the needs of its Commercial
Division. See "--Recent Rapid Growth; Ability to Manage Growth," "--Expansion
of Commercial Division," "Business--Billing and Data Processing" and "--
Network and Operations." In addition, the Company bills its residential casual
calling customers through LEC billing and collection agreements, pursuant to
which the Company's charges are placed on its customers' monthly local
telephone bills. The Company believes that LEC billing and collection is the
most effective mechanism for billing and collecting charges from the Company's
residential customers, and the loss of agreements covering a significant
number of customers could have a material adverse effect on the Company's
business, results of operations and financial condition.
AVAILABILITY OF LEASED CAPACITY
All telephone calls made by the Company's customers are connected via
transmission lines leased by the Company from transmission facilities-based
long distance carriers that compete with the Company, including AT&T and
WorldCom, Inc. ("WorldCom"). The Company's profitability will continue to
depend, in part, on its ability to obtain and utilize leased capacity on a
cost-effective basis. The Company leases its capacity pursuant to agreements
with terms ranging from 18 to 36 months. Accordingly, the Company is
vulnerable to changes in its lease arrangements, such as price increases and
service cancellations. Although the Company believes that it has and will
continue to enjoy favorable relationships with the transmission facilities-
based long distance carriers from which the Company leases transmission lines,
there can be no assurance that leased capacity will continue to be available
at cost-effective rates.
RESPONSE RATES; CUSTOMER ATTRITION
The Company's business and results of operations are significantly affected
by the customer response rates to its direct mailing campaigns, customer
minute-usage patterns and by customer attrition rates with respect to its
mailing campaigns. The number of new customers who utilize the Company's
service in the near term period after a mailing determines the campaign's
overall response rate. Customer attrition generally represents the number of
customers who utilize the Company's service immediately after a mailing
campaign in one month but who fail to use the Company's service in subsequent
months. The Company believes that a high level of customer attrition is
inherent in the long distance industry. Attrition in the long distance
telecommunications industry is generally attributable to a number of factors,
including (i) initiatives of existing and new competitors as they engage in,
among other things, national advertising campaigns, telemarketing programs,
and the issuance of cash and other forms of customer "win back" incentives and
other customer acquisition programs prevalent in the residential long distance
market and (ii) the termination of service for non-payment. The Company
typically experiences higher customer attrition in the first few months
following a specific mailing as a significant number of customers sample the
Company's casual calling service. While remailings and additional marketing
9
<PAGE>
efforts in its existing markets are important components of the Company's
growth strategy, the Company recognizes that it may eventually reach a point
in its existing markets, at which the Company determines that it is no longer
cost-effective to target customers in such markets with its direct mail
marketing strategy. There can be no assurance that the Company's customer
attrition rate will not increase or that its response rate or customer minute-
usage pattern will not decrease. An increase in the Company's attrition rate
or a decrease in the Company's response rate or customer minute-usage pattern
could have a material adverse effect upon the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Overview."
REGULATORY AND LEGISLATIVE RISKS
Regulations, regulatory actions and court decisions have had, and in the
future may have, both positive and negative effects on the Company and its
ability to compete. The recent trend in both federal and state regulation of
telecommunication service providers has been in the direction of lessened
regulation. However, the general recent trend toward lessened regulation has
also given AT&T, the largest long distance carrier in the U.S., increased
pricing flexibility that has permitted it to compete more effectively with
smaller long distance carriers, such as the Company. In addition, the 1996
Telecommunications Act has opened the Company's markets to increased
competition. See "--Increasing Competition." There can be no assurance that
future regulatory, judicial and legislative changes will not have a material
adverse effect on the Company. See "Business--Regulation."
The Company is currently subject to federal and state government regulation
of its long distance telephone services. The FCC and relevant state public
service commissions ("PSCs") have the authority to regulate interstate and
intrastate rates, respectively, ownership of transmission facilities, and the
terms and conditions under which the Company'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 intrastate service, and is required to maintain a certificate
issued by the FCC in connection with the provision of international services.
Any failure to maintain proper federal and state tariffing or certification or
any difficulties or delays in obtaining required authorization could have a
material adverse effect on the Company.
To originate and terminate calls in connection with providing their
services, long distance carriers such as the Company must purchase "access"
from the LECs or CLECs. Access charges represent a significant portion of the
Company's cost of services and, generally, such access charges are regulated
by the FCC. The FCC has informally announced that it intends, in the near
future, to undertake a comprehensive review of its regulation of LEC access
charges to better account for increasing levels of local competition. Under
alternative access charge rate structures being considered by the FCC, LECs
would be permitted to allow volume discounts in the pricing of access charges.
While the outcome of these proceedings is uncertain, if these rate structures
are adopted many long distance carriers, including the Company, could be
placed at a significant cost disadvantage to larger competitors.
The FCC and certain state agencies also impose prior approval requirements
on transfers of control, including pro forma transfers of control and
corporate reorganizations, and assignments of regulatory authorizations. Such
requirements may delay, prevent or deter a change in control of the Company.
In addition, the Company's usage of its CIC Codes is regulated by the FCC.
Because all of the available three digit CIC Codes, such as those used by the
Company, have already been allocated, applicants for new CIC Codes are now
issued four digit codes. The FCC currently is conducting a rule making
proceeding in which it has proposed to require all carriers currently using
three digit CIC Codes, including the Company, to switch to four digit CIC
Codes. The FCC has not taken final action in this proceeding and has not
determined the date on which the carriers currently using three digit CIC
Codes will be required to switch to four digit CIC Codes. The
10
<PAGE>
Company is unable to determine what effect a switch to new four digit CIC
Codes would have on its business and results of operations. See "Business--
Industry Overview."
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's quarterly operating results have fluctuated in the past and
may fluctuate significantly in the future as a result of a variety of factors,
including the timing of direct mail marketing campaigns, general economic
conditions, specific economic conditions in the telecommunications industry,
the effects of governmental regulation and regulatory changes, user demand,
capital expenditures and other costs relating to the expansion of operations,
the introduction of new services by the Company or its competitors, the mix of
services sold and the mix of channels through which those services are sold,
the provision for bad debt expense, charges associated with the commissioning
of new switches, pricing changes and new service introductions by the Company
and its competitors and prices charged by the Company's facilities-based
transmission line suppliers. Certain of these factors are outside of the
Company's control. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the continued
contributions of its management team, as well as its technical, marketing and
sales personnel. While certain of the Company's employees have entered into
employment agreements with the Company, the Company's employees may
voluntarily terminate their employment with the Company at any time. The
Company's success also will depend on its ability to continue to attract and
retain qualified management, marketing, technical and sales personnel. The
process of locating such personnel with the combination of skills and
attributes required to carry out the Company's strategies is often lengthy.
Competition for qualified employees and personnel in the telecommunications
industry is intense and, from time to time, there are a limited number of
persons with knowledge of and experience in particular sectors of the
telecommunications industry. There can be no assurance that the Company will
be successful in attracting and retaining such executives and personnel. The
Company does not carry key man life insurance on any of such executives or
personnel. The loss of the services of key personnel, or the inability to
attract additional qualified personnel, could have a material adverse effect
on the Company's results of operations, development efforts and ability to
expand. See "Management."
CONTROL OF COMPANY BY PRINCIPAL SHAREHOLDERS
After completion of the Offerings and the Reorganization, the directors and
executive officers of the Company will own in the aggregate approximately 57%
of the then outstanding Common Stock (approximately 55% if the U.S.
Underwriters' and the Managers' over-allotment options are exercised).
Accordingly, if they choose to do so, management acting as a group will have
the power to amend the Company's Restated Articles of Incorporation (the
"Articles"), elect all of the directors, effect fundamental corporate
transactions such as mergers, asset sales and the sale of the Company and
otherwise direct the Company's business and affairs, without the approval of
any other shareholder. See "Management," "Principal and Selling Shareholders"
and "Description of Capital Stock--Certain Provisions of the Company's
Articles and Bylaws."
RELATED PARTY TRANSACTIONS
The Company has entered and, in connection with the Offerings, will enter,
into business transactions with certain of its principal shareholders,
including the acquisitions of LDWC and Tel Labs. Although the Company may
continue to enter into such transactions in the future, its policy is not to
enter into transactions with related persons unless the terms thereof are at
least as favorable to the Company as those that could be obtained from
unaffiliated third parties and are approved by a majority of disinterested
directors. See "Certain Transactions."
IMPACT OF INCREASED POSTAGE AND PAPER COSTS
Direct mail is the primary marketing vehicle for the Company's residential
services. Postage and paper costs are significant expenses in the operation of
the Company's business. There can be no assurance that the Company
11
<PAGE>
will be able to pass on any significant postage and paper cost increases to
its customers. Additionally, strikes or other service interruptions associated
with the production or delivery of the Company's direct mail could adversely
affect the Company's ability to market services on a timely basis. Any
increases in postage or paper costs or substantial service interruptions in
the production or delivery of the Company's direct mail could have an adverse
effect on the Company's operating results.
RISKS ASSOCIATED WITH ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES
In furtherance of its business strategy, the Company may enter into
strategic alliances with, acquire assets or businesses from, or make
investments in, companies that are complementary to its current operations.
The Company has no present commitments or agreements with respect to any such
strategic alliance, investment or acquisition. Any such future strategic
alliances, investments or acquisitions would be accompanied by the risks
commonly encountered in such transactions. Such risks include, among other
things, the difficulty of assimilating the operations and personnel of the
companies, the potential disruption of the Company's ongoing business, costs
associated with the development and integration of such operations, the
inability of management to maximize the financial and strategic position of
the Company by the successful incorporation of licensed or acquired technology
into the Company's service offerings, the maintenance of uniform standards,
controls, procedures and policies and the impairment of relationships with
employees and customers as a result of changes in management. In addition, the
Company may experience higher customer attrition with respect to customers
obtained through acquisitions.
ANTITAKEOVER CONSIDERATIONS
The Company's Articles and Amended and Restated Bylaws (the "Bylaws")
include certain provisions which may have the effect of delaying, deterring or
preventing a future takeover or change in control of the Company without the
approval of the Company's Board of Directors. Such provisions may also render
the removal of directors and management more difficult. Among other things,
the Company's Articles and/or Bylaws: (i) provide for a classified Board of
Directors serving staggered three-year terms, (ii) impose restrictions on who
may call a special meeting of shareholders, (iii) include a requirement that
shareholder action be taken only by unanimous written consent or at
shareholder meetings and (iv) specify certain advance notice requirements for
shareholder nominations of candidates for election to the Board of Directors
and certain other shareholder proposals. In addition, the Board of Directors,
without further action by the shareholders, may cause the Company to issue up
to 15,000,000 shares of preferred stock, no par value per share (the
"Preferred Stock"), on such terms and with such rights, preferences and
designations as the Board of Directors may determine. Issuance of such
Preferred Stock, depending upon the rights, preferences and designations
thereof, may have the effect of delaying, deterring or preventing a change in
control of the Company. Further, certain "antitakeover" provisions of the
Virginia Stock Corporation Act impose restrictions on the ability of a third
party to effect a change in control of the Company and may be considered
disadvantageous by a shareholder. See "Description of Capital Stock--Preferred
Stock," "--Certain Provisions of the Company's Articles and Bylaws," and "--
Virginia Stock Corporation Act; Antitakeover Effects." Certain federal and
state regulations requiring prior approval of transfers of control may also
have the effect of delaying, deterring or preventing a change in control of
the Company. See "--Regulatory and Legislative Risks" and "Business--
Regulation."
ABSENCE OF PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to the Offerings, there has been no public market for the Common
Stock. Although the Common Stock has been approved for trading on the Nasdaq
National Market, there can be no assurance that an active trading market will
develop or be maintained after the Offerings. The initial public offering
price of the Common Stock offered hereby will be determined by negotiations
among the Company and the representatives of the U.S. Underwriters and the
Managers and may not be indicative of the market price of the Common Stock
after the Offerings. For a description of the factors considered in
determining the initial public offering price, see "Underwriting." The market
price of the Common Stock may be highly volatile. Factors such as fluctuation
in the Company's operating results, announcements of technological innovations
or
12
<PAGE>
new products or services by the Company or its competitors, changes in the
regulatory framework or in the cost of long distance service or other
operating costs and changes in general market conditions may have a
significant effect on the market price of the Common Stock.
DILUTION TO PURCHASERS OF COMMON STOCK
Investors purchasing shares of Common Stock in the Offerings will experience
an immediate dilution in net tangible book value of their shares of Common
Stock. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial numbers of shares of Common Stock in the public
market, or the perception that such sales could occur, could adversely affect
the market price of the Common Stock and make it more difficult for the
Company to raise funds through equity offerings in the future. Several of the
Company's principal shareholders hold a significant portion of the Company's
outstanding Common Stock and a decision by one or more of these shareholders
to sell their shares pursuant to the exercise of registration rights, Rule 144
under the Securities Act of 1933, as amended (the "Securities Act"), or
otherwise, could materially adversely affect the market price of the Common
Stock. See "Principal and Selling Shareholders" and "Description of Capital
Stock--Registration Rights of Certain Holders."
Upon completion of the Offerings, the Company will have outstanding
34,273,411 shares of Common Stock and 2,693,560 shares of Common Stock subject
to stock options granted under the Company's 1994 Amended and Restated Stock
Option Plan (the "Stock Option Plan"). Of such outstanding shares, the
8,700,000 shares of Common Stock to be sold in the Offerings (together with
any shares sold upon exercise of the U.S. Underwriters' and Managers' over-
allotment options) will be freely tradeable without restriction or further
registration under the Securities Act, except for any shares held by
"affiliates" of the Company. The remaining 25,573,411 outstanding shares of
Common Stock will be deemed "restricted securities" under the Securities Act
and will be available for public sale if such shares are registered under the
Securities Act or sold in compliance with Rule 144. Of such restricted
securities, 24,122,054 shares are held by "affiliates" of the Company and will
be eligible (subject to the 180-day lock-up described below) for sale after
the Offerings in the public market pursuant to, and in accordance with the
volume, manner of sale and other conditions of Rule 144. The Securities and
Exchange Commission (the "Commission") has recently proposed amendments to
Rule 144 that would shorten by one year the holding periods applicable to
restricted securities, which could result in resales of the 1,451,357
restricted securities held by non-affiliates of the Company sooner than would
be the case under Rule 144 as currently in effect. Certain shareholders have
registration rights with respect to 25,118,753 shares of Common Stock which
are restricted securities. See "Shares Eligible for Future Sale."
Immediately prior to the Offerings, the Company intends to grant options
pursuant to the Stock Option Plan to purchase up to an aggregate of 600,000
shares of Common Stock to approximately 30 non-executive employees of the
Company's Commercial Division. The options will be exercisable at the initial
public offering price of the Common Stock per share and will vest in one-third
increments on the first, second and third anniversaries of the date of grant.
The Company, its executive officers and directors and the Selling
Shareholders who continue to own shares upon completion of the Offerings have
agreed that, subject to certain limited exceptions, for a period of 180 days
after the date of this Prospectus, they will not, directly or indirectly,
offer to sell, sell, hypothecate, pledge or otherwise dispose of any shares of
Common Stock (or securities convertible into, exchangeable for or exercisable
for or evidencing the right to purchase any shares of Common Stock), without
the prior written consent of Bear, Stearns & Co. Inc. See "Underwriting."
Promptly following the Offerings, the Company intends to register on Form S-
8 under the Securities Act approximately 7,500,000 shares of Common Stock
issuable under options granted or to be granted under the Stock Option Plan.
As a result, any shares issued upon exercise of outstanding options will be
eligible for sale in
13
<PAGE>
the public market beginning on the effective date of such registration
statement, other than shares acquired by individuals subject to the foregoing
lock-up. See "Shares Eligible for Future Sale" and "Management--Amended and
Restated 1994 Stock Option Plan."
USE OF PROCEEDS
The net proceeds to the Company from the Offerings are estimated to be
approximately $90.0 million ($109.2 million if the U.S. Underwriters' and
Managers' over-allotment options are exercised in full). The Company expects to
use the net proceeds from the Offerings to repay all outstanding indebtedness
under its revolving credit facility with Signet Bank, as administrative agent
(the "Credit Facility"). The Credit Facility, which expires on January 24,
1998, bears interest at a floating rate, based on LIBOR, which was
approximately 7.5% at May 31, 1996. As of May 31, 1996, $43.3 million of
indebtedness was outstanding under the Credit Facility. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations." Of
the remaining proceeds, approximately $15.6 million will be used to repay
outstanding amounts under the Company's existing capital leases and the balance
for working capital and general corporate purposes, including the expansion of
the Company's Commercial Division. The Company may use a portion of the net
proceeds from the Offerings to further its business strategy through strategic
alliances with, investments in, or acquisitions of, companies that are
complementary to the Company's operations. See "Business--Business Strategy."
The Company has no current pending acquisitions and is not currently engaged in
negotiations with respect to any potential acquisitions, other than the
acquisition of Tel Labs in the Reorganization. Pending application, such net
proceeds will be invested in short-term, marketable securities. The Company
will also receive de minimis proceeds upon the exercise of the Signet Warrant
by one of the Selling Shareholders and approximately $240,000 upon the exercise
by certain other Selling Shareholders of options with respect to 112,996 shares
of Common Stock concurrently with the Offerings, which shares will be sold in
the Offerings. Such proceeds will be used for working capital and general
corporate purposes. See "Management--Amended and Restated 1994 Stock Option
Plan," "Certain Transactions--Loans to Certain Executive Officers" and
"Principal and Selling Shareholders." The Company will not receive any of the
proceeds from the sale of shares by the Selling Shareholders.
DIVIDEND POLICY
The Company currently intends to retain all future earnings for use in the
operation of its business and, therefore, does not anticipate paying any cash
dividends in the foreseeable future. The declaration and payment in the future
of any cash dividends will be at the discretion of the Company's Board of
Directors and will depend upon, among other things, the earnings, capital
requirements and financial position of the Company, existing and/or future loan
covenants and general economic conditions. Under the terms of the Credit
Facility, the Company and its subsidiaries are restricted from declaring,
making or paying any distributions except in certain limited circumstances. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
14
<PAGE>
DILUTION
The Company's pro forma net tangible book value as of March 31, 1996 would
have been $18.9 million, or $0.69 per share. Pro forma net tangible book value
per share represents the total amount of tangible assets of the Company, less
the total amount of liabilities of the Company, divided by the number of
shares of Common Stock outstanding on a fully diluted basis, in each case
after giving pro forma effect to the Reorganization, as if it had occurred on
March 31, 1996, the exercise of the Signet Warrant for 682,082 shares of
Common Stock, and the exercise of options for 112,996 shares of Common Stock
concurrently with the Offerings. After giving effect to the sale by the
Company of the 6,100,000 shares of Common Stock offered hereby (at an assumed
public offering price of $16 per share), less estimated underwriting discounts
and commissions and the other estimated expenses of the Offerings payable by
the Company, and the application of the estimated net proceeds therefrom the
Company's pro forma net tangible book value as of March 31, 1996 would have
been $108.9 million, or $3.26 per share of Common Stock. This represents an
immediate increase in net tangible book value of $2.57 per share to existing
shareholders and an immediate dilution in net tangible book value of $12.74
per share to new investors purchasing shares of Common Stock in the Offerings.
The following table illustrates this dilution on a per share basis to the new
investors:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $16.00
------
Pro forma net tangible book value per share at March 31,
1996..................................................... $0.69
Increase in net tangible book value attributable to new
investors.................................................. $2.57
-----
Pro forma net tangible book value per share after giving
effect to the Offerings.................................... $ 3.26
------
Dilution per share to new investors......................... $12.74
======
</TABLE>
The following table sets forth, on a pro forma basis as of March 31, 1996,
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the weighted average price per share
paid by existing shareholders and by new investors before deducting the
underwriting discounts and commissions and estimated expenses of the Offerings
payable by the Company:
<TABLE>
<CAPTION>
SHARES AVERAGE
PURCHASED TOTAL CONSIDERATION PRICE
------------------ -------------------- PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- -------
<S> <C> <C> <C> <C> <C>
Existing shareholders........... 27,354,638 81.8% $ 48,713,720 33.3% $1.78
New investors................... 6,100,000 18.2% 97,600,000 66.7% 16.00
---------- ----- ------------ -----
Total......................... 33,454,638 100% $146,313,720 100% $4.37
========== ===== ============ =====
</TABLE>
The information in the table above excludes the effect of options to
purchase 2,693,560 shares of Common Stock outstanding at July 11, 1996, at
exercise prices ranging from $0.67 to $7.53 per share with a weighted average
exercise price of $5.08 per share and excludes the exercise of options to
purchase 649,198 shares of Common Stock on June 21, 1996 at a weighted average
exercise price of $.44 and the exercise of options to acquire 169,575 shares
of Common Stock concurrently with the Offerings at an exercise price of $1.76
per share, which shares are not being sold in the Offerings. The exercise of
any of the outstanding options to purchase 1,129,528 shares with exercise
prices of less than $3.26 would result in additional dilution to new
investors. In addition, the Company intends to grant, immediately prior to the
Offerings, options to purchase up to an aggregate of 600,000 shares of Common
Stock under the Stock Option Plan at an exercise price equal to the initial
public offering price per share. See "Management--Executive Compensation" and
"--Amended and Restated 1994 Stock Option Plan," "Shares Eligible for Future
Sale" and "Principal and Selling Shareholders."
15
<PAGE>
CAPITALIZATION
The following table sets forth the cash and capitalization of the Company (i)
as of March 31, 1996, and (ii) on a pro forma basis giving effect to the
Reorganization and the issuance and sale by the Company of 6,100,000 shares of
Common Stock in the Offerings (at an assumed public offering price of $16 per
share) and the application of the estimated net proceeds therefrom. See "Use of
Proceeds," "Selected Consolidated Historical and Pro Forma Financial Data,"
"Pro Forma Consolidated Financial Statements," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements and notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
---------------------------------
PRO FORMA
HISTORICAL PRO FORMA AS ADJUSTED
---------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................. $ 1,300 $ 2,001 $ 37,564
======= ======== ========
Current portion of capital lease
obligations.............................. $ 3,163 $ 3,163 $ --
Long-term debt, net of current portion:
Credit Facility(1)...................... 38,634 $ 38,634 $ --
Capital lease obligations(1)............ 12,640 $ 12,640 $ --
------- -------- --------
Total long-term debt...................... 51,274 51,274 --
Shareholders' equity:
Preferred Stock, no par value;
15,000,000 shares authorized; no shares
issued or outstanding, pro forma....... $ -- $ -- $ --
Common Stock, no par value; 150,000,000
shares authorized; 20,864,100 shares
issued and outstanding, historical;
27,354,638 issued and outstanding, pro
forma(2); 33,454,638 issued and
outstanding, pro forma as adjusted..... 896 48,714 138,714
Additional paid in capital--accumulated
deficit remaining upon termination of
S-corporation election................. (1,247) (1,247) (1,247)
Retained earnings......................... 16,052 16,052 16,052
------- -------- --------
Total shareholders' equity................ $15,701 $ 63,519 $153,519
======= ======== ========
Total capitalization.................. $70,138 $114,793 $153,519
======= ======== ========
</TABLE>
- --------
(1) At May 31, 1996, approximately $43.3 million was outstanding under the
Credit Facility and $15.6 million was outstanding under capital leases.
After giving effect to the Offerings and the application of the net
proceeds therefrom, the Company would have had $65.0 million of
availability under the Credit Facility which can be borrowed (subject to
borrowing base limitations) to finance working capital requirements and for
general corporate purposes.
(2) Excludes 2,693,560 shares of Common Stock issuable upon the exercise of
options outstanding on the date hereof at a weighted average exercise price
of $5.08 per share, the exercise of options to acquire 649,198 shares of
Common Stock exercised on June 21, 1996, and the exercise of options to
acquire 169,575 shares of Common Stock concurrently with the Offerings,
which shares will not be sold in the Offerings. Includes options
outstanding on the date hereof with respect to 112,996 shares of Common
Stock which are expected to be exercised concurrently with the Offerings at
a weighted average exercise price of $2.12 per share and 682,082 shares of
Common Stock issuable upon the exercise of the Signet Warrant at a nominal
exercise price. See "Management--Amended and Restated 1994 Stock Option
Plan," "Principal and Selling Shareholders," "Description of Capital
Stock--The Signet Warrant" and "--Stock Option Plan."
16
<PAGE>
SELECTED CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth certain consolidated financial information
for the Company for the periods ended December 31, 1993, 1994 and 1995, which
have been derived from the Company's audited consolidated financial statements
and notes thereto included elsewhere in this Prospectus and pro forma
information reflecting the Offerings and the Reorganization. The financial
information set forth below for the three-month periods ended March 31, 1995
and 1996 has been derived from unaudited consolidated financial statements of
the Company. In the opinion of management, the unaudited financial statements
have been prepared on the same basis as the audited financial statements and
include all adjustments, which consist only of normal recurring adjustments,
necessary for a fair presentation of the financial position and the results of
operations for these periods. Operating results for the three months ended
March 31, 1996 are not necessarily indicative of the results that may be
expected for the full year. The following financial information should be read
in conjunction with "Pro Forma Consolidated Financial Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
INCEPTION(1) ------------------------------ ----------------------------
THROUGH HISTORICAL PRO FORMA, HISTORICAL PRO FORMA,
DECEMBER 31, ----------------- AS ADJUSTED ---------------- AS ADJUSTED
1993 1994 1995 1995 (2) 1995 1996 1996 (2)
------------ ------- --------- ----------- ------- -------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER MINUTE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues, net........... $ 1,135 $44,707 $ 215,376 $217,011 $45,277 $ 91,928 $92,392
Cost of services....... 993 27,736 133,728 134,384 28,079 54,730 55,005
Gross margin............ 142 16,971 81,648 82,627 17,198 37,198 37,387
Selling, general and
administrative........ 1,310 12,018 55,936 56,118 10,186 27,863 27,605
Depreciation and amor-
tization.............. 54 496 3,326 5,006 452 1,433 1,856
Operating income
(loss)................. (1,222) 4,457 22,386 21,503 6,560 7,902 7,926
Interest expense....... 25 897 2,952 -- 591 1,066 --
Other income (ex-
pense)................ -- 15 (92) (68) 4 13 57
Provision for income
taxes................. -- 1,432 7,531 9,046 2,326 3,135 3,743
Minority interest...... -- 137 1,046 -- 109 433 --
Net income (loss)....... $(1,247) $ 2,006 $ 10,765 $ 12,389 $ 3,538 $ 3,281 $ 4,240
Net income (loss) per
share(3)(4)............ $ (0.05) $ 0.07 $ 0.38 $ 0.38 $ 0.12 $ 0.12 $ 0.13
Weighted average number
of shares outstanding
(in thousands)(3)(4)... 26,149 27,129 28,442 32,752 28,434 28,502 32,812
BALANCE SHEET DATA (AT
PERIOD END):
Cash and cash
equivalents............ $ 140 $ 475 $ 937 $ 1,300 $37,564
Total assets............ 2,051 33,533 87,124 108,928 191,147
Total debt (including
capital lease
obligations)........... 1,559 18,884 44,410 54,437 --
Minority interest....... -- 137 1,183 1,617 --
Shareholders' equity
(deficit).............. (376) 1,655 12,420 15,701 153,519
OTHER OPERATING DATA:
Minutes of use(in
thousands) (5)......... 1,384,300 653,123
Revenue per minute of
use(6)................. $ 0.156 $ 0.141
Cost of services per
minute of use(7)....... $ 0.097 $ 0.084
</TABLE>
- --------
(1) The Company was incorporated in Virginia on July 21, 1993, and commenced
operations in November 1993.
(2) Adjusted to give pro forma effect to (a) the Offerings and the application
of the proceeds therefrom and (b) the Reorganization. See "Use of
Proceeds," "Pro Forma Consolidated Financial Statements" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
The Reorganization."
(3) Historical net income per share and weighted average number of shares
outstanding give effect to the 425-for-1 stock split, an offering price of
$16 per share, which price is used to measure the potentially dilutive
effect of options granted since June 13, 1995, and the issuance of
5,102,125 shares of Common Stock in connection with the acquisition of all
outstanding shares of LDWC (excluding shares held by the Company). The
consolidated financial statements of the Company included elsewhere in
this document assume an offering price of $15. "Description of Capital
Stock--Stock Option Plan" and "Management--Amended and Restated 1994 Stock
Option Plan."
(4) The net proceeds from the sale of approximately 3,716,000 shares of Common
Stock offered by the Company hereby will be used to repay certain
indebtedness. Pro forma as adjusted net income per share is calculated
assuming that only these shares had been issued and the indebtedness
repaid as of the beginning of the period. Pro Forma as adjusted net income
per share also reflects the issuance of 593,334 shares of Common Stock in
connection with the acquisition of all outstanding shares of Tel Labs. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--The Reorganization."
(5) Represents billed minutes during the period indicated.
(6) Represents revenues, net, per minute of use for the period divided by
minutes of use for the period.
(7) Represents cost of services for the period divided by minutes of use for
the period.
17
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements have
been prepared to give effect to the Reorganization and the Offerings. The
unaudited pro forma consolidated statements of income of the Company for the
year ended December 31, 1995 and the three months ended March 31, 1996, give
effect to the Reorganization and the Offerings as if they occurred on January
1, 1995 and January 1, 1996, respectively. The accompanying unaudited pro
forma consolidated balance sheet as of March 31, 1996 has been prepared as if
the Reorganization and the sale by the Company of the Common Stock offered
hereby were consummated as of that date. The pro forma statements are based
upon available information and certain assumptions that the Company believes
are reasonable under the circumstances.
As part of the Reorganization, Telco has purchased all of the outstanding
minority interest (44.4%) in LDWC, a 55.6% owned subsidiary of the Company,
effective on April 1, 1996 through the exchange of 5,102,125 shares of Telco
for 100 shares of LDWC and the conversion of outstanding LDWC options into
options to purchase 291,842 shares of the Company's Common Stock, for a total
purchase price of approximately $39,984,000. Concurrently with the completion
of the Offerings, the Company will purchase all of the outstanding shares of
Tel Labs in exchange for 593,334 shares of the Company's Common Stock for a
total purchase price of $7,594,000. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--The Reorganization" and
"Certain Transactions--Long Distance Wholesale Club" and "--Tel Labs."
Under purchase accounting, the purchase price is allocated to the fair value
of the assets and liabilities of acquired entities at the date of acquisition.
For purposes of determining the pro forma effect of the LDWC acquisition, the
Company's unaudited pro forma consolidated financial statements reflect
management's estimate of such allocations based on knowledge gained through
its operating control and ownership of 55.6% of LDWC's capital stock. Such
allocations with respect to Tel Labs will be finalized based upon continued
analysis. As a result, the final allocation of the purchase price for Tel Labs
may differ from that set forth in the unaudited pro forma consolidated
financial statements. The Company does not expect that the final allocation of
the purchase price for Tel Labs will differ materially from the preliminary
allocation.
The unaudited pro forma consolidated financial statements and notes thereto
should be read in conjunction with "Use of Proceeds," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Company's consolidated financial statements and notes thereto included
elsewhere in this Prospectus. These unaudited pro forma consolidated financial
statements and notes thereto are provided for informational purposes only and
do not purport to be indicative of the results that would have actually been
obtained had the Reorganization and the Offerings been completed on the dates
indicated or that may be expected to occur in the future.
18
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
TELCO TEL LABS REORGANIZATION OFFERINGS PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
---------- ---------- -------------- --------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Revenues, net........... $215,376 $2,895 $(1,260)(/1/) $217,011 $ -- $217,011
Cost of services........ 133,728 656 -- 134,384 -- 134,384
-------- ------ ------- -------- ------ --------
Gross margin.......... 81,648 2,239 (1,260) 82,627 -- 82,627
Operating expenses:
Selling, general and
administrative....... 55,936 1,442 (1,260)(/1/) 56,118 -- 56,118
Depreciation and
amortization......... 3,326 42 1,638 (/2/) 5,006 -- 5,006
-------- ------ ------- -------- ------ --------
Total operating
expenses............... 59,262 1,484 378 61,124 -- 61,124
-------- ------ ------- -------- ------ --------
Operating income........ 22,386 755 (1,638) 21,503 -- 21,503
Interest expense........ 2,952 -- -- 2,952 (2,952)(/4/) --
Other income (expense).. (92) 24 -- (68) -- (68)
Income taxes............ 7,531 327 -- 7,858 1,188 (/4/) 9,046
Minority interest....... 1,046 -- (1,046)(/3/) -- -- --
-------- ------ ------- -------- ------ --------
Net income.............. $ 10,765 $ 452 $ (592) $ 10,625 $1,764 $ 12,389
======== ====== ======= ======== ====== ========
Net income per
share(/1//1/).......... $ 0.38 n.m. n.m. $ 0.37 n.m. $ 0.38
Weighted average number
of
shares outstanding
(in
thousands)(/1//3/)..... 28,442 594 n.m. 29,036 3,716 32,752
</TABLE>
The accompanying notes to Unaudited Pro Forma Consolidated Financial Statements
are an integral part of these statements.
19
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
TELCO TEL LABS REORGANIZATION OFFERINGS PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
---------- ---------- -------------- --------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Revenues, net........... $91,928 $1,091 $(627)(/1/) $92,392 $ -- $92,392
Cost of services........ 54,730 275 -- 55,005 -- 55,005
------- ------ ----- ------- ------ -------
Gross margin.......... 37,198 816 (627) 37,387 -- 37,387
Operating expenses:
Selling, general and
administrative....... 27,863 369 (627)(/1/) 27,605 -- 27,605
Depreciation and
amortization......... 1,433 13 410 (/2/) 1,856 -- 1,856
------- ------ ----- ------- ------ -------
Total operating
expenses............... 29,296 382 (217) 29,461 -- 29,461
------- ------ ----- ------- ------ -------
Operating income
(loss)................. 7,902 434 (410) 7,926 -- 7,926
Interest expense........ 1,066 -- -- 1,066 (1,066)(/4/) --
Other income (expense).. 13 44 -- 57 -- 57
Income taxes............ 3,135 179 -- 3,314 429 (/4/) 3,743
Minority interest....... 433 -- (433)(/3/) -- -- --
------- ------ ----- ------- ------ -------
Net income.............. $ 3,281 $ 299 $ 23 $ 3,603 $ 637 $ 4,240
======= ====== ===== ======= ====== =======
Net income per
share(/1//1/).......... $ 0.12 n.m. n.m. $ 0.12 n.m. $ 0.13
Weighted average number
of shares outstanding
(in thousands)(13)..... 28,502 594 n.m. 29,096 3,716 32,812
</TABLE>
The accompanying notes to Unaudited Pro Forma Consolidated Financial Statements
are an integral part of these statements.
20
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1996
<TABLE>
<CAPTION>
TELCO TEL LABS REORGANIZATION PRO OFFERINGS PRO FORMA,
HISTORICAL HISTORICAL ADJUSTMENTS FORMA ADJUSTMENTS AS ADJUSTED
---------- ---------- -------------- -------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash.................. $ 1,300 $ 461 $ 240(/1//2/) $ 2,001 $ 35,563 (9) $ 37,564
Accounts receivable,
trade, net........... 75,999 402 -- 76,401 -- 76,401
Prepaid expenses...... 1,378 2 -- 1,380 -- 1,380
Deferred income tax
asset................ 697 -- -- 697 -- 697
Other................. 66 345 (211)(/5/) 200 -- 200
-------- ------ ------- -------- -------- --------
Total current
assets............. 79,440 1,210 29 80,679 35,563 116,242
Property, Plant and
Equipment:
Leasehold
improvements......... 1,168 -- -- 1,168 -- 1,168
Network equipment..... 5,430 -- -- 5,430 19,291 24,721
Office furniture...... 2,194 268 -- 2,462 -- 2,462
Network equipment
under capital lease.. 19,291 -- -- 19,291 (19,291) --
Network facilities
under development.... 5,595 -- -- 5,595 -- 5,595
Accumulated
depreciation......... (4,886) (78) -- (4,964) -- (4,964)
-------- ------ ------- -------- -------- --------
Total property,
plant and
equipment.......... 28,792 190 -- 28,982 -- 28,982
39,041 (/7/) 45,923 -- 45,923
Other Assets
(principally
goodwill).......... 696 583 5,603 (/6/) --
-------- ------ ------- -------- -------- --------
Total Assets........ $108,928 $1,983 $44,673 $155,584 $ 35,563 $191,147
======== ====== ======= ======== ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities:
Capital lease
obligations, current
portion.............. $ 3,163 $ -- $ -- $ 3,163 $ (3,163)(9) $ --
Excise taxes payable.. 1,338 -- -- 1,338 -- 1,338
Accounts payable...... 12,812 37 -- 12,849 -- 12,849
Accrued network access
and transmission
expense.............. 12,605 -- -- 12,605 -- 12,605
Other accrued ex-
penses............... 6,333 315 -- 6,648 -- 6,648
Income taxes payable.. 2,394 187 -- 2,581 -- 2,581
Payable to related
parties.............. 280 -- (211)(5) 69 -- 69
-------- ------ ------- -------- -------- --------
Total current
liabilities........ 38,925 539 (211) 39,253 (3,163) 36,090
Long-Term Liabilities:
Long-term debt........ 38,634 -- -- 38,634 (38,634)(9) --
Capital lease
obligations.......... 12,640 -- -- 12,640 (12,640)(9) --
Deferred income
taxes................ 1,411 127 -- 1,538 -- 1,538
-------- ------ ------- -------- -------- --------
Total long-term
liabilities........ 52,685 127 -- 52,812 (51,274) 1,538
-------- ------ ------- -------- -------- --------
Minority Interest....... 1,617 -- (1,617)(3)(8) -- -- --
Commitments and
Contingencies.......... -- -- -- -- -- --
Shareholders' Equity:
Common stock, no par.. 896 1 240(/1//2/) 48,714 90,000 (/1//0/) 138,714
39,984 (/7/)
7,594 (/6/)
(1)(6)
Additional paid in capi-
tal-accumulated deficit
remaining upon termina-
tion of S-corporation
election............. (1,247) -- -- (1,247) -- (1,247)
Retained earnings..... 16,052 1,316 (1,316)(6) 16,052 -- 16,052
-------- ------ ------- -------- -------- --------
Total shareholders'
equity............. 15,701 1,317 46,501 63,519 90,000 153,519
-------- ------ ------- -------- -------- --------
Total Liabilities
and Shareholders'
Equity............. $108,928 $1,983 $44,673 $155,584 $ 35,563 $191,147
======== ====== ======= ======== ======== ========
</TABLE>
The accompanying notes to Unaudited Pro Forma Consolidated Financial Statements
are an integral part of these statements.
21
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS:
(1) Reflects the elimination of intercompany revenues and expenses between
Telco and Tel Labs.
(2) Reflects the amortization of Tel Labs' identified intangibles over a
period of five years and goodwill with estimated lives of 15 and 35 years
for Tel Labs and LDWC, respectively.
(3) Reflects the elimination of minority interest in income of LDWC and Telco
Development Group of Delaware, Inc. (an 80% owned subsidiary of Telco).
The remaining 20% interest is owned by Tel Labs and will be acquired by
Telco in connection with the acquisition of Tel Labs in the
Reorganization.
(4) Reflects reduction of interest expense resulting from the repayment of
all debt and capital lease obligations with proceeds from the Offerings
and an increase in income taxes associated therewith which were
calculated at statutory rates.
(5) Reflects the elimination of intercompany receivables and payables between
the Company and Tel Labs.
(6) Reflects the following pro forma adjustments associated with the purchase
of Tel Labs:
<TABLE>
<S> <C>
Purchase price: 593,334 shares of Telco Common Stock................ $ 7,594
Fair value of net assets at March 31, 1996.......................... (1,991)
-------
Excess purchase price............................................... $ 5,603
=======
Estimated allocation:
Identified intangibles.............................................. $ 1,120
Goodwill and trained workforce...................................... 4,483
-------
$ 5,603
=======
</TABLE>
(7) Reflects the following pro forma adjustments associated with the purchase
of LDWC:
<TABLE>
<S> <C>
Purchase price: 5,102,125 shares of Telco Common Stock............ $38,416
Conversion of LDWC options into options to purchase a total of
291,842 shares of Common Stock................................... 1,568
-------
39,984
Fair value of 44.4% of the net assets of LDWC at March 31, 1996... (943)
-------
Excess purchase price............................................. $39,041
=======
Estimated allocation:
Goodwill and trained workforce.................................... $39,041
=======
</TABLE>
(8) Reflects the elimination of cumulative minority interest in the net
assets of LDWC and Telco Development Group of Delaware, Inc. (an 80%
owned subsidiary of Telco). The remaining 20% interest is owned by Tel
Labs and will be acquired by Telco in connection with the acquisition of
Tel Labs in the Reorganization.
(9) Reflects the following application of net proceeds from the Offerings:
<TABLE>
<S> <C>
Offering proceeds................................................... $90,000
Retirement of long-term debt........................................ (38,634)
Retirement of capital lease obligations
Current portion................................................... (3,163)
Long-term portion................................................. (12,640)
-------
$35,563
=======
</TABLE>
(10) Reflects net proceeds of $90,000 from the Offerings.
(11) Pro Forma, as Adjusted, net income per share is based on the weighted
average number of shares outstanding, adjusted to give pro forma effect
to the application of proceeds from the Company's sale of approximately
3,716,000 shares of Common Stock, to be used to repay certain
indebtedness therefrom and the issuance of 5,102,125 and 593,334 shares
of Common Stock to give effect to the Reorganization. Pro Forma net
income per share gives pro forma effect only to the Reorganization.
(12) Reflects proceeds of approximately $240,000 from the exercise of options
with respect to 112,996 shares of Common Stock to be exercised
concurrently with the Offerings at a weighted average exercise price of
$2.12 per share.
(13) Represents weighted average number of shares outstanding based on a 425-
for-1 stock split and an assumed offering price of $16 per share in order
to measure the potentially dilutive effects of options granted since June
13, 1995.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is presented to assist in assessing the changes in
financial condition and performance of the Company over the three fiscal years
since inception. The following information should be read in conjunction with
the financial statements and related notes and other detailed information
regarding the Company included elsewhere in this Prospectus and should not be
construed to imply management's belief that the results, causes or trends
presented will necessarily continue in the future. Certain information
contained below and elsewhere in this Prospectus, including information with
respect to the Company's plans and strategy for its business, are forward-
looking statements. See "Risk Factors" for a discussion of important factors
which could cause actual results to differ materially from the forward-looking
statements contained herein.
OVERVIEW
The Company is a rapidly growing switch-based provider of domestic and
international long distance telecommunications services primarily to
residential customers in the United States. The Company, which was formed on
July 21, 1993 and commenced operations in November 1993, has expanded its
originating service area from Florida to 37 states and the District of
Columbia, with switches located in Washington, D.C., Ft. Lauderdale, Florida,
Davenport, Iowa, Chattanooga, Tennessee and Austin, Texas. The Company expects
that its recently deployed Las Vegas, Nevada, switch will expand the Company's
originating service area to an additional 10 contiguous states. Additionally,
the Company has made a commitment to install a DEX 600E switch in the New York
City metropolitan area during the first quarter of 1997, in order to increase
network efficiency. The Company intends to direct mail market to most of the
households located in the 48 contiguous United States in 1996.
The Company's business and results of operations are significantly affected
by customer response rates to individual mailing campaigns, customer minute-
usage patterns and by customer attrition rates with respect to its mailing
campaigns shortly after such campaigns. The number of new customers who
utilize the Company's service in the near term period after a mailing defines
the campaign's overall response rate. Customer attrition generally represents
the number of customers who utilize the Company's service immediately after a
mailing campaign in one month but who fail to use the Company's service in
subsequent months. Customer attrition is typically highest in the first few
months following a specific mailing campaign as a significant number of
customers initially sample the Company's casual calling service in response to
the mailing. Although the Company experiences monthly attrition in its
customer base, the Company's monthly average minute usage per customer
typically increases following the attrition of the initial users.
The Company has experienced significant growth since its inception. The
Company's revenues have increased to approximately $215.4 million in 1995 from
approximately $44.7 million in 1994, while for the three months ended March
31, 1996, revenues increased to $91.9 million versus $45.3 million for the
three months ended March 31, 1995. Although the Company intends to continue to
grow rapidly, there can be no assurance that the growth experienced by the
Company will continue. The Company believes that its further growth is
dependent in part on its diversification into other distribution channels and
product categories. A key element of the Company's strategy is the development
of a direct sales force for its Commercial Division which will target business
customers to more fully utilize its network's daytime capacity. See "Risk
Factors--Recent Rapid Growth; Ability to Manage Growth," "--Expansion of
Commercial Division," "--Availability of Leased Capacity," "--Increasing
Competition," "--Response Rates; Customer Attrition " and "--Regulatory and
Legislative Risks."
The Company's revenues consist of sales revenues for long distance usage
less related bad debt expenses. The Company accrues for bad debt at varying
percentages of revenue, based on the higher of actual bad debt experience or
the contracted amount withheld pursuant to the Company's LEC billing and
collection agreements. The Company records an allowance for amounts which it
estimates will be unbillable or uncollectible, which allowance reduces gross
revenues. For the three months ended March 31, 1996, the Company reduced its
revenue by approximately $7.8 million for amounts related to bad debt accruals
and charges.
23
<PAGE>
The Company's cost of services consists of transmission and installation
expenses. The majority of transmission expenses consist of payments to LECs
for local access charges. The remainder of the transmission expenses are fixed
cost facilities lease payments to facilities-based carriers for leased
transmission lines and payments to other long distance providers for the
Company's off-network and international traffic. For the month ended May 31,
1996, 100% of the Company's "1 plus" traffic minutes were originated on the
Company's switch-based network and approximately 82% of its domestic traffic
minutes were terminated on the network. With the installation of its Las Vegas
switch, and the incurrence of installation charges relating to the markets
served by that switch, the Company believes that its ongoing installation
charges will be reduced. Efficiencies attributable to the expansion of the
Company's network have enabled the Company to increase its revenues at a
declining cost per minute of use.
The Company's operating expenses consist primarily of mail marketing
expenses, depreciation, customer service, billing service, data processing and
other general corporate overhead items. Mail and other marketing expenses,
billing service and data processing are almost exclusively variable expenses
while customer service has both a variable and fixed component. The Company
expenses all mail and other marketing and telemarketing/customer service costs
related to casual calling in the period in which they are incurred.
Billing service expense consists of payments made to LECs under billing and
collection agreements which enable the Company to include its charges on its
customers' monthly local telephone bills and take advantage of the LECs'
extensive collections infrastructure. The Company's back office and billing
support are provided by Tel Labs. The majority of the Company's depreciation
expense is related to network equipment and facilities, all of which is
depreciated for financial accounting purposes over a five-year period. The
Company anticipates increased amortization expense due to the goodwill created
in connection with the Company's acquisition of Tel Labs and its acquisition
of the remaining minority interest in LDWC. In addition, the Company expects
to incur significant expenses and negative cash-flows for its Commercial
Division as it expands its direct sales force and builds its customer base.
The start-up costs relating to its Commercial Division are expected to reduce
the Company's consolidated net income at least through 1997. See "Risk
Factors--Recent Rapid Growth; Ability to Manage Growth" and "--Expansion of
Commercial Division. "
The Company's quarterly operating results have fluctuated in the past and
may fluctuate significantly in the future as a result of a variety of factors,
including the timing of direct mail marketing campaigns, the installation of
new switches, the provision for bad debt expense, pricing changes and the
expansion of operations. See "Risk Factors--Potential Fluctuations in
Quarterly Operating Results" and "--Quarterly Results of Operations" below.
THE REORGANIZATION
Prior to April 1, 1996, LDWC was a 55.6%-owned subsidiary of the Company;
the remaining 44.4% was held by Thomas J. Cirrito, President of the Consumer
Division and a director of the Company, and two of his children. On April 1,
1996, the Company agreed to acquire the remaining 44.4% interest in LDWC in
exchange for the issuance of 5,102,125 shares of the Company's Common Stock.
In connection with the transaction, options issued pursuant to the LDWC stock
option plan were converted into options to purchase 291,842 shares of the
Company's Common Stock under the Company's Stock Option Plan. See "Certain
Transactions--Long Distance Wholesale Club," "Management," and "Principal and
Selling Shareholders."
Prior to the consummation of the Offerings, all of the issued and
outstanding capital stock of Tel Labs was owned by Henry G. Luken, III, the
Company's Chairman of the Board, Bryan K. Rachlin, the Company's Chief
Operating Officer, Secretary and General Counsel, and two employees of Tel
Labs. Concurrently with the consummation of the Offerings, the shareholders of
Tel Labs will exchange their shares in Tel Labs for a total of 593,334 shares
of the Company's Common Stock. See "Certain Transactions--Tel Labs,"
"Management" and "Principal and Selling Shareholders."
24
<PAGE>
The Reorganization is being accounted for using the purchase method of
accounting which results in the revaluation of acquired assets and liabilities
to their estimated fair market values. These adjustments are expected to
increase depreciation and amortization expense by approximately $1.6 million
annually.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial
data as a percentage of revenues.
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
---------------------------------------------
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------- ----------------
1993 1994 1995 1995 1996
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues, net................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services................ 87.5 62.0 62.1 62.0 59.5
-------- ------- ------- ------- -------
Gross margin.................... 12.5 38.0 37.9 38.0 40.5
Operating expenses:
Selling, general and adminis-
trative...................... 115.3 26.9 26.0 22.5 30.3
Depreciation and
amortization................. 4.8 1.1 1.5 1.0 1.6
-------- ------- ------- ------- -------
Operating income................ (107.6) 10.0 10.4 14.5 8.6
Interest and other.............. 2.2 2.0 1.4 1.3 1.2
Income taxes.................... -- 3.2 3.5 5.1 3.4
-------- ------- ------- ------- -------
Net income...................... (109.8%) 4.5% 5.0% 7.8% 3.6%
======== ======= ======= ======= =======
</TABLE>
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31,
1995
Revenues. Revenues increased 103%, or $46.6 million, from $45.3 million for
the three months ended March 31, 1995 to $91.9 million for the three months
ended March 31, 1996. The increase in revenues was due primarily to an
increase in billed customer minutes both from the casual calling and wholesale
distribution channels. The casual calling revenue growth is largely the result
of a significant increase in the amount of mail marketing sent by the Company
during both the three months ended December 31, 1995 and the three months
ended March 31, 1996.
The Company expanded its mail marketing during the three months ended March
31, 1996 into areas served by the three switches deployed by the Company
during 1995. In addition, the Company sent significant mail into Florida in
anticipation of the winter season, as well as into New York and Massachusetts.
During the three months ended March 31, 1996, the Company began to experiment
with radio advertising to augment mail campaigns in specific geographical
markets. Additionally, during this period the Company entered 12 new states
with the Dial & Save brand and 6 new states with the Long Distance Wholesale
Club brand. The Company's offsets to revenues increased during the three
months ended March 31, 1996 compared to the three months ended March 31, 1995
both as a percentage of revenue and in the aggregate due to increased billed
customer minutes and increases in accruals for bad debts principally in new
geographic areas where LECs require a higher holdback percentage.
Cost of Services. Cost of services increased 95%, or $26.6 million, from
$28.1 million for the three months ended March 31, 1995, to $54.7 million for
the three months ended March 31, 1996. $26.0 million of this increase was
attributable to direct costs relating to LEC access charges and from the
Company's transmission of on-net and off-net traffic, all of which increased
primarily as a result of the increase in the Company's billed minutes of use
but was partially offset by a decrease in per minute cost. The cost per minute
decrease was largely the result of a higher percentage of on-net traffic
coupled with greater network efficiencies and improved off-net pricing.
Gross Margin. Gross margin increased 116%, or $20 million, from $17.2
million for the three months ended March 31, 1995 to $37.2 million for the
three months ended March 31, 1996. As a percentage of revenues,
25
<PAGE>
gross margin increased from 38.0% for the three months ended March 31, 1995 to
40.5% for the three months ended March 31, 1996.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 174%, or $17.7 million, from $10.2 million
for the three months ended March 31, 1995 to $27.9 million for the three
months ended March 31, 1996. Approximately $9.2 million of this increase was
attributable to increases in marketing expenses as the Company increased by
approximately 195% the number of mail pieces sent, introduced radio
advertising and expanded its telesales marketing department. Additionally,
$4.4 million of this increase was due to LEC billing expense primarily related
to the increase in the minutes of use, differences in LEC fees and to
increased accruals associated with the LDWC subsidiary. As a percentage of
revenues, selling, general and administrative expense increased from 22.5% for
the three months ended March 31, 1995 to 30.3% for the three months ended
March 31, 1996. Percentage increases in marketing and general and
administrative expense accounted for the majority of the percentage increase.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased by $0.9 million, from $0.5 million for the three months ended March
31, 1995 to $1.4 million for the three months ended March 31, 1996. As a
percentage of revenues, depreciation and amortization expense increased from
1% for the three months ended March 31, 1995 to 1.6% for the three months
ended March 31, 1996. These expenses were primarily attributable to
depreciation related to the expansion of the Company's switch network.
Interest Expense. Interest expense increased $0.5 million from $0.6 million
for the three months ended March 31, 1995 to $1.1 million for the three months
ended March 31, 1996. This increase was due primarily to interest expense
associated with borrowings under the Credit Facility primarily to fund working
capital and increases in capital leases outstanding as a result of the
expansion of the Company's switch network.
Net Income. Net income decreased $0.2 from $3.5 million for the three months
ended March 31, 1995 to $3.3 million for the three months ended March 31,
1996.
1995 COMPARED TO 1994
Revenues. Revenues increased 382%, or $170.7 million, from $44.7 million in
1994 to $215.4 million in 1995. This increase was due primarily to an increase
in billed customer minutes of use from casual calling customers. During 1994,
the Company marketed its casual calling services in Florida, five mid-Atlantic
states and the District of Columbia. During 1995, the Company expanded its
mail campaigns into 21 additional states and conducted remailings in certain
states targeted during 1994. The Dial & Save and Long Distance Wholesale Club
brands were jointly marketed in two states and nine states during 1994 and
1995, respectively, and in the District of Columbia. The Company's offsets to
revenues increased as a percentage of revenues primarily as a result of the
increased accruals for bad debt principally related to the Company's expansion
into certain geographic areas where LECs require a higher holdback percentage
and as a result of an increase in the provision for bad debt expense. See "--
Quarterly Results of Operations."
Cost of Services. Cost of services increased 382%, or $106.0 million, from
approximately $27.7 million in 1994 to approximately $133.7 million in 1995.
$102.3 million of this increase was attributable to direct costs relating to
LEC access charges and from the Company's transmission of on-net and off-net
traffic, all of which increased primarily as a result of the increase in the
Company's billed minutes of use. Installation expenses increased from $0.5
million in 1994 to $4.2 million in 1995 primarily as a result of one-time
expenses associated with provisioning local network circuits at Company switch
facilities brought on-line during 1995. During 1995, the Company deployed
three switches, in Austin, Texas, Chattanooga, Tennessee and Davenport, Iowa,
while in 1994 the Company deployed one switch in Washington, D.C.
Gross Margin. Gross margin increased 381%, or $64.6 million, from $17.0
million in 1994 to $81.6 million in 1995, due to the reasons discussed above.
As a percentage of revenues, gross margin decreased from 38.0% in 1994 to
37.9% in 1995.
26
<PAGE>
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 365%, or $43.9 million, from $12.0 million in
1994 to $55.9 million in 1995. $28.3 million of this increase was due to
increased mail marketing expenses as the Company expanded geographically and
remailed to certain existing markets and to increased LEC billing costs which
are directly related to the increase in the minutes of use. In addition,
customer service expense increased $6.8 million primarily as a result of an
increase in customer service personnel required to service the Company's
expanding customer base. As a percentage of revenues, selling, general and
administrative expense decreased from 26.9% in 1994 to 26.0% in 1995 primarily
as a result of operating efficiencies associated with the Company's growth in
revenues.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased by $2.8 million, from $0.5 million in 1994 to $3.3 million in 1995.
As a percentage of revenues, depreciation and amortization increased from 1.1%
in 1994 to 1.5% in 1995. These expenses were primarily attributable to
depreciation related to the expansion of the Company's switch network.
Interest Expense. Interest expense increased $2.1 million from $0.9 million
in 1994 to $3.0 million in 1995. This increase was due primarily to interest
expense associated with borrowings under the Credit Facility used primarily to
fund working capital requirements and increases in capital leases outstanding
as a result of the expansion of the Company's switch network.
Net Income. Net income increased $8.8 million from $2.0 million in 1994 to
$10.8 million in 1995.
1994 COMPARED TO 1993
Revenues. Revenues increased $43.6 million, from $1.1 million in 1993 to
$44.7 million in 1994. The Company commenced operations in November 1993 and
marketed in southern and central Florida. During 1994, the Company expanded
its mail campaigns to additional areas of Florida, and began marketing in
Maryland, Virginia, Delaware, New Jersey, Pennsylvania and the District of
Columbia. In addition, 1994 revenues include revenues of LDWC, in which the
Company acquired a 55.0% ownership interest in 1994.
Cost of Services. Cost of services increased $26.7 million, from $1.0
million in 1993 to $27.7 million in 1994. This increase is consistent with the
growth in billable minutes.
Gross Margin. Gross margin increased $16.9 million, from $0.1 million in
1993 to $17.0 million in 1994. As a percentage of revenues, gross margin
increased from 12.5% in 1993 to 38.0% in 1994.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased $10.7 million, from $1.3 million in 1993 to
$12.0 million in 1994. As a percentage of revenues, selling, general and
administrative expense decreased from 115.3% in 1993 to 26.9% in 1994.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased by $0.4 million, from a de minimis amount in 1993 to approximately
$0.5 million in 1994.
Interest Expense. Interest expense increased $0.9 million from a de minimis
amount in 1993 to $0.9 million in 1994. This increase was primarily due to
interest expense associated with borrowings under the Credit Facility and to
increases in capital leases outstanding.
Net Income. Net income increased $3.2 million from a net loss of
approximately $1.2 million in 1993 to approximately $2.0 million in 1994.
27
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly financial data
for each of the quarters within the twelve months ended December 31, 1994, the
twelve months ended December 31, 1995 and the three months ended March 31,
1996. This quarterly information has been derived from and should be read in
conjunction with the Company's consolidated financial statements and the notes
thereto included elsewhere in this Prospectus, and, in management's opinion,
reflects all adjustments (consisting only of normal recurring adjustments,
except as described below) necessary for a fair presentation of the
information for the quarters presented. Operating results for any quarter are
not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1994 1995 1996
---------------------------------- ---------------------------------- -------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT REVENUE AND COST OF SERVICES PER MINUTE OF USE
AND SELECTED DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenues, net........... $3,385 $4,925 $7,611 $28,786 $45,277 $47,318 $58,341 $64,440 $91,928
Cost of services........ 2,130 3,043 5,031 17,532 28,079 28,416 36,338 40,895 54,730
------ ------ ------ ------- ------- ------- ------- ------- -------
Gross margin............ 1,255 1,882 2,580 11,254 17,198 18,902 22,003 23,545 37,198
Selling, general and
administrative........ 679 1,271 2,288 7,780 10,186 11,692 13,117 20,941 27,863
Depreciation and
amortization.......... 63 67 146 220 452 540 997 1,337 1,433
------ ------ ------ ------- ------- ------- ------- ------- -------
Operating income
(loss)................. 513 544 146 3,254 6,560 6,670 7,889 1,267 7,902
Interest expense........ 44 55 278 520 591 542 783 1,036 1,066
Other income (expense).. -- 13 2 -- 4 4 (19) (80) 13
------ ------ ------ ------- ------- ------- ------- ------- -------
Net income (loss) before
taxes.................. 469 502 (130) 2,734 5,973 6,132 7,087 151 6,849
Provision for income
taxes.................. 188 201 (52) 1,095 2,326 2,388 2,760 58 3,135
Minority interest....... -- -- -- 137 109 9 561 368 433
------ ------ ------ ------- ------- ------- ------- ------- -------
Net income (loss)....... $ 281 $ 301 $ (78) $ 1,502 $ 3,538 $ 3,735 $ 3,766 $ (275) $ 3,281
====== ====== ====== ======= ======= ======= ======= ======= =======
SELECTED DATA AS A
PERCENTAGE OF REVENUES:
Cost of services........ 62.9% 61.8% 66.1% 60.9% 62.0% 60.1% 62.3% 63.5% 59.5%
Gross margin............ 37.1% 38.2% 33.9% 39.1% 38.0% 39.9% 37.7% 36.5% 40.5%
Selling, general and
administrative......... 20.1% 25.8% 30.1% 27.0% 22.5% 24.7% 22.5% 32.5% 30.3%
OTHER OPERATING DATA:
Minutes of use (1)..... 289,309 295,587 379,153 420,252 653,123
Revenue per minute of
use (2)............... $ 0.157 $ 0.160 $ 0.154 $ 0.153 $0.141
Cost of services per
minute of use (3)..... $ 0.097 $ 0.096 $ 0.096 $ 0.097 $0.084
</TABLE>
- --------
(1) Represents billed minutes during the period indicated.
(2) Represents revenues, net, per minute of use for the period divided by
minutes of use for the period.
(3) Represents cost of services for the period divided by minutes of use for
the period.
28
<PAGE>
Quarterly revenues increased from approximately $3.4 million in the first
quarter of 1994 to approximately $91.9 million in the first quarter of 1996.
The growth in revenues from the first to the third quarter of 1994 was
primarily due to the Company's expansion of its Dial & Save marketing efforts
in Florida and the acquisition of an initial 55.0% interest in LDWC. From the
third quarter to the fourth quarter of 1994, revenues increased from $7.6
million to $28.8 million, mainly as a result of mail marketing in Florida, as
well as from mail marketing efforts in the mid-Atlantic region following the
deployment of the Company's Washington, D.C. switch.
In the first quarter of 1995, revenues increased to $45.3 million primarily
as a result of the expansion of the Long Distance Wholesale Club brand into
Massachusetts, remailings for both the Dial & Save and Long Distance Wholesale
Club brands in existing territories, and the expansion of the Dial & Save
brand into the southwestern United States following the deployment of the
Company's Austin, Texas switch. In the second quarter of 1995, revenues
increased to $47.3 million from $45.3 million in the first quarter of 1995.
While the Company achieved substantially increased revenue from mailings in
other southwestern states, during the first quarter of 1995 the Company
directed a significant portion of its mailing efforts into Texas which
experienced below average response rates. The Company attributes its limited
success in Texas to the strong market presence in that state of other casual
calling companies. The increase in revenues during the second through the
fourth quarters of 1995 resulted from the further penetration into the
southeast and expansion into the midwest of the Dial & Save brand, and from
the expansion of the Company's Long Distance Wholesale Club brand into the
mid-Atlantic, southwestern, and, to a limited extent, the midwestern states
already served by Dial & Save. The increase in revenues during the fourth
quarter of 1995 was partially offset by an increase in the monthly provision
for bad debt expense caused by the Company's entry into geographic areas where
the LECs require a higher holdback percentage and $1.9 million in bad debt
write-offs primarily related to international traffic to Cuba and refunds
(which the Company elected to make) from improperly rated New York intrastate
long distance calls by LDWC.
In addition, management believes that the Company's revenues in the fourth
quarter of 1995 were limited as a result of constraints on the Company's
borrowing capabilities during September 1995, which precluded the Company from
conducting any significant mailings during that month, and because the bulk of
the Company's mail marketing during the fourth quarter of 1995 was conducted
late in the quarter. Since December 31, 1995, the Company has increased its
availability under its Credit Facility from $25.0 million to $65.0 million.
See "--Liquidity and Capital Resources."
In the first quarter of 1996, revenues increased to $91.9 million from $64.4
million during the fourth quarter of 1995 due to increased network capacity
from the areas served by the two switches in Chattanooga, Tennessee and
Davenport, Iowa, combined with mail marketing in areas served by these
switches and in other markets both in the first quarter of 1996 and late in
the fourth quarter of 1995. During the first quarter of 1996, the Company
introduced the Dial & Save brand into 12 additional states, primarily in the
southeast and midwest, while LDWC also entered 6 new states, primarily
existing Dial & Save states. The Company also targeted several existing
markets such as Florida, Pennsylvania and New Jersey with remailing campaigns.
Gross margin as a percentage of revenues for the nine quarters of 1994, 1995
and 1996 ranged from a low of 36.5% during the fourth quarter of 1995 to a
high of 40.5% for the first quarter of 1996, except for the third quarter of
1994 when the gross margin was 33.9%. During the third quarter of 1994, the
first period which included the consolidated operations of LDWC, a significant
portion of LDWC's traffic was transmitted over a third party network at a
materially lower gross margin. During 1994, cost of services included
approximately $0.5 million of expenses relating to the installation of
switches, of which $0.3 million was expensed during the third quarter. During
1995, such expenses totaled approximately $4.2 million, of which approximately
$1.1 million and $1.8 million were expensed during the third and fourth
quarters, respectively. During the first quarter of 1996, installation
expenses totaled approximately $1.1 million.
Fixed cost facilities lease expense is another major component of cost of
services. During certain time periods, particularly when new switches were
being commissioned, facilities lease cost increased well in excess
29
<PAGE>
of either revenue growth or the percentage changeover from off-net to on-net
traffic. This was particularly apparent during the fourth quarter of 1995,
when the facilities lease expense component of cost of services increased over
the third quarter by 87% even though revenues increased by 10% and the
percentage of domestic on-net traffic increased by 15%.
The Company's selling, general and administrative expense as a percentage of
revenues varied significantly over the nine quarter period due primarily to
quarterly fluctuations in mail marketing expenses, the largest component of
total marketing expenses. During two particularly heavy mail expense quarters,
the fourth quarter of both 1994 and 1995, marketing expense represented 76%
and 41%, respectively, of total marketing expenses for the corresponding year.
Over the eight quarters ended December 31, 1995 and the quarter ended March
31, 1996, marketing expense represented 46% and 50%, respectively, of total
selling, general and administrative expenses. The Company's billing expenses,
the next largest selling, general and administrative expense item, have
generally decreased as a percentage of revenues due to efficiencies
attributable to direct billing and collection agreements with the LECs, along
with the benefits of increasing volume discounts. The Company's other selling,
general and administrative expenses, mainly customer service and corporate
overhead expenses, have continued to decrease as a percentage of revenues due
to operating leverage associated with increased sales. The one exception was
the fourth quarter of 1995, when bonuses aggregating $1.0 million were paid to
the Company's employees. Selling, general and administrative expenses as a
percentage of revenues will likely increase for the remainder of 1996 and into
1997 primarily as a result of the start-up expenses associated with the
Commercial Division.
LIQUIDITY AND CAPITAL RESOURCES
Since commencing operations in 1993, the Company has experienced rapid
growth, which has required substantial investments in working capital, capital
expenditures and mail marketing expenses. The Company initially funded these
investments from the sale of Common Stock for aggregate proceeds of $0.9
million and shareholder loans totaling $0.8 million which were repaid in 1994.
Net cash used in operating activities was a de minimis amount, $11.9 million
and $1.0 million in 1995, 1994 and 1993, respectively, and $7.0 million for
the three months ended March 31, 1996. Net cash used in investing activities
was $9.8 million, $1.3 million and $0.3 million in 1995, 1994 and 1993,
respectively, and $2.3 million for the three months ended March 31, 1996. Net
cash from financing activities was $10.3 million, $13.5 million and $1.5
million in 1995, 1994 and 1993, respectively, and $9.6 million for the three
months ended March 31, 1996.
During 1995, the Company's growth in revenue necessitated a significant
investment in working capital, particularly in accounts receivable. The need
to fund daily operations is caused by the timing difference between the time
the Company pays its suppliers and the time it receives payments from the
LECs, the payors on the vast majority of the Company's accounts receivable.
Additionally, during 1995, the Company funded the commissioning of two
switching facilities located in Chattanooga, Tennessee and Davenport, Iowa,
provided partial funding for the Las Vegas, Nevada switching facility,
expanded switching capacity in existing switching locations and expanded the
Company's corporate office. During 1994, the Company funded a significant
working capital increase, funded the commissioning of two switching facilities
in Washington, D.C. and Austin, Texas and expanded the Company's corporate
office.
In June 1994, the Company obtained a credit facility with Signet Bank, which
provided for borrowings of up to $8.0 million. In connection with the
establishment of this facility, the Company issued to Signet Media Capital
Group, a division of the lender, the Signet Warrant to acquire 2% of the
Common Stock of the Company. See "Shares Eligible for Future Sale" and
"Principal and Selling Shareholders." During 1994, the facility was amended to
increase amounts available for borrowing to $15 million in November and to $25
million in December. During the first quarter of 1996, the Company entered
into its current Credit Facility which provides for borrowings from a
syndicate of lenders of up to $65 million.
Borrowings under the Credit Facility are subject to a limitation of 85% of
eligible accounts receivable. As of May 31, 1996, approximately $43.3 million
was outstanding under the Credit Facility. The Credit Facility terminates in
January 1998. Borrowings under the Credit Facility bear interest at LIBOR plus
2% or, at the option
30
<PAGE>
of the Company, at the federal funds rate plus 1/2%, provided that borrowings
over $60 million bear interest at the higher of the prime rate or the federal
funds rate plus 1/2%. The interest rate on the Credit Facility at May 31, 1996
was approximately 7.5%. The Credit Facility is secured by (i) substantially
all of the present and future assets of the Company and its subsidiaries; (ii)
a pledge of the stock of the Company's subsidiaries; and (iii) a pledge, which
will be released upon consummation of the Offerings, of the Company's Common
Stock owned by Messrs. Burns and Luken.
The Credit Facility contains a number of covenants, including, among others,
covenants restricting the Company and its subsidiaries with respect to the
conduct of business and maintenance of corporate existence, the incurrence of
indebtedness, the creation of liens, transactions with affiliates, the
consummation of certain merger or consolidation transactions or the sale of
substantial assets, the sale of the capital stock of any subsidiary, the
making of any investments or acquiring any assets and the making of restricted
payments including dividends. In addition, the Credit Facility contains a
number of financial covenants, including covenants requiring the Company to
maintain (i) a maximum leverage ratio (consolidated debt to consolidated
adjusted cash flow which excludes mail marketing expenses) equal to or greater
than 2 to 1 for any quarter ending on or before December 31, 1996 and 3.5 to 1
for any fiscal quarter ending after December 31, 1996, and (ii) a minimum
interest coverage ratio (consolidated adjusted cash flows to consolidated
interest expense which excludes mail marketing expenses) as of the last day of
each fiscal quarter of 2.5 to 1. The failure of the Company to satisfy any of
the covenants will constitute an event of default under the Credit Facility,
notwithstanding the Company's ability to meet its debt service obligations.
The Credit Facility includes other customary events of default, including
cross defaults to other indebtedness, change of control provisions and certain
events including bankruptcy, reorganization and insolvency and judgments in
excess of $250,000. An event of default would allow the lenders thereunder to
accelerate the maturity of the indebtedness under the Credit Facility and to
enforce their security interests.
The Company leases certain equipment under capital leases, the majority of
which are with the Company's primary provider of switching equipment. Capital
lease obligations totaled $16.1 million, $3.3 million and $0.8 million at
December 31, 1995, 1994 and 1993, respectively, and $15.8 million for the
three months ended March 31, 1996. The effective interest expense associated
with these leases was approximately 10%. Capital leases have terms ranging
from 28 to 60 months. The Company has made capital lease payments of $2.4
million, $1.3 million and a de minimis amount for 1995, 1994 and 1993,
respectively, and $0.8 million for the three months ended March 31, 1996.
Capital lease principal payments of approximately $3.0 million are expected to
be made during 1996 in connection with outstanding capital lease obligations
as of March 31, 1996. Messrs. Burns and Luken have guaranteed certain of the
Company's obligations under its switching equipment leases.
In July 1994, the Company acquired a 55.0% interest in LDWC for cash
consideration of approximately $135,000. Subsequently, LDWC issued a
convertible note to the Company in the aggregate principal amount of $250,000
payable by LDWC. The Company subsequently converted the note into shares of
LDWC common stock equal to 0.6% of LDWC's outstanding capital stock. As part
of the Reorganization, the Company acquired the remaining 44.4% interest in
LDWC in exchange for the issuance of 5,102,125 shares of the Company's Common
Stock and will acquire all of the stock of Tel Labs in exchange for 593,334
shares of the Company's Common Stock. See "--The Reorganization," "Certain
Transactions--Long Distance Wholesale Club" and "--Tel Labs."
The Company expects to use a portion of the net proceeds from the Offerings
to repay all outstanding borrowings under the Credit Facility and outstanding
amounts under the Company's existing capital leases. The Company believes that
the estimated net proceeds to be received from the Offerings, together with
cash flow generated from operations and borrowings under the Credit Facility,
will be sufficient to fund the Company's working capital needs, planned
capital expenditures and interest expense for the foreseeable future. The
Company has identified approximately $20 million in capital expenditures
(including assets acquired under capital leases) which it intends to undertake
in 1996, which includes approximately $2.1 million to install the
31
<PAGE>
Company's Las Vegas switching facility. These expenditures consist primarily
of amounts for improvements and capacity upgrades to the Company's switching
facilities and expenses relating to the deployment of a new switch in the New
York City metropolitan area. The actual amount of capital expenditures made in
1996 will depend on numerous factors, including the timing of the Company's
future expansion, economic conditions, competition, regulatory developments
and the availability of capital. The Company may also require additional
financing, which may include public or private debt and equity financings, in
the event the Company enters into strategic alliances, acquires assets or
businesses or makes investments in furtherance of its business strategy.
SEASONALITY
The Company's long distance revenue is subject to some seasonal variations
due to the fact that residential customer usage is typically higher during the
fourth quarter due to holidays, and on weekends and other holidays throughout
the year.
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued the Statement
of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS 121"), which the Company adopted as of January 1, 1996. This statement
requires the Company to review long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Based on the Company's current operating
environment, adoption of SFAS 121 is not expected to have a material impact.
In 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), which establishes,
among other things, financial accounting and reporting standards for stock-
based employee compensation plans. Entities may either adopt a "fair value
based method" of accounting for an employee stock option as defined by SFAS
123 or may continue to use accounting methods as prescribed by APB (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees ("APB Opinion No.
25")." Entities electing to remain with APB Opinion No. 25 are required to
make pro forma disclosures of net income and earnings per share as if the fair
value based method of accounting defined in SFAS 123 had been applied. The
accounting requirements of SFAS 123 are effective for transactions entered
into in fiscal years that begin after December 15, 1995. The Company has
decided to continue to apply APB Opinion No. 25 for recognition and
measurement purposes and make appropriate disclosures in the future in
accordance with SFAS 123.
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BUSINESS
GENERAL
Telco is a rapidly growing switch-based provider of domestic and
international long distance telecommunication services primarily to
residential customers in the United States. Substantially all of the Company's
customers access its network by dialing a unique CIC Code before dialing the
number they are calling. Using a CIC Code to access the Company's network is
known as "casual calling" because customers can use the Company's services at
any time without changing their existing long distance carrier. The Company
markets its long distance services under two brands, each with a unique CIC
Code: Dial & Save (CIC Code 10457) and the Long Distance Wholesale Club (CIC
Code 10297), and prices its services at a discount to the basic "1 plus" rates
offered by the three major long distance carriers: AT&T, MCI and Sprint.
During May 1996, the Company provided long distance services to approximately
2.6 million customers (switched access lines) in 37 states and the District of
Columbia. The Company plans to expand its marketing efforts in these states
and to offer service in one additional New England and 10 additional western
states during 1996. Since the Company began operations in November 1993, its
revenues and net income have grown to approximately $215.4 million and $10.8
million, respectively, for the year ended December 31, 1995, and to $91.9
million and $3.3 million, respectively, for the three months ended March 31,
1996.
Although casual calling has been in existence since the mid-1980s, only
recently have companies such as Telco begun to aggressively pursue this market
opportunity. The Company markets its services primarily through direct mail
and inbound telesales and marketing, and believes that this marketing strategy
enables the Company to attract residential customers in a cost effective
manner. Because casual calling customers are not required to cancel or change
their presubscribed long distance carrier, the Company believes that
aggressive "win-back" and other customer acquisition programs prevalent in the
residential long distance market have a limited impact on the Company's
business. See "Risk Factors--Response Rates; Customer Attrition."
The Company bills its casual calling customers through LEC billing and
collection agreements which enable the Company to place its charges on the
monthly local phone bills of its casual calling customers. The Company has
agreements with LECs, including all of the RBOCs, that cover approximately 96%
of the switched access lines in the United States. The Company believes that
these billing arrangements are the most effective mechanism for billing the
Company's residential customers, because of the convenience to its customers
of receiving one bill for both local and long distance service and the
benefits derived from the LECs' extensive collections infrastructure. The
Company's billing information systems and services are provided by Tel Labs, a
telecommunications billing company started in 1991 by Telco's Chairman of the
Board. During May 1996, Tel Labs processed approximately 98 million call
records for 17 telecommunications companies, including Telco. Concurrently
with the completion of the Offerings, Telco will acquire all of the
outstanding capital stock of Tel Labs. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--The
Reorganization."
To increase its volume of call traffic, Telco has begun to sell its excess
daytime capacity on a wholesale basis to other long distance carriers and has
created a Commercial Division to target business customers. Because the
Company's existing customer base is primarily residential, the majority of
calls are handled during off-peak evening and weekend periods.
The Company's switch-based network currently consists of six DSC DEX 600S,
600 and 600E switches located in Washington, D.C.; Fort Lauderdale, Florida;
Davenport, Iowa; Chattanooga, Tennessee; and Austin, Texas with one DEX 600E
switch which recently became operational in Las Vegas, Nevada. Additionally,
the Company has made a commitment to install a DEX 600E switch in the New York
City metropolitan area during the first quarter of 1997. The Company's state-
of-the-art digital switching and cross-connect systems are designed to
optimize traffic routing and provide for automatic traffic re-routing in the
event of a network failure. The Company leases transmission lines from a
variety of facilities-based long distance service providers. The Company's
sophisticated switch-based network (i) enables it to control proprietary
information such as customer call records, and (ii) positions it to take
advantage of competitive rates for local access from CLECs, such as MFS and
Teleport.
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INDUSTRY OVERVIEW
The U.S. long distance market is dominated by the nation's three largest
long distance carriers, AT&T, MCI and Sprint, which, according to a report
issued by the FCC in December 1995, together accounted for 83% of the $67.0
billion in aggregate revenues generated by all U.S. long distance carriers in
1994. Other long distance carriers, some with national transmission and
marketing capabilities, accounted for the remainder of the market. The U.S.
local telecommunications services industry is dominated by the RBOCs, which,
according to the 1995 FCC report, together accounted for 83% of the $43.0
billion in aggregate local service revenues generated by all reporting LECs in
the U.S. market in 1994. The remaining 17% was accounted for by the GTOCs and
other independent LECs. The three largest long distance providers, the RBOCs
and certain other carriers own transmission and switching facilities, and are
therefore sometimes referred to as facilities-based carriers. Non-facilities-
based carriers lease transmission lines from facilities-based carriers and are
either switch-based carriers, like the Company, or switchless resellers which
rely on third-party carriers for all aspects of call transmission.
The structure of the telecommunications industry since 1984 has been shaped
largely by the AT&T divestiture decree, which required the divestiture by AT&T
of its Bell operating companies and divided the country into 201 LATAs (the
"AT&T Divestiture Decree"). The 22 Bell operating companies were combined into
seven RBOCs and were permitted to provide local telephone service, local
access service to long distance carriers and long distance ("intraLATA")
service within the LATAs. However, the Bell operating companies were
prohibited from providing interLATA long distance service, or service between
LATAs. To encourage competition in the long distance market, the AT&T
Divestiture Decree and certain regulations of the FCC require most LECs to
provide carriers with access to local exchange service that is "equal in type,
quality and price" to that provided to AT&T and with the opportunity to be
selected by customers as a preferred long distance service provider ("equal
access"). According to a 1995 FCC report, as of December 31, 1994, there were
465 long distance carriers purchasing equal access services from LECs in the
United States.
For each long distance call, the originating and terminating LECs charge an
access fee to the long distance carrier. The long distance carrier charges its
customers a fee for its transmission of the call, a portion of which covers
the cost of the access fees charged by the LECs. Access charges represent a
significant portion of the Company's cost of services and, generally, such
access charges are regulated by the FCC. The FCC has informally announced that
it intends, in the near future, to undertake a comprehensive review of its
regulation of LEC access charges to better account for increasing levels of
local competition. See "Risk Factors--Regulatory and Legislative Risks" and
"Business--Regulation."
Thus, judicial and legislative factors have helped to create a foundation
for smaller companies, such as the Company, to emerge as competitive
alternatives to the larger facilities-based carriers for long distance
services. Equal access, combined with the FCC's policy mandating that carriers
not unreasonably restrict resale of their services, allows resellers such as
the Company to lease transmission facilities from facilities-based long
distance carriers and to offer consumers long distance telecommunications
services having the same quality and convenience as those of the facilities-
based carriers.
For policy reasons, equal access was fully implemented for interLATA long
distance service only. For intraLATA long distance service, a modified form of
equal access was adopted, which enables customers to reach a preferred carrier
(other than the customer's LEC) on a call-by-call basis by dialing a CIC Code.
Where equal access is available, a customer can reach the preferred carrier by
dialing an access code, such as 10XXX, or 950-OXXX (or on a toll-free basis),
where XXX is the CIC Code. The use of access codes to reach a preferred long
distance carrier has recently gained significant exposure and customer
acceptance, as evidenced by marketing campaigns of the larger facilities-based
carriers, such as AT&T's "1-800 CALLATT" and MCI's "1-800-COLLECT."
In view of anticipated exhaustion of all three digit CIC Codes available for
assignment to carriers, in April 1994 the FCC initiated a proceeding on the
issue and concluded that the expansion of the CIC Codes is important because
it increases access to the public switched telephone network by both end users
and carriers. The FCC
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tentatively proposed to expand codes from a three digit (XXX) to a four digit
(XXXX) format, with a transition period of six years, during which both
formats could be utilized. After expiration of the transition period, three
digit (XXX) CIC Codes, such as the CIC Codes currently used by the Company and
other carriers, will no longer be able to be used. Instead, the Company and
all other carriers currently using three digit CIC Codes will be assigned new
four digit codes to be used after the transition period has expired. Under the
four digit format, customers will be required to dial a seven digit Carrier
Access Code ("CAC"), or 101XXXX. In contrast, customers currently dial a five
digit CAC (or 10XXX) to reach the Company's network. The FCC has not yet acted
upon this proposal and has not yet finally determined the length of the
transition period. On April 30, 1996, the FCC released a Public Notice in
which it requested additional public comment on the issue of the appropriate
length of the transition period. Comments and reply comments were filed with
the FCC on May 21, 1996 and May 28, 1996, respectively. It is not known when
the FCC will take final action in this proceeding or what the length of the
transition period will be when finally established by the FCC. However, all of
the three digit CIC Codes available for assignment have already been
allocated, and commencing in March 1995, Bell Communications Research, Inc.,
the administrator of the North American Numbering Plan, has only been issuing
four digit (XXXX) codes to applicants for new CIC Codes.
The 1996 Telecommunications Act removed the restrictions concerning the
provision of long distance service by the RBOCs and GTOCs, although the RBOCs
will need to obtain specific FCC approval and satisfy other conditions,
including a checklist of interconnection and other requirements on LECs, prior
to providing long distance service in the regions in which they provide local
exchange service. See "Risk Factors--Increasing Competition" and "--Regulatory
and Legislative Risks."
In addition to promoting competition in the U.S. long distance
telecommunications market, the 1996 Telecommunications Act also opened U.S.
local service telecommunication markets to competition by preempting state and
local laws to the extent they prevent competitive entry into the provision of
any telecommunications service, and by imposing a variety of new duties on
LECs to promote competition in local exchange services. Among other
requirements, all LECs are required to permit resale of their
telecommunications services without unreasonable restrictions or conditions,
and on a non-discriminatory basis. The law and its accompanying regulations
will enable the Company, upon receipt of all necessary regulatory approvals,
to resell local telecommunication services in addition to its long distance
services. The bases upon which such local services will be available to
carriers such as the Company for resale are to be determined in proceedings of
the various state PSCs. Significantly, the 1996 Telecommunications Act
mandates that LECs make their services available to resellers at "wholesale
rates," defined as retail rates less any marketing, bill collection and other
costs that will be avoided by the LEC by providing the wholesale service. The
Company believes that the opening of the local telecommunication services
market to resellers provides the Company with significant growth
opportunities.
BUSINESS STRATEGY
The Company's strategy is to achieve continued growth by providing a broad
array of competitively priced long distance services. The Company's primary
objectives in pursuing this strategy are to:
Continue to Expand the Company's Casual Calling Distribution Channel and
Brand Awareness by increasing its direct mail and telesales marketing efforts
for both the Dial & Save and Long Distance Wholesale Club brand names. The
Company continues to explore innovations within this product line including
the use of advertising media that are alternative or complementary to direct
mail and the development of casual calling advertising targeting specific
affinity groups. The Company's goal in all of these efforts is to increase
advertising response rates and customer usage and to lower customer attrition,
thereby decreasing customer acquisition costs. During 1996 the Company intends
to expand into the 11 remaining contiguous states where it has not yet
marketed and to conduct additional marketing and remailings in existing
territories. Where possible, the Company may also consider introducing its
casual calling services to consumers in foreign markets.
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Expand the Commercial Division to increase its commercial customer base. The
Commercial Division's sales strategy is to build its sales force, including
direct and independent sales representatives and telesales marketing agents
targeting commercial accounts. The Company intends to supplement this sales
force with its existing strong customer support functions and field service
operations and Tel Labs' direct billing capabilities. Currently, usage of the
Company's network occurs mostly during the evenings and on weekends. By
increasing the number of commercial customers, the Company intends to more
effectively use the significant available daytime capacity of its network.
Decrease Network Cost per minute of use through the continued expansion and
development of the Company's network. A DEX 600E switch recently became
operational in Las Vegas, Nevada. Additionally, the Company has made a
commitment to install a DEX 600E switch in the New York City metropolitan area
during the first quarter of 1997. The Company further intends to continue to
add low cost fixed capacity to its network in order to keep pace with the
Company's growth and to reduce off-network transmission expenses. To enhance
the efficiency of the fixed-cost elements of its network, the Company seeks to
increase traffic volume and balance business-driven daytime traffic with night
and weekend off-peak traffic from residential customers. Low cost transmission
expenses coupled with an expansive network, are expected to provide the
Company with the continued ability to grow its existing casual calling
distribution segment and to expand into new distribution channels. Such growth
may also be facilitated by select strategic alliances, investments or
acquisitions as the Company deems appropriate.
Offer Innovative Products and Services While Leveraging its Network and
Operating Infrastructure and Business Information Systems, to meet the needs
of the Company's residential and commercial customer base. Tel Labs, a
telecommunications billing company, was organized in 1991 by Telco's Chairman.
During May 1996, Tel Labs processed approximately 98 million call records for
17 telecommunications companies, including Telco. The Company believes that
accurate and sophisticated information systems are critical to growth in the
telecommunications industry. Tel Labs provides the Company with the support
that will enable the Company to expand its existing customer base and to
provide new products and services to its residential and commercial customer
base, including the provision of direct bills to commercial customers. Such
products and services may also include the resale of local exchange services,
voice mail, FAX broadcast, video conferencing and conference calling. The
Company believes that its network intelligence, billing and reporting systems
enhance the Company's competitive ability and provide a platform for future
growth and product expansion.
MARKETING AND SERVICES
Since it commenced operations in 1993, the Company's primary focus has been
residential sales through the marketing of casual calling service. The Company
further intends to expand its customer base by adding business customers
through its newly formed Commercial Division. A discussion of the Company's
service offerings and residential and commercial marketing follows.
Residential Services. The Company markets its residential casual calling
services under the Dial & Save and Long Distance Wholesale Club brand names.
The two brands are differentiated by rate structure (LDWC's discount rates
vary with the distance of the telephone call, whereas Dial & Save's discount
rates do not), and marketing approach (in terms of size, content and color of
the mailings). The Company believes that its dual brand strategy responds to
the varying casual calling needs of potential customers. The Company also
believes that its dual brand strategy appeals to different segments of the
population by providing one segment of the population with LDWC's variable
percentage discount off basic direct dialed "1 plus" rates and another segment
of the population with Dial & Save's flat percentage discount off basic direct
dialed "1 plus" rates. Customers access the Company's network by dialing a
five digit code before the number they are calling (10457 for Dial & Save;
10297 for the Long Distance Wholesale Club), and therefore are not required to
permanently change or cancel their existing long distance carrier in order to
use the Company's service. Since inception, the Company has targeted the
domestic residential market, with an estimated 110 million households, and
offers its customers savings off of the basic direct dialed "1 plus" rates
charged by AT&T, MCI and Sprint. Approximately 99% of the Company's total
customers were residential customers at May 31, 1996. Customers who prefer to
access the
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Company's network by dialing "1 plus" rather than dialing the Company's CIC
Codes may select Dial & Save or Long Distance Wholesale Club as their
presubscribed long distance carrier. Whether a residential customer dials the
Company's access codes or is presubscribed, their calls will appear on the
customer's regular monthly local telephone bill.
The Company markets its residential services primarily through direct mail
pieces that seek to educate potential customers regarding casual calling and
its benefits. Direct mail is targeted towards residential customers within a
specified geographic region and includes a service explanation and dialing
instructions, a general pricing comparison, and a set of reminder stickers
highlighting the Company's CIC Codes for customers to keep near their
telephone.
Prospective customers do not need to sign-up or call the Company to take
advantage of its discounted service offerings upon receiving a mail
solicitation from the Company. The Company works with various outside
advertising agencies to design the copy and creative components of the direct
mail marketing pieces and contracts with various vendors of mail shop and
printing services in an effort to ensure that mail is sent out in a timely and
cost-effective manner. The Company's data processing resources allow for
prompt monitoring of customer long distance usage and permit the Company to
carefully measure response rates to its direct mail campaigns. The Company
constantly strives to improve response rates by varying the design and
components of its direct mail marketing packages, and seeks to engineer the
timing of its initial and follow-on direct mail campaigns to maximize response
rates and to increase overall market penetration. In addition, the Company has
begun to experiment with other media to supplement direct mail.
The Company has typically targeted new and existing geographical areas for a
mailing campaign when its switch network, marketing and back office
infrastructure have allowed it to effectively manage incremental growth.
Initial mailings to new states are usually sequenced over a time period of
several weeks in an effort to ensure proper customer support and efficient
call transmission. The Company has periodically conducted subsequent mailings
into its existing territory to stimulate incremental usage by new and existing
customers, and to build brand awareness. The Company's experience indicates
that subsequent mailings into its geographic markets have generated
incremental new customer usage, in some cases with response rates equal to
initial mailings into such markets.
The Company's in-bound telesales customer service department is designed to
complement the Company's direct mail marketing strategy. Customer Service
Representatives ("CSRs") are available 24 hours a day, 7 days a week in order
to answer marketing 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. See "--Customer Services."
Commercial Services. In order to provide an additional distribution channel
for the Company's telecommunications products and services, the Company has
developed and begun to implement a plan to build a direct commercial sales
force. In April 1996, the Company hired Stephen G. Canton as the President of
its newly formed Commercial Division as part of the Company's plan to sell
voice, data, and enhanced telecommunications services to business customers.
The Company intends to open regional sales offices throughout the country in
order to market these services. The Company's commercial sales agents will
market the Company's services through personal contacts which will emphasize
customer service, network quality, value-added services, reporting, rating and
promotional discounts. As of June 10, 1996, the Commercial Division had opened
nine sales offices.
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 the form of hard-copy, magnetic media, or
via Internet or bulletin board services.
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In addition to the Company's plan to establish a direct commercial sales
force, the Company currently markets basic long distance services on a
presubscribed basis to small business customers through direct mail and
telemarketing campaigns. The Company markets its "Prime Business" product by
including a description of this service in its Dial & Save residential
mailings. The Company also markets its Long Distance Wholesale Club brand's
business products via a direct mail insert in its LDWC mail campaigns and
telesales campaigns which are conducted both by in-house employees and through
a contractual arrangement with a third party telesales firm.
The Company is positioning itself to provide local service using existing
telephone lines obtained from incumbent LECs, allowing customers to switch to
local service provided by the Company without changing the customer's existing
telephone numbers. Accordingly, as of July 12, 1996, the Company has filed
with 33 states and the District of Columbia seeking authorization to resell
local exchange telecommunications products and services. The Company has
obtained local exchange resale authorization from the State of California and
anticipates that it will file applications for authorization to resell local
exchange telecommunications services and products in the remaining 15 states.
Wholesale Services. The Company sells transmission capacity and services to
other long distance carriers. Most of the Company's marketing activity in this
segment is through limited participation in industry trade shows. The Company
believes that the combination of the Company's nationwide network and Tel
Labs' data processing resources provides an avenue for continuing growth
through the wholesaling of one-stop telecommunications services to long
distance resellers. The Company offers a complete package of networking,
billing and customer service, eliminating the need for resellers to coordinate
with multiple vendors and giving them the ability to obtain all of their long
distance services from a single source. Additionally, the Company provides
reseller clients with a customized version of the Tel Labs' customer account
database software, TelePhone Maintenance system ("PM"). While revenue per
minute from wholesale service sales is generally lower than the Company's
average sales to end users, the cost of sales and overhead involved in
servicing carrier customers is also lower. Moreover, the Company has used this
market segment to more effectively utilize its network during the daytime
hours, the busiest time of day for many carrier and reseller customers.
Other Value-Added Services. The Company has introduced and is developing
additional value-added services to extend features available to its existing
customer base and to attract additional customers. Within the past twelve
months, the Company has introduced 800 service and calling card services. In
addition, the Company expects to introduce enhanced calling card services,
including voice mail and information services, to casual and presubscribed
business and residential customers during 1996, and may decide to provide
additional services, including the resale of local telecommunications
services, paging, cellular and other wireless products and services, Internet
access, and other enhanced long distance products such as packet switching,
video- conferencing and conference calling.
CUSTOMER SERVICES
To ensure that in-bound telesales marketing and customer service are always
available, the Company's customer service department operates 24-hours a day,
7 days a week to provide full-service support for its residential and
commercial customer base and to handle marketing inquiries from potential and
existing customers. During the first quarter of 1996, the Company's customer
telesales and service department personally responded to approximately 900,000
customer inquiries and service calls.
As of April 30, 1996, the Company employed approximately 119 CSRs and
related customer service personnel. In connection with its mailing campaigns,
the Company also employs additional personnel through a temporary employment
agency on an ongoing basis, particularly in connection with mass mailings. An
intensive one-week training program (including hands-on training in the
Company's PM system and computer software, participation in role playing
exercises, and monitoring of actual customer calls), as well as regular
follow-on training and repeated quality assurance assessments ensure that CSRs
are properly prepared to handle customer calls. The Company maintains a
relationship with an inbound telemarketing service provider capable of
handling
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incoming customer service calls should the Company's customer telesales and
service department become disabled.
The Company's call centers are equipped with state-of-the-art computer and
telecommunications technology. Incoming calls are managed efficiently with the
help of a Mitel Phone System, which includes an automatic call distributor and
an automated attendant. This high-powered, multi-task system allows for swift
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.
CSRs use the Company's proprietary PM software which delivers prompt access
to accurate, up-to-date customer account information. This customized software
is a powerful database which provides CSRs the capability to respond swiftly
to customer needs. CSRs are able to issue credits while speaking with a
customer, log service trouble tickets for treatment by the Company's Network
Control Center, record pertinent customer information into an account memo
field to maintain customer history, enter new customers into the database and
assign appropriate billing codes. The software also generates actual credit
vouchers, as well as letters responding to customer requests for additional
stickers and other marketing materials. While Tel Labs has customized the
software to accommodate the Company's specific needs, Tel Labs also has made
this software available to its other long distance clients.
BILLING AND DATA PROCESSING
The Company believes that accurate and sophisticated information systems are
critical to growth in the telecommunications industry. The Company has
dedicated substantial resources to its information systems and believes that
the strong growth of its casual calling business is largely attributable to
the existence of Tel Labs, back office and billing platform. 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. The Company believes that its
network intelligence, billing and financial reporting systems enhance the
Company's competitive ability and provide a platform for future growth and the
expansion of its product line.
Tel Labs processes raw switch data into a format that can be used to produce
end-user invoices. During May 1996, Tel Labs processed approximately 98
million call records for 17 telecommunications companies, including Telco.
This data processing is executed on specially designed personal computers
operating a proprietary software program. Tel Labs receives the Company's raw
call records directly from the Company's switches, and prepares them for
rating by determining the answer status, originating location, terminating
location and mileage. The calls are then rated according to standard rates or
according to customer specific rates, if applicable. Rated calls are then
sorted depending on which LEC will actually bill the end-user and placed in an
industry standard format ("EMI"). Tel Labs then prepares management reports
which provide the Company with the total number of calls, minutes and dollars
billed during that bill cycle.
Since its inception, the Company has billed all of its residential traffic
through LECs. The Company has entered into billing and collection agreements
with LECs, including all of the RBOCs, that cover approximately 96% of the
switched access lines in the U.S. These agreements permit the Company to place
its customers' call detail records on the customers' regular monthly local
phone bill. In addition, by billing through the LECs, the Company benefits
from the LECs' extensive collections infrastructure. The Company believes that
LEC billing agreements are the most effective mechanism for billing the
Company's residential customers because consumers can receive one bill for
both local and long distance service. The Company also provides billing
clearinghouse services through Tel Labs to other unaffiliated long distance
carriers.
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Since April 1995, the Company has contracted with a third party to manage
its billing and collection agreements ("Contract Manager"). After receiving
rated call records from Tel Labs, the Contract Manager transmits them to the
LEC and ensures that incoming and outgoing call records and revenues are
properly tracked. The Company is considering managing its own contracts to
enable it to realize greater operating efficiencies and more effectively
manage its cash flow.
NETWORK AND OPERATIONS
The Company operates an advanced telecommunications network consisting of
six switches, leased transmission lines and sophisticated network management
systems designed to optimize traffic routing. The Company's network currently
originates traffic in all or some part of 37 states and the District of
Columbia, and
the Company expects that its Las Vegas, Nevada switch will enable the Company
to extend its originating service area to all of the contiguous United States.
The Company operates an "open network," meaning that any individual within the
Company's originating service area whose LEC provides equal access can access
the Company's long distance network by dialing either of the Company's access
codes, 10457 or 10297, or by presubscribing to the Company as their long
distance service provider. Because customers do not need to register with the
Company before accessing its network, the Company must determine capacity
needs and install and test circuits before entering a new geographic market.
The Company's network provides high quality, reliable transmission and
switching. The Company's network surveillance capabilities, including self-
diagnostic software, generally enable the Company to anticipate and correct
problems before they result in service interruption. The Company's technicians
monitor the Company's entire network 24 hours a day, 7 days a week, from its
Network Control Center in Chantilly, Virginia. To reduce the potential impact
of any equipment or transmission failure, the Company can reroute or restore
transmissions through the Company's standby transmission facilities or reroute
traffic over the networks of other carriers. The Company's technicians also
monitor the network for fraud on a real-time basis, using computer systems
that detect unusual or high volume calling patterns. The Company has
established a second Network Control Center in Austin, Texas to further
enhance its monitoring capabilities.
Switching Facilities. The Company currently operates six DSC DEX 600S, 600
and 600E digital telecommunications switches in Ft. Lauderdale, Florida;
Davenport, Iowa; Chattanooga, Tennessee; Austin, Texas; and Washington, D.C.,
with one DEX 600E switch which recently became operational in Las Vegas,
Nevada. Additionally, the Company has made a commitment to install a DEX 600E
switch in the New York City metropolitan area by the first quarter of 1997.
Switches are digital computerized routing facilities that receive calls, route
calls through transmission lines to their destination and record information
about the source, destination and duration of the calls. In order for a call
to be completed through a switch, there must be two ports available--an
incoming port and an outgoing port. For example, if a switch is equipped with
30,000 ports, the switch can accommodate up to 15,000 simultaneous telephone
calls. The Company's switches are currently configured with between 13,824 and
36,480 equipped ports. The Company's DEX 600 switch can be expanded to a
configuration of 30,720 equipped ports while the Company's DEX 600E switches
can be expanded to a configuration of 107,520 equipped ports. The Company
continually evaluates the capacity of its switches and in the future may
expand its switches' capacity or add new switches in selected markets where
the volume of its customer traffic makes such an investment economically
viable.
Leased Transmission Lines. The Company leases transmission lines from a
variety of facilities-based and resale long distance carriers. The Company's
contracts with these entities typically have terms ranging from 18 to 36
months. The Company supplements its leased "on-network" capacity with "off-
net" services from a variety of resale and facilities-based long distance
carriers. In addition, the Company does not have any on-network international
network arrangements and exclusively resells the network capacity of other
resale and facilities-based long distance carriers to international
destinations.
Network Management Systems. Once calls are originated over the Company's
circuits, the calls are routed over leased digital, fiber optic transmission
facilities to the Company's nearest switch location and then routed
40
<PAGE>
on a least-cost basis to either the Company's leased network or to an off-net
supplier for termination. The Company utilizes state-of-the-art Digital Access
Cross Connect Systems ("DACS") to electronically cross-connect circuits
thereby increasing call routing and circuit provisioning efficiency and
providing better network monitoring capabilities. The Company has installed
Tellabs ABS Titan 5500 3/1 and 530 1/0 DACS equipment on three of the
Company's switches. Additional DACS systems are expected to be installed on
the remaining switches by the third quarter of 1996. In addition, the Company
has configured a large portion of its network with Signaling System 7 Common
Channel Signaling ("SS7"). This network protocol reduces connect time delays
and provides additional technical capabilities and efficiencies for call
routing. The Company is currently in the process of deploying SS7 in
additional portions of its network.
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 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 casual calling
companies, many of which have considerably greater financial and other
resources than the Company.
The Company believes it competes favorably in its targeted markets, due to
its casual calling service and billing services, competitive pricing, high
network quality and customer service infrastructure. The Company also believes
that its success will depend increasingly on its ability to offer on a timely
basis new services based on evolving technologies and industry standards.
There can be no assurance that new technologies or services will be available
to the Company on favorable terms.
Regulatory trends have had, and may have in the future, significant effects
on competition in the industry. See "--Regulation," "Risk Factors--Legislative
and Regulatory Risks" and "--Increasing Competition."
REGULATION
The services which the Company provides 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 PSCs
retain jurisdiction over jurisdictionally intrastate communications.
1996 Telecommunications Act. The 1996 Telecommunications Act was enacted in
February, 1996. The legislation is intended to introduce increased competition
in U.S. telecommunication markets. The legislation opens the local services
markets by requiring local exchange carriers to permit interconnection to
their networks and by establishing local exchange carrier obligations with
respect to unbundled access, resale, number portability, dialing parity,
access to rights-of-way, mutual compensation and other matters. In addition,
the legislation codifies the local exchange carriers' equal access and
nondiscrimination obligations and preempts inconsistent state regulation. The
legislation also contains special provisions that eliminate the restrictions
on the RBOCs and the GTOCs from providing long distance services. These new
provisions permit an RBOC to enter the "out-of-region" long distance market
immediately, upon the receipt of any state and/or federal regulatory approvals
otherwise applicable to the provision of long distance service, and the "in-
region" long distance market if it satisfies several procedural and
substantive requirements, including obtaining FCC approval upon a showing that
in certain situations facilities-based competition is present in its market,
and that it has entered into interconnection agreements which satisfy a 14-
point "checklist" of competitive requirements.
The legislation defines in-region service to include every state, in its
entirety, in which the RBOC provides local exchange service, even if the RBOC
is not the incumbent local exchange service provider in all portions of that
state. The GTOCs are permitted to enter the long distance market as of the
date of enactment of the 1996
41
<PAGE>
Telecommunications Act, without regard to limitations by region, although
necessary regulatory approvals to provide long distance services must be
obtained, and the GTOCs are subject to the provisions of the 1996
Telecommunications Act that impose interconnection and other requirements on
LECs. The Company will be facing new competition from the RBOCs and the GTOCs
that are able to obtain the necessary state and/or FCC approvals to provide
out-of-region and/or in-region long distance service. The new legislation
provides for certain safeguards to protect against anticompetitive abuse by
the RBOCs. Among other things, the legislation limits the ability of the RBOCs
to market jointly for a certain time period interLATA long distance service,
equipment, and certain information services together with local services. The
RBOCs must pursue such activities only through separate subsidiaries with
separate books and records, financing, management, and employees. All
affiliate transactions must be conducted on an arm's-length and on a
nondiscriminatory basis. The RBOCs are also prohibited from jointly marketing
local and long distance services, equipment, and certain information services
unless they permit competitors to offer similar packages of local and long
distance services. Further, the RBOCs must obtain in-region long distance
authority before jointly marketing local and long distance service in a
particular state. It is unknown whether these safeguards will provide adequate
protection against anti-competitive conduct by the RBOCs, and the impact of
anticompetitive conduct on the Company, if such conduct occurs, is uncertain.
In addition, long distance service providers such as the Company will be
significantly affected by the implementation and enforcement of statutory and
regulatory provisions designed to prevent the RBOCs and the GTOCs from
capitalizing on their monopolistic provision of local services to existing
subscribers to win interLATA business.
The 1996 Telecommunications Act also addresses a wide range of other
telecommunications issues that will potentially impact the Company's
operations, including a sunset provision pertaining to when safeguards
designed to prevent RBOCs from capitalizing on their local exchange monopolies
will cease to apply; provisions pertaining to regulatory forbearance by the
FCC; the creation of new opportunities for competitive local service
providers; and requirements pertaining to the treatment and confidentiality of
subscriber network information. The legislation also restricts for some period
AT&T and other long distance carriers serving more than five percent of the
nation's presubscribed access lines from packaging their long distance
services with local services provided over RBOC facilities. It is unknown at
this time precisely the nature and extent of the impact that the legislation
will have on the Company. As required by the legislation, the FCC is
conducting a large number of proceedings over the next year to adopt rules and
regulations to implement the new statutory provisions and requirements.
Depending on the exact nature and timing of GTOC and RBOC out-of-region and
in-region entry into the long distance market, such entry and the ability of
the Company's competitors to market jointly local and long distance services
could have a material adverse effect upon the Company's results of operations.
It is expected by the Company that most or all of the RBOCs will file
applications for out-of-region (and also eventually in-region) long distance
service authority. Certain of the RBOCs have already obtained the necessary
authority to provide out-of-region long distance services in multiple states.
It is not known when, and under what specific conditions, other applications
for long distance authority will be filed by the RBOCs and/or be granted by
state utility commissions.
Federal. The FCC has classified the Company as a non-dominant interexchange
carrier. As a non-dominant carrier, the Company may provide domestic
interstate communications without prior FCC authorization, although FCC
authorization is required for the provision of international
telecommunications by non-dominant carriers. Non-dominant carriers currently
are required to file tariffs listing the rates, terms and conditions of
interstate and international services provided by the carrier. However,
generally the FCC has chosen not to exercise its statutory power to closely
regulate the charges or practices of non-dominant carriers. Nevertheless, non-
dominant carriers are required by statute to offer interstate and
international services under rates, terms and conditions that are just,
reasonable, and not unduly discriminatory, and the FCC acts upon complaints
against such carriers for failure to comply with statutory obligations or with
the FCC's rules, regulations and policies. The FCC also has the power to
impose more stringent regulatory requirements on the Company and to change its
regulatory classification. The Company believes that, in the current
regulatory environment, the FCC is unlikely to do so.
42
<PAGE>
Until October 1995, AT&T was classified as a dominant carrier, but AT&T
successfully petitioned the FCC for non-dominant status in the domestic
interstate market. Therefore, certain pricing restrictions that once applied
to AT&T have been eliminated, which could result in increased prices for
services the Company purchases from AT&T and more competitive retail prices
offered by AT&T to customers. AT&T has been reclassified as a non-dominant
carrier in the international market.
Both domestic and international non-dominant carriers must maintain tariffs
on file with the FCC. Pursuant to this requirement, the Company has filed and
maintains with the FCC a tariff for its interstate and international services.
The Company also has obtained FCC authority to provide international services
through the resale of switched services of various carriers.
On March 21, 1996, the FCC initiated a rulemaking proceeding in which it
proposed to eliminate the requirement that non-dominant interstate carriers
such as the Company maintain tariffs on file with the FCC for domestic
interstate services. The FCC's proposed rules are pursuant to authority
granted to the FCC in the 1996 Telecommunications Act to "forebear" from
regulating any telecommunications service provider if the FCC determines that
the public interest will be served. The FCC also requested public comment on
whether any other regulations currently imposed on non-dominant carriers also
should be eliminated pursuant to the FCC's "forbearance" authority. It is not
known when the FCC will take final action on this proposal.
The FCC also imposes prior approval requirements on transfers of control and
assignments of operating authorizations. The FCC has the authority to
generally condition, modify, cancel, terminate or revoke operating authority
for failure to comply with federal laws and/or the rules, regulations and
policies of the FCC. Fines or other penalties also may be imposed for such
violations. There can be no assurance that the FCC or third parties will not
raise issues with regard to the Company's compliance with applicable laws and
regulations.
Among domestic local carriers, only the incumbent local exchange carriers
are currently classified by the FCC as dominant carriers for the provision of
interstate access services. Thus, the FCC regulates many of the local exchange
carriers' rates, charges and services to a greater degree than the Company's,
although FCC regulation of the local exchange carriers is expected to decrease
over time, particularly in light of the 1996 Telecommunications Act. The FCC
has proposed that RBOCs that offer out-of-region interexchange services be
regulated as non-dominant carriers, as long as such services are offered by an
affiliate that complies with certain structural separation requirements.
Like other long distance carriers, the Company has been the subject of
informal complaints before the FCC regarding certain marketing and billing
issues. The Company has filed timely responses to these informal complaints.
The Company believes that such matters will be satisfactorily resolved without
a material adverse impact upon the Company's results of operations.
State. The Company's intrastate long distance operations are subject to
various state laws and regulations including, in most jurisdictions,
certification and tariff filing requirements. The vast majority of the states
require the Company to apply for certification to provide intrastate
telecommunications services, or at least to register or to be found exempt
from regulation, before commencing intrastate service. The vast majority of
states also require the Company to file and maintain detailed tariffs listing
their rates for intrastate service. Many states also impose various reporting
requirements and/or require prior approval for transfers of control of
certified carriers, and/or for corporate reorganizations; acquisitions of
telecommunications operations; assignments of carrier assets, including
subscriber bases; carrier stock offerings; and incurrence by carriers of
significant debt obligations. Certificates of authority can generally be
conditioned, modified, canceled, terminated, or revoked by state regulatory
authorities for failure to comply with state law and/or the rules,
regulations, and policies of the state regulatory authorities. Fines and other
penalties also may be imposed for such violations.
The Company provides long distance service in all or some portion of 37
states and the District of Columbia and has received the necessary certificate
and tariff approvals to provide intrastate long distance service in 47 states.
Applications are pending in other states for certification. Although the
Company intends and expects to
43
<PAGE>
obtain operating authority in each jurisdiction in which operating authority
is required, there can be no assurance that one or more of these jurisdictions
will not deny the Company's request for operating authority. The Company
monitors regulatory developments in all 50 states to ensure regulatory
compliance.
Informal complaints concerning certain marketing and billing issues have
been lodged against the Company before certain state PSCs. The Company
believes that such matters will be satisfactorily resolved without a material
adverse impact upon the Company's results of operations.
PSCs also regulate access charges and other pricing for telecommunications
services within each state. The RBOCs and other local exchange carriers have
been seeking reduction of state regulatory requirements, including greater
pricing flexibility. This could adversely affect the Company in several ways.
If regulations are changed to allow variable pricing of access charges based
on volume, the Company could be placed at a competitive disadvantage over
larger long distance carriers. The Company also could face increased price
competition from the RBOCs and other local exchange carriers for intraLATA and
interLATA long distance services, which may be increased by the removal of
former restrictions on long distance service offerings by the RBOCs as a
result of the 1996 Telecommunications Act.
INTELLECTUAL PROPERTY
The Company has registered several trademarks for use in its marketing
materials. The original logo used by the Company to market its Dial & Save
residential long distance service is a registered trademark of the Company.
The logo is used in a limited fashion today, as it has been replaced by a more
updated logo design. The new logo utilized by the Company to market its Dial &
Save residential long distance service is actively used on all Dial & Save
marketing materials. The Company filed a registration application to obtain a
trademark for its new logo design and to trademark the words "Dial & Save" in
late 1994. The registration application has been suspended pending the
disposition of one other application before the Patent and Trademark Office
("PTO"). While each of the Company and the other applicant have filed an
opposition to the other's application, they have commenced discussions to
resolve the matter. The Company believes that the common law trademark right
of first use reduces any potential adverse effect to the Company in the event
that its application to register the "Dial & Save" trademark is denied. While
the Company believes its registered trademarks are important to its business
in terms of further protecting its existing common law right to use such
trademarks, the Company does not believe that failure to register its
trademarks poses any material risk of infringement on its rights to use such
trademarks. The Company's CIC Code for its Long Distance Wholesale Club brand
is a registered trademark of the Company.
"Prime Business" is the name of the Company's small business product line.
The Company filed its registration application to obtain a trademark for the
phrase "Prime Business" and its logo in 1995. The registration application is
currently pending.
EMPLOYEES
As of July 7, 1996, the Company has approximately 386 full-time employees, 8
part-time employees, and approximately 200 workers who are employed as
independent contractors through various employment agencies. The employment
agency workers are Customer Service Representatives who handle inbound
marketing inquiries from customers. None of these employees are represented by
a union. The Company believes that it has good relations with its employees.
PROPERTIES
The Company currently leases approximately 23,189 square feet of space for
its corporate headquarters at 4219 Lafayette Center Drive and 4215 Lafayette
Center Drive in Chantilly, Virginia, pursuant to a lease agreement expiring on
July 31, 1999. See "Certain Transactions--Leases of Real Property from
Affiliate of Shareholder." The average monthly rent (not including
electricity) as of March 1996 is approximately $19,867.
44
<PAGE>
The Company is also negotiating for an additional 6,000 square feet of space
at 4200 Lafayette Center Drive. In addition, the Company occupies
approximately 14,508 square feet of leased office space on the 11th floor of
1401 Wilson Boulevard in Arlington, Virginia, which is occupied primarily by
the Company's Washington, D.C. Commercial Division. The monthly rental for
this space as of April 1996 is approximately $24,785. The lease expires on May
31, 2000 with an option to renew for one additional term of five years. The
Company also leases an aggregate of 27,162 square feet of space in seven
locations in Florida, Iowa, Nevada, Tennessee, Texas, and Washington, D.C., to
house its telecommunications switching equipment sites and one of its network
control centers. Due to the rapid expansion and growth of the Company, there
may be a need to lease additional office space. If this need arises, the
Company believes additional space can be readily obtained as needed. The
Company's Commercial Division is currently utilizing temporary office space in
eight of its nine existing locations. The Company expects to secure longer
term office space later in 1996.
RESEARCH AND DEVELOPMENT
The Company has not expended material amounts of capital for research and
development since its inception in 1993.
LITIGATION
The Company is a party from time to time to litigation or proceedings
incident to its business, including, but not limited to, informal complaints
before the FCC and state agencies regarding certain marketing and billing
issues. There is no pending legal proceeding to which the Company is party
that in the opinion of management is likely to have a material adverse effect
on the Company's business, financial condition or results of operations.
45
<PAGE>
MANAGEMENT
The following table sets forth, as of June 30, 1996, certain information
regarding the Company's directors, executive officers and certain other
significant employees.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Henry G. Luken, III................. 37 Chairman of the Board
Donald A. Burns..................... 33 Vice Chairman of the Board, Chief
Executive Officer and President
Thomas J. Cirrito................... President--Consumer Division and
48 Director
Robert W. Ross...................... 55 Director
Natalie J. Marine-Street............ 27 Executive Vice President
Stephen G. Canton................... 40 President--Commercial Division
Bryan K. Rachlin.................... 40 Chief Operating Officer, Secretary and
General Counsel
Nicholas A. Merrick................. 33 Chief Financial Officer and Treasurer
Janet D. Anastasi................... 49 Vice President and Corporate Controller
Mark J. Stodter..................... Vice President--Electronic Data
37 Processing
</TABLE>
Following completion of the Offerings, the Company intends to elect one
additional person to the Company's Board of Directors, who will be an
independent director.
HENRY G. LUKEN, III, a co-founder of the Company, has served as the Chairman
of the Company's Board of Directors since its formation in July 1993. Mr.
Luken served as the Company's Chief Executive Officer and Treasurer from July
1993 to April 1996. Mr. Luken has also served as Chairman of Tel Labs since
1991 and Chairman of Telco Development Group, Inc., a computer systems company
owned by Mr. Luken, since 1987, both of which entities he founded.
DONALD A. BURNS, a co-founder of the Company, has served as Chief Executive
Officer and Vice Chairman of the Company's Board of Directors since April
1996, and has served as the President and as a director of the Company since
its formation in July 1993. Mr. Burns served as the Company's Secretary from
July 1993 to April 1996. Prior to joining the Company, Mr. Burns held several
positions with Mid Atlantic Telecom, Inc. ("Mid Atlantic"), a regional long
distance carrier based in Washington, D.C., including executive vice president
and chief operating officer from October 1992 to July 1993 and director of
operations from 1988 to October 1992.
THOMAS J. CIRRITO has served as the President of the Company's Consumer
Division since April 1996 and as a director of the Company since June 1996.
Mr. Cirrito is a co-founder of LDWC and has served as its president and chief
executive officer since its formation in September 1993. From November 1991
through September 1993, Mr. Cirrito served as president and chief executive
officer of Telecommunications Associates, Inc., an operator assisted services
company. Mr. Cirrito was vice president of marketing/sales with Mid Atlantic
from November 1988 to November 1991.
ROBERT W. ROSS has been a director of the Company since June 1996. Mr. Ross
served as Vice President, International Business Development, of Turner
Broadcasting System, Inc. ("TBS") from August 1990 through June 1996, and
President of Turner International, Inc., a subsidiary of TBS, since September
1994.
NATALIE J. MARINE-STREET has served as an Executive Vice President of the
Company since February 1996. Ms. Marine-Street served in several other
positions with the Company since its formation in July 1993, including vice
president of administration from February 1995 to February 1996 and marketing
manager/special projects from July 1993 to February 1995. Prior to joining the
Company, Ms. Marine-Street served as marketing coordinator and in other
capacities at Mid Atlantic from April 1991 to July 1993.
46
<PAGE>
STEPHEN G. CANTON has served as the President of the Company's Commercial
Division since April 1996. Prior to joining the Company, Mr. Canton held
several positions with Allnet Communications Services, Inc., a long distance
telecommunications company, including vice president of the sales division and
regional sales director from 1988 to 1995.
BRYAN K. RACHLIN has served as the Chief Operating Officer and Secretary of
the Company since April 1996. Mr. Rachlin has served as vice president and
general counsel of the Company since its inception, and as the chief executive
officer of Tel Labs since May 1994. Prior to joining the Company, Mr. Rachlin
was a partner in the law firm of Rachlin & Fitzgerald.
NICHOLAS A. MERRICK has served as Chief Financial Officer of the Company
since March 1996. Prior to joining the Company, from July 1990 to March 1996,
Mr. Merrick held several positions as an investment banker in the corporate
finance department of The Robinson-Humphrey Company, Inc. In this capacity,
Mr. Merrick was involved in numerous public and private financings and merger
and acquisition transactions involving companies in the telecommunications
industry.
JANET D. ANASTASI has served as Vice President and Corporate Controller of
the Company since October 1994. Prior to joining the Company, Ms. Anastasi
served as a manager at Chase and Associates CPAs, P.C., certified public
accountants, from 1988 to 1994.
MARK J. STODTER has served as Vice President-Electronic Data Processing of
the Company since its formation in July 1993. Additionally, Mr. Stodter served
as Chief Operating Officer of the Company from July 1993 to March 1996. Prior
to joining the Company, Mr. Stodter served as director of management
information systems with Long Distance Service, Inc., a regional long distance
carrier based in Washington, D.C. from 1986 to 1993.
The Company's Board of Directors is divided into three classes serving
staggered three-year terms. At each annual meeting of the Company's
shareholders, successors to the class of directors whose term expires at such
meeting will be elected to serve for three-year terms and until their
successors are elected and qualified. Mr. Ross's term expires at the 1997
annual meeting of shareholders, Mr. Cirrito's term expires at the 1998 annual
meeting of shareholders, and Mr. Luken's and Mr. Burns' terms expire at the
1999 annual meeting of shareholders. The Company intends to appoint a second
independent director within ninety days after the consummation of the
Offerings. Officers are elected by, and serve at the discretion of, the Board
of Directors. There are no family relationships among any of the directors or
officers of the Company.
COMMITTEES OF THE BOARD
Subsequent to the Offerings, the Board of Directors will establish an Audit
Committee. The Audit Committee will be comprised solely of independent
directors and will be charged with recommending the firm to be appointed as
independent accountants to audit the Company's financial statements,
discussing the scope and results of the audit with the independent accounts,
reviewing the functions of the Company's management and independent auditors
pertaining to the Company's financial statements and performing such other
related duties and functions as are deemed appropriate by the Audit Committee
and the Board of Directors.
Also, subsequent to the Offerings, the Board of Directors will establish a
Compensation Committee. The Compensation Committee will be comprised solely of
"disinterested persons"or "Non-Employee Directors" as such term is used in
Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and "outside directors" as such term is used in Treasury
Regulation Section 1.162-27(c)(3) promulgated under the Internal Revenue Code
of 1986, as amended (the "Code"). The Compensation Committee will be
responsible for reviewing general policy matters relating to compensation and
benefits of employees and officers, determining the total compensation of the
officers and directors of the Company and administering the Company's Stock
Option Plan.
47
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors did not have a Compensation Committee during fiscal
year 1995. As a result, the entire Board of Directors (consisting of Mr. Luken
and Mr. Burns) participated in deliberations concerning executive officer
compensation. Subsequent to the Offerings, the Board of Directors will
establish a Compensation Committee comprised of directors who are not
executive officers or employees of the Company.
DIRECTOR REMUNERATION
Following the completion of the Offerings, directors who are not employees
of the Company will receive an annual fee, a meeting fee for every board
meeting attended and each committee meeting held separately and a fee for each
telephonic board meeting or telephonic committee meeting held separately. The
Company is in the process of determining such fees. All directors will be
reimbursed for out-of-pocket expenses. The Company may, from time to time and
in the sole discretion of the Company's Board of Directors, grant options to
directors under the Company's Stock Option Plan.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning
compensation for services in all capacities awarded to, earned by or paid to,
the Company's Chief Executive Officer and each of the other most highly
compensated executive officers of the Company, whose aggregate cash and cash
equivalent compensation exceeded $100,000 (collectively, the "Named
Officers"), with respect to the year ended December 31, 1995.
SUMMARY COMPENSATION TABLE(/1/)
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------- -----------------
NAME OF INDIVIDUAL OTHER ANNUAL SECURITIES UNDER- ALL OTHER
AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION LYING OPTIONS (#) COMPENSATION
---------------------- ---- ---------- --------- ------------ ----------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Henry G. Luken, III..... 1995 $835,327/(2)/ $300,000 $22,500/(5)/ 0 $ 0
Chairman of the Board
Donald A. Burns......... 1995 397,533/(3)/ 300,000 0 0 0
President and Chief
Executive Officer
Bryan K. Rachlin........ 1995 450,355/(4)/ 0 22,500/(5)/ 102,043/(6)/ 0
Chief Operating
Officer, Secretary and
General Counsel
Thomas J. Cirrito....... 1995 274,508/(7)/ 0 41,784/(8)/ 0 0
President--Consumer
Division
Natalie J. Marine- 1995 82,090/(9)/ 21,875 0 1,576 0
Street.................
Executive Vice
President
</TABLE>
- --------
(1) Includes compensation paid by Telco and its subsidiaries, including LDWC.
The figures also include compensation paid by Tel Labs which, upon the
completion of the Offerings, will become a wholly owned subsidiary of
Telco.
(2) Mr. Luken's annual salary was adjusted to $400,000 in 1996.
(3) Mr. Burns' annual salary was adjusted to $400,000 in 1996.
(4) Mr. Rachlin's annual salary was adjusted to $375,000 in 1996.
(5) Represents deferred compensation payable by Tel Labs under the Tel Labs
Simplified Employee Pension Plan.
(6) In October 1995, Mr. Rachlin was granted options to purchase two shares of
LDWC common stock at an exercise price of $181,060.77 per share,
exercisable for a period of ten years. In connection with the Company's
acquisition of the minority interest in LDWC, such LDWC options were
automatically converted into options to purchase a total of 102,043 shares
of Telco Common Stock at an exercise price of $3.55 per share, with an
exercise period expiring on October 1, 2005. Options to purchase 76,532
shares vested in January 1996, and the remaining options will vest in
January 1997.
(7) Mr. Cirrito's annual salary was adjusted to $375,000 in 1996.
(8) Represents accrued deferred compensation payable by LDWC under the LDWC
deferred compensation plan.
(9) Ms. Marine-Street's annual salary was adjusted to $130,000 in 1996.
48
<PAGE>
STOCK OPTION GRANTS
The following table sets forth certain information regarding grants of
options to purchase Common Stock made by the Company during the fiscal year
ended December 31, 1995, to each of the Named Officers. No stock appreciation
rights were granted during 1995.
OPTION GRANTS IN 1995
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF TOTAL POTENTIAL REALIZABLE
SECURITIES OPTIONS VALUE AT ASSUMED
UNDERLYING GRANTED TO EXERCISE ANNUAL RATES OF STOCK
OPTIONS EMPLOYEES PRICE EXPIRATION PRICE APPRECIATION FOR
NAME GRANTED IN 1995(1) ($/SHARE) DATE OPTION TERM(2)
---- ---------- ---------- --------- ---------- -----------------------
(5%) (10%)
<S> <C> <C> <C> <C> <C> <C>
Henry G. Luken, III..... 0 -- -- -- -- --
Donald A. Burns......... 0 -- -- -- -- --
Bryan K. Rachlin(3)..... 102,043 20.2% $3.55 10/01/05 $ 227,821 $ 577,339
Thomas J. Cirrito....... 0 -- -- -- -- --
Natalie Marine-Street... 0 -- -- -- -- --
</TABLE>
- --------
(1) The Company granted options to purchase a total of 504,342 shares of
Common Stock in 1995, which includes options to purchase shares of common
stock of LDWC that were converted into options to purchase Common Stock of
Telco in connection with the Company's acquisition of the minority
interest in LDWC as part of the Reorganization.
(2) Represents amounts that may be realized upon exercise of options
immediately prior to the expiration of their term assuming the specified
compounded rates of appreciation (5% and 10%) on the Common Stock over the
terms of the options. These assumptions do not reflect the Company's
estimate of future stock price appreciation. Actual gains, if any, on the
stock option exercises and Common Stock holdings are dependent on the
timing of such exercise and the future performance of the Common Stock.
There can be no assurance that the rates of appreciation assumed in this
table can be achieved or that the amounts reflected will be received by
the option holder.
(3) In October 1995, Mr. Rachlin was granted options to purchase two shares of
LDWC at an exercise price of $181,060.77 per share, exercisable for a
period of ten years. In connection with the Company's acquisition of the
minority interest in LDWC, such LDWC options were automatically converted
into options to purchase a total of 102,043 shares of Telco Common Stock
at an exercise price of $3.55 per share, with an exercise period expiring
on October 1, 2005. Options to purchase 76,532 shares vested in January
1996, and the remaining options will vest in January 1997.
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OPTION EXERCISES AND HOLDINGS
The following table sets forth certain information regarding options to
purchase Common Stock held as of December 31, 1995, by each of the Named
Officers. None of the Named Officers exercised any stock options or stock
appreciation rights during fiscal year 1995.
FISCAL 1995 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR- "IN-THE-MONEY" OPTIONS AT
END (#) FISCAL YEAR-END ($)(1)
------------------------- -------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Henry G. Luken, III........ -0- -0- -0- -0-
Donald A. Burns............ -0- -0- -0- -0-
Bryan K. Rachlin(2)........ 700,219 25,511 2,672,838 23,725
Thomas J. Cirrito.......... -0- -0- -0- -0-
Natalie Marine-Street(3)... 740,775 56,525 2,014,908 153,748
</TABLE>
- --------
(1) Options are "in the money" if the fair market value of the underlying
securities exceeds the exercise price of the options. The amounts set
forth represent the difference between $4.48 per share, the market value
of the Common Stock issuable upon exercise of options at December 31, 1995
(as determined by the Board of Directors), and the exercise price of the
option, multiplied by the applicable number of shares underlying the
options. Such fair market value has been adjusted to reflect the pro forma
effect of the Stock Split and the Reorganization.
(2) Includes options to purchase 102,043 shares of Common Stock granted to Mr.
Rachlin in exchange for Mr. Rachlin's options to acquire shares of LDWC
common stock, pursuant to Telco's acquisition of the minority interests in
LDWC. See "Certain Transactions--Long Distance Wholesale Club." On June
21, 1996, Mr. Rachlin exercised 649,198 options to purchase shares for a
weighted average exercise price of $0.44 per share.
(3) The Company has received notice that Ms. Marine-Street will exercise
options to acquire 55,811 shares which will be sold in the Offerings and
options to acquire 169,575 shares which will not be sold in the Offerings.
All such options are exercisable at an exercise price of $1.76 per share.
EMPLOYMENT AGREEMENTS
On July 10, 1996, July 10, 1996, and May 3, 1996, the Company entered into
employment agreements with each of Messrs. Burns and Rachlin and Ms. Marine-
Street pursuant to which Mr. Burns has agreed to serve as Vice Chairman of the
Board of Directors, President and Chief Executive Officer of the Company, Mr.
Rachlin has agreed to serve as Chief Operating Officer, General Counsel and
Secretary, and Ms. Marine-Street has agreed to serve as Executive Vice
President. The agreement with Mr. Burns expires on July 10, 2001 and the
agreements with Mr. Rachlin and Ms. Marine-Street expire on July 10, 1999 and
May 3, 1999, respectively, in each case unless earlier terminated in
accordance with the terms of the respective agreement. The annual base salary
under such agreements is reviewed annually but cannot be less than $400,000
for Mr. Burns, $375,000 for Mr. Rachlin, and $130,000 for Ms. Marine-Street.
Also on July 10, 1996, the Company entered into an employment agreement with
Mr. Luken, pursuant to which Mr. Luken has agreed to serve as Chairman of the
Company until July 10, 2001, unless earlier terminated in accordance with the
terms of the agreement. Mr. Luken's annual base compensation under such
agreement is reviewed annually but cannot be less than $400,000.
On March 19, 1996, the Company entered into an employment agreement with Mr.
Merrick, pursuant to which he has agreed to serve as the Chief Financial
Officer of the Company until March 19, 1999, unless earlier terminated in
accordance with the terms of the agreement. Mr. Merrick's annual base salary
under the agreement is reviewed annually, but cannot be less than $130,000. In
addition, the agreement provides for an annual bonus for Mr. Merrick in a
minimum amount of $78,000 for each year of the agreement. Mr. Merrick was also
granted options to acquire 425,000 shares of the Company's Common Stock at an
exercise price of $7.53 per share, exercisable over a ten year period from the
date of grant and vesting in one-third increments over the three-year
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period commencing with the date of the agreement. The agreement provides that
all unvested options shall vest immediately upon the occurrence of a "change
in control" of the Company, including, but not limited to, any time in which
Mr. Burns and Mr. Luken, together, cease to own beneficially an aggregate of
at least 25% of the voting power of the total voting stock of the Company.
On April 4, 1996, the Company entered into an employment agreement with Mr.
Canton, pursuant to which he has agreed to serve as the President of the
Company's Commercial Division until April 3, 2001, unless earlier terminated
in accordance with the agreement. Mr. Canton's annual base salary under the
agreement is reviewed annually, but cannot be less than $300,000. Pursuant to
the agreement, Mr. Canton also received options to acquire 1,062,500 shares of
the Company's Common Stock, exercisable at an option price of $7.53 per share,
exercisable over a ten year period from the date of grant and vesting in one-
third increments over the three-year period commencing with the date of the
agreement. The agreement provides that all unvested options shall vest
immediately upon the occurrence of a "change in control" of the Company (as
defined in the agreement).
On April 15, 1996, the Company entered into an employment agreement with Mr.
Cirrito, pursuant to which he has agreed to serve as the President of the
Company's Consumer Division until April 15, 1999, unless earlier terminated in
accordance with the agreement. Mr. Cirrito's annual base salary under the
agreement is reviewed annually, but cannot be less than $375,000.
Under each of the agreements described above with Messrs. Burns, Luken,
Cirrito, Canton, Rachlin and Merrick in the event of termination "without
cause," the named individual will be entitled to receive termination payments
equal to 100% of his base salary for the remainder of the term of the
agreement (with a minimum of one year's salary). Under the agreement described
above with Ms. Marine-Street, in the event of any termination of the
agreement, "with" or "without cause," she will be entitled to receive payments
in the amount of $97,000. In addition, Messrs. Burns', Luken's, Cirrito's,
Rachlin's, Canton's and Merrick's agreements contain non-competition covenants
which prohibit such individuals for a period of one year (or, as to Mr.
Rachlin, six months) following termination of their employment agreements in
most circumstances from working for any company that competes with the Company
in the United States. The Company will pay each of Messrs. Burns, Luken and
Cirrito $1,000,000 in exchange for these non-competition covenants upon
termination of the individual's agreement.
INDEMNIFICATION AGREEMENTS
The Company has entered into certain indemnification agreements
(collectively, the "Indemnification Agreements") with Messrs. Luken, Burns,
Cirrito and Rachlin. Pursuant to the terms of the Indemnification Agreements,
each of the above named executive officers of the Company will be indemnified
by the Company to the full extent permitted by law in the event such officer
is made or threatened to be made a party to a claim arising out of such person
acting in his capacity as an officer of the Company. The Company has further
agreed that, upon a change of control, as defined in the Indemnification
Agreements, the rights of such officers to indemnification payments and
expense advances will be determined in accordance with certain provisions of
the Virginia Stock Corporation Act and has also agreed that, upon a potential
change of control, as defined in the Indemnification Agreements, it will
create a trust in an amount sufficient to satisfy all indemnity expenses
reasonably anticipated at the time a written request to create such a trust is
submitted by an officer.
AMENDED AND RESTATED 1994 STOCK OPTION PLAN
In April 1996, the Board of Directors of the Company adopted and the
shareholders of the Company approved the Stock Option Plan, which provides for
the grant to officers, key employees and directors of the Company and its
subsidiaries of both "incentive stock options" within the meaning of Section
422 of the Code, and stock options that are non-qualified for federal income
tax purposes. The total number of shares for which options may be granted
pursuant to the Stock Option Plan and the maximum number of shares for which
options may be granted to any person is 7,500,000 shares, subject to certain
adjustments reflecting changes in the Company's capitalization. The Stock
Option Plan is currently administered by the Company's Board of
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<PAGE>
Directors. Upon the completion of the Offerings, the Stock Option Plan will be
administered by the Compensation Committee. The Compensation Committee will
determine, among other things, which officers, employees and directors will
receive options under the plan, the time when options will be granted, the
type of option (incentive stock options, non-qualified stock options, or both)
to be granted, the number of shares subject to each option, the time or times
when the options will become exercisable, and, subject to certain conditions
discussed below, the option price and duration of the options. Members of the
Compensation Committee will not be eligible to receive discretionary options
under the plan, but are entitled to receive options as directors.
The exercise price of incentive stock options will be determined by the
Compensation Committee, but may not be less than the fair market value of the
Common Stock on the date of grant and the term of any such option may not
exceed ten years from the date of grant. With respect to any participant in
the Stock Option Plan who owns stock representing more than 10% of the voting
power of all classes of the outstanding capital stock of the Company or of its
subsidiaries, the exercise price of any incentive stock option may not be less
than 110% of the fair market value of such shares on the date of grant and the
term of such option may not exceed five years from the date of grant.
The exercise price of non-qualified stock options will be determined by the
Compensation Committee on the date of grant. In the case of non-qualified
stock options granted on or before the earliest of (i) the expiration of the
Plan; (ii) the material modification of the Plan; (iii) the issuance of all
stock allocated under the Plan; or (iv) the first meeting of shareholders at
which directors are elected occurring after the close of the third calender
year following the calender year in which the initial public offering occurs
(the "Reliance Period"), the exercise price of such options may not be less
than fifty percent (50%) of the fair market value of the Common Stock on the
date of grant. In the case of non-qualified stock options granted after the
Reliance Period, the exercise price of such options may not be less than the
fair market value of the Common Stock on the date of grant. In either case,
the term of such options may not exceed ten years from the date of grant.
Payment of the option price may be made in cash or, with the approval of the
Compensation Committee, in shares of Common Stock having a fair market value
in the aggregate equal to the option price. Options granted pursuant to the
Stock Option Plan are not transferable, except by will or the laws of descent
and distribution. During an optionee's lifetime, the option is exercisable
only by the optionee.
The Compensation Committee has the right at any time and from time to time
to amend or modify the Stock Option Plan, without the consent of the Company's
shareholders or optionees; provided, that no such action may adversely affect
options previously granted without the optionee's consent, and provided
further that no such action, without the approval of a majority of the
shareholders of the Company, may increase the total number of shares of Common
Stock which may be purchased pursuant to options under the plan, increase the
total number of shares of Common Stock which may be purchased pursuant to
options under the plan by any person, expand the class of persons eligible to
receive grants of options under the plan, decrease the minimum option price,
extend the maximum term of options granted under the plan, extend the term of
the plan or change the performance criteria on which the granting of options
is based. The expiration date of the Stock Option Plan after which no option
may be granted thereunder, is June 12, 2006.
Promptly after the completion of the Offerings, the Company expects to file
with the Securities and Exchange Commission a registration statement on Form
S-8 covering the shares of Common Stock underlying options granted under the
Stock Option Plan.
As of May 31, 1996, options to purchase an aggregate of 3,625,329 shares of
Common Stock had been granted to nine individuals under the Stock Option Plan
(including 649,198 shares issued upon exercise of options by Mr. Rachlin on
June 21, 1996 at a weighted average exercise price of $0.44 per share, 169,575
shares issued upon exercise of options by Ms. Marine-Street concurrently with
the Offerings at an exercise price of $1.76 per share, which shares are not
being sold in the Offerings, and 112,996 shares of Common Stock to be issued
pursuant to options that will be exercised concurrently with the Offerings at
a weighted average exercise price of $2.12 per share) and a total of 3,874,671
shares of Common Stock were available for future grants. Such options were
granted between July 3, 1994 and April 4, 1996 and expire ten years from the
date of grant. After giving effect to the options for 649,198 shares of Common
Stock exercised on June 21, 1996 and the
52
<PAGE>
options for 169,575 shares of Common Stock and 112,996 shares of Common Stock
to be exercised concurrently with the Offerings, the Company will have
outstanding options to purchase 2,693,560 shares of Common Stock remaining,
which will be exercisable at prices ranging from $.67 to $7.53 per share. The
Company determined the fair value of its Common Stock at the date of grant for
the purpose of determining the exercise price of the options granted pursuant
to the Stock Option Plan. As a result, the Company has not recognized
compensation expense with respect to any option grants because option exercise
prices reflect the fair value at the respective option grant dates. Shares
subject to options granted under the plan that have lapsed or terminated may
again be subject to options granted under the plan.
Prior to June 21, 1996, Mr. Rachlin held options to purchase 725,730 shares
of Common Stock, which were granted to him on July 3, 1994 and on October 1,
1995. The latter options represented options to purchase LDWC shares which
were converted into options to purchase Company shares on April 1, 1996. See
"Certain Transactions--Long Distance Wholesale Club." On June 21, 1996, Mr.
Rachlin exercised options to purchase 649,198 shares of Common Stock at a
weighted average exercise price of $0.44 per share, none of which will be sold
in connection with the Offerings.
Concurrently with the Offerings, Messrs. Stodter, Sznajder, and Jarman and
Ms. Marine-Street and Anastasi will exercise options to purchase an aggregate
of 112,996 shares of Common Stock and sell such shares in the Offerings. The
number of shares to be purchased upon the exercise of options, the exercise
price of the options and the date the options were granted are as follows: Mr.
Stodter will exercise 14,875 options to purchase shares at an exercise price
of $1.85 per share, which were granted to him on December 30, 1994; Mr.
Sznajder will exercise 3,570 options to purchase shares at an exercise price
of $2.51 per share, which were granted to him on April 1, 1996; Mr. Jarman
will exercise 7,928 options to purchase shares at an exercise price of $0.67
per share, which were granted to him on April 1, 1996; Ms. Marine-Street will
exercise options to purchase 225,386 shares (of which 55,811 will be sold in
the Offering) at an exercise price of $1.76 per share, which were granted to
her on November 30, 1994; and Ms. Anastasi will exercise 30,812 options to
purchase shares at $3.23 per share, which were granted to her on September 1,
1995. The proceeds received by the Company from the exercise of the options
will be used for working capital and general corporate purposes.
Each of Messrs. Stodter, Sznajder and Jarman and Ms. Anastasi will receive
temporary loans from the Company to enable such individuals to exercise their
respective options concurrently with the Offerings. The principal amount of
such loans will be approximately $27,520, $8,960, $5,300 and $99,500 for
Messrs. Stodter, Sznajder and Jarman and Ms. Anastasi, respectively, and will
be repaid from the proceeds of the Offerings. In addition, Ms. Marine-Street
will receive two loans from the Company, a loan in the principal amount of
approximately $98,230 to enable her to options, to acquire 169,575 shares of
Common Stock concurrently with the Offerings and to sell such shares in the
Offerings, and a second loan in the principal amount of approximately $298,500
in connection with the concurrent exercise of options to acquire 169,575
shares which will not be sold in the Offerings. In addition, Ms. Marine-Street
has the right to borrow an additional amount to satisfy federal and state tax
obligations incurred in connection with the exercise of such options to
acquire 169,575 shares. Mr. Rachlin has also received a loan from the Company
in the principal amount of approximately $283,900, representing the aggregate
exercise price of options for 649,198 shares of Common Stock exercised by
Mr. Rachlin on June 21, 1996. See "Certain Transactions--Loans to Certain
Executive Officers."
Immediately prior to the Offerings, the Company intends to grant options
pursuant to the Stock Option Plan to purchase up to an aggregate of 600,000
shares of Common Stock to approximately 30 non-executive employees of the
Company's Commercial Division. The options will be exercisable at the initial
public offering price per share and will vest in one-third increments on the
first, second and third anniversaries of the date of grant.
Certain Federal Income Tax Consequences. The following discussion is
generally a summary of the principal United States federal income tax
consequences under current federal income tax laws relating to option grants
to employees under the Stock Option Plan. This summary is not intended to be
exhaustive and, among other things, does not describe state, local or foreign
income and other tax consequences.
An optionee will not recognize any taxable income upon the grant of a non-
qualified option and the Company will not be entitled to a tax deduction with
respect to such grant. Generally, upon exercise of a non-
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<PAGE>
qualified option, the excess of the fair market value of the Common Stock on
the exercise date over the exercise price will be taxable as compensation
income to the optionee. Subject to the discussion below with respect to Section
162(m) of the Code and the optionee including such compensation in income or
the Company satisfying applicable reporting requirements, the Company will be
entitled to a tax deduction in the amount of such compensation income. The
optionee's tax basis for the Common Stock received pursuant to such exercise
will equal the sum of the compensation income recognized and the exercise
price.
Special rules may apply in the case of an optionee who is subject to Section
16 of the Exchange Act.
In the event of a sale of Common Stock received upon the exercise of a
nonqualified option, any appreciation or depreciation after the exercise date
generally will be taxed to the optionee as capital gain or loss and will be
long-term capital gain or loss if the holding period for such Common Stock was
more than one year.
Subject to the discussion below, an optionee will not recognize taxable
income at the time of grant or exercise of an "incentive stock option" and the
Company will not be entitled to a tax deduction with respect to such grant or
exercise. The exercise of an "incentive stock option" generally will give rise
to an item of tax preference that may result in alternative minimum tax
liability for the optionee.
Generally, a sale or other disposition by an optionee of shares acquired upon
the exercise of an "incentive stock option" more than one year after the
transfer of the shares to such optionee and more than two years after the date
of grant of the "incentive stock option" will result in any difference between
the amount realized and the exercise price being treated as long-term capital
gain or loss to the optionee, with no deduction being allowed to the Company.
Generally, upon a sale or other disposition of shares acquired upon the
exercise of an "incentive stock option" within one year after the transfer of
the shares to the optionee or within two years after the date of grant of the
"incentive stock option," any excess of (i) the lesser of (a) the fair market
value of the shares at the time of exercise of the option and (b) the amount
realized on such sale or other disposition over (ii) the exercise price of such
option will constitute compensation income to the optionee. Subject to the
discussion below with respect to Section 162(m) of the Code and the optionee
including such compensation in income or the Company satisfying applicable
reporting requirements, the Company will be entitled to a deduction in the
amount of such compensation income. The excess of the amount realized on such
sale or disposition over the fair market value of the shares at the time of the
exercise of the option generally will constitute short-term or long-term
capital gain and will not be deductible by the Company.
Section 162(m) of the Code disallows a federal income tax deduction to any
publicly held corporation for compensation paid in excess of $1,000,000 in any
taxable year to the chief executive officer or any of the four other most
highly compensated executive officers who are employed by the corporation on
the last day of the taxable year. Under regulations promulgated under Section
162(m), the deduction limitation of Section 162(m) does not apply to any
compensation paid pursuant to a plan that existed during the period in which
the corporation was not publicly held, to the extent the prospectus
accompanying the initial public offering disclosed information concerning such
plan that satisfied all applicable securities laws. However, the foregoing
exception may be relied upon only for awards made before the earliest of (i)
the expiration of the plan; (ii) the material modification of the plan; (iii)
the issuance of all stock allocated under the plan; or (iv) the first meeting
of shareholders at which directors are elected occurring after the close of the
third calendar year following the calendar year in which the initial public
offering occurs (the "Reliance Period"). The compensation attributable to
awards granted under the Company's Stock Option Plan during the Reliance Period
is not subject to the deduction limitation of Section 162(m). The Company
intends to structure and implement the Stock Option Plan in a manner so that
compensation attributable to awards made after the Reliance Period will not be
subject to the deduction limitation.
EMPLOYEE BENEFITS
Tel Labs has adopted a Simplified Employee Pension Plan ("SEP") which will
remain in effect after the Offerings. The SEP allows employees to defer a
portion of their salaries. Employer contributions are optional, and the Board
of Directors of Tel Labs will determine annually whether Tel Labs will
contribute amounts to the SEP and at what level. The maximum amount that may be
contributed annually per SEP participant from a combination of salary deferrals
plus Tel Labs optional contributions is $22,500. The Company does not have a
similar plan for any of its other employees.
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CERTAIN TRANSACTIONS
The Company, its shareholders and affiliates have been parties to the
following transactions:
LONG DISTANCE WHOLESALE CLUB
Since its inception in 1994, LDWC has provided long distance services under
the Long Distance Wholesale Club brand name (CIC Code 10297). In connection
with the organization of LDWC, 100 shares of LDWC's common stock were issued to
Henry G. Luken, III, Chairman of the Board of the Company, and 100 shares were
issued to Thomas Cirrito, President of the Consumer Division of the Company, on
January 1, 1994. On July 28, 1994, the Company purchased Mr. Luken's LDWC
shares for cash consideration of approximately $85,000, which shares were
valued at Mr. Luken's original cost of $850 per share. On July 28, 1994, the
Company also purchased from LDWC 22.22 newly issued shares of LDWC common stock
for $50,000, which represents a price equal to $2,250 per share, resulting in
the Company's ownership of approximately 55.0%. The Company also loaned
$250,000 to LDWC, which was evidenced by a convertible note payable by LDWC to
Telco in the aggregate principal amount of $250,000. On August 16, 1995, Telco
converted the note into an additional 3.04 newly issued shares of LDWC common
stock, which shares were determined by using a pre-determined formula for
establishing a price per share for the outstanding LDWC shares. That price per
share was then divided by the face value of the note ($250,000). As a result of
the foregoing transactions, approximately 55.6% of the outstanding shares of
LDWC common stock were held by the Company and approximately 44.4% of such
shares were held by Mr. Cirrito and two of his children. The Company's
acquisition of the shares from LDWC resulted in Telco's acquisition of a
controlling interest in LDWC, thereby accounting for the control premium that
the Company paid for the shares acquired from LDWC.
Pursuant to an Agreement dated April 1, 1996, Telco acquired the remaining
minority interest in LDWC in a transaction in which all of the LDWC shares held
by Mr. Cirrito and his two children were exchanged for a total of 5,102,125
shares of Telco's Common Stock and LDWC became a wholly owned subsidiary of
Telco. In connection with such transaction, all outstanding options under the
LDWC stock option plan were converted into options to purchase a total of
291,842 shares of Common Stock under the Company's Stock Option Plan and the
LDWC stock option plan was terminated. Such options have exercise prices
ranging from $0.67 to $3.55 per share. As part of such conversion, Bryan
Rachlin, the Chief Operating Officer, Secretary and General Counsel of the
Company, received options to purchase 102,043 shares of Telco Common Stock
having an exercise price of $3.55 per share.
TEL LABS
Pursuant to a Share Exchange Agreement dated as of June 1, 1996, concurrently
with the completion of the Offerings, Tel Labs will become a wholly owned
subsidiary of the Company, and the Tel Labs shareholders will receive an
aggregate of 593,334 shares of the Company's Common Stock in exchange for all
of their shares in Tel Labs. The Tel Labs exchange ratio was negotiated between
the principals of each company. Henry Luken will exchange 600 shares of Tel
Labs common stock for 377,334 shares of Common Stock, Bryan Rachlin, will
exchange 250 shares of Tel Labs common stock for 135,000 shares of Common
Stock, Michael Cheng, will exchange 100 shares of Tel Labs common stock for
54,000 shares of Common Stock, and Kevin Yang, will exchange 50 shares of Tel
Labs common stock for 27,000 shares of Common Stock. The difference between the
exchange ratio for Mr. Luken's shares and the exchange ratio for the other Tel
Labs' shareholders represents a control premium which the former Tel Labs'
shareholders agreed to convey to Mr. Luken. Telco Development Group of
Delaware, Inc. ("Telco Delaware") is eighty percent (80%) owned by the Company
and twenty percent (20%) by Tel Labs. As a result of the Tel Labs share
exchange described above, Telco Delaware will become a wholly owned subsidiary
of the Company.
The Company purchases call translation and rating data processing on a month-
to-month basis from Tel Labs. The Company paid a total of $155,000 and $1.3
million for these services for the years ended December 31, 1994 and 1995,
respectively, and $627,000 for the three months ended March 31, 1996.
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LEASES OF REAL PROPERTY FROM AFFILIATE OF SHAREHOLDER
The Company leases its corporate headquarters office space and its
Chattanooga, Tennessee switch site from Bricks in the Sticks, Ltd., a company
50% owned by Mr. Luken. The lease for the Company's corporate headquarters
space expires on July 31, 1999 and the lease for the Chattanooga, Tennessee
switch site expires February, 1999. The Company paid total rents of $179,420
and $63,500 for these facilities for the years ended December 31, 1995 and
1994, respectively, and $45,253 for the three months ended March 31, 1996. No
rents were paid during 1993. The headquarters lease provides for a 4% rent
increase and the switch lease provides for a $1 per square foot rent increase
for each year of the lease term.
PURCHASE OF COMPUTER EQUIPMENT AND SUPPORT FROM COMPANY AFFILIATED WITH
SHAREHOLDER
The Company purchases computer equipment and support on a month-to-month
basis from Telco Development, a company owned by Mr. Luken. The Company paid
$779,918 and $229,100 for these services for the years ended December 31, 1995
and December 31, 1994, respectively, and $130,687 for the three months ended
March 31, 1996.
SHARE EXCHANGE
On July 20, 1994, the Company purchased 5,793,812 shares of Common Stock
from a founding shareholder and a former director of the Company, representing
all of such shareholder's Common Stock, for a purchase price of $25,000 and,
on July 25, 1994, issued, at such shareholder's direction, 6,470,413 shares of
Common Stock for a sales price of $50,000, to Iceberg Transport, S.A.
("Iceberg"). On April 30, 1996, Iceberg notified the Company that it had
transferred its 6,470,413 shares of Common Stock to Gold & Appel Transfer,
S.A., ("Gold & Appel"), a wholly owned subsidiary of Iceberg.
TRANSACTIONS WITH ESPRIT TELECOM, LTD.
Esprit Telecom, Ltd. ("Esprit"), a corporation in which Gold & Appel is a
minority shareholder, is a provider of international long distance service.
Esprit and the Company purchase long distance service from one another, and
Esprit purchases billing services from Tel Labs. See "Principal and Selling
Shareholders." The Company paid Esprit $1,451,684, $1,882,638 and $1,145,279
and Esprit paid the Company $0, $2,205,912 and $782,854 for transmission
services during the years ended December 31, 1994 and 1995, and the three
months ended March 31, 1996, respectively, Esprit paid Tel Labs $58,026 and
$108,436 for billing services during the years ended December 31, 1994 and
1995, respectively, and $75,076 for the three months ended March 31, 1996.
LOANS TO CERTAIN EXECUTIVE OFFICERS
Each of Messrs. Stodter, Sznajder and Jarman and Ms. Anastasi will receive
loans from the Company to enable such individuals to exercise their respective
options concurrently with the Offerings. The principal amount of such loans
will be approximately $27,520, $8,960, $5,300 and $99,500 for Messrs. Stodter,
Sznajder and Jarman and Ms. Anastasi, respectively. In addition, Ms. Marine-
Street will receive two loans from the Company, a loan in the principal amount
of approximately $98,230 to enable her to exercise options to acquire 169,575
shares of Common Stock concurrently with the Offerings and to sell such shares
in the Offerings, and a second loan in the principal amount of approximately
$298,500 in connection with the concurrent exercise of options to acquire
169,575 shares which will not be sold in the Offerings. In addition, Ms.
Marine-Street has the right to borrow an additional amount to satisfy federal
and state tax obligations named in connection with the exercise of such
options to acquire 169,575 shares. Mr. Rachlin has also received a loan from
the Company in the principal amount of approximately $283,900, representing
the aggregate exercise price of options to purchase 649,198 shares of Common
Stock exercised by Mr. Rachlin on June 21, 1996. Each of such loans will be
made at the lowest interest rate permitted by law and, with the exception of
the second loan to Ms. Marine-Street and the loan to Mr. Rachlin, will become
due and payable within three days of the date on which the shares purchased
upon the exercise of the options are sold. Ms. Marine-Street's second loan
from the Company will become due and payable upon the earlier of three years
from the date of the loan or three days of the date on which the shares
purchased upon the exercise of the options are sold. Mr. Rachlin's loan from
the Company becomes due and payable on the day after the shares purchased upon
the exercise of his options are marginable.
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<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of June 30, 1996 and as adjusted to
reflect the sale of Common Stock being offered hereby by the Reorganization and
the Offerings (i) each person known by the Company to own beneficially more
than five percent of the Common Stock, (ii) each director of the Company, (iii)
each executive officer of the Company (including the Named Officers) and (iv)
all directors and executive officers of the Company, as a group. All
information with respect to beneficial ownership has been furnished to the
Company by the respective shareholders of the Company.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY NUMBER SHARES BENEFICIALLY
OWNED PRIOR OF SHARES OWNED AFTER
TO OFFERINGS(1) BEING OFFERED OFFERINGS(1)(2)
------------------------------------ -----------------------
BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
---------------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Donald A. Burns(3)...... 7,671,250 28.3% 504,562 7,166,688 20.9%
Henry G. Luken,
III(3)(4).............. 6,887,272 25.3 504,563 6,382,709 18.6
Gold & Appel Transfer,
S.A.(5)................ 6,470,412 23.8 452,929 6,017,483 17.6
Thomas J. Cirrito(6).... 4,898,041 18.0 342,868 4,555,173 13.3
Bryan K. Rachlin(7)(4).. 1,047,720 3.8 -- 1,047,719 3.1
Natalie J. Marine-
Street(8).............. 797,300 2.8 55,811 741,489 2.1
Stephen G. Canton(10)... -- * -- -- *
Nicholas A.
Merrick(11)............ -- * -- -- *
Robert W. Ross.......... -- -- -- -- --
All Directors and
Executive Officers as a
Group (eight persons,
including those named
above)................. 21,301,583 75.9% 19,893,779 57.0%
Signet Media Capital
Group(9)............... 682,082 2.4 682,082 -- --
Mark Stodter(8)......... 212,500 * 14,875 197,625 *
Janet Anastasi(8)....... 212,500 * 30,812 181,688 *
James Sznajder(8)....... 51,021 * 3,570 47,451 *
Dennis Jarman(8)........ 113,267 * 7,928 105,339 *
</TABLE>
- --------
*Represents beneficial ownership of less than 1% of the outstanding shares of
Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission. In computing the number of shares beneficially owned by a
person and the percentage of ownership of that person, shares of Common
Stock subject to options and warrants held by that person that are
currently exercisable or exercisable within 60 days of May 31, 1996 are
deemed outstanding. Such shares, however, are not deemed outstanding for
the purposes of computing the percentage of ownership of any other person.
Except as otherwise indicated, and subject to community property laws where
applicable, the persons named in the table above have sole voting and
investment power with respect to all shares of Common Stock shown as owned
by them.
(2) Assumes no exercise of the U.S. Underwriters' and Managers' over-allotment
options.
(3) All such shares have been pledged to secure the Company's indebtedness
under the Credit Facility. In the event of a default, the bank could
foreclose and acquire record and beneficial ownership of such shares. The
Agent has agreed to release such shares from the pledge upon consummation
of the Offerings.
(4) Includes 377,334 and 135,000 shares to be received by Mr. Luken and Mr.
Rachlin, respectively, as part of the Reorganization.
(5) Gold & Appel is a wholly owned subsidiary of Iceberg. Walter Anderson, a
former director and founding shareholder of the Company, is an attorney-in-
fact and secretary of Gold & Appel. Mr. Anderson disclaims beneficial
ownership of such shares.
(6) Does not include 102,042 shares held by Mr. Cirrito's son, Michael Cirrito,
and 102,042 shares held by Mr. Cirrito's daughter, Nicole Cirrito, as to
which Mr. Cirrito disclaims beneficial ownership. All shares are held by
Cirrito-I, Limited, a Texas limited partnership.
(7) Reflects the exercise of options to acquire 649,198 shares at a weighted
average exercise price of $0.44 per share.
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<PAGE>
(8) Assumes the exercise, concurrently with the Offerings, of options to
acquire 55,811 shares at a weighted average exercise price of $1.76 per
share by Ms. Marine-Street, 14,875 shares at a weighted average exercise
price of $1.85 per share by Mr. Stodter, 30,812 shares at a weighted
average exercise price of $3.23 per share by Ms. Anastasi, 3,570 shares at
a weighted average exercise price of $2.51 per share by Mr. Sznajder and
7,928 shares at a weighted average exercise price of $0.67 per share by Mr.
Jarman. All such shares will be sold in the Offerings. Also assumes the
exercise, concurrently with the Offerings, by Ms. Marine-Street of options
to acquire 169,575 shares at an exercise price of $1.76 per share, which
shares will not be sold in the Offerings.
(9) Signet Media Capital Group has informed the Company that it intends to
exercise the Signet Warrant for an aggregate exercise price of $58.70 and
sell all of the 682,082 shares of Common Stock issuable upon exercise of
such warrant in the Offerings.
(10) Does not include options to acquire 1,062,500 shares of Common Stock
exercisable at $7.53 per share, which vest and become exercisable in one-
third increments on April 4, 1997, 1998 and 1999, respectively, subject to
certain terms and conditions covering his employment agreement.
(11) Does not include options to acquire 425,000 shares of Common Stock
exercisable at $7.53 per share, which vest and become exercisable in one-
third increments on March 19, 1997, 1998 and 1999, respectively, subject
to certain terms and conditions covering his employment agreement.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Effective upon completion of the Offerings, the Company's authorized capital
stock will consist of (i) 150 million shares of Common Stock, no par value per
share, and (ii) 15 million shares of Preferred Stock, no par value per share of
which 34,273,411 shares of Common Stock and no shares of Preferred Stock will
be issued and outstanding.
The statements under this caption are brief summaries of all material
provisions of the Company's Articles and Bylaws, relating to the Company's
capital stock which are filed as exhibits to the Registration Statement of
which this Prospectus is a part. Such summaries do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, such
documents.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote per share on all
matters on which the holders of Common Stock are entitled to vote and do not
have any cumulative voting rights. This means that the holders of more than 50%
of the shares voting for the election of directors can elect all of the
directors if they choose to do so; and, in such event, the holders of the
remaining shares of Common Stock will not be able to elect any person to the
Board of Directors. Subject to the rights of the holders of shares of any
series of Preferred Stock, holders of Common Stock are entitled to receive such
dividends as may from time to time be declared by the Board of Directors of the
Company out of funds legally available therefor. Holders of shares of Common
Stock have no preemptive, conversion, redemption, subscription or similar
rights. In the event of a liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, holders of shares of Common Stock
are entitled to share ratably in the assets of the Company which are legally
available for distribution, if any, remaining after the payment or provision
for the payment of all debts and other liabilities of the Company and the
payment and setting aside for payment of any preferential amount due to the
holders of shares of any series of Preferred Stock. All outstanding shares of
Common Stock are, and all shares of Common Stock offered hereby when issued
will be, upon payment therefor, validly issued, fully paid and nonassessable.
At present, there is no established trading market for the Common Stock. The
Common Stock has been approved for trading on the Nasdaq National Market under
the symbol "TCGX."
PREFERRED STOCK
The Company's Board of Directors is authorized to issue from time to time up
to 15 million shares of Preferred Stock in one or more series and to fix the
rights, designations, preferences, qualifications, limitations and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, the terms of any sinking fund,
liquidation preferences and the number of shares constituting any series,
without any further action by the shareholders of the Company. Holders of the
Preferred Stock, if and when issued, will be entitled to vote as required under
applicable Virginia law and as otherwise provided in the resolutions
establishing such Preferred Stock. Virginia law includes provisions for the
voting of Preferred Stock in the case of any amendment to the Articles
affecting the rights of holders of the Preferred Stock, the payment of certain
stock dividends, merger or consolidation, sale of all or substantially all of
the Company's assets and dissolution. The issuance of Preferred Stock with
voting rights could have an adverse effect on the voting power of holders of
Common Stock by increasing the number of outstanding shares having voting
rights. In addition, if the Board of Directors authorizes Preferred Stock with
conversion rights, the number of shares of Common Stock outstanding could
potentially be increased up to the amount authorized under the Articles. The
issuance of Preferred Stock could decrease the amount of earnings and assets
available for distribution to holders of Common Stock. Any such issuance could
also have the effect of delaying, deterring or preventing a change in control
of the Company and may adversely affect the rights of holders of Common Stock.
The Board of Directors does not currently intend to issue any shares of
Preferred Stock.
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<PAGE>
CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES AND BYLAWS
The Company's Articles provide that directors are not personally liable to
the Corporation or its shareholders for breach of the director's duty as a
director, except for liability of a director for willful misconduct or a
knowing violation of law.
The Company's Bylaws require the Company to indemnify any director or officer
of the Company, or any person who is or was serving at the request of the
Company as a director, trustee, partner, officer, employee or agent of any
other corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, to the fullest extent permitted by law. The Company has
obtained officers' and directors' liability insurance of $5.0 million for
members of its Board of Directors and executive officers. In addition to the
indemnification provided in the Company's Bylaws, the Company intends to enter
into agreements to indemnify its directors and officers.
The Articles and Bylaws include certain provisions which are intended to
enhance the likelihood of continuity and stability in the composition of the
Company's Board of Directors and which may have the effect of delaying,
deterring or preventing a future takeover or change in control of the Company
unless such takeover or change in control is approved by the Company's Board of
Directors. Such provisions may also render the removal of the directors and
management more difficult. See "Risk Factors--Antitakeover Considerations."
The Articles provide that the Board of Directors of the Company shall be
divided into three classes serving staggered three-year terms. The Articles and
Bylaws also restrict who may call a special meeting of shareholders, to provide
that shareholders may only act at an annual or special meeting or by unanimous
written consent. The Company's Bylaws establish an advance notice procedure
with regard to the nomination, other than by or at the direction of the Board
of Directors, of candidates for election as directors and with regard to
certain matters to be brought before an annual meeting of shareholders of the
Company. In general, notice must be received by the Company not less than 60
days prior to the meeting and must contain certain specified information
concerning the person to be nominated or the matter to be brought before the
meeting and concerning the shareholder submitting the proposal.
Generally, the Board of Directors may adopt, repeal, alter, amend or rescind
the Bylaws of the Company by the affirmative vote of at least a majority of the
entire Board of Directors, except that if an "Interested Person," as defined by
the Articles, exists, the affirmative vote of at least a majority of the entire
Board of Directors, including a majority of the "Continuing Directors," as
defined by the Articles, is required. The shareholders may also adopt, repeal,
alter, amend, or rescind the Bylaws of the Company by the affirmative vote of
at least 66 2/3% of the votes held by the holders of voting securities. If,
however, there exists an "Interested Person," the vote is increased to 80%.
The affirmative vote of at least a majority of the entire Board of Directors
and a majority of the votes held by the holders of voting securities is
required to amend certain provisions of the Articles, including provisions
relating to the classification of the Company's Board of Directors, filling
vacancies on the Board of Directors and removal of directors only for cause,
except that, if an "Interested Person" exists, the affirmative vote of a least
a majority of the Board of Directors, including a majority of the "Continuing
Directors," and the affirmative vote of 80% of the votes held by the voting
security holders is required.
VIRGINIA STOCK CORPORATION ACT; ANTITAKEOVER EFFECTS
The Virginia Stock Corporation Act contains provisions governing "Affiliated
Transactions." These provisions, with several exceptions discussed below, apply
to Virginia corporations having more than 300 shareholders of record and
require approval of certain material transactions between a Virginia
corporation and any beneficial owner of more than 10% of any class of its
outstanding voting shares (an "Interested Shareholder") or an affiliate or
associate of the corporation that at any time within the past three years has
been an Interested Shareholder by a majority of disinterested directors and by
the holders of at least two-thirds of the remaining voting shares. Affiliated
Transactions subject to this approval requirement include mergers, share
exchanges, material dispositions of corporate assets not in the ordinary course
of business, any guarantee by the
60
<PAGE>
corporation of a material amount of indebtedness of any Interested Shareholder,
certain dispositions to an Interested Shareholder of voting shares of the
corporation, any dissolution of the corporation proposed by or on behalf of an
Interested Shareholder, or any reclassification, including reverse stock
splits, recapitalization or merger of the corporation with its subsidiaries,
which increases the percentage of voting shares owned beneficially by an
Interested Shareholder by more than 5%.
For three years following the time that an Interested Shareholder becomes an
owner of 10% of the outstanding voting shares, a Virginia corporation cannot
engage in any Affiliated Transaction with such Interested Shareholder without
the approval of two-thirds of the voting shares other than those shares
beneficially owned by the Interested Shareholder, and the approval of a
majority of the Disinterested Directors. "Disinterested Director" means, with
respect to a particular Interested Shareholder, a member of the Company's Board
of Directors who was (1) a member on the date on which an Interested
Shareholder became an Interested Shareholder or (2) recommended for election
by, or was elected to fill a vacancy and received the affirmative vote of, a
majority of the Disinterested Directors then on the Board. After the expiration
of the three-year period, the statute requires approval of Affiliated
Transactions by two-thirds of the voting shares other than those beneficially
owned by the Interested Shareholder.
The principal exceptions to the special voting requirements apply to
transactions proposed after the three-year period has expired and require
either that the transaction be approved by a majority of the Company's
Disinterested Directors or that the transaction satisfy the fair-price
requirements of the statute. In general, the fair-price requirement provides
that in a two-step acquisition transaction, the Interested Shareholder must pay
the shareholders in the second step either the same amount of cash or the same
amount and type of consideration paid to acquire the Company's shares in the
first step.
None of the foregoing limitations and special voting requirements applies to
a transaction with a person who was an Interested Shareholder prior to the
consummation of the Offerings or to an Interested Shareholder whose acquisition
of shares making such person an Interested Shareholder was approved by a
majority of the Company's Disinterested Directors. See "Principal and Selling
Shareholders."
These provisions are designed to deter certain types of takeovers of Virginia
corporations. The statute provides that, by affirmative vote of a majority of
the voting shares other than shares owned by any Interested Shareholder, a
corporation can adopt an amendment to its articles of incorporation or bylaws
providing that the Affiliated Transactions provisions shall not apply to the
corporation. The Company has not "opted out" of the Affiliated Transactions
provisions.
Virginia law also provides that, with respect to Virginia corporations having
300 or more shareholders of record, shares acquired in a transaction that would
cause the acquiring person's voting strength to meet or exceed any of three
thresholds (20%, 33 1/3% or 50%) have no voting rights with respect to such
shares unless granted by a majority vote of shares not owned by the acquiring
person or any officer or employee-director of the corporation. This provision
empowers an acquiring person to require the Virginia corporation to hold a
special meeting of shareholders to consider the matter within 50 days of its
request. The Board of Directors of a Virginia corporation can opt out of this
provision at any time before four days after receipt of a control share
acquisition notice. The Company's Articles contain a provision "opting out" of
this provision.
THE SIGNET WARRANT
As part of the consideration for establishing the Company's credit facility,
in June 1994, the Company issued to Signet Media Capital Group, a division of
Signet Bank, the Signet Warrant to acquire 2% of the Common Stock of the
Company on a fully diluted basis after giving effect to the Offerings for an
aggregate exercise price of $58.70. The exercise price for the warrant was a
nominal exercise price which was negotiated at the time the Company entered
into the credit agreement with Signet Bank. The Company believed that the
exercise price for the Signet Warrant, while nominal, did not differ materially
from the fair value of the Signet Warrant at the date of grant. Signet Media
Capital Group has indicated that, in conjunction with the Offerings, it
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<PAGE>
intends to exercise the Signet Warrant in full for 682,082 shares of Common
Stock and to sell all shares of Common Stock issuable upon such exercise in
the Offerings. See "Principal and Selling Shareholders."
STOCK OPTION PLAN
As of May 31, 1996, options to purchase an aggregate of 3,625,329 shares of
Common Stock had been granted under the Stock Option Plan (including 649,198
shares issued upon exercise of options on June 21, 1996 at a weighted average
exercise price of $0.44 per share, 169,575 shares issued upon exercise of
options concurrently with the Offerings at an exercise price of $1.76 per
share, which shares are not being sold in the Offerings, and 112,996 shares of
Common Stock to be issued pursuant to options that will be exercised
concurrently with the Offerings at a weighted average exercise price of $2.12
per share, which shares will be sold in the Offerings) with a total of
3,874,671 shares of Common Stock remaining available for future grants. After
giving effect to the exercise of the options for 649,198, 169,575 and 112,996
shares of Common Stock referred to in the preceding sentence, the Company will
have outstanding options to acquire 2,693,560 shares of Common Stock
remaining, which will be exercisable at prices ranging from $0.67 to $7.53. Of
the remaining options, options to acquire 1,004,163 shares of Common Stock are
currently exercisable. Immediately prior to the Offerings, the Company intends
to grant to approximately 30 non-executive employees options to purchase up to
an aggregate of 600,000 shares of Common Stock at an exercise price equal to
the initial public offering price per share, which options will vest in one-
third increments on the first, second and third anniversaries of the date of
grant. All options have an exercise period of ten years from the date of
grant. See "Management--Amended and Restated 1994 Stock Option Plan."
TRANSFER AGENT AND REGISTRAR
Registrar and Transfer Company will serve as transfer agent and registrar
for the Common Stock.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offerings, the Company will have 34,273,411
outstanding shares of Common Stock and options exercisable for an aggregate of
2,693,560 shares of Common Stock, of which options with respect to 1,004,163
shares will then be exercisable at a weighted average price of $1.83 per share.
Of the Common Stock outstanding upon completion of the Offerings, the
8,700,000 shares of Common Stock sold in the Offerings will be freely tradeable
without restriction or further registration under the Securities Act, except
for any shares held by "affiliates" of the Company, as that term is defined in
Rule 144 under the Securities Act, and the regulations promulgated thereunder
(an "Affiliate"), or persons who have been Affiliates within the preceding
three months. The remaining 25,573,411 outstanding shares of Common Stock will
be "restricted securities" as that term is defined in Rule 144 and may be sold
in the public market only if registered under the Securities Act or if they
qualify for an exemption from registration under Rule 144 as described below.
Of such restricted securities, 24,122,054 shares will be held by Affiliates.
Pursuant to a certain Registration Rights Agreement to be entered into
concurrently with the Offerings (the "Registration Rights Agreement"), among
the Company, the Affiliates and one other shareholder (the "Holders"), the
Holders or their permitted transferees are entitled to certain piggyback
registration rights, and in the event the Company becomes eligible to use a
registration statement on Form S-3, two demand registration rights, with
respect to an aggregate of 25,118,753 shares of Common Stock which are
restricted securities. These rights are generally subject to certain conditions
and limitations, among them the right of the underwriters of an offering to
limit the number of shares included in such registration in certain
circumstances. The Registration Rights Agreement obligates the Company to pay
all expenses of any such registration, other than underwriting discounts and
commissions relating to the shares being sold on behalf of any Holders.
The Signet Warrant contains a provision which entitles Signet Media Capital
Group to include all or any portion of the shares of the Company's Common Stock
issuable upon the exercise of the Signet Warrant in a registration statement
filed by the Company in connection with its initial public offering. Signet
Media Capital Group has informed the Company that it intends to exercise the
Signet Warrant and sell all shares of Common Stock issuable upon such exercise
in the Offerings. See "Principal and Selling Shareholders."
Sales of restricted securities in the public market or the perception that
such sales could occur could adversely affect the market price of the Common
Stock.
In general, under Rule 144 as currently in effect, a person (or person whose
shares are aggregated), including an Affiliate, who has beneficially owned
restricted securities for a period of at least two years from the later of the
date such restricted securities were acquired from the Company and the date
they were acquired from an Affiliate, is entitled to sell, within any three-
month period, a number of shares that does not exceed the greater of 1% of the
then outstanding shares of Common Stock (34,273,411 shares immediately after
the Offerings) and the average weekly trading volume in the Common Stock during
the four calendar weeks preceding such sale. Sales under Rule 144 are also
subject to certain provisions relating to the manner and notice of sale and the
availability of current public information about the Company. Further, under
Rule 144(k), if a period of at least three years has elapsed between the later
of the date restricted securities were acquired from the Company and the date
they were acquired from an Affiliate of the Company, a holder of such
restricted securities who is not an Affiliate at the time of the sale and has
not been an Affiliate for at least three months prior to the sale would be
entitled to sell the shares immediately without regard to the volume and manner
of sale limitations described above. The Commission has recently proposed
amendments to Rule 144 and Rule 144(k) that would permit resales of restricted
securities under Rule 144 after a one-year holding period, rather than a two-
year holding period, subject to compliance with the other provisions of Rule
144, and would permit resale of restricted securities by non-Affiliates under
Rule 144(k) after a two-year, rather than a three-year holding period. Adoption
of such amendments could result in resales of restricted securities sooner than
would be the case under Rule 144 and Rule 144(k) as currently in effect. All of
the 24,122,054 shares of Common Stock held by Affiliates have been beneficially
owned by them for a period of more than two years.
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Immediately prior to the Offerings, the Company intends to grant options
pursuant to the Stock Option Plan to purchase up to an aggregate of 600,000
shares of Common Stock to approximately 30 non-executive employees of the
Company's Commercial Division. The options will be exercisable at the initial
public offering price of the Common Stock per share and will vest in one-third
increments on the first, second and third anniversaries of the date of grant.
In addition, the Company intends to register on Form S-8 under the
Securities Act approximately 7,500,000 shares of Common Stock issuable under
options subject to the Company's Stock Option Plan. Shares issued under the
Stock Option Plan (other than shares issued to affiliates) generally may be
sold immediately in the public market, subject to vesting requirements and the
lock-up agreements described below under "Underwriters."
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<PAGE>
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF COMMON STOCK
General. The following discussion concerns the material United States federal
income and estate tax consequences of the ownership and disposition of shares
of Common Stock applicable to Non-U.S. Holders of such shares of Common Stock.
In general, a "Non-U.S. Holder" is any holder other than (i) a citizen or
resident, as specifically defined for U.S. federal income and estate tax
purposes, of the United States, (ii) a corporation, partnership or any entity
treated as a corporation or partnership for U.S. federal income tax purposes
created or organized in the United States or under the laws of the United
States or of any State thereof, or (iii) an estate or trust whose income is
includible in gross income for United States federal income tax purposes
regardless of its source. The discussion is based on current law, which is
subject to change retroactively or prospectively, and is for general
information only. The discussion does not address all aspects of United States
federal income and estate taxation and does not address any aspects of state,
local or foreign tax laws. The discussion does not consider any specific facts
or circumstances that may apply to a particular Non-U.S. Holder. Accordingly,
prospective investors are urged to consult their tax advisors regarding the
current and possible future United States federal, state, local and non-U.S.
income and other tax consequences of holding and disposing of shares of Common
Stock.
Dividends. In general, dividends paid to a Non-U.S. Holder will be subject to
United States withholding tax at a 30% rate (or a lower rate as may be
specified by an applicable tax treaty) unless the dividends are (i) effectively
connected with a trade or business carried on by the Non-U.S. Holder within the
United States, or (ii), if a tax treaty applies, attributable to a United
States permanent establishment or, in the case of an individual, a fixed base
in the United States, maintained by the Non-U.S. Holder. Dividends effectively
connected with such a trade or business or, if a tax treaty applies,
attributable to such permanent establishment or a fixed base will generally not
be subject to withholding (if the Non-U.S. Holder files certain forms annually
with the payor of the dividend) but will generally be subject to United States
federal income tax on a net income basis at regular graduated individual or
corporate rates. In the case of a Non-U.S. Holder that is a corporation, such
effectively connected income also may be subject to the branch profits tax
(which is generally imposed on a foreign corporation on the deemed repatriation
from the United States of effectively connected earnings and profits) at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty.
The branch profits tax may not apply if the recipient is a qualified resident
of certain countries with which the United States has an income tax treaty.
To determine the applicability of a tax treaty providing for a lower rate of
withholding, dividends paid to an address in a foreign country are presumed
under current Treasury Regulations to be paid to a resident of that country,
unless the payor has definite knowledge that such presumption is not warranted
or an applicable tax treaty (or United States Treasury Regulations thereunder)
requires some other method for determining a Non-U.S. Holder's residence.
However, under proposed regulations, in the case of dividends (paid after
December 31, 1997 or December 31, 1999 in the case of dividends paid to
accounts in existence on or before the date that is 60 days after the proposed
regulations are published as final regulations), a Non-U.S. Holder generally
would be subject to United States withholding tax at a 31-percent rate under
the backup withholding rules described below, rather than at a 30-percent rate
or at a reduced rate under an income tax treaty, unless certain certification
procedures (or, in the case of payments made outside the United States with
respect to an offshore account, certain documentary evidence procedures) are
complied with, directly or through an intermediary. Under current regulations,
the Company must report annually to the United States Internal Revenue Service
(the "IRS") and to each Non-U.S. Holder the amount of dividends paid to, and
the tax withheld with respect to, each Non-U.S. Holder. These reporting
requirements apply regardless of whether withholding was reduced or eliminated
by an applicable tax treaty. Copies of these information returns also may be
made available under the provisions of a specific treaty or agreement with the
tax authorities of the country in which the Non-U.S. Holder resides.
A Non-U.S. Holder that is eligible for a reduced rate of United States
withholding tax pursuant to an income tax treaty may obtain a refund of any
excess amounts currently withheld by filing an appropriate claim for refund
with the IRS.
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Sale of Common Stock. Generally, a Non-U.S. Holder will not be subject to
United States federal income tax on any gain realized upon the sale or other
disposition of such holder's shares of Common Stock unless (i) the gain is
effectively connected with a trade or business carried on by the Non-U.S.
Holder within the United States and, if a tax treaty applies, the gain is
attributable to a permanent establishment or a fixed base maintained by the
Non-U.S. Holder in the United States; (ii) the Non-U.S. Holder is an individual
who holds the shares of Common Stock as a capital asset and is present in the
United States for 183 days or more in the taxable year of the disposition, and
either (a) such Non-U.S. Holder has a "tax home" (as specifically defined for
U.S. federal income tax purposes) in the United States (unless the gain from
disposition is attributable to an office or other fixed place of business
maintained by such non-U.S. Holder in a foreign country and a foreign tax equal
to at least 10% of such gain has been paid to a foreign country), or (b) the
gain from the disposition is attributable to an office or other fixed place of
business maintained by such Non-U.S. Holder in the United States; (iii) the
Non-U.S. Holder is subject to tax pursuant to the provisions of U.S. tax law
applicable to certain United States expatriates, or (iv) the Company is or has
been during certain periods a "U.S. real property holding corporation" for U.S.
federal income tax purposes (which the Company does not believe that it has
been, currently is or is likely to become) and, assuming that the Common Stock
is deemed for tax purposes to be "regularly traded on an established securities
market," the Non-U.S. Holder held, at any time during the five-year period
ending on the date of disposition (or such shorter period that such shares were
held), directly or indirectly, more than five percent of the Common Stock.
Estate Tax. Shares of Common Stock owned or treated as owned by an individual
who is not a citizen or resident (as specially defined for United States
federal estate tax purposes) of the United States at the time of death will be
includible in the individual's gross estate for United States federal estate
tax purposes, unless an applicable tax treaty provides otherwise, and may be
subject to United States federal estate tax.
Backup Withholding and Information Reporting. As a general rule, under
current United States federal income tax law, backup withholding tax (which
generally is a withholding tax imposed at the rate of 31% on certain payments
to persons that fail to furnish the information required under the U.S.
information reporting requirements) and information reporting requirements
apply to the actual and constructive payments of dividends. The United States
backup withholding tax and information reporting requirements generally, under
current regulations, will not apply to dividends paid on Common Stock to a Non-
U.S. Holder at an address outside the United States that are either subject to
the 30% withholding discussed above or that are not so subject because a tax
treaty applies that reduces or eliminates such 30% withholding, unless the
payer has knowledge that the payee is a U.S. person. Backup withholding and
information reporting generally will apply to dividends paid to addresses
inside the United States on shares of Common Stock to beneficial owners that
are not recipients that are entitled to an exemption, as discussed above and
that fail to provide in the manner required certain identifying information.
However, under proposed regulations, in the case of dividends paid after
December 31, 1997, a Non-U.S. Holder generally would be subject to backup
withholding at a 31% rate, unless certain certification procedures (or, in the
case of payments made outside the United States with respect to an offshore
account, certain documentary evidence procedures) are complied with, directly
or through an intermediary.
The payment of the proceeds from the disposition of shares of Common Stock to
or through the United States office of a broker will be subject to information
reporting and backup withholding unless the holder, under penalties of perjury,
certifies, among other things, its status as a Non-U.S. Holder, or otherwise
establishes an exemption. Generally, the payment of the proceeds from the
disposition of shares of Common Stock to or through a non-U.S. office of a non-
U.S. broker will not be subject to backup withholding and will not be subject
to information reporting. In the case of the payment of proceeds from the
disposition of shares of Common Stock to or through a non-U.S. office of a
broker that is a U.S. person or a "U.S.-related person," existing regulations
require (i) backup withholding if the broker has actual knowledge that the
owner is not a Non-U.S. Holder, and (ii) information reporting on the payment
unless the broker receives a statement from the owner, signed under penalties
of perjury, certifying, among other things, its status as a Non-U.S. Holder, or
the broker has documentary evidence in its files that the owner is a Non-U.S.
Holder and the broker has no actual knowledge to the contrary. For this
purpose, a "U.S.-related person" is (i) a "controlled foreign corporation" for
United States
66
<PAGE>
federal income tax purposes or (ii) a foreign person 50% or more of whose gross
income from all sources for the three-year period ending with the close of its
taxable year preceding the payment (or for such part of the period that the
broker has been in existence) is derived from activities that are effectively
connected with the conduct of a United States trade or business. The IRS
recently proposed regulations addressing the withholding and information
reporting rules which could affect the treatment of the payment of proceeds
discussed above. Non-U.S. Holders should consult their tax advisors regarding
the application of these rules to their particular situations, the availability
of an exemption therefrom, the procedure for obtaining such an exemption, if
available, and the possible application of the proposed regulations addressing
the withholding and information reporting rules.
Backup withholding is not an additional tax. Any amounts withheld from a
payment to a Non-U.S. Holder under the backup withholding rules will be allowed
as a credit against such holder's United States federal income tax liability,
if any, and provided that such holder furnishes the IRS with the information
entitling such holder to an exemption from or reduced rate of withholding, such
holder would be entitled to a refund.
67
<PAGE>
UNDERWRITING
The underwriters of the U.S. Offering named below (the "U.S. Underwriters"),
for whom Bear, Stearns & Co. Inc. and Salomon Brothers Inc are acting as
representatives, have severally agreed with the Company and the Selling
Shareholders, subject to the terms and conditions of the U.S. Underwriting
Agreement (the form of which has been filed as an exhibit to the Registration
Statement on Form S-1 of which this Prospectus is a part), to purchase from the
Company and the Selling Shareholders the aggregate number of U.S. Shares set
forth opposite their respective names below:
<TABLE>
<CAPTION>
NUMBER OF
NAME OF U.S. UNDERWRITER U.S. SHARES
------------------------ -----------
<S> <C>
Bear, Stearns & Co. Inc..........................................
Salomon Brothers Inc ............................................
----
Total..........................................................
====
</TABLE>
The Managers of the concurrent International Offering named below (the
"Managers"), for whom Bear, Stearns International Limited and Salomon Brothers
International Limited are acting as lead Managers, have severally agreed with
the Company and the Selling Shareholders, subject to the terms and conditions
of the International Underwriting Agreement (the form of which has been filed
as an exhibit to the Registration Statement on Form S-1 of which this
Prospectus is a part), to purchase from the Company and the Selling
Stockholders the aggregate number of International Shares set forth opposite
their respective names below:
<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL
NAME OF MANAGER SHARES
--------------- -------------
<S> <C>
Bear, Stearns International Limited............................
Salomon Brothers International Limited.........................
----
Total........................................................
====
</TABLE>
The nature of the respective obligations of the U.S. Underwriters and the
Managers is such that all of the U.S. Shares and all of the International
Shares must be purchased if any are purchased. Those obligations are subject,
however, to various conditions, including the approval of certain matters by
counsel. The Company and the Selling Shareholders have agreed to indemnify the
U.S. Underwriters and the Managers against certain liabilities, including
liabilities under the Securities Act, and, where such indemnification is
unavailable, to contribute to payments that the U.S. Underwriters and the
Managers may be required to make in respect of such liabilities.
The Company and the Selling Shareholders have been advised that the U.S.
Underwriters propose to offer the U.S. Shares in the United States and Canada
and the Managers propose to offer the International Shares outside the United
States and Canada, initially at the public offering price set forth on the
cover page of this Prospectus and to certain selected dealers at such price
less a concession not to exceed $ per share; that the U.S. Underwriters and
the Managers may allow, and such selected dealers may reallow, a concession to
68
<PAGE>
certain other dealers not to exceed $ per share; and that after the
commencement of the Offerings, the public offering price and the concessions
may be changed.
The Company has granted the U.S. Underwriters and the Managers options to
purchase in the aggregate up to 1,305,000 additional shares of Common Stock
solely to cover over-allotments, if any. The options may be exercised in whole
or in part at any time within 30 days after the date of this Prospectus. To the
extent the options are exercised, the U.S. Underwriters and the Managers will
be severally committed, subject to certain conditions, to purchase the
additional shares of Common Stock in proportion to their respective purchase
commitments as indicated in the preceding tables.
Pursuant to an agreement between the U.S. Underwriters and the Managers (the
"Agreement Between"), each U.S. Underwriter has agreed that, as part of the
distribution of the U.S. Shares and subject to certain exceptions, (a) it is
not purchasing any U.S. Shares for the account of anyone other than a U.S. or
Canadian Person (as defined below) and (b) it has not offered or sold, and will
not offer, sell, resell or deliver, directly or indirectly, any U.S. Shares or
distribute any prospectus relating to the U.S. Offering outside the United
States or Canada or to anyone other than a U.S. or Canadian Person or a dealer
who similarly agrees. Similarly, pursuant to the Agreement Between, each
Manager has agreed that, as part of the distribution of the International
Shares and subject to certain exceptions, (a) it is not purchasing any of the
International Shares for the account of any U.S. or Canadian Person and (b) it
has not offered or sold, and will not offer, sell, resell or deliver, directly
or indirectly, any of the International Shares or distribute any prospectus
relating to the International Offering in the United States or Canada or to any
U.S. or Canadian Person or to a dealer who does not similarly agree. As used
herein, "U.S. or Canadian Person" means any individual who is a resident or
citizen of the United States or Canada, any corporation, pension, profit
sharing or other trust or any other entity organized under or governed by the
laws of the United States or Canada or of any political subdivision thereof
(other than the foreign branch of any U.S. or Canadian Person), any estate or
trust the income of which is subject to United States or Canadian federal
income taxation regardless of the source of such income, and any United States
or Canadian branch of a person other than a U.S. or Canadian Person; "United
States" means the United States of America (including the District of
Columbia), its territories, its possessions and other areas subject to its
jurisdiction; "Canada" means the provinces of Canada, its territories, its
possessions and other areas subject to its jurisdiction.
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the Managers of such number of shares of Common Stock as may
be mutually agreed upon. The price of any shares so sold shall be the public
offering price as then in effect for the Common Stock being sold by the U.S.
Underwriters and the Managers, less an amount no greater than the selling
concession allocable to such Common Stock. To the extent that there are sales
between the U.S. Underwriters and the Managers pursuant to the Agreement
Between, the number of shares of Common Stock initially available for sale by
the U.S. Underwriters or by the Managers may be more or less than the amount
specified on the cover page of this Prospectus.
Each Manager has represented and agreed that (i) it has not offered or sold,
and, prior to the expiration of six months following the consummation of the
Offerings, it will not offer or sell, any shares of Common Stock to any person
in the United Kingdom other than persons whose ordinary activities involve them
in acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances that
have not resulted and will not result in an offer to the public in the United
Kingdom within the meaning of the Public Offers of Securities Regulations 1995;
(ii) it has complied and will comply with applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in relation to
the Common Stock in, from or otherwise involving the United Kingdom, and (iii)
it has only issued or passed on, and will only issue or pass on, in the United
Kingdom any document received by it in connection with the issue of the Common
Stock to a person who is of a kind described in Article 11(3) of the Financial
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995 or is a
person to whom such document may otherwise lawfully be issued or passed on.
69
<PAGE>
Purchasers of the International Shares offered in the International Offering
may be required to pay stamp taxes and other charges in accordance with the
laws and practices of the country of purchase in addition to the initial public
offering price set forth on the cover page hereof.
The Company and its executive officers, directors and principal shareholders,
other than Signet Media Capital Group which will not own shares after the
Offerings, have agreed that for a period of 180 days following the Offerings,
without the prior written consent of Bear, Stearns & Co. Inc., they will not,
directly or indirectly, offer or agree to sell, sell, hypothecate, pledge or
otherwise dispose of any shares of Common Stock (or securities convertible
into, exchangeable for or exercisable for or evidencing the right to purchase
shares of Common Stock).
At the Company's request, the U.S. Underwriters and the Managers have
reserved up to 430,000 shares of Common Stock (the "Directed Shares") for sale
at the public offering price to the Company's management employees, customers
and suppliers and other persons associated with the Company or affiliated with
any director, officer or management employee of the Company. Each purchaser of
more than 20,000 Directed Shares will be required to agree to a 30-day lock-up
on resale following the Offerings. The number of shares of Common Stock
available for sale to the general public will be reduced to the extent of sales
of Directed Shares to any of the persons for whom they have been reserved. Any
shares not so purchased will be offered by the U.S. Underwriters and the
Managers on the same basis as all other shares offered hereby.
Prior to the Offerings, there has been no public market for the Company's
Common Stock. Consequently, the initial public offering price will be
determined through negotiations among the Company, the representatives of the
U.S. Underwriters and the Managers. Among the factors to be considered in
making such determination will be the Company's financial and operating history
and condition, its prospects and such prospects for the industry in which it
does business in general, the management of the Company, prevailing equity
market conditions and the demand for securities considered comparable to those
of the Company.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Common Stock in Canada is being made only on a
private placement basis exempt from the requirement that the Company or the
Selling Shareholders prepare and file a prospectus with the securities
regulatory authorities in each province where trades of Common Stock are
effected. Accordingly, any resale of the Common Stock in Canada must be made in
accordance with applicable securities laws, which will vary depending on the
relevant jurisdiction, and which may require resales to be made in accordance
with available statutory exemptions or pursuant to a discretionary exemption
granted by the applicable Canadian securities regulatory authority. Purchasers
are advised to seek legal advice prior to any resale of the Common Stock.
REPRESENTATIONS OF PURCHASERS
Confirmations of the acceptance of offers to purchase shares of Common Stock
will be sent to Canadian residents to whom this Prospectus has been sent and
who have not withdrawn their offers to purchase prior to the issuance of such
confirmations. Each purchaser of Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to the Company, the Selling
Shareholders and the dealer from whom such purchase confirmation is received
that (i) such purchaser is entitled under applicable Canadian provincial
securities laws to purchase such Common Stock without the benefit of a
prospectus qualified under such securities laws, (ii) where required by law,
such purchaser is purchasing as principal and not as agent, (iii) such
purchaser has reviewed the text above under "Notice to Canadian Residents--
Resale Restrictions", (iv) if such purchaser is located in Manitoba, such
purchaser is not an individual and is purchasing for investment only and not
with a view to resale or distribution, (v) if such purchaser is located in
Ontario, a dealer registered as an international dealer in Ontario may sell
shares of Common Stock to such purchaser, and (vi) if such purchaser is
70
<PAGE>
located in Quebec, such purchaser is a "sophisticated purchaser" within the
meaning of Section 43 of the Securities Act (Quebec).
TAXATION
Canadian residents should consult their own legal and tax advisers with
respect to the tax consequences of an investment in the Common Stock in their
particular circumstances and with respect to the eligibility of the Common
Stock for investment by the purchaser under relevant Canadian legislation.
ENFORCEMENT OF LEGAL RIGHTS
The Company is organized under the laws of the Commonwealth of Virginia. All
or substantially all of the directors and officers of the Company reside
outside Canada and substantially all of the assets of the Company are located
outside Canada. As a result, it may not be possible for Canadian investors to
effect service of process within Canada upon the Company or to enforce against
the Company in Canada judgments obtained in Canadian courts that are predicated
upon the contractual rights of action, if any, granted to certain purchasers by
the Company. It may also not be possible for investors to enforce against the
Company in the United States judgments obtained in Canadian courts.
Furthermore, although the requirement for an issuer to provide to certain
purchasers the contractual right of action for damages and/or rescission
described below is consistent with contractual considerations associated with a
private placement which constitutes a primary distribution of the issuer's
securities by the issuer, an investor may not be able to enforce a contractual
right of action for rescission against the issuer where the offer or sale of
the issuer's securities is a secondary distribution being made by a third party
such as the sale of the Common Stock by the Selling Shareholders.
NOTICE TO ONTARIO RESIDENTS
The Common Stock offered hereby is being issued by a foreign issuer and
Ontario purchasers will not receive the contractual right of action prescribed
by Section 32 of the Regulation under the Securities Act (Ontario). As a
result, Ontario purchasers must rely on other remedies that may be available,
including common law rights of action for damages or rescission or rights of
action under the civil liability provisions of the U.S. federal securities
laws.
All the Company's directors and officers as well as the experts named herein
may be located outside of Canada and, as a result, it may not be possible for
Ontario purchasers to effect service of process within Canada upon the Company
or such persons. All or a substantial portion of the assets of the Company and
such persons may be located outside of Canada and, as a result, it may not be
possible to satisfy a judgment against the Company or such persons in Canada or
to enforce a judgment obtained in Canadian courts against the Company or
persons outside of Canada.
NOTICE TO NOVA SCOTIA RESIDENTS
The Securities Act (Nova Scotia) provides that where a Canadian offering
document, together with any amendments thereto, contains an untrue statement of
material fact or omits to state a material fact that is required to be stated
or that is necessary to make a statement not misleading in the light of the
circumstances in which it was made (such untrue statement or omission herein
called a "misrepresentation"), a purchaser who was delivered such offering
document and who purchases such securities shall be deemed to have relied on
such misrepresentations if it was a misrepresentation at the time of purchase
and has a right of action for damages against the seller of the securities or
he may elect to exercise the right of rescission against the seller, in which
case he shall have no right of action for damages against the seller, provided
that:
(a) The seller will not be liable if the seller proves that the purchaser
purchased the securities with knowledge of the misrepresentation;
71
<PAGE>
(b) In an action for damages, the seller will not be liable for all or any
portion of such damages that the seller proves do not represent the
depreciation in value of the security as a result of the
misrepresentation relied upon;
(c) In no case shall the amount recoverable pursuant to the right of action
exceed the price at which the securities were offered; and
(d) The action for recision or damages conferred by the Securities Act
(Nova Scotia) is in addition to and without derogation from any other
rights the purchaser may have at law;
but no action to enforce these rights may be commenced more than 120 days after
the date on which payment is made for the securities or after the date on which
the initial payment for the securities is made where a payment or payments
subsequent to the initial payment are made pursuant to a contractual commitment
assumed prior to, or concurrently with, the initial payment.
NOTICE TO SASKATCHEWAN RESIDENTS
The Securities Act (Saskatchewan) provides that in the event an offering
memorandum, together with any amendment thereto, or any advertising or sales
literature (as such terms are defined in the Securities Act (Saskatchewan))
used in connection with an offering contains a misrepresentation (as defined in
the Securities Act (Saskatchewan)) that was a misrepresentation at the time of
purchase, purchasers of securities will be deemed to have relied upon such
misrepresentation and will have a statutory right of action pursuant to the
Securities Act (Saskatchewan) for damages against the issuer and the seller of
the securities, or alternatively may elect to exercise a right of rescission
against the issuer or the seller, provided that:
(a) no person or company is liable where the person or company proves that
the purchaser purchased the securities with knowledge of the
misrepresentation;
(b) no person or company, other than the issuer or selling security holder,
is liable unless that person or company: (i) failed to conduct a
reasonable investigation sufficient to provide reasonable grounds for a
belief that there had been no misrepresentation; or (ii) believed there
had been a misrepresentation; and
(c) in an action for damages, the defendant is not be liable for all or any
portion of such damages that it proves does not represent the
depreciation in value of the securities as a result of the
misrepresentation relied upon,
but no action to enforce these rights may be commenced:
(a) in the case of rescission, more than 180 days after the date of the
transaction that gave rise to the cause of action; and
(b) in the case of any other action, other than an action for rescission,
more than the earlier of,
(i)180 days after the purchaser first had knowledge of the facts giving
rise to the cause of action, or
(ii)three years after the date of the transaction that gave rise to the
cause of action.
LANGUAGE OF DOCUMENTS
All Canadian purchasers of shares of Common Stock acknowledge that all
documents evidencing or relating in any way to the sale of such shares will be
drawn in the English language only. Tous les acheteurs canadiens d'actions
communes reconnaissant par les presentes que c'est a leur volonte expresse que
tous les documents faisant foi ou se rapportant de quelque mainiere a la vente
des valeurs mobilieres soient rediges en anglais seulement.
72
<PAGE>
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Swidler & Berlin, Chartered, Washington,
D.C. Certain legal matters in connection with the Common Stock offered hereby
will be passed upon for the Underwriters by Weil, Gotshal & Manges LLP.
EXPERTS
The consolidated financial statements of the Company as of and for the years
ended December 31, 1994 and 1995 included in this Prospectus have been audited
by Deloitte & Touche LLP, independent auditors, as indicated in their reports
with respect thereto, and are included herein and in the Registration Statement
in reliance upon the reports of such firm given upon their authority as experts
in accounting and auditing.
The consolidated financial statements of the Company as of December 31, 1993
and for the period from the Company's inception to December 31, 1993 included
in this Prospectus have been audited by Chase and Associates CPAs, P.C.,
independent public accountants, as indicated in their report thereon, and are
included in reliance upon the authority of said firm as experts in giving said
report.
AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement on Form S-
1 (herein, together with all amendments and exhibits thereto, referred to as
the "Registration Statement") under the Securities Act with respect to the
shares of Common Stock offered hereby. This Prospectus, which forms a part of
the Registration Statement, does not contain all of the information set forth
in the Registration Statement, certain portions of which have been omitted as
permitted by the rules and regulations of the Commission. Statements contained
in this Prospectus as to the contents of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by reference to
such contract or document. For further information regarding the Company and
the Common Stock offered hereby, reference is hereby made to the Registration
Statement and the exhibits and schedules thereto which may be inspected without
charge at the Commission's principal office at 450 Fifth Street, N.W.,
Judiciary Plaza, Room 1024, Washington, D.C. 20549, at the following regional
offices of the Commission: Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and at Seven World Trade Center, Suite 1300, New
York, New York 10048 and the Commission web site at (http://www.sec.gov).
Copies of all or any portion of the Registration Statement may be obtained from
the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates.
The Company is not currently subject to the informational requirements of the
Exchange Act. As a result of the Offerings, the Company will become subject to
the informational requirements of the Exchange Act. The Company will fulfill
its obligations with respect to such requirements by filing periodic reports
with the Commission. In addition, the Company will furnish its shareholders
with annual reports containing audited financial statements certified by its
independent public accounts and quarterly reports for the first three quarters
of each fiscal year containing unaudited summary financial information.
73
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995 AND MARCH 31, 1996 (UNAUDITED), CONSOLIDATED
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 and March 31,
1996 (unaudited)......................................................... F-3
Consolidated Statements of Income for the years ended December 31, 1994
and 1995 and the three month periods ended March 31, 1995 and 1996
(unaudited).............................................................. F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1994 and 1995 and the three month periods ended March 31,
1995 and 1996 (unaudited)................................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1994 and 1995 and the three month periods ended March 31, 1995 and 1996
(unaudited).............................................................. F-6
Notes to Consolidated Financial Statements................................ F-7
DECEMBER 31, 1993 FINANCIAL STATEMENTS
Independent Auditor's Report on the Financial Statements.................. F-15
Financial Statements
Balance sheet as of December 31, 1993................................... F-16
Statement of income from inception to December 31, 1993................. F-17
Statement of changes in shareholders' deficit........................... F-18
Statement of cash flows from inception to December 31, 1993............. F-19
Notes to financial statements........................................... F-20
Schedule of general and administrative expenses from inception to December
31, 1993................................................................. F-23
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Telco Communications Group, Inc.
Chantilly, Virginia
We have audited the accompanying consolidated balance sheet of Telco
Communications Group, Inc. and subsidiaries as of December 31, 1995 and 1994,
and the related consolidated statements of income, shareholders' equity and of
cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Telco Communications Group,
Inc. and subsidiaries at December 31, 1995 and 1994, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
Deloitte & Touche llp
Richmond, Virginia
May 10, 1996
F-2
<PAGE>
TELCO COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1994 1995 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents............. $ 474,512 $ 936,771 $ 1,300,284
Accounts receivable, trade (net of
allowances of $1,078,442 and
$3,771,413 and $7,136,748 at December
31, 1994 and 1995 and March 31, 1996,
respectively)........................ 24,986,466 55,823,988 75,998,752
Prepaid income taxes.................. -- 333,378 --
Deferred income tax asset............. -- 884,769 696,779
Other................................. 1,823,425 1,112,504 1,443,486
----------- ----------- ------------
Total current assets.................. 27,284,403 59,091,410 79,439,301
----------- ----------- ------------
Property, Plant And Equipment:
Leasehold improvements................ 278,837 1,147,867 1,168,075
Network equipment..................... 496,263 4,533,900 5,430,411
Office furniture...................... 582,601 1,957,566 2,194,188
Network equipment under capital
lease................................ 3,134,099 19,289,850 19,291,081
Network facilities under development.. 1,913,074 4,076,015 5,594,561
Accumulated depreciation.............. (530,900) (3,478,485) (4,885,903)
----------- ----------- ------------
Total property, plant and equipment,
net.................................. 5,873,974 27,526,713 28,792,413
----------- ----------- ------------
Other Assets........................... 374,789 505,847 696,270
----------- ----------- ------------
Total Assets.......................... $33,533,166 $87,123,970 $108,927,984
=========== =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Notes payable, short-term............. $ 213,233 $ -- $ --
Capital lease obligation, current
portion.............................. 685,844 2,972,549 3,163,087
Excise taxes payable.................. 478,589 1,288,985 1,337,822
Accounts payable...................... 2,632,269 15,303,439 12,811,705
Accrued network access and
transmission expense................. 6,987,371 9,429,070 12,605,880
Other accrued expenses................ 1,592,647 1,322,454 6,333,273
Income taxes payable.................. 741,163 -- 2,393,652
Payable to related parties............ 67,711 413,923 279,753
----------- ----------- ------------
Total current liabilities............. 13,398,827 30,730,420 38,925,172
----------- ----------- ------------
Long-term Liabilities:
Long-term debt........................ 15,367,424 28,261,527 38,634,444
Capital lease obligation, noncurrent.. 2,617,364 13,175,732 12,639,966
Deferred income taxes................. 357,492 1,353,382 1,411,081
----------- ----------- ------------
Total long-term liabilities........... 18,342,280 42,790,641 52,685,491
----------- ----------- ------------
Minority Interest...................... 137,155 1,183,093 1,616,813
----------- ----------- ------------
Commitments And Contingencies (Note 14)
Shareholders' Equity:
Common stock (no par, 100,000 shares
authorized, 49,092 shares
outstanding)......................... 896,079 896,079 896,079
Additional paid-in capital--
accumulated deficit remaining upon
termination of
S-corporation election............... (1,247,200) (1,247,200) (1,247,200)
Retained earnings..................... 2,006,025 12,770,937 16,051,629
----------- ----------- ------------
Total shareholders' equity............ 1,654,904 12,419,816 15,700,508
----------- ----------- ------------
Total Liabilities and Shareholders'
Equity............................... $33,533,166 $87,123,970 $108,927,984
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
TELCO COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTH THREE MONTH
------------------------- PERIOD ENDED PERIOD ENDED
1994 1995 MARCH 31, 1995 MARCH 31, 1996
----------- ------------ -------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues, net........... $44,706,867 $215,375,486 $45,276,969 $91,927,548
Cost of services........ 27,736,195 133,727,834 28,078,859 54,729,975
----------- ------------ ----------- -----------
Gross margin.......... 16,970,672 81,647,652 17,198,110 37,197,573
----------- ------------ ----------- -----------
Operating expenses:
Selling, general and
administrative....... 12,017,726 55,935,945 10,185,668 27,863,407
Depreciation and
amortization......... 495,883 3,325,641 451,843 1,432,678
----------- ------------ ----------- -----------
Total operating ex-
penses............. 12,513,609 59,261,586 10,637,511 29,296,085
----------- ------------ ----------- -----------
Operating income........ 4,457,063 22,386,066 6,560,599 7,901,488
Interest expense........ 896,871 2,951,975 591,547 1,065,942
Other expense (income).. (14,614) 91,649 (3,828) (13,405)
Income taxes:
Current............... 1,074,837 7,420,471 2,090,508 2,888,850
Deferred.............. 356,789 111,121 235,331 245,689
----------- ------------ ----------- -----------
Total income taxes.. 1,431,626 7,531,592 2,325,839 3,134,539
----------- ------------ ----------- -----------
Minority interest....... 137,155 1,045,938 109,010 433,720
----------- ------------ ----------- -----------
Net income.............. $ 2,006,025 $ 10,764,912 $ 3,538,031 $ 3,280,692
=========== ============ =========== ===========
Net income per common
and common Equivalent
share.................. $ 31.57 $ 161.91 $ 53.16 $ 48.92
Average common and
common equivalent
shares................. 63,541 66,488 66,554 67,063
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
TELCO COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994 AND THREE MONTH PERIODS ENDED MARCH 31,
1996 AND 1995
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN-
CAPITAL:
--------------
ACCUMULATED
DEFICIT
REMAINING UPON
TERMINATION OF RETAINED
COMMON S-CORPORATION EARNINGS
STOCK ELECTION (DEFICIT)
-------- -------------- -----------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1993............... $871,079 $ -- $(1,247,200)
Conversion from S-Corporation tax sta-
tus................................... -- (1,247,200) 1,247,200
Shares repurchased into treasury....... (25,000) -- --
Issuance of common shares.............. 50,000 -- --
Net income............................. -- -- 2,006,025
-------- ------------ -----------
BALANCE, DECEMBER 31, 1994............... $896,079 $ (1,247,200) $ 2,006,025
Net income............................. -- -- 10,764,912
-------- ------------ -----------
BALANCE, DECEMBER 31, 1995............... $896,079 $(1,247,200) $12,770,937
Net income (Unaudited)................. -- -- 3,280,692
-------- ------------ -----------
BALANCE, MARCH 31, 1996 (Unaudited)...... $896,079 $ (1,247,200) $16,051,629
======== ============ ===========
BALANCE, JANUARY 1, 1995................. $896,079 $ (1,247,200) $ 2,006,025
Net income (Unaudited)................. -- -- 3,538,031
-------- ------------ -----------
BALANCE, MARCH 31, 1995 (Unaudited)...... $896,079 $ (1,247,200) $ 5,544,056
======== ============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
TELCO COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTH THREE MONTH
YEARS ENDED DECEMBER 31 PERIOD ENDED PERIOD ENDED
-------------------------- MARCH 31, MARCH 31,
1994 1995 1995 1996
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash Flow From (Used
for) Operations:
Net income........... $ 2,006,025 $ 10,764,912 $ 3,538,031 $ 3,280,692
Adjustments to
reconcile net income
to net cash from (used
for) operating
activities:
Depreciation and
amortization........ 495,883 3,325,641 451,834 1,432,678
Minority interest.... 137,155 1,045,938 109,010 433,720
Deferred income
taxes............... 356,789 111,121 235,311 245,689
Loss on disposal of
fixed assets........ -- 122,783 -- --
Change in current
assets and
liabilities:
Trade accounts
receivable.......... (24,115,053) (30,837,522) (4,643,495) (20,174,764)
Prepaid and other
assets.............. (1,617,168) 513,674 (116,095) (188,029)
Accounts payable..... 1,299,850 13,827,778 4,294,439 (2,577,067)
Accrued expenses..... 8,795,562 2,171,506 494,788 8,187,629
Income taxes
payable............. 741,163 (1,074,541) 1,651,987 2,393,652
------------ ------------ ----------- ------------
Net cash used for
operating
activities........ (11,899,794) (28,710) 6,015,810 (6,965,800)
------------ ------------ ----------- ------------
Cash Flows (Used for)
Investing Activities:
Equipment purchases.. (1,300,878) (9,814,752) (1,806,400) (2,253,308)
Investments, net of
cash acquired....... (7,758) -- -- --
------------ ------------ ----------- ------------
Net cash used for
investing
activities........ (1,308,637) (9,814,753) (1,806,400) (2,253,308)
------------ ------------ ----------- ------------
Cash Flows From (Used
for) Financing
Activities:
Proceeds from line of
credit.............. 29,126,823 28,261,527 13,484,991 38,634,444
Payments on line of
credit.............. (13,759,399) (15,367,424) (15,367,424) (28,261,527)
Payments on capital
leases.............. (1,266,413) (2,375,149) (348,312) (790,296)
Payments on short-
term debt........... (583,000) (213,233) --
Proceeds from
contributed
capital............. 50,000 -- -- --
Repurchase of common
shares.............. (25,000) -- -- --
------------ ------------ ----------- ------------
Net cash from fi-
nancing activi-
ties.............. 13,543,011 10,305,721 (2,230,745) 9,582,621
------------ ------------ ----------- ------------
Increase in Cash....... 334,579 462,259 1,978,665 363,513
Cash, Beginning of the
Period................ 139,933 474,512 474,512 936,771
------------ ------------ ----------- ------------
Cash, End of the
Period................ $ 474,512 $ 936,771 $ 2,453,177 $ 1,300,284
============ ============ =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
TELCO COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
1. NATURE OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations--The Company is a switch-based long distance telephone
company headquartered in Chantilly, Virginia. The Company principally provides
service to residential customers in 28 states and the District of Columbia.
Significant Accounting Policies:
A. Basis of Consolidation--The consolidated financial statements include the
accounts of Telco Communications Group, Inc. (TCGI) and its wholly-owned Dial
& Save subsidiaries as well as TCGI's 80% interest in Telco Development Group
of Delaware, Inc. and a 55.55% interest in Long Distance Wholesale Club. All
intercompany transactions and accounts have been eliminated in consolidation
(see Note 7).
B. Revenue Recognition--Revenue is recorded when service is rendered, which
is measured when a long distance call is completed and is recorded net of an
allowance for revenues which the Company estimates will ultimately be
refunded, rebated, uncollectible or unbillable.
C. Sales, Advertising and Related Marketing Expenses--Costs incurred in
connection with Company sales, advertising and marketing activities are
recognized in the period that they are incurred. Costs incurred in advance of
utilization in sales, advertising or marketing activity are recognized as
prepaid assets until such activity occurs. The Company had recorded prepaid
advertising and mail marketing costs of $377,745 and $1,055,414 at December
31, 1995 and 1994, respectively. These expenditures were utilized in
promotional activities and mailings in subsequent periods and were expensed in
the periods in which the items were mailed.
D. Cash and Cash Equivalents--For the purposes of reporting cash flows, the
Company considers all highly liquid instruments with original maturities of
less than three months to be cash equivalents.
E. Accounts Receivable--Accounts receivable principally consists of amounts
due from customers. The Company contracts with Local Exchange Carriers (LECs),
or an authorized clearinghouse, to bill and collect from its customers. The
fees vary from LEC to LEC. Currently, the Company pays between $0.26 and $0.86
per bill for bill rendering and an additional amount per call record which
ranges from $0.01 to $0.076. This amount is offset against the related LEC
receivable. In addition to fees to LECs, the Company utilizes the services of
Tel Labs, a related party, for call data translation and rating. (See Note 2).
F. Property and Depreciation--Property, plant and equipment is recorded at
cost. Depreciation is computed using the straight-line method based on
estimated useful lives (or lease terms, if shorter for facilities under
capital leases and leasehold improvements) of five years. Expenditures for
maintenance and repairs are charged to expense as incurred whereas
expenditures for additions and replacements are capitalized. The cost and
related accumulated depreciation of assets sold or otherwise disposed of
during the period are removed from the accounts. Any gain or loss is reflected
in the year of disposal.
G. Income Taxes--Income taxes are provided for the tax effects of
transactions reported in the financial statements and consist of taxes
currently due and deferred taxes. Deferred taxes are recognized for
differences between the basis of assets and liabilities for financial
statement and income tax purposes. Such differences relate primarily to
depreciable assets and accounts receivable. The Company revoked its S-Chapter
election effective January 1, 1994.
H. Excise Taxes Payable--Excise taxes payable represent sales and excise tax
amounts collected which are subsequently remitted to taxing authorities.
I. Reclassification--Certain amounts in the 1994 consolidated financial
statements have been reclassified to conform to the 1995 presentation.
J. Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts
F-7
<PAGE>
TELCO COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
K. Net Income Per Share--Net income per share is based on the weighted
average number of shares of common stock and common stock equivalent shares
outstanding using the treasury stock method. Pursuant to Securities and
Exchange Commission requirements, common and common equivalent shares issued
during the twelve-month period prior to the initial filing of the Company's
proposed public offering have been included in the calculation as if they were
outstanding for all periods presented using the treasury stock method, based
on an estimated initial public offering price of $15. (See also Note 16).
L. Recently Issued Accounting Pronouncements--In March 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," which must be adopted by the Company by
January 1, 1996. This statement requires the Company to review long-lived
assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Based on the
Company's current operating environment, adoption of SFAS 121 does not have a
material impact.
In 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock Based Compensation." The Company has decided, as
permitted by SFAS No. 123, to continue to apply Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees," for
recognition and measurement purposes.
M. Interim Financial Data (Unaudited)--The interim financial data at March
31, 1996 and for the three-month periods ended March 31, 1995 and 1996 is
unaudited; however, in the opinion of management, such interim data includes
all adjustments, consisting only of normal recurring adjustments, necessary
for a fair statement of the results for the interim period.
2. RELATED PARTY TRANSACTIONS
The Company has entered into various transactions with several entities
which are or have been controlled by the Company's Chairman of the Board, who
is also a shareholder with a direct ownership interest of 33%. These other
entities include Tel Labs Inc., Telco Development Group, Inc., Bricks In The
Sticks, Ltd., Telco Development Group of Delaware (an 80%-owned subsidiary of
the Company), and Dial & Save of Pennsylvania (a wholly-owned subsidiary of
the Company).
The Company leases office and switch site facilities from Bricks In The
Sticks, Ltd. The Company paid total rents of $179,420 and $63,500 for these
facilities, for the years ended December 31, 1995 and 1994, respectively.
Total annual future minimum operating lease payments due to the related
party for the above lease are as follows for the years ending December 31:
<TABLE>
<S> <C>
1996................................ $189,546
1997................................ 201,377
1998................................ 213,387
1999................................ 168,996
2000................................ 8,159
</TABLE>
The Company purchases data processing services for call translation and
rating on a month-to-month basis from Tel Labs, Inc. The Company paid
$1,260,000 and $155,000 for these services for the years ended December 31,
1995 and 1994, respectively.
F-8
<PAGE>
TELCO COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company purchases computer equipment and support on a month-to-month
basis from Telco Development Group, Inc. The Company paid $779,918 and
$229,100 for these services for the years ended December 31, 1995 and 1994,
respectively.
On August 1, 1994, the Company purchased 100% of the outstanding shares of
Dial & Save of Pennsylvania from the Company's Chairman for $31,479 in cash.
The Consolidated Statement of Income for the year ended December 31, 1994
includes the operations of Dial & Save of Pennsylvania from August 1, 1994.
Operations of Dial & Save of Pennsylvania prior to August 1, 1994 were not
material.
Prior to July 28, 1994, the Company's Chairman owned a 50% interest in the
common stock of Long Distance Wholesale Club (LDWC). The Company purchased the
Chairman's 50% interest and an additional 5% of the common stock of LDWC (see
Note 7). The Company paid approximately $85,000 for the Chairman's interest in
LDWC.
The Company was organized during 1993 through the investment of: 1) its
Chairman, 2) its President, and 3) a non-management shareholder. At the
Company's inception, the non-management shareholder purchased a minority
interest in the Company's common stock for $250,000. On July 20, 1994, the
Company purchased, into treasury, 100% of the non-management shareholder's
original minority interest in the common stock of the Company for $25,000 and,
on July 25, 1994, sold, at the non-management shareholder's request, a similar
minority interest in its common stock to a foreign corporation of which such
shareholder is an executive officer in exchange for $50,000 (see Note 10).
The foreign corporation also holds a minority ownership interest in an
international long distance services provider. The former non-management
shareholder is a director and member of the management of this provider. This
international provider and Telco purchase transmission services from one
another pursuant to service agreements.
3. ALLOWANCES
Changes in the allowance for unbillable or uncollectible accounts and
billing services fees were as follows at December 31:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Balance at the beginning of year................. $ 59,763 $ 1,078,442
Provision charged to operations.................. 2,545,350 11,517,017
Write-offs, net of recoveries.................... (1,526,671) (8,824,046)
----------- -----------
Balance at the end of year....................... $ 1,078,442 $ 3,771,413
=========== ===========
</TABLE>
Allowances related to refunds, rebates, and unbilled or uncollectible
revenue totaled $9,143,602 and $2,625,451 for the years ended 1995 and 1994,
respectively.
4. LONG-TERM AND OTHER DEBT
The long-term debt of TCGI consists of a $25,000,000 line of credit from
Signet Bank due January 1996 with an interest rate of prime plus 2%. The
weighted average interest rates for 1995 and 1994 were 10.86% and 9.94%,
respectively. The bank has a first security interest on all accounts
receivable, equipment, furniture and fixtures, and the common stock of
subsidiaries is pledged as additional security. The credit agreement cites
minimum operating ratios, and prohibits creation of debt, merger, sale of
assets, loans or advances, guarantees, and payment of dividends without
consent of the lender. The credit agreement also includes a warrant agreement
between TCGI and Signet Media Capital Group, which entitles Signet Media
Capital Group to 1,174 warrants at an exercise price of $.05 per share. No
warrants have been exercised as of December 31, 1995. In 1996, the number of
shares subject to the warrant was adjusted to 1,255. The credit agreement is
guaranteed by two executive officers of the Company. Under the terms of the
agreement, the officers guarantee a term note,
F-9
<PAGE>
TELCO COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
consisting solely of loan points, and any borrowing in excess of 80% of
receivables. At December 31, 1995 and 1994, there were no amounts outstanding
personally guaranteed by the officers.
At December 31, 1995, the Company was in the process of renegotiating the
credit agreement. Interim financing of an additional $10,000,000 was available
to the Company under the terms of the current credit agreement. On January 24,
1996, permanent financing was obtained in the amount of $45,000,000. On March
20, 1996, the credit agreement was amended to provide $20,000,000 of
additional financing. The new credit agreement has a maturity date of January
24, 1998 and carries an adjustable interest rate based on the LIBOR and prime
rates. As a result of the new financing, $28,261,527 has been reclassified to
long term debt at December 31, 1995. Under the new credit agreement there are
no personal guarantees. The new credit agreement is secured by substantially
all of the Company's assets and requires the Company to maintain certain
financial ratios, restricts the payment of dividends and requires all
subsidiary companies' stock be pledged as collateral.
Short-term notes payable consist of deposits to a leasing agent. The terms
for the leases require a 10% payment at inception and a 10% payment to be made
in equal installments over a period of five months.
5. OBLIGATIONS UNDER CAPITAL AND OPERATING LEASES
The Company leases certain equipment under capital leases. Accordingly, the
Company has capitalized such equipment in the amount of $22,214,849 and
$4,819,099 less accumulated depreciation of $2,587,847 and $412,372 as of
December 31, 1995 and 1994, respectively. At December 31, 1995, 93% of such
equipment was leased from one vendor. Total equipment under capital leases
includes $2,925,000 and $1,685,000 classified as network facilities under
development, as of December 31, 1995 and 1994, respectively.
The following represents the future minimum payments required under such
leases for the next five years.
<TABLE>
<S> <C>
1996........................................................ $ 4,347,275
1997........................................................ 4,604,616
1998........................................................ 4,564,692
1999........................................................ 4,248,216
2000........................................................ 1,969,639
-----------
Total minimum base payments................................. 19,734,438
-----------
Imputed interest............................................ (3,586,157)
-----------
Net obligation.............................................. 16,148,281
Current portion............................................. (2,972,549)
-----------
Capital lease obligation, noncurrent........................ $13,175,732
===========
</TABLE>
In addition to operating leasing activities discussed in Note 2, the Company
leases space in Ft. Lauderdale, Florida; Austin, Texas; Washington, D.C.;
Davenport, Iowa; Arlington, Virginia and Las Vegas, Nevada. The total minimum
rental commitment as of December 31, 1995 due in future years is as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------
<S> <C>
1996................................ $534,334
1997................................ 541,972
1998................................ 554,711
1999................................ 516,537
2000................................ 205,780
</TABLE>
F-10
<PAGE>
TELCO COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Total rent expense under these leases was $206,534 and $68,809 for the years
ended December 31, 1995 and 1994, respectively.
6. INCOME TAXES
The Company accounts for income taxes using the liability method, whereby
deferred tax liabilities and assets are determined based on the temporary
differences between the financial statements and tax bases of assets and
liabilities by applying enacted statutory tax rates applicable to future years
in which the differences are expected to reverse.
Significant components of income taxes are as follows for the years ended
December 31, 1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Current:
Federal.............................................. $ 822,612 $6,023,084
State................................................ 252,225 1,397,387
---------- ----------
Total Current...................................... $1,074,837 $7,420,471
========== ==========
Deferred:
Federal.............................................. $ 320,589 $ 91,780
State................................................ 36,200 19,341
---------- ----------
Total Deferred..................................... $ 356,789 $ 111,121
========== ==========
</TABLE>
Temporary differences which give rise to significant components of the
Company's deferred tax liabilities and assets for the years ended December 31,
1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
--------- -----------
<S> <C> <C>
Deferred Tax Liabilities:
Book over tax basis in property, plant and
equipment....................................... $(177,194) $(1,161,939)
Bad debts--non-accrual method.................... (110,375) --
Other............................................ (69,923) (191,443)
--------- -----------
(357,492) (1,353,382)
--------- -----------
Deferred Tax Assets:
Bad debts--non-accrual method.................... -- 580,643
Other............................................ -- 304,126
--------- -----------
-- 884,769
--------- -----------
Deferred Tax Liability, net........................ $(357,492) $ (468,613)
========= ===========
</TABLE>
No valuation allowance has been recorded for the realization of the deferred
tax asset resulting from the temporary differences as management believes that
it will, more likely than not, be able to realize the deferred tax asset.
F-11
<PAGE>
TELCO COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Reconciliation of income taxes computed at the federal statutory tax rate to
actual income tax expense for the years ended December 31, 1994 and 1995 are
as follows:
<TABLE>
<CAPTION>
1994 1995
----- -----
<S> <C> <C>
Federal Statutory Rate......................................... 34.00% 35.00%
Effect of:
State taxes--net of Federal benefit.......................... 6.23 4.76
Other........................................................ (.18) (.82)
----- -----
Income Tax Expense............................................. 40.05% 38.94%
===== =====
</TABLE>
7. BUSINESS COMBINATIONS
On July 28, 1994, the Company acquired 55% of the outstanding stock of Long
Distance Wholesale Club (see Note 2). The Company paid $134,834 in cash for
the shares. The acquisition has been accounted for as a purchase transaction
and, accordingly, the cash paid has been allocated to assets and liabilities
based on the estimated fair value as of the acquisition date. The Consolidated
Statement of Income for the year ended December 31, 1994 includes the
operating results of Long Distance Wholesale Club from August 1, 1994.
See also Note 2 regarding Dial & Save of Pennsylvania.
8. INCENTIVE STOCK OPTIONS
On July 1, 1994, the Company adopted a Stock Plan (the Plan) which provides
for the granting of one or any combination of incentive stock options,
nonqualified stock options, restricted stock awards and bargain purchases of
Company stock. All Company employees are eligible to participate in the Plan.
10,000 shares of common stock are authorized for issuance by the Plan. Options
are issued at a price equal to the fair market value of the common stock at
the date granted. No options were exercised or canceled during 1995 or 1994.
Options for 3,583 shares are exercisable at December 31, 1995. The following
options are currently outstanding:
<TABLE>
<CAPTION>
YEAR OF GRANT NUMBER OF SHARES OPTION PRICE
------------- ---------------- ------------
<S> <C> <C>
1994....................................... 3,843.5 $131-$784
1995....................................... 500 $1,374
</TABLE>
In addition, LDWC has granted options to certain employees. Options are
issued at a price equal to the fair market value of the common stock at the
date granted. No options were exercised or canceled during 1995. Options on
1.11 shares are exercisable at December 31, 1995. The following options are
currently outstanding:
<TABLE>
<CAPTION>
YEAR OF GRANT NUMBER OF SHARES OPTION PRICE
------------- ---------------- ----------------
<S> <C> <C>
1995................................... 5.72 $33,955-$181,061
</TABLE>
F-12
<PAGE>
TELCO COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. SUPPLEMENTAL CASH FLOW INFORMATION
The following represents supplemental cash flow information for the years
ended December 31, 1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
---------- -----------
<S> <C> <C>
Cash paid for:
Interest......................................... $ 656,958 $ 2,939,472
Income taxes..................................... $ 336,598 $ 8,223,750
Non-cash investing and financing activities:
Conversion of note receivable to equity.......... $ -- $ 250,000
Equipment purchased through capital leases....... $2,821,353 $15,220,222
Fair value of assets acquired.................... $1,025,533 $ --
Cash paid for common stock....................... 170,360 --
---------- -----------
Liabilities assumed.............................. $ 855,173 $ --
</TABLE>
10. CAPITAL STOCK
On June 1, 1994, the Company declared a ten-for-one stock split. All share
amounts have been restated to reflect the split. On July 20, 1994, the Company
purchased 13,633 shares of its stock at $1.83 per share and subsequently sold
15,225 shares at $3.28 per share on July 25, 1994 (see Note 2).
11. NOTE RECEIVABLE CONVERSION
In June 1995, the Company exercised its option to convert a $250,000 short-
term note receivable from its majority-owned subsidiary Long Distance
Wholesale Club to equity in that entity. 3.046 shares of Long Distance
Wholesale Club common stock were issued in the transaction, resulting in an
increase in the Company's ownership interest from 55% to 55.55%.
12. EMPLOYEE BENEFIT PLANS
The Company's majority-owned subsidiary Long Distance Wholesale Club
implemented a 401(k) pension plan during 1995. Employees are eligible to
participate in the plan if they have been employed by Long Distance Wholesale
Club for one year and work at least 20 hours per week. Generally, employees
can defer up to 15% of their gross bi-weekly salary into the plan. The
Company's contribution is to be determined annually by the Board of Directors.
The Company contributed $11,781 to the plan in 1995.
13. DEFERRED COMPENSATION PLAN
The Company though its majority-owned subsidiary Long Distance Wholesale
Club provides a deferred compensation plan for one of its officers. The plan
provides for annual elections to be made by the officer of deferral amounts,
such deferral to be made only from compensation amounts earned and otherwise
payable. The plan requires funding of the deferred compensation amount equal
to the officer's deferral plus interest at an annual rate to be determined by
the board of directors from time to time. As of December 31, 1995, $373,604
has been accrued under the plan, $331,820 of which has been funded to date.
14. COMMITMENTS AND CONTINGENCIES
The Company is a party from time to time to routine litigation or employment
related litigation incident to its business. No provision has been reflected
in the accompanying financial statements for any litigation. Based
F-13
<PAGE>
TELCO COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
upon information presently available, management believes the final
disposition of these items will not have an adverse material effect on
operations or the financial position of the Company.
During the first half of 1996, the Company entered into employment and
consulting agreements with certain members of management. The agreements
provide for the employees to receive amounts not less than specified base
annual salaries through the terms of the agreements, which have terms of three
to five years. Certain of the contracts also include non-competition covenants
and options to purchase shares of the Company's common stock.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable, accounts payable, and
accrued expenses approximate fair value because of the short maturity of these
items.
The carrying amounts of notes payable and debt issued pursuant to the
Company's bank credit agreements approximate fair value because the interest
rates on these instruments change with market interest rates.
16. SUBSEQUENT EVENTS
Acquisitions of Affiliated Companies: Subsequent to December 31, 1995, the
Company announced its intention to purchase the remaining shares of LDWC and
Telco Development Group of Delaware. In addition, the Company has announced
plans to acquire Tel Labs concurrent with an offering to sell 8,700,000 shares
of the Company's Common Stock.
Stock Split (Unaudited): The Board of Directors of the Company has
authorized a 425-to-1 stock split. The split will occur immediately prior to
consummation of an Offering to sell 8,700,000 shares of the Company's Common
Stock. Net income per share and related weighted average shares outstanding do
not reflect the impact of these future transactions.
Preferred Stock (Unaudited): The Company has authorized but not issued
15,000,000 shares of Preferred Stock. Such shares may be issued in one or more
series with rights, designations, preferences, qualifications, limitations and
restrictions as may be authorized by the Board of Directors of the Company.
F-14
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Telco Communications Group, Inc.
Chantilly, Virginia
We have audited the accompanying balance sheet of Telco Communications
Group, Inc. as of December 31, 1993, and the related statements of income,
changes in stockholders' deficit, and cash flows from inception to December
31, 1993. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Telco Communications
Group, Inc. as of December 31, 1993, and the results of operations and its
cash flows from inception to December 31, 1993 in conformity with generally
accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information is
presented for purposes of additional analysis and is not a required part of
the basic financial statements. Such information has been subjected to the
auditing procedures applied in the audits of the basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.
/s/ Chase and Associates CPAs, P.C.
Manassas, Virginia
March 25, 1994
F-15
<PAGE>
TELCO COMMUNICATIONS GROUP, INC.
BALANCE SHEET
DECEMBER 31, 1993
<TABLE>
<S> <C>
ASSETS
------
Current Assets
Cash and cash equivalents....................................... $ 139,933
Trade receivables............................................... 441,706
Other receivables............................................... 4,031
Deposits........................................................ 236,612
Prepaid expenses................................................ 30,853
-----------
Total current assets.......................................... 853,135
-----------
Property and Equipment
Leasehold improvements.......................................... 68,000
Machinery and equipment......................................... 159,846
Office furniture and equipment.................................. 24,270
Equipment acquired under capital leases......................... 1,000,000
Less accumulated deprecation.................................... (54,358)
-----------
1,197,758
-----------
$ 2,050,893
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current Liabilities
Shareholder notes payable (Note 2).............................. $ 72,233
Short-term notes payable (Note 3)............................... 724,000
Current obligations under capital leases (Note 5)............... 148,463
Accounts payable................................................ 829,662
Accrued expenses................................................ 38,069
-----------
Total current liabilities..................................... 1,812,427
-----------
Obligations Under Capital Leases, less current portion (Note 5)... 614,586
-----------
Commitments and Contingencies (Note 4)
Stockholders' Deficit
Common stock, par value $.01 per share; authorized 5,000 shares;
issued 4,747 shares............................................ 47
Paid in capital................................................. 871,033
Retained earnings deficit....................................... (1,247,200)
-----------
(376,120)
-----------
$ 2,050,893
===========
</TABLE>
F-16
<PAGE>
TELCO COMMUNICATIONS GROUP, INC.
STATEMENT OF INCOME
FROM INCEPTION TO DECEMBER 31, 1993
<TABLE>
<S> <C>
Net sales......................................................... $ 1,135,490
Cost of sales..................................................... 993,741
-----------
Gross Profit.................................................. 141,749
-----------
Billing, General and Administrative Expenses:
Billing services................................................ 100,762
General and administrative...................................... 1,263,033
-----------
1,363,795
-----------
Operating income loss......................................... (1,222,046)
Interest Expense.................................................. 25,154
-----------
Net Income loss................................................... $(1,247,200)
===========
</TABLE>
F-17
<PAGE>
TELCO COMMUNICATIONS GROUP, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
FROM INCEPTION TO DECEMBER 31, 1993
<TABLE>
<S> <C>
Issuance of common stock.......................................... $ 47
Proceeds of paid in capital in excess of par...................... 871,033
Accumulated (deficit)............................................. (1,247,200)
-----------
Total Stockholders' Deficit..................................... $ (376,120)
===========
</TABLE>
F-18
<PAGE>
TELCO COMMUNICATIONS GROUP, INC.
STATEMENT OF CASH FLOWS
FROM INCEPTION TO DECEMBER 31, 1993
<TABLE>
<S> <C>
Cash Flows From Operating Activities
(Net loss)..................................................... $(1,247,200)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation................................................... 48,692
Amortization................................................... 5,666
Increase in trade receivables.................................. (441,706)
Increase in other receivables.................................. (4,031)
Increase in deposits........................................... (230,560)
Increase in prepaid expenses................................... (30,853)
Increase in accounts payable................................... 829,662
Increase in accrued expenses................................... 38,069
-----------
Net cash (used in) operating activities...................... (1,032,261)
-----------
Cash Flows From Investing Activities
Purchase of property and equipment............................. (218,110)
Leasehold improvements......................................... (68,000)
-----------
Net cash (used in) investing activities...................... (286,110)
-----------
Cash Flows From Financing Activities
Proceeds from borrowings from shareholders and related
parties....................................................... 796,233
Payments under capital leases.................................. (21,276)
Proceeds from sale of stock.................................... 683,347
-----------
Net cash provided by financing activities.................... 1,458,304
-----------
Net increase in cash and cash equivalents...................... 139,933
Beginning cash and cash equivalents............................ 0
-----------
Ending cash and cash equivalents............................... $ 139,933
===========
Supplemental Disclosures of Cash Flow Information
Cash payments for interest..................................... $ 7,240
===========
Supplemental Schedule of Noncash Investing and Financing
Activities
Capital lease obligation incurred for use of equipment......... $ 784,325
===========
Equipment acquired for stock................................... $ 181,681
===========
Deposits acquired for stock.................................... $ 6,052
===========
</TABLE>
F-19
<PAGE>
TELCO COMMUNICATIONS GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES.
Nature of business:
The Company is a full service long distance telephone company headquartered
in Chantilly, Virginia. The Company currently provides service to consumers
and businesses in the state of Florida under the trade style Dial & Save.
A summary of the Company's significant accounting policies follows:
Revenue recognition:
Revenue is recorded on an accrual basis whereby revenue is recognized when a
long distance call is completed and the calls are priced by a third party data
processing contractor. Revenues are realized net of an allowance for estimated
unbillable or uncollectible amounts.
Sales, advertising and related marketing expenses:
Costs incurred in connection with Company sales, advertising, and marketing
activities are realized in the period that they are incurred.
Cash and cash equivalents:
For the purposes of reporting cash flows, the Company considers all cash
accounts which are not subject to withdrawal restrictions or penalties to be
cash equivalents.
Trade receivables:
Accounts receivable consist primarily of monies due from Local Exchange
Carriers ("LEC") (BellSouth Telecommunications, GTE Telephone, and Sprint
United Telephone Company) or an authorized billing clearinghouse. The Company
contracts with LECs, or an authorized clearinghouse, to bill and collect from
it's customers. Accounts receivable are recognized net of collection costs,
bad debt and uncollectible allowances, interest expenses and carrying costs.
The Company has elected to receive monies due from local telephone companies,
via an authorized clearing house on an expedited basis, utilizing an advance
payment agreement. Under this agreement, the Company may borrow up to a fixed
percentage of the outstanding accounts receivable.
Property and equipment:
Property and equipment are stated at cost. Depreciation and amortization is
computed by the straight line method over the shorter of the asset's lease
term or its estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Leasehold improvements............................................... 2
Office furniture & equipment......................................... 3
Machinery & equipment................................................ 5
Leased equipment..................................................... 5
</TABLE>
Income tax status:
The Company, with the consent of its stockholders, has elected to be taxed
under sections of federal and state income tax law, which provide that, in
lieu of corporation income taxes, the stockholders separately account
F-20
<PAGE>
TELCO COMMUNICATIONS GROUP, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
for their prorata shares of the Company's items of income, deductions, losses
and credits. As a result of this election, no income taxes have been
recognized in the accompanying financial statements.
NOTE 2. NOTES PAYABLE TO SHAREHOLDERS
The Company has two (2) unsecured note agreements in the amounts of $43,379
and $28,839 payable to individual stockholders and directors. The note
agreements provide for an annual interest rate of 12% payable in monthly
installments with principal amounts due on December 31, 1994.
NOTE 3. SHORT-TERM NOTES PAYABLE
The Company has two unsecured note agreements payable to third parties in
the amounts of $224,000 and $500,000. The note agreements provide for an
annual interest rate of at least 12%, payable in monthly installments with
principal amounts due June 30, 1994.
NOTE 4. COMMITMENTS
The Company leases it's Chantilly, Virginia and Ft. Lauderdale, Florida
offices under operating leases which expire variously through August, 1997.
The total minimum rental commitment as of December 31, 1993, due in future
years is as follows:
<TABLE>
<S> <C>
Years ending December 31,
1994............................................................ $33,516
1995............................................................ 31,944
1996............................................................ 28,800
1997............................................................ 16,800
</TABLE>
The total rent expense from inception to December 31, 1993 was $13,572.
NOTE 5. CAPITAL LEASE OBLIGATIONS
The Company leases telephone switching equipment under a capital lease
agreement. The lease carries an implied interest rate of ten percent (10%)
with a term of sixty (60) months and allows for the purchase of the leased
equipment at the end of the lease term for $1. This lease is guaranteed by two
(2) stockholders and directors.
The Company leases telephone PBX equipment under a capital lease agreement.
The lease carries an implied interest rate of 13.9% with a term of twenty-four
(24) months and allows for the purchase of the leased equipment at the end of
lease term for $1.
The total minimum aggregate dollar amount due under capital leases is
$784,325 with interest totaling $199,350. The total depreciation on the
related assets was $37,294. The total minimum lease commitments due as of
December 31, 1993 are as follows:
<TABLE>
<S> <C>
Years ending December 31,
1994........................................................... $148,463
1995........................................................... 157,952
1996........................................................... 141,869
1997........................................................... 156,725
1998........................................................... 158,040
</TABLE>
F-21
<PAGE>
TELCO COMMUNICATIONS GROUP, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6. TRANSACTIONS WITH RELATED PARTIES
The Company rents office space in Chantilly, Virginia for a two (2) year
term from Telco Development Group, Inc., a corporate which is 74% owned by a
company director and stockholder.
The Company purchases data processing services on a month-to-month basis
from Tel Labs, Inc., a corporation which is 100% owned by a company director
and stockholder.
The Company purchased computer equipment from a corporation owned by a
company director and stockholder. Total equipment purchases from the
corporation during 1993 were $21,109.
Amounts charged to expenses as a result of transactions with related parties
from inception to December 31, 1993 consist of the following:
<TABLE>
<S> <C>
Rent............................................................... $12,000
Data processing.................................................... 5,210
-------
$17,210
=======
</TABLE>
All transactions with related parties are at a fair market price, balances
are cleared regularly, and similar services are readily available from other
suppliers.
As of December 31, 1993 the total amount included in accounts payable due to
related parties is $13,545.
F-22
<PAGE>
TELCO COMMUNICATIONS GROUP, INC.
SCHEDULE OF GENERAL AND ADMINISTRATIVE EXPENSES
FROM INCEPTION TO DECEMBER 31, 1993
<TABLE>
<S> <C>
General and administrative expenses:
Depreciation and amortization..................................... $ 54,358
Data processing................................................... 5,210
Call center....................................................... 91,971
Temporary help.................................................... 1,402
Insurance......................................................... 4,752
Professional fees................................................. 9,427
Mail marketing.................................................... 838,298
Travel............................................................ 30,319
Miscellaneous..................................................... 8,561
Office supplies................................................... 12,952
Rent.............................................................. 27,133
Salaries.......................................................... 164,507
Payroll taxes..................................................... 14,143
----------
$1,263,033
==========
</TABLE>
F-23
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMA-
TION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN CONNEC-
TION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH OTHER INFORMA-
TION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, ANY SELLING SHAREHOLDER, ANY UNDERWRITER OR ANY OTHER PERSON. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RE-
LATES, OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, TO ANYONE IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO,
OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AF-
FAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Dilution................................................................. 15
Capitalization........................................................... 16
Selected Consolidated Historical and Pro Forma Financial Data............ 17
Pro Forma Consolidated Financial Statements.............................. 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 33
Management............................................................... 46
Certain Transactions..................................................... 55
Principal and Selling Shareholders....................................... 57
Description of Capital Stock............................................. 58
Shares Eligible for Future Sale.......................................... 63
Certain United States Federal Tax Considerations for Non-U.S Holders of
Common Stock............................................................ 65
Underwriting............................................................. 68
Notice to Canadian Residents............................................. 70
Legal Matters............................................................ 73
Experts.................................................................. 73
Available Information.................................................... 73
Index to Consolidated Financial Statements............................... F-1
</TABLE>
----------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIRE-
MENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
8,700,000 SHARES
[LOGO OF TELCO COMMUNICATIONS GROUP APPEARS HERE]
COMMON STOCK
---------------
PROSPECTUS
---------------
BEAR, STEARNS & CO. INC.
SALOMON BROTHERS INC
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED AUGUST 7, 1996
PROSPECTUS
8,700,000 SHARES
[LOGO OF TELCO COMMUNICATIONS GROUP APPEARS HERE]
COMMON STOCK
-----------
Of the 8,700,000 shares (the "Shares") of Common Stock offered hereby,
6,100,000 shares will be sold by Telco Communications Group, Inc. ("Telco" or
the "Company") and 2,600,000 shares will be sold by the Selling Shareholders.
The Company will not receive any of the proceeds from the sale of the Shares
being sold by the Selling Shareholders. See "Principal and Selling
Shareholders."
A total of 1,740,000 shares (the "International Shares") are being offered
outside the United States and Canada (the "International Offering") by the
Managers and 6,960,000 shares (the "U.S. Shares") are being offered in the
United States and Canada (the "U.S. Offering") by the U.S. Underwriters. The
initial public offering price and the underwriting discounts and commissions
are identical for both the International Offering and the U.S. Offering
(collectively, the "Offerings").
Prior to the Offerings, there has been no public market for the Common Stock.
It is currently anticipated that the initial public offering price will be
between $15.00 and $17.00 per share. See "Underwriting" for a discussion of the
factors considered in determining the initial public offering price.
The Common Stock has been approved for trading on the Nasdaq National Market
under the symbol "TCGX," subject to official notice of issuance.
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN RISKS
ASSOCIATED WITH AN INVESTMENT IN THE SHARES.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS SELLING
PUBLIC COMMISSIONS(1) TO COMPANY(2) SHAREHOLDERS(2)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share....... $ $ $ $
- ------------------------------------------------------------------------------
Total(3)........ $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) See "Underwriting" for indemnification arrangements with the Managers and
U.S. Underwriters.
(2) Before deducting expenses payable by the Company, estimated at $1,012,000.
(3) The Company has granted the Managers and the U.S. Underwriters 30-day
options to purchase in the aggregate up to 1,305,000 additional shares of
Common Stock solely to cover over-allotments, if any. If the options are
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, and Proceeds to Company will be $ , $ , and $ , respectively.
See "Underwriting."
-----------
The International Shares are offered by the several Managers, subject to
prior sale, when, as and if delivered to and accepted by them and subject to
certain conditions, including the approval of certain legal matters by counsel.
The Managers reserve the right to withdraw, cancel or modify the International
Offering and to reject orders in whole or in part. It is expected that the
delivery of the International Shares will be made against payment therefor on
or about , 1996, at the offices of Bear, Stearns & Co. Inc., 245 Park
Avenue, New York, New York 10167.
-----------
BEAR, STEARNS INTERNATIONAL LIMITED SALOMON BROTHERS INTERNATIONAL LIMITED
, 1996
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMA-
TION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN CONNEC-
TION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH OTHER INFOR-
MATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE COMPANY, ANY SELLING SHAREHOLDER, ANY UNDERWRITER OR ANY OTHER PERSON.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES, OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, TO ANYONE
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR
IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO, OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UN-
DER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CON-
TAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Dilution................................................................. 15
Capitalization........................................................... 16
Selected Consolidated Historical and Pro Forma Financial Data............ 17
Pro Forma Consolidated Financial Statements.............................. 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 33
Management............................................................... 46
Certain Transactions..................................................... 55
Principal and Selling Shareholders....................................... 57
Description of Capital Stock............................................. 58
Shares Eligible for Future Sale.......................................... 63
Certain United States Federal Tax Considerations for Non-U.S. Holders of
Common Stock............................................................ 65
Underwriting............................................................. 68
Notice to Canadian Residents............................................. 70
Legal Matters............................................................ 73
Experts.................................................................. 73
Available Information.................................................... 73
Index to Consolidated Financial Statements............................... F-1
</TABLE>
----------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIRE-
MENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
8,700,000 SHARES
[LOGO OF TELCO COMMUNICATIONS GROUP APPEARS HERE]
COMMON STOCK
---------------
PROSPECTUS
---------------
BEAR, STEARNS INTERNATIONAL LIMITED
SALOMON BROTHERS INTERNATIONAL LIMITED
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The table below sets forth the expenses to be incurred by the Company in
connection with the issuance and distribution of the shares registered for
offer and sale hereby, other than underwriting discounts and commissions. All
amounts shown represent estimates except the Securities Act registration fee
and the NASD filing fee.
<TABLE>
<S> <C>
Registration fee under the Securities Act of 1933................ $ 62,358
NASD filing fee.................................................. 18,584
Nasdaq National Market fee....................................... 7,775
Printing expenses................................................ 350,000
Registrar and Transfer Agent's fees and expenses................. 3,000
Accountants' fees and expenses................................... 300,000
Legal fees and expenses (not including Blue Sky)................. 550,000
Blue Sky fees and expenses....................................... 20,000
Miscellaneous.................................................... 9,283
----------
Total.......................................................... $1,321,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article 10 of the Virginia Stock Corporation Act allows, in general, for
indemnification, in certain circumstances, by a corporation of any person
threatened with or made a party to any action, suit, or proceeding by reason
of the fact that he or she is, or was, a director, officer, employee, or agent
of such corporation. Indemnification is also authorized with respect to a
criminal action or proceeding where the person had no reasonable cause to
believe that his conduct was unlawful. Article 9 of the Virginia Stock
Corporation Act provides limitations on damages payable by officers and
directors, except in cases of willful misconduct or knowing violation of
criminal law or any federal or state securities law.
The Company's Articles of Incorporation provide for mandatory
indemnification of its directors and officers against liability incurred by
them in proceedings instituted or threatened against them by third parties, or
by or on behalf of the Registrant itself, relating to the manner in which they
performed their duties unless they have been guilty of willful misconduct or a
knowing violation of the criminal law.
The Company has directors' and officers' insurance with National Union Fire
Insurance Company of Pittsburgh which provides for indemnification, subject to
certain conditions, of certain directors and officers of the Company.
The Company has entered into indemnification agreements (collectively, the
"Indemnification Agreements") with certain executive officers of the Company.
Pursuant to the terms of the Indemnification Agreements, the executive
officers of the Company will be indemnified by the Company to the full extent
permitted by law in the event such officer is made or threatened to be made a
party to a claim arising out of such person acting in his capacity as an
officer of the Company. The Company has further agreed that, upon a change of
control, as defined in the Indemnification Agreements, the rights of such
officers to indemnification payments and expense advances will be determined
in accordance with certain provisions of the Virginia Stock Corporation Act
and has also agreed that, upon a potential change of control, as defined in
the Indemnification Agreements, it will create a trust in an amount sufficient
to satisfy all indemnity expenses reasonably anticipated at the time a written
request to create such a trust is submitted by an officer.
In the U.S. Underwriting Agreement and International Underwriting Agreement,
proposed forms of which have been filed as Exhibits 1.1 and 1.2 hereto,
respectively, the U.S. Underwriters and Managers will agree to
II-1
<PAGE>
indemnify, under certain conditions, the Registrant's officers, directors and
controlling persons against certain liabilities, including liabilities under
the Securities Act of 1933.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following reflects a 10-for-1 stock split declared by the Company on
July 1, 1994 and a 425-for-1 stock split to be effective immediately prior to
the Offerings.
In connection with the organization of the Company, 4,250 shares of the
Company's Common Stock was issued to Henry G. Luken, III, 4,845 shares were
issued to Donald A. Burns, and 3,655 shares were issued to Walter C. Anderson
on August 15, 1993.
On November 9, 1993, an additional 6,718,187, 7,666,405 and 5,790,157 shares
of the Company's Common Stock were issued to Mr. Luken, Mr. Burns and Mr.
Anderson, respectively.
On July 3, 1994 options for 623,687 shares of Common Stock were granted to
Mr. Rachlin, at an exercise price of $0.31 per share.
On July 20, 1994, the Company reacquired 5,794,025 shares of its Common
Stock from Mr. Anderson for $25,000. On July 25, 1994, the Company issued
6,470,412 shares of its Common Stock to Iceberg Transport, S.A., a Panamanian
corporation, in a private placement for $50,000.
On November 30, 1994 options for 797,300 shares were issued to Ms. Marine-
Street at an exercise price of $1.76 per share.
On December 30, 1994 options for 212,500 shares were issued to Mr. Stodter
at an exercise price of $1.85 per share.
On June 27, 1994 a non-dilutable warrant to purchase 498,950 shares at a
nominal exercise price was issued to Signet Media Capital Group. As a result
of the application of the warrant's anti-dilution feature, the number of
shares for which the warrant is exercisable has been increased to 682,082
shares in connection with the Offerings.
On January 15, 1995, two options, each for 1.11 shares of LDWC common stock,
were issued to Mr. Jarman, at an exercise price of $33,955.18 per share.
On July 30, 1995, an option for .5 share of LDWC common stock was issued to
Ms. Anderson at an exercise price of $128,294.32 per share.
On July 30, 1995, two options, each for .5 share of LDWC common stock, were
issued to Mr. Sznajder at an exercise price of $128,294.32 per share.
On October 1, 1995, two options were issued to Mr. Rachlin for 1.5 and .5
shares of LDWC common stock at an exercise price of $181,060.77 per share.
On September 1, 1995 options for 212,500 shares were issued to Ms. Anastasi
at an exercise price of $3.23 per share.
On March 19, 1996, options to acquire 425,000 shares were issued to Mr.
Merrick at an exercise price of $7.53 per share.
On April 1, 1996, Bonita Anderson, James Sznajder, Bryan Rachlin and Dennis
Jarman exchanged their options in LDWC for options to acquire 25,511, 51,021,
102,043, and 113,267 shares of Telco Common Stock, respectively, under the
Company's Stock Option Plan.
II-2
<PAGE>
On April 1, 1996, the Company issued 5,102,125 shares of Common Stock in
exchange for the remaining minority interest in LDWC.
On April 4, 1996, options to acquire 1,062,500 shares were issued to Mr.
Canton at an exercise price of $7.53 per share.
On June 1, 1996, the Company agreed to issue 593,334 shares of the Company's
Common Stock to the shareholders of Tel Labs in exchange for all of their
shares in Tel Labs.
On June 21, 1996, Mr. Rachlin exercised options to purchase 649,198 shares
of Common Stock at a weighted average exercise price of $0.44 per share.
Each issuance of securities described above was made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act as
a transaction by an issuer not involving any public offering. The recipients
of securities in each such transaction represented their intention to acquire
the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed
to the share certificates issued in such transactions. All recipients had
adequate access, through their relationships with the Company, to information
about the Company.
ITEM 16(A). EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
------- ----------- -------------
<C> <S> <C>
**1.1 Form of U.S. Underwriting Agreement................................................
1.2 Form of International Underwriting Agreement.......................................
2.1 Share Exchange Agreement between Telco Communications Group, Inc., Henry G.
Luken, III, Bryan Rachlin, Michael Cheng and Kevin Yang dated as of June 1,
1996 (Tel Labs, Inc. Share Exchange Agreement) ..................................
2.2 Share Exchange Agreement between Telco Communications Group, Inc., Thomas
Cirrito, Nicole Cirrito and Michael Cirrito dated as of April 1, 1996 (Long
Distance Wholesale Club Share Exchange Agreement)................................
3.1 Restated Articles of Incorporation of Telco Communications Group, Inc..............
3.2 Amended and Restated Bylaws of Telco Communications Group, Inc.....................
4.1 Form of Common Stock Certificate of Telco Communications Group, Inc................
5.1 Opinion of Swidler & Berlin, Chartered.............................................
**+10.1 Agreement for the Provision of Billing and Collection Services between Telco
Development Group of Delaware, Inc. and the Ameritech Companies dated July 1,
1995.............................................................................
**10.2 Agreement for the Provision of Billing and Collection Services between the Bell
Atlantic Operating Telephone Companies and Telco Development Group of
Delaware, Inc. dated June 10, 1994...............................................
**+10.3 Clearinghouse Billing and Collection Services Operating Contract between Telco
Development Group of Delaware, Inc. and Bell South Communications dated
January 3, 1994..................................................................
**10.4 Agreement for Billing Services by Tel Labs, Inc. and Esprit Telecom dated
December 29, 1995................................................................
**10.5 Agreement for Billing Services by Tel Labs, Inc. and Long Distance Wholesale
Club, Inc. dated July 19, 1995...................................................
**10.6 One Plus Billing & Information Management Services Agreement between Long
Distance Wholesale Club, Inc., and Telco Development Group of Delaware, Inc.
dated January 23, 1996...........................................................
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
------- ----------- -------------
<C> <S> <C>
**+10.7 Agreement between Nevada Bell and Telco Development Group of Delaware, Inc.
for Billing and Collection Service dated September 3, 1995.......................
**10.8 Agreement for Interstate Billing and Collection Services Agreement between New
England Telephone and Telegraph Company and Telco Development Group of
Delaware, Inc. dated July 31, 1995...............................................
**10.9 Agreement for Interstate Billing and Collection Services between New York
Telephone Company and Telco Development Group of Delaware, Inc. dated
July 31, 1995....................................................................
**+10.10 Agreement for the Provision of Billing and Collection Services between Pacific Bell
and Telco Development Group of Delaware, Inc. dated July 12, 1996................
**+10.11 Casual Billing Services Agreement between the Southern New England Telephone
Company and Telco Development Group of Delaware, Inc. dated February 9, 1996.....
**10.12 Agreement for the Provision of Billing and Collection Services between
Southwestern Bell Telephone Company and Telco Development Group of
Delaware, Inc. dated December 16, 1994; and Amendment to the Agreement for
the Provision of Billing and Collection Services between Southwestern Bell
Telephone Company and Telco Development Group of Delaware, Inc. dated
December 19, 1994.................................................................
**10.13 One Plus Billing and Information Management Services Agreement between Telco
Development Group of Delaware, Inc. and Telco Communications Group, Inc.
dated December 30, 1995...........................................................
**10.14 Agreement for Billing Services by Tel Labs, Inc. and Telco Communications
Group, Inc. (undated).............................................................
**+10.15 Agreement for the Provision of Billing and Collection Services for Clearing Agents
between U S WEST, Inc. and Telco Development Group of Delaware, Inc. dated
April 1, 1995; Amendment dated June 6, 1996.......................................
**+10.16 Standard Agreement for the Provision of Billing and Collection Services between
United Telephone Company of Florida and Telco Development Group of
Delaware, Inc. dated October 19, 1994.............................................
**10.17 Service Agreement between IXC Carrier, Inc. and Telco Communication Group,
Inc. dated December 15, 1995......................................................
**10.18 Telco Communications Group, Inc. Wholesale Customer Agreement for Special
International Pricing with Esprit Telecom dated February 21, 1996.................
10.19 Telco Communications Group, Inc. Amended and Restated 1994 Stock Option Plan........
**10.20 Lease Agreement between CPL Properties and Telco Communications Group, Inc.
effective March 1, 1995 (Davenport, Iowa Switch Site).............................
**10.21 Lease Agreement between Thomas Kurschner and Telco Communications Group,
Inc. effective November 2, 1995 (Las Vegas, Nevada Switch Site)...................
**10.22 Deed of Lease Agreement between Bricks in the Sticks, Ltd. and Telco
Communications Group, Inc. effective March 1, 1995 (Chattanooga, Tennessee
Switch Site)......................................................................
**10.23 Lease Agreement between The University of Texas System and Telco
Communications Group, Inc. effective August 22, 1994 (Austin, Texas Switch
Site).............................................................................
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
------- ----------- -------------
<C> <S> <C>
**10.24 Agreement of Lease between 13th and L Associates and
Telco Communications Group, Inc. effective August 25,
1994 (Washington, DC Switch Site)....................
**10.25 Deed of Lease agreement between Bricks in the Sticks,
Ltd. and Tel Labs, Inc. effective July 1, 1994
(Corporate Office)...................................
**10.26 Deed of Lease Agreement between Bricks in the Sticks,
Ltd. and Telco Communications Group, Inc. effective
March 1, 1995 (Corporate Office).....................
**10.27 Master Lease Agreement between Telco Communications
Group, Inc. and Dana Commercial Credit Corporation
dated September 14, 1995; Addendum to the Master
Lease Agreement dated September 15, 1995; and Lease
Schedules 001 and 002 ...............................
**10.28 Equipment Lease between DGI Technologies, Inc. and
Telco Communications Group, dated October 1, 1994....
**10.29 Equipment Leases between DSC Finance Corporation and
Telco Communications Group, Inc. (Master Lease dated
January 1, 1994 and Schedules A-P1)..................
**10.30 Credit Agreement between Telco Communications Group,
Incorporated, Signet Bank and the Banks listed
therein, dated as of January 24, 1996................
**10.31 Employment Agreement between Telco Communications
Group, Inc. and
Donald A. Burns dated as of July 10, 1996............
**10.32 Employment Agreement between Telco Communications
Group, Inc. and
Thomas J. Cirrito dated as of April 1, 1996..........
**10.33 Employment and Stock Option Agreement between Telco
Communications Group, Inc. and Stephen G. Canton
dated as of April 4, 1996............................
**10.34 Employment Agreement between Telco Communications
Group, Inc. and Bryan K. Rachlin dated as of July 10,
1996.................................................
**10.35 Employment Agreement between Telco Communications
Group, Inc. and Nicholas A. Merrick dated as of March
19, 1996.............................................
**10.36 Employment Agreement between Telco Communications
Group, Inc. and Janet D. Anastasi dated as of May 2,
1996.................................................
**10.37 Employment Agreement between Telco Communications
Group, Inc. and Natalie Marine-Street dated as of May
3, 1996..............................................
**10.38 Employment Agreement between Telco Communications
Group, Inc. and Mark J. Stodter dated as of May 2,
1996.................................................
10.39 Employment Agreement between Telco Communications
Group, Inc. and Henry G. Luken, III dated as of July
10, 1996.............................................
10.40 Form of Indemnification Agreement between Telco
Communications Group, Inc. and the Indemnitee........
10.41 Form of Registration Rights Agreement between Telco
Communications Group, Inc. and holders of certain
shares of common stock of the Company and certain
options to purchase common stock.....................
+10.42 Billing and Collection Services Agreement between GTE
Telephone Operations and Telco Development Group of
Delaware, Inc. dated March 15, 1995.
11.1 Statement Regarding Computation of Per Share
Earnings.............................................
21.1 Subsidiaries of Telco Communications Group, Inc. .....
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
------- ----------- -------------
<C> <S> <C>
23.1 Consent of Deloitte & Touche LLP......................
23.2 Consent of Chase and Associates CPAs, PC..............
23.3 Consent of Swidler & Berlin, Chartered (included in
Exhibit 5.1 to this Registration Statement)..........
**24.1 Powers of Attorney....................................
**27.1 Financial Data Schedule...............................
</TABLE>
- --------
**Previously filed.
+ Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment and filed separately with the Commission.
ITEM 16(B). FINANCIAL STATEMENT SCHEDULES.
None.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CHANTILLY, COMMONWEALTH
OF VIRGINIA, ON AUGUST 7, 1996.
Telco Communications Group, Inc.
/s/ Bryan K. Rachlin
By: _________________________________
BRYAN K. RACHLIN
Chief Operating Officer, Secretary
and General Counsel
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED
ON AUGUST 7, 1996.
SIGNATURE TITLE
* Chairman of the Board and Director
- -------------------------------------
HENRY G. LUKEN, III
* Vice Chairman of the Board,
- ------------------------------------- President, Chief Executive Officer
DONALD A. BURNS and Director (Principal Executive
Officer)
* President of Consumer Division and
- ------------------------------------- Director
THOMAS J. CIRRITO
* Director
- -------------------------------------
ROBERT W. ROSS
* Chief Financial Officer and
- ------------------------------------- Treasurer (Principal Financial
NICHOLAS A. MERRICK Officer)
* Vice President and Corporate
- ------------------------------------- Controller (Principal Accounting
JANET D. ANASTASI Officer)
* Bryan K. Rachlin, by signing his name hereto, signs this document on behalf
of each of the persons so indicated above pursuant to powers of attorney
duly executed by such persons and filed with the Securities and Exchange
Commission.
/s/ Bryan K. Rachlin Attorney-in-Fact
- -------------------------------------
BRYAN K. RACHLIN
II-7
<PAGE>
Exhibit 1.2
1,740,000 Shares of Common Stock
(no par value per share)
TELCO COMMUNICATIONS GROUP, INC.
INTERNATIONAL UNDERWRITING AGREEMENT
------------------------------------
August __, 1996
Bear, Stearns International Limited
Salomon Brothers International Limited
as Representatives of the
several Managers named
in Schedule I hereto
----------
c/o Bear, Stearns International Limited
One Canada Square
London, E14 5AD, England
Ladies and Gentlemen:
Telco Communications Group, Inc., a Virginia corporation (the
"Company"), and each of the selling stockholders listed on Schedule II hereto
-----------
(the "Selling Stockholders") hereby confirm their respective agreements with you
as follows:
1. Managers. The term "Managers", as used herein, refers
collectively to you and the other managers named in Schedule I hereto, for whom
----------
you are acting as representatives. Except as may be expressly set forth below,
any reference to you in this Agreement shall be solely in your capacity as
representatives of the Managers, and the Company and the Selling Stockholders
shall be entitled to act and rely upon any statement, request, notice, consent,
waiver or agreement purportedly on behalf of any Manager made or given by Bear,
Stearns International Limited ("Bear, Stearns").
2. Description of Stock.
(a) The Company and the Selling Stockholders severally propose to sell
to the Managers an aggregate of 1,740,000 shares (the "Firm International
Shares") of Common Stock, no par value per share (the "Common Stock"), of the
Company, upon the terms and subject to the conditions set forth herein. Of the
Firm International Shares, 1,220,000 are to be issued and sold by the Company
and 520,000 in the aggregate are to be sold severally by the Selling
Stockholders. The Company also proposes to grant to
<PAGE>
the Managers an option to purchase from the Company, for the sole purpose of
covering over-allotments in connection with the sale of the Firm International
Shares, an aggregate of up to 261,000 additional shares (the "Additional
International Shares") of Common Stock upon the terms and subject to the
conditions set forth herein and for the purposes set forth in Section 5(b)
hereof. The Firm International Shares and the Additional International Shares
are hereinafter referred to collectively as the "International Shares."
(b) It is understood and agreed to by all the parties that the Company
and each of the Selling Stockholders are concurrently entering into an agreement
(the "U.S. Underwriting Agreement") providing for the sale by the Company and
the Selling Stockholders of an aggregate of 6,960,000 shares (the "Firm U.S.
Shares") of Common Stock through arrangements with certain underwriters in the
United States and Canada (the "U.S. Underwriters"), for which Bear, Stearns Co.
Inc. and Salomon Brothers Inc are acting as representatives. Of the U.S.
Shares, 4,880,000 are to be issued and sold by the Company and 2,080,000 in the
aggregate are to be sold severally by the Selling Stockholders. The Company
also proposes to grant the U.S. Underwriters an option to purchase from the
Company, for the sole purpose of covering over-allotments in connection with the
sale of the Firm U.S. Shares, an aggregate of 1,044,000 additional shares (the
"Additional U.S. Shares") of Common Stock upon the terms and subject to the
conditions set forth in the U.S. Underwriting Agreement. The Firm U.S. Shares
and the Additional U.S. Shares are hereinafter referred to collectively as the
"U.S. Shares." The International Shares and the U.S. Shares are collectively
referred to herein as the "Shares" and this Agreement and the U.S. Underwriting
Agreement are collectively referred to herein as the "Underwriting Agreements."
Two forms of prospectus are to be used in connection with the offering and sale
of the Shares contemplated by the foregoing, one relating to the International
Shares and the other relating to the U.S. Shares. The latter form of prospectus
will be identical to the former except for certain substitute pages as included
in the registration statement and amendments thereto as mentioned below. Except
as the context otherwise may require, references hereinafter to any prospectus,
whether in preliminary or final form and whether as amended or supplemented,
shall include the International and the U.S. versions thereof.
(c) It is also understood and agreed to by all the parties that the
Managers have entered into an agreement with the U.S. Underwriters (the
"Agreement Between U.S. Underwriters and Managers") contemplating the
coordination of certain transactions between the Managers and the U.S.
Underwriters and that, pursuant
2
<PAGE>
thereto and subject to the conditions set forth therein, the U.S. Underwriters
may (i) purchase from the Managers a portion of the International Shares to be
sold to the Managers pursuant to this Agreement or (ii) sell to the Managers a
portion of the U.S. Shares to be sold to the U.S. Underwriters pursuant to the
U.S. Underwriting Agreement. The Company and the Selling Stockholders also
understand that any such purchases and sales between the Managers and the U.S.
Underwriters shall be governed by the Agreement Between U.S. Underwriters and
Managers and shall not be governed by the terms of this Agreement.
(d) The Shares to be sold by Signet Media Capital Group, a division of
Signet Bank, a Virginia banking corporation, ("Signet"), hereunder will be
purchased by Signet immediately prior to sale through the exercise of
outstanding warrants (the "Signet Warrant") to purchase shares of Common Stock,
which Signet Warrant was issued to Signet in connection with the credit facility
provided to the Company by Signet Bank. It is understood by all parties that
the Company will receive an aggregate of $58.70 upon the exercise of the Signet
Warrant.
3. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, each Manager that:
(a) The Company meets the requirements for the use of a Registration
Statement on Form S-1 under the Securities Act of 1933, as amended (the
"Act"), and has prepared and filed with the Securities and Exchange
Commission (the "Commission"), pursuant to the Act and the rules and
regulations promulgated by the Commission thereunder (the "Regulations"), a
registration statement on Form S-1 (File No. 333-05857) relating to the
Shares and may have filed one or more amendments thereto, including in each
case preliminary prospectuses relating to the offerings of the Shares. The
Company next proposes to file with the Commission a further amendment to
the registration statement, including therein a final prospectus, necessary
to permit the registration statement to become effective or, if no
amendment is required for that purpose, then promptly following the
effectiveness of the registration statement, the Company proposes to file
with the Commission, in accordance with Rules 430A and 424(b)(1) or Rule
424(b)(4) of the Regulations, final prospectuses with respect to the
offerings of the Shares, the final prospectus so filed in either case to
include all Rule 430A Information (as hereinafter defined) and to conform,
in content and form, to the last printer's proof thereof furnished to and
approved by you immediately prior to such filing. As used in this
3
<PAGE>
Agreement, (i) "Effective Date" means the date that the registration statement
hereinabove referred to, or the most recent post-effective amendment thereto, if
any, is declared effective by the Commission, (ii) "Registration Statement"
means such registration statement as last amended prior to the time the same was
declared effective by the Commission, including all exhibits and schedules
thereto and all Rule 430A Information deemed to be included therein at the
Effective Date pursuant to Rule 430A of the Regulations, (iii) "Rule 430A
Information" means information with respect to the Shares and the public
offerings thereof permitted, pursuant to the provisions of paragraph (a) of Rule
430A of the Regulations, to be omitted from the form of prospectus included in
the Registration Statement at the time it is declared effective by the
Commission, (iv) "International Prospectus" means the form of final prospectus
relating to the International Shares first filed with the Commission pursuant to
Rule 424(b) of the Regulations or, if no filing pursuant to Rule 424(b) is
required, the form of final prospectus included in the Registration Statement at
the Effective Date, (v) "U.S. Prospectus" means the form of final prospectus
relating to the International Shares first filed with the Commission pursuant to
Rule 424(b) of the Regulations or, if no filing pursuant to Rule 424(b) is
required, the form of final prospectus included in the Registration Statement at
the Effective Date (the International Prospectus and the U.S. Prospectus are
referred to collectively as the "Prospectuses") and (vi) "Preliminary
Prospectus" means any preliminary prospectus (as described in Rule 430 of the
Regulations) with respect to the Shares that omits Rule 430A Information.
(b) The Registration Statement conforms and on the Effective Date
will conform, and the Prospectuses on the date thereof and on the date
first filed with the Commission pursuant to Rule 424(b) of the Regulations
(if required) will conform, in all material respects with the applicable
requirements of the Act and the Regulations. On the Effective Date, the
date the Prospectuses are first filed with the Commission pursuant to Rule
424(b) of the Regulations (if required), at all times subsequent thereto
and including the Closing Date (as defined in Section 5(a)(ii) hereof) and,
if later, the Additional Closing Date (as defined in Section 5(b)(ii)
hereof), when any post-effective amendment to the Registration Statement
becomes effective or any supplement to the Prospectuses is filed with the
Commission, and during such longer period as the Prospectuses may require
to be delivered in connection with sales of Shares by the Managers, the
U.S. Underwriters or a dealer, the Registration Statement and the
Prospectuses (as amended or supplemented if the Company shall have filed
with
4
<PAGE>
the Commission an amendment or supplement thereto) did not and will not
contain an untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make
the statements made therein (in the case of the Prospectuses, in light of
the circumstances under which they were made) not misleading. No order
preventing or suspending the use of any Preliminary Prospectus has been
issued by the Commission, and when any Preliminary Prospectus was first
filed with the Commission (whether filed as part of the Registration
Statement or an amendment thereof or pursuant to Rule 424(a) of the
Regulations) and when any amendment thereof or supplement thereto was first
filed with the Commission, such Preliminary Prospectus and any amendments
thereof and supplements thereto conformed in all material respects with the
applicable requirements of the Act and the Regulations thereunder and did
not contain an untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances under which they
were made, not misleading. No representation and warranty, however, is
made in this subsection 3(b) by the Company with respect to written
information contained in or omitted from the Registration Statement, the
Prospectuses, any Preliminary Prospectus, or any amendment or supplement in
reliance upon and in conformity with written information with respect to
the Managers and the U.S. Underwriters and the plan of distribution of the
Shares furnished to the Company on your behalf by Bear, Stearns expressly
for use in connection with the preparation thereof.
(c) Each contract, agreement, instrument, lease, license or other item
required to be described in the Registration Statement or the Prospectuses
or filed as an exhibit to the Registration Statement has been so described
or filed, as the case may be.
(d) Deloitte & Touche LLP, whose separate reports appear in the
Prospectuses, are independent public accountants with respect to the
Company, as required by and within the meaning of the Act and the
Regulations. The financial statements (including the related notes) of the
Company (the "Company Financials") included in the Registration Statement
or any Preliminary Prospectus, or to be included in the Prospectuses fairly
present the financial position, results of operations and cash flows of the
Company and the other information purported to be shown therein at the
respective dates and for the respective periods to which they apply. The
Company Financials have
5
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been prepared in accordance with generally accepted accounting principles
as in effect in the United States ("US GAAP") consistently applied
throughout the periods involved, except as disclosed therein, and are, in
all material respects, in accordance with the books and records of the
Company and its subsidiaries. The consolidated "pro forma" and "pro forma
as adjusted" financial information included in the Registration Statement
or any Preliminary Prospectus, or to be included in the Prospectuses,
fairly present the information purported to be shown therein at the
respective dates thereof and for the respective periods covered thereby and
all adjustments have been properly applied. No other financial statements
are required by Form S-1 or otherwise to be included in the Registration
Statement or the Prospectuses other than those included therein.
(e) Subsequent to the respective dates as of which information is
given in the Registration Statement, except as set forth in the
Registration Statement or as may be set forth in the Prospectuses, there
has not been any material adverse change in the business, properties,
operations, condition (financial or other) or results of operations of the
Company and the subsidiaries (as defined below) taken as a whole, whether
or not arising from transactions in the ordinary course of business, and
since the date of the latest balance sheet of the Company included in the
Registration Statement, and except as described in the Registration
Statement or as may be described in the Prospectuses, (i) neither the
Company nor any subsidiary (A) has incurred or undertaken any liabilities
or obligations, direct or contingent, that are, individually or in the
aggregate, material to the Company and the subsidiaries taken as a whole,
or (B) entered into any transaction not in the ordinary course of business
that is material to the Company and the subsidiaries taken as a whole; and
(ii) the Company has not declared or paid any dividend on or made any
distribution of or with respect to any shares of its capital stock or
redeemed, purchased or otherwise acquired or agreed to redeem, purchase or
otherwise acquire any shares of its or its subsidiaries' capital stock. As
used in this Agreement, the term "subsidiary" means any corporation,
partnership, joint venture, association, company, business trust or other
entity in which the Company directly or indirectly (i) beneficially owns or
controls a majority of the outstanding voting securities having by the
terms thereof ordinary voting power to elect a majority of the board of
directors (or other body fulfilling a substantially similar function) of
such entity (irrespective of whether or not at the time any class or
classes of such voting
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securities shall have or might have voting power by reason of the happening
of any contingency) or (ii) has the authority or ability to control the
policies of such entity (including, but without limitation thereto, any
partnership of which the Company or a subsidiary is a general partner or
owns or has the right to obtain a majority of limited partnership interests
and any joint venture in which the Company or a subsidiary has liability
similar to the liability of a general partner of a partnership or owns or
has the right to obtain a majority of the joint venture interests).
(f) The Company has all requisite corporate power and authority to
execute, deliver and perform its obligations under each of the Underwriting
Agreements and to issue, sell and deliver the Shares in accordance with the
terms and conditions thereof. Each of the Underwriting Agreements has been
duly and validly authorized, executed and delivered by the Company and is a
legal and binding obligation of the Company, enforceable against the
Company in accordance with its terms, subject to applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and other
similar laws affecting rights and remedies of creditors and other obligees
generally, and subject, as to enforceability, to general principles of
equity, including principles of commercial reasonableness, good faith and
fair dealing (regardless of whether enforcement is sought in a proceeding
at law or in equity), and except insofar as rights to indemnification and
contribution contained herein may be limited by federal or state securities
laws or related public policy.
(g) The Company's execution and delivery of, and its performance of
its obligations under, each of the Underwriting Agreements and the
consummation of the transactions contemplated thereby, and the issuance of
shares of Common Stock to Signet upon the exercise of the Signet Warrant,
will not (i) conflict with or result in a breach of any of the terms and
provisions of, or constitute a default under (or an event that with notice
or lapse of time, or both, would constitute a default under) or require
approval or consent under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company or
any subsidiary pursuant to the terms of any agreement, contract, indenture,
mortgage, lease, license, arrangement or understanding to which the Company
or a subsidiary is a party, or to which any of its properties is subject,
that is material to the Company and the subsidiaries taken as a whole
(hereafter,
7
<PAGE>
collectively, "Material Contracts"), or any governmental franchise, license
or permit heretofore issued to the Company or any subsidiary that is
material to the Company and the subsidiaries taken as a whole (hereafter,
collectively, "Material Permits"), (ii) violate or conflict with any
provision of the certificate of incorporation, by-laws or similar governing
instruments of the Company or any subsidiary or (iii) violate or conflict
with any judgment, decree, order, statute, rule or regulation of any court
or any public, governmental or regulatory agency or body having
jurisdiction over the Company or any subsidiary or any of its respective
properties or assets, except for those violations or conflicts, that,
individually or in the aggregate, would not have a material adverse effect
on the Company and the subsidiaries taken as a whole (hereafter, a
"Material Adverse Effect").
(h) No consent, approval, authorization, order, registration, filing,
qualification, license or permit of or with any court or any public,
governmental or regulatory agency or body having jurisdiction over the
Company or any subsidiary or any of its respective properties or assets is
required for (i) the Company's execution and delivery of, and its
performance of its obligations under, each of the Underwriting Agreements,
and the consummation of the transactions contemplated thereby, and (ii) the
issuance of shares of Common Stock to Signet upon the exercise of the
Signet Warrant, except the registration of the Shares under the Act and the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
approval of the Shares for quotation on the Nasdaq National Market
("Nasdaq") and such filings and registrations as may be required under
state securities or "Blue Sky" laws and the securities laws of foreign
jurisdictions in connection with the purchase and distribution of the
Shares by the Managers and the U.S. Underwriters.
(i) All of the currently outstanding shares of capital stock of the
Company, and all of the outstanding shares of capital stock (or similar
interests) of each of the subsidiaries have been duly and validly
authorized and issued, are fully paid and nonassessable and were not issued
in violation of or subject to any preemptive rights. The shares of Common
Stock of the Company to be outstanding on the Closing Date (as defined in
Section 5(a)(ii) hereof) have been duly authorized and, when issued will be
validly issued, fully paid and nonassessable, and will not have been issued
in violation of or be subject to any preemptive rights. The Company's
obligations under the Signet Warrant
8
<PAGE>
have been duly and validly authorized and are legal and binding obligations
of the Company entitling the holder thereof to acquire shares of Common
Stock upon the terms and in the manner set forth therein. The Shares of
Common Stock issuable upon exercise of the Signet Warrant (the "Underlying
Shares") have been duly authorized and validly reserved for issuance, and
when issued and delivered to Signet upon receipt of the exercise price for
the Signet Warrant, the Underlying Shares will be validly issued, fully
paid and nonassessable, and will not have been issued in violation of or be
subject to any preemptive rights. The Shares have been duly authorized
and, when issued, delivered and sold in accordance with the terms of the
Underwriting Agreements, will be validly issued, fully paid and
nonassessable, and will not have been issued in violation of or be subject
to any preemptive rights, and the Managers and the U.S. Underwriters will
receive valid title to those of the Shares to be purchased by them from the
Company, free and clear of all liens, security interests, pledges, charges,
encumbrances, stockholders' agreements and voting trusts (other than any
placed thereon by the Managers or the U.S. Underwriters). The Company has,
as of the date hereof, and will have, as of the Closing Date and the
Additional Closing Date, if any, an authorized and outstanding
capitalization as set forth in the Registration Statement and as shall be
set forth in the Prospectuses, both on an historical basis and as adjusted
to give effect to the offering of the Shares. The Company's capital stock
conforms to the description thereof set forth in the Registration Statement
and as shall be set forth in the Prospectuses. The Company owns directly
or indirectly such percentage of the outstanding capital stock (or similar
interests) of each of its subsidiaries as is set forth opposite the name of
such subsidiary in Schedule III hereto, free and clear of all claims,
------------
liens, security interests, pledges, charges, encumbrances, stockholders'
agreements and voting trusts, except as otherwise described in said
Schedule III.
------------
(j) There is no commitment, plan or arrangement to issue, and no
outstanding option, warrant or other right calling for the issuance of, any
shares of capital stock (or similar interests) of the Company or of any
subsidiary or any security or other instrument that by its terms is
convertible into, exercisable for or exchangeable for or evidencing the
right to purchase capital stock (or similar interests) of the Company or
such subsidiary, except as described in the Registration Statement and as
shall be described in the Prospectuses.
9
<PAGE>
(k) The Company has no subsidiaries other than those listed in
Schedule III hereto. Each of the Company and the subsidiaries has been duly
------------
organized and is validly existing as a corporation in good standing under
the laws of its jurisdictions of incorporation. Each of the Company and the
subsidiaries duly listed on Schedule IV hereto (the "Material
-----------
Subsidiaries") is qualified and in good standing as a foreign corporation
in each jurisdiction in which the character or location of its properties
(owned, leased or licensed) or the nature or conduct of its business makes
such qualification necessary, except for those failures to be so qualified
or in good standing that will not in the aggregate have a Material Adverse
Effect. Each of the Company and the subsidiaries has all requisite
corporate power and authority, and all necessary consents, approvals,
authorizations, orders, registrations, filings, qualifications, licenses
and permits of and from all public, regulatory or governmental agencies and
bodies, to own, lease and operate its properties and conduct its business
as now being conducted and as described in the Registration Statement and
as shall be described in the Prospectuses (except for those the absence of
which, individually or in the aggregate, would not have a Material Adverse
Effect), and no such consent, approval, authorization, order, registration,
qualification, license or permit contains a materially burdensome
restriction that is not adequately disclosed in the Registration Statement
and the Prospectuses. Neither the Company nor any of the subsidiaries has
received any notice of proceedings relating to revocation or modification
of any such consents, approvals, authorizations, orders, registrations,
filings, qualifications, licenses or permits.
(l) Neither the Company nor any subsidiary, nor to the best knowledge
of the Company, any other party, is in any material respect in violation or
breach of, or in default under (nor has an event occurred that with notice,
lapse of time or both, would constitute a default under), any Material
Contract, and each Material Contract is in full force and effect, and is
the legal, valid, and binding obligation of the Company or such subsidiary,
as the case may be, and (subject to applicable bankruptcy, insolvency, and
other laws affecting the enforceability of rights of creditors and other
obligees generally and general equitable principles) is enforceable as to
the Company or such subsidiary, as the case may be, in accordance with its
terms. Neither the Company nor any subsidiary is in violation of its
articles or certificate of incorporation, by-laws or similar governing
instrument.
10
<PAGE>
(m) There is no litigation, arbitration, claim, governmental or other
proceeding pending or, to the best knowledge of the Company, threatened or
contemplated with respect to the Company or any subsidiary, or any of its
respective operations, businesses, properties or assets, except as
described in the Registration Statement and as shall be described in the
Prospectuses, that, individually or in the aggregate, might have a Material
Adverse Effect. Neither the Company nor any subsidiary is, or, to the best
knowledge of the Company, with the giving of notice or lapse of time or
both would be, in violation of or non-compliance with the requirements of
any Material Permit or the provisions of any law, rule, regulation, order,
judgment or decree, including, but without limitation thereto, all
applicable federal, state and local laws and regulations relating to (i)
zoning, land use, protection of the environment, human health and safety or
hazardous or toxic substances, wastes, pollutants or contaminants and (ii)
employee or occupational safety, discrimination in hiring, promotion or pay
of employees, employee hours and wages or employee benefits, except for
such violations or failures of compliance that, individually or in the
aggregate, would not have a Material Adverse Effect.
(n) Except as described in the Registration Statement and as shall be
described in the Prospectuses, the Company and each subsidiary have (i)
good and marketable title to all real and personal properties owned by
them, free and clear of all liens, security interests, pledges, charges,
encumbrances, and mortgages, and (ii) valid, subsisting and enforceable
leases for all real and personal properties leased by them, in each case,
subject to such exceptions as, individually or in the aggregate, do not
have and are not reasonably likely to have a Material Adverse Effect. No
real property owned, leased, licensed or used by the Company or by any
subsidiary lies in an area that is, or to the best knowledge of the Company
will be, subject to zoning, use, or building code restrictions that would
prohibit, and, to the best knowledge of the Company, no state of facts
relating to the actions or inaction of another person or entity or his, her
or its ownership, leasing, licensing, or use of any real or personal
property exists that would prevent, the continued effective ownership,
leasing, licensing, or use of such real property in the business of the
Company or such subsidiary as presently conducted or as the Prospectuses
indicate are contemplated to be conducted, subject to such exceptions as,
individually or in the aggregate, do not have and are not reasonably likely
to have a Material Adverse Effect.
11
<PAGE>
(o) The Company, directly or through one or more of the subsidiaries,
owns or possesses all patents, patent rights, licenses, inventions,
copyrights, trademarks, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information,
systems or procedures), service marks and trade names (collectively,
"Intellectual Property") necessary to conduct its business as now conducted
and proposed to be conducted as disclosed in the Registration Statement and
as shall be disclosed in the Prospectuses, except where the failure to own
or possess such Intellectual Property, individually or in the aggregate,
would not have a Material Adverse Effect. Other than as disclosed in the
Registration Statement and as shall be disclosed in the Prospectuses,
neither the Company nor any subsidiary has received any notice of
infringement of or conflict with the asserted rights of others with respect
to any Intellectual Property, which, if adversely determined, would have a
Material Adverse Effect. To the best knowledge of the Company, there is no
infringement by others of any Intellectual Property of the Company or any
subsidiary that has had or is reasonably likely to have a Materially
Adverse Effect. The Company or a predecessor has registered, and the
Company or a subsidiary owns the rights to all registrations of,
predecessors, the rights to the trademark and related logo for each of
"Dial and Save" and "Long Distance Wholesale Club" in all jurisdictions in
which such trademarks and logos are currently being or are contemplated to
be used and in which such registration is currently permitted.
(p) To the Company's best knowledge, neither the Company, any
subsidiary, nor any director, officer or employee of the Company or any
subsidiary has, directly or indirectly, used any corporate funds for
unlawful contributions, gifts, entertainment, or other unlawful expenses
relating to political activity; made any unlawful payment to foreign or
domestic government officials or employees or to foreign or domestic
political parties or campaigns from corporate funds; violated any provision
of the Foreign Corrupt Practices Act of 1977, as amended; or made any
bribe, rebate, payoff, influence payment, kickback, or other unlawful
payment.
(q) No person or entity has the right, by contract or otherwise, to
require registration under the Act of shares of capital stock or other
securities of the Company or any subsidiary solely because of the filing or
effectiveness of the Registration Statement and the consummation of the
transactions contemplated by the Underwriting Agreements,
12
<PAGE>
except for (i) Signet which has exercised its right to have the Underlying
Shares registered under the Act and (ii) such other rights as have been
legally and effectively waived.
(r) Neither the Company nor any of its officers, directors or
affiliates (as defined in the Regulations) has taken or will take, directly
or indirectly, prior to the termination of the offerings of the Shares
contemplated by the Underwriting Agreements, any action designed to
stabilize or manipulate the price of the Common Stock, or that might
reasonably be expected to cause or result in stabilization or manipulation
of the price of the Common Stock.
(s) Neither the Company nor any subsidiary is, or intends to conduct
its business in such a manner that it would become, an "investment company"
or a company "controlled" by an "investment company" as such terms are
defined in the Investment Company Act of 1940, as amended (the "Investment
Company Act").
(t) Except as may be set forth in the Prospectuses, the Company has
not incurred any liability for a fee, commission, or other compensation on
account of the employment of a broker or finder in connection with the
transactions contemplated by the Underwriting Agreements.
(u) The Company and each of the subsidiaries maintain systems of
internal accounting controls sufficient to provide reasonable assurances
that (i) transactions are executed in accordance with management's general
or specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with US GAAP and
to maintain accountability for assets; (iii) the access to the respective
assets of the Company and each subsidiary, as the case may be, is permitted
only in accordance with management's general or specific authorization; and
(iv) the recorded accountability for assets is compared with existing
assets at reasonable intervals and appropriate action is taken with respect
to any differences.
(v) Other than as disclosed in the Registration Statement and as shall
be disclosed in the Prospectuses, no labor dispute with the employees of
the Company or any subsidiary exists or, to the best knowledge of the
Company, is imminent that, individually or in the aggregate, is or is
reasonably likely to have a Material Adverse Effect.
13
<PAGE>
(w) (i) All United States Federal income tax returns of the Company
and each subsidiary required by law to be filed have been filed and all
taxes shown by such returns or otherwise assessed that are due and payable
have been paid, except assessments against which appeals have been or will
be promptly taken and (ii) the Company and the subsidiaries have filed all
other tax returns that are required to have been filed by them pursuant to
the applicable laws of all other jurisdictions, except, as to each of the
foregoing clauses (i) and (ii), insofar as the failure to file such
returns, individually or in the aggregate, would not have a Material
Adverse Effect, and the Company and the subsidiaries have paid all taxes
due pursuant to said returns or pursuant to any assessment received by the
Company or any subsidiary, except for such taxes, if any, as are being
contested in good faith and as to which adequate reserves have been
provided in accordance with US GAAP. The charges, accruals and reserves on
the consolidated books of the Company in respect of any tax liability for
any years not finally determined are adequate to meet any assessments or
re-assessments for additional tax for any years not finally determined,
except to the extent of any inadequacy that would not have a Material
Adverse Effect.
(x) The Company and each subsidiary is insured by insurers of
recognized financial responsibility against such losses and risks and in
such amounts as are prudent and customary in the businesses in which the
Company and the subsidiaries are engaged. Neither the Company nor any
subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage from similar insurers as may be necessary to
continue its business, except as are disclosed in the Registration
Statement and as shall be disclosed in the Prospectuses.
(y) Except as disclosed in the Registration Statement and as shall be
disclosed in the Prospectuses, there are no business relationships or
related party transactions of the nature required to be disclosed herein
under Item 404 of Regulation S-K of the Commission involving the Company or
any other persons referred to in such Item 404.
4. Representations and Warranties of the Selling Stockholders. Each
of the Selling Stockholders (other than Signet), with respect to itself and
severally and not jointly, represents and warrants to, and agrees with, each
Manager that:
(a) Such Selling Stockholder, if it is a corporation or partnership,
has been duly organized and is validly
14
<PAGE>
existing as a corporation or partnership, as the case may be, in good
standing under the laws of its jurisdiction of organization.
(b) Upon the issuance of shares of Common Stock to such Selling
Stockholder in connection with the Company's 425-for-1 stock split, such
Selling Stockholder will be the sole owner of the number of Shares set
forth opposite its name on Schedule II hereto, and, upon delivery of and
-----------
payment for the Shares to be sold by the Selling Stockholder to each
Manager and U.S. Underwriter in accordance with the Underwriting Agreements
and the Power of Attorney and Custody Agreement, each Manager and U.S.
Underwriter will receive valid title to such Shares, free and clear of all
liens, security interests, pledges, charges, encumbrances, stockholders'
agreements and voting trusts.
(c) There is no commitment, plan or arrangement to transfer, and no
outstanding option, warrant or other right calling for the transfer of, any
of the Shares to be sold by such Selling Stockholder to the Managers or to
the U.S. Underwriters pursuant to the Underwriting Agreements.
(d) Such Selling Stockholder has duly executed and delivered an
Irrevocable Power of Attorney and Custody Agreement (the "Power of Attorney
and Custody Agreement"), in the form heretofore delivered to you,
appointing Donald A. Burns and Bryan K. Rachlin, as such Selling
Stockholder's attorneys-in-fact (the "Attorneys-in-Fact"), with full power
and authority to execute, deliver and perform the Underwriting Agreements,
and, in the case of the Power of Attorney and Custody Agreement duly
executed and delivered by Signet, appointing the Attorneys-in-Fact, with
full power and authority to exercise the Signet Warrants for the purchase
from the Company of the Shares to be sold by Signet pursuant to the
Underwriting Agreements. If such Selling Shareholder is a corporation or a
partnership, such Power of Attorney and Custody Agreement is a legal and
binding obligation of such Selling Stockholder, enforceable against such
Selling Stockholder in accordance with its terms, subject to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium
and other similar laws affecting creditors' rights and remedies generally,
and subject, as to enforceability, to general principles of equity,
including principles of commercial reasonableness, good faith and fair
dealing (regardless of whether enforcement is sought in a proceeding at law
or in equity), and except insofar as rights to indemnification contained
therein may be limited by federal or state
15
<PAGE>
securities laws or related public policy. The appointment of the
Attorneys-in-Fact by such Selling Stockholder and the Attorneys-in-Facts'
authority under the Power of Attorney and Custody Agreement are
irrevocable, and the obligations of such Selling Stockholder under the
Underwriting Agreements shall not be terminated, except as provided in the
Underwriting Agreements and the Power of Attorney and Custody Agreement.
(e) Each of the Underwriting Agreements has been duly and validly
executed and delivered by the Attorneys-in-Fact on behalf of such Selling
Stockholder and is a legal and binding obligation of such Selling
Stockholder, enforceable against such Selling Stockholder in accordance
with its terms, subject to applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and other similar laws affecting
creditors' rights and remedies generally, and subject, as to
enforceability, to general principles of equity, including principles of
commercial reasonableness, good faith and fair dealing (regardless of
whether enforcement is sought in a proceeding at law or in equity), and
except insofar as right to indemnification and contribution contained
herein may be limited by federal or state securities laws or related public
policy.
(f) The execution, delivery and performance by such Selling
Stockholder (or the Attorneys-in-Fact on behalf of such Selling
Stockholder) of the Underwriting Agreements, the Power of Attorney and
Custody Agreement, and the consummation of the transactions contemplated
thereby, including the exercise of the Signet Warrants and the purchase,
delivery and sale of the Shares to be delivered and sold thereunder, will
not (i) conflict with or result in a breach of any of the terms and
provisions of, or constitute a default under (or an event that with notice
or lapse of time, or both, would constitute a default under) or require
approval or consent under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of such Selling
Stockholder pursuant to the terms of any agreement, contract, indenture,
mortgage, lease, license, arrangement or understanding to which such
Selling Stockholder is a party, or to which any of its properties is
subject, except as disclosed in note 3 in the section of the Prospectuses
entitled "Principal and Selling Shareholders," or (ii) in the case of each
Selling Stockholder which is a corporation or a partnership, violate or
conflict with any provision of the articles or certificate of
incorporation, by-laws or similar governing instruments of such Selling
Stockholder or any judgment,
16
<PAGE>
decree, order, statute, rule or regulation of any court or any public,
governmental or regulatory agency or body having jurisdiction over such
Selling Stockholder or any of its properties or assets.
(g) No consent, approval, authorization, order, registration, filing,
qualification, license or permit of or with any court or any public,
governmental or regulatory agency or body having jurisdiction over such
Selling Stockholder or any of its properties or assets is required for (i)
such Selling Stockholder's execution and delivery of, and performance of
its obligation under, Underwriting Agreements, the Power of Attorney and
Custody Agreement, and the consummation of the transactions contemplated
thereby, and (ii) the exercise of the Signet Warrant and the purchase of
the Underlying Shares upon such exercise, except for the registration of
the Shares under the Act and the Exchange Act, the authorization of the
Shares for quotation on Nasdaq and such filings and registration as may be
required under state securities or "Blue Sky" Laws and the securities laws
of foreign jurisdictions in connection with the purchase and distribution
of the Shares by the Managers and the U.S. Underwriters.
(h) To the extent that any statements or omissions are made in the
Registration Statement, the Prospectuses or any amendment or supplement
thereto in reliance upon and in conformity with written information
furnished to the Company by such Selling Stockholder specifically for use
therein (the "Written Information"), on the Effective Date, the date the
Prospectuses are first filed with the Commission pursuant to Rule 424(b) of
the Regulations (if required), at all times subsequent thereto and
including the Closing Date, when any post-effective amendment to the
Registration Statement becomes effective or any supplement to the
Prospectuses is filed with the Commission, and during such longer period as
the Prospectuses may require to be delivered in connection with sales of
Shares by the Managers, the U.S. Underwriters or a dealer, the Registration
Statement and the Prospectuses (as amended or supplemented if the Company
shall have filed with the Commission an amendment or supplement thereto)
did not and will not contain an untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in
order to make the statements made therein (in the case of the Prospectuses,
in light of the circumstances under which they were made) not misleading.
Such Selling Stockholder has reviewed the most recent Preliminary
Prospectuses, the Prospectuses (if the same
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<PAGE>
shall be in existence) and the Registration Statement, and the information
regarding such Selling Stockholder set forth therein based upon the Written
Information is complete and accurate. From the Effective Date through the
Closing Date, such Selling Stockholder will advise Bear, Stearns in writing
if and to the extent that such information based upon the Written
Information does not conform with the requirements of the Act and the
Regulations or contains any untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary in order
to make the statements made therein (in the case of the Prospectuses, in
light of the circumstances under which they were made) not misleading.
(i) Such Selling Stockholder has not taken or will not take, directly
or indirectly, prior to the termination of the offerings of the Shares
contemplated by the Underwriting Agreements, any action designed to
stabilize or manipulate the price of the Common Stock, or that might
reasonably be expected to cause or result in stabilization or manipulation
of the price of the Common Stock.
4A. Representations and Warranties of Signet. Signet represents and
warrants to, and agrees with, each Manager that:
(a) Signet is a corporation duly organized and is validly existing as
a corporation in good standing under the laws of its jurisdiction of
organization.
(b) Signet is the sole owner of the Signet Warrants and, upon its
exercise of the Signet Warrants and issuance by the Company of the number
of Shares set forth opposite Signet's name on Schedule II, Signet will be
the sole owner of such Shares and upon delivery of and payment for such
Shares to each Manager and U.S. Underwriter in accordance with the
Underwriting Agreements and the Power of Attorney and Custody Agreement,
each Manager and U.S. Underwriter will acquire such Shares free and clear
of all adverse claims, assuming it has purchased the Shares in good faith
and without notice of any adverse claim.
(c) There is no commitment, plan or arrangement to transfer, and no
outstanding option, warrant or other right calling for the transfer of, any
of the Shares to be sold by Signet to the Managers or to the U.S.
Underwriters pursuant to the Underwriting Agreements.
(d) Signet has duly executed and delivered the Power of Attorney and
Custody Agreement, in the form heretofore
18
<PAGE>
delivered to you, appointing the Attorneys-in-Fact, with full power and
authority to exercise the Signet Warrants for the purchase from the Company
of the Shares to be sold by Signet pursuant to the Underwriting Agreements.
Such Power of Attorney and Custody Agreement is a legal and binding
obligation of Signet. The appointment of the Attorneys-in-Fact by Signet
and the Attorneys-in-Facts' authority under the Power of Attorney and
Custody Agreement are irrevocable, and the obligations of Signet under the
Underwriting Agreements shall not be terminated, except as provided in the
Underwriting Agreements and the Power of Attorney and Custody Agreement.
(e) Assuming that each of the Underwriting Agreements has been duly
and validly executed and delivered by the Attorneys-in-Fact on behalf of
Signet, each such Underwriting Agreement is a legal and binding obligation
of Signet.
(f) The execution, delivery and performance by Signet (or the
Attorneys-in-Fact on behalf of Signet) of the Underwriting Agreements, the
Power of Attorney and Custody Agreement, and the consummation of the
transactions contemplated thereby, including the exercise of the Signet
Warrants and the purchase, delivery and sale of the Shares to be delivered
and sold thereunder, will not (i) conflict with or result in a breach of
any of the terms and provisions of, or constitute a default under (or an
event that with notice or lapse of time, or both, would constitute a
default under) or require approval or consent under, or result in the
creation or imposition of any lien, charge or encumbrance upon any property
or assets of Signet pursuant to the terms of any agreement, contract,
indenture, mortgage, lease, license, arrangement or understanding to which
Signet is a party, or to which any of its properties is subject or (ii)
violate or conflict with any provision of the articles of incorporation,
by-laws or similar governing instruments of Signet or any judgment, decree,
order, statute, rule or regulation of any court or any public, governmental
or regulatory agency or body having jurisdiction over Signet or any of its
properties or assets.
(g) No consent, approval, authorization, order, registration, filing,
qualification, license or permit of or with any court or any public,
governmental or regulatory agency or body having jurisdiction over Signet
or any of its properties or assets is required for (i) Signet's execution
and delivery of, and performance of its obligation under, Underwriting
Agreements, the Power of Attorney and Custody
19
<PAGE>
Agreement, and the consummation of the transactions contemplated thereby,
and (ii) the exercise of the Signet Warrant and the purchase of the
Underlying Shares upon such exercise, except in each case as may be
required under the Act and the Exchange Act, the authorization of the
Shares for quotation on Nasdaq and such filings and registration as may be
required under state securities or "Blue Sky" Laws and the securities laws
of foreign jurisdictions in connection with the purchase and distribution
of the Shares by the Managers and the U.S. Underwriters.
(h) Such parts of the Registration Statement and Prospectuses
comprised of the table and notes thereto under the caption "Principal and
Selling Shareholders" which specifically relate to Signet do not, and, on
the Closing Date, will not, contain an untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary in order to make the statements made therein (in the case of the
Prospectuses, in light of the circumstances under which they were made) not
misleading.
(i) Signet has not taken or will not take, directly or indirectly,
prior to the termination of the offerings of the Shares contemplated by the
Underwriting Agreements, any action designed to stabilize or manipulate the
price of the Common Stock, or that might reasonably be expected to cause or
result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or the resale of the Shares pursuant to the
distribution contemplated by this Agreement.
5. Purchase, Sale and Delivery of the International Shares.
(a)(i) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to issue and sell to each of the Managers an aggregate
of 1,220,000 shares of Common Stock and the Selling Stockholders, severally and
not jointly, agree to sell to the Managers an aggregate of 520,000 shares of
Common Stock (each such Selling Stockholder to sell the number of Shares set
forth opposite its name in Schedule III hereto under the caption "Number of Firm
------------
International Shares to be Sold"), and each Manager agrees, severally and not
jointly, to purchase from the Company and the Selling Stockholders, the number
of Firm International Shares set forth opposite the name of such Manager in
Schedule I hereto, all at a purchase price per share of $_________ (the
- ----------
"Purchase
20
<PAGE>
Price"). The number of Firm International Shares to be purchased from the
Company and the Selling Stockholders by each Manager (as adjusted by Bear,
Stearns to eliminate fractions) shall be determined by multiplying the aggregate
number of Firm International Shares to be sold by the Company or the Selling
Stockholders, as the case may be, as set forth above by a fraction (A) the
numerator of which is the total number of Firm International Shares set forth
opposite the name of such Manager in Schedule I hereto and (B) the denominator
----------
of which is the total number of Firm International Shares.
(ii) Delivery of the Firm International Shares and payment of the
aggregate Purchase Price therefor shall be made at the offices of Weil, Gotshal
& Manges LLP, 767 Fifth Avenue, New York, New York 10153, or such other location
in the New York City metropolitan area as Bear, Stearns shall determine and
advise the Company and the Selling Stockholders upon at least two full business
days' (as defined in Section 20 hereof) notice in writing. Such delivery and
payment shall be made at 10:00 A.M., New York City time, on the [third] [fourth]
full business day following the determination of the Purchase Price, or at such
other time as may be agreed upon by Bear, Stearns, the Company and the Selling
Stockholders. The time and date of such delivery and payment are herein called
the "Closing Date." Delivery of the Firm International Shares shall be made to
or upon the order of Bear, Stearns, for the respective accounts of the Managers,
against payment to the Company or the Selling Stockholders, as the case may be,
of the aggregate Purchase Price therefor by wire transfer of same day funds to
the respective accounts of the Company and each Selling Stockholder, as the case
may be, designated in writing to Bear, Stearns at least two business days prior
to the Closing Date.
(iii) Certificates for the Firm International Shares shall be
registered in such name or names and in such authorized denominations as Bear,
Stearns may request in writing at least two full business days prior to the
Closing Date, provided that, if so specified by Bear, Stearns, the Firm
International Shares may be represented by a global certificate registered in
the name of Cede & Co., as nominee of the Depositary Trust Company ("Cede").
Bear, Stearns shall be permitted to examine and package such certificates for
delivery at least one full business day prior to the Closing Date, unless the
Firm International Shares are to be represented by a global certificate.
(b)(i) The Company hereby grants to the Managers an option (the
"International Option") to purchase from the Company the Additional
International Shares at the Purchase Price, for the sole purpose of covering
over-allotments in the offering of
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<PAGE>
the Firm International Shares by the Managers. The International Option shall
be exercisable by the Managers on one occasion only, at any time before the
expiration of 30 days from the date of the International Prospectus, for the
purchase of all or part of the Additional International Shares, such exercise to
be made by notice, given by Bear, Stearns to the Company in the manner specified
in Section 16 hereof, which notice shall set forth the aggregate number of
Additional International Shares with respect to which the International Option
is being exercised, the denominations and the name or names in which
certificates evidencing the Additional International Shares so purchased are to
be registered, and the date and time of delivery of such Additional
International Shares, which date may be at or subsequent to the Closing Date and
shall not be less than two nor more than ten days after such notice. The
aggregate number of Additional International Shares so purchased from the
Company by each Manager (as adjusted by Bear, Stearns to eliminate fractions)
shall be determined by multiplying the total number of such Additional
International Shares to be sold by the Company by a fraction (A) the numerator
of which is the number of Firm International Shares set forth opposite the name
of such Manager in Schedule I hereto and (B) the denominator of which is the
----------
total number of Firm International Shares.
(ii) Delivery of the Additional International Shares so purchased
and payment of the Purchase Price therefor shall be made at the offices of Weil,
Gotshal & Manges LLP, 767 Fifth Avenue, New York, New York 10153, or such other
location in the New York City metropolitan area as Bear, Stearns shall determine
and advise the Company upon at least two full business days' notice in writing.
Such delivery and payment shall be made at 10:00 A.M., New York City time, on
the date designated in such notice or at such other time and date as may be
agreed upon by Bear, Stearns and the Company. The time and date of such delivery
and payment are herein called the "Additional Closing Date." Delivery of the
Additional International Shares shall be made to or upon the order of Bear,
Stearns, for the respective accounts of the Managers, against payment to the
Company of the aggregate Purchase Price therefor by wire transfer of same day
funds to the account of the Company.
(iii) Certificates for the Additional International Shares purchased
by the Managers, when so delivered, shall be registered in such name or names
and in such authorized denominations as Bear, Stearns shall have requested in
the notice of exercise of the International Option, provided that, if so
specified therein, such Additional International Shares may be represented by a
global certificate registered in the name of Cede. Bear, Stearns shall be
permitted to examine and package
22
<PAGE>
such certificates for delivery at least one full business day prior to the
Additional Closing Date, unless the Additional International Shares are to be
represented by a global certificate.
(c) The Managers shall not be obligated to purchase any Firm
International Shares from the Company or the Selling Stockholders except upon
tender to the Managers by the Company or the Selling Stockholders, as the case
may be, of all of the Firm International Shares and the Managers shall not be
obligated to purchase any Additional International Shares from the Company
except upon tender to the Managers by the Company of all of the Additional
International Shares specified in the notice of exercise of the International
Option. The Company or the Selling Stockholders shall not be obligated to sell
or deliver any Firm International Shares or Additional International Shares, as
the case may be, except upon tender of payment by the Managers for all the Firm
International Shares or the Additional International Shares, as the case may be,
agreed to be purchased by the Managers.
6. Offering.
The Company and the Selling Stockholders have been advised by Bear,
Stearns that the Managers propose to make a public offering of their respective
portions of the International Shares as soon after the Registration Statement
and this Agreement have become effective as in your judgment is advisable. The
Company and the Selling Stockholders have been further advised by Bear, Stearns
that the International Shares are to be offered to the public initially at a
price of $_____ per share and to certain dealers selected by you at a price that
represents a concession not in excess of $____ per share, and that any Manager
may allow, and such dealers may reallow, a further concession, not in excess of
$____ a share, to any Manager or to certain other dealers, and that after the
initial offering of the International Shares, the public offering price and such
concessions may be changed by you.
7. Covenants of the Company. The Company covenants and agrees with
each Manager that:
(a) The Company shall use its best efforts to cause the Registration
Statement to become effective as promptly as possible and to maintain it in
effect. If the Registration Statement has become or becomes effective
pursuant to Rule 430A of the Regulations, or filing of the Prospectuses
with the Commission is otherwise required under Rule 424(b) of the
Regulations, the Company shall file the
23
<PAGE>
Prospectuses, properly completed, with the Commission pursuant to Rule
424(b) of the Regulations within the time period therein prescribed and
shall provide evidence satisfactory to you of such timely filing. The
Company shall promptly advise you and confirm such advice in writing,
(i) when the Registration Statement or any post-effective amendment thereto
has become effective, (ii) of the initiation or threatening of any
proceedings for, or receipt by the Company of any notice with respect to,
the suspension of the qualification of the Shares for sale in any
jurisdiction or the issuance by the Commission of any order suspending the
effectiveness of the Registration Statement and (iii) of receipt by the
Company or any representative of or attorney for the Company of any other
communications from the Commission relating to the Company, the
Registration Statement, any Preliminary Prospectus, the Prospectuses or the
transactions contemplated by the Underwriting Agreements. The Company shall
make every reasonable effort to prevent the issuance of an order suspending
the effectiveness of the Registration Statement or any post-effective
amendment thereto and, if any such order is issued, to obtain its lifting
as soon as possible. The Company shall not file any amendment to the
Registration Statement or any amendment of or supplement to the
Prospectuses before or after the Effective Date to which you shall
reasonably object after being timely furnished in advance a copy thereof
unless the Company shall conclude, upon the advice of counsel, that any
such amendment must be filed at a time prior to obtaining such consent.
(b) Within the time during which the Prospectuses are required to be
delivered under the Act, the Company shall comply with all requirements
imposed upon it by the Act, as now or hereafter amended, and by the
Regulations, as from time to time in force, so far as necessary to permit
the continuance of sales of or dealings in the Shares as contemplated by
the provisions hereof and by the Prospectuses. If, during such period, any
event shall occur as a result of which the Prospectuses as then amended or
supplemented include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
the statements made therein, in the light of the circumstances under which
they were made, not misleading, or if it shall be necessary at any time to
amend the Registration Statement or supplement the Prospectuses to comply
with the Act and the Regulations, the Company shall notify you promptly and
prepare and file with the Commission an appropriate post-effective
amendment to the Registration Statement or supplement to each Prospectus
24
<PAGE>
(in form and substance reasonably satisfactory to you) that will correct
such statement or omission and shall use its reasonable best efforts to
have any such post-effective amendment to the Registration Statement
declared effective as soon as possible.
(c) The Company shall promptly deliver to you five manually-signed
copies of the Registration Statement, including exhibits and all amendments
thereto, and to those persons (including your counsel) whom you identify to
the Company, such quantity of conformed copies of the Registration
Statement, with exhibits, each Preliminary Prospectus, the Prospectuses and
all amendments of and supplements to such documents, if any, as you may
reasonably request.
(d) The Company shall cooperate with the Managers, the U.S.
Underwriters and Weil, Gotshal & Manges LLP ("Underwriters' Counsel") in
connection with their efforts to qualify or register the Shares for sale
under the state securities (or "Blue Sky") or foreign laws of such
jurisdictions as you shall request, shall execute such applications and
documents and furnish such information as reasonably may be required for
such purpose and shall comply with such laws so as to continue such
registrations and qualifications in effect for so long as may be required
to complete the distribution of the Shares; provided, however, that in
-------- -------
connection therewith the Company shall not be required to (i) qualify as a
foreign corporation in any jurisdiction in which it is not so qualified as
of the date hereof, (ii) file a consent to service of process in any
jurisdiction in any action other than one arising out of the offering or
sale of the Shares in such jurisdiction or (iii) become subject to taxation
in any jurisdiction in which it is not now so subject.
(e) The Company shall make generally available (within the meaning of
Section 11(a) of the Act) to its security holders and to you, in such
numbers as you reasonably may request for distribution to the Managers, as
soon as practicable but in no event later than 45 days after the end of its
fiscal quarter in which the first anniversary date of the Effective Date
occurs, an earnings statement, covering a period of at least twelve
consecutive full calendar months commencing after the Effective Date, that
satisfies the provisions of Section 11(a) of the Act and Rule 158 of the
Regulations.
25
<PAGE>
(f) For a period of 180 days after the date of this Agreement,
without the prior written consent of Bear, Stearns, the Company shall not,
directly or indirectly, issue, offer or agree to sell, sell or otherwise
dispose of any shares of Common Stock (or any securities convertible into,
exercisable for or exchangeable for or evidencing the right to purchase
shares of Common Stock) other than (A) the Company's issuance of shares of
Common Stock in connection with the 425-for-1 stock split, (B) the
Company's issuance and sale of Shares in accordance with the Underwriting
Agreements, including the issuance of Underlying Shares upon exercise of
the Signet Warrant, (C) the Company's issuance of shares of Common Stock in
exchange for all the issued and outstanding capital stock of Tel Labs,
Inc., (D) the issuance of Common Stock upon the exercise of stock options
granted, or the grant of stock options under the Company's Stock Option
Plan (and the filing of a Form S-8 registration).
(g) During the five years following the Effective Date, the Company
shall furnish to Bear, Stearns, in such quantity as Bear, Stearns may
reasonably request for distribution to the Managers, copies of (i) all
reports furnished by the Company to its stockholders, and (ii) all reports,
financial statements, and proxy or information statements filed by the
Company with the Commission or any national securities exchange.
(h) The Company shall apply the proceeds from the sale of the Shares
to be sold by it under the Underwriting Agreements in the manner set forth
under "Use of Proceeds" in the Prospectuses. The Company shall take such
steps as shall be necessary to ensure that neither the Company nor any
subsidiary shall become an "investment company" or a company "controlled"
by an "investment company" within the meaning of such terms under the
Investment Company Act of 1940.
(i) The Company shall use its best efforts promptly to cause the
Shares to be quoted on Nasdaq and shall take all actions necessary to
comply with the rules and regulations of Nasdaq in order to maintain the
quotation of the Shares on Nasdaq.
(j) The Company shall comply with all registration, filing and
reporting requirements of the Exchange Act and the rules and regulations
thereunder, which may from time to time be applicable to the Company, and
shall timely file
26
<PAGE>
with the Commission such reports on Form SR as may be required pursuant to
Rule 463 of the Regulations.
(k) The Company shall comply with all provisions of all undertakings
contained in the Registration Statement.
(l) Prior to the Closing Date and, if the International Option is
exercised, until the Additional Closing Date, the Company shall issue no
press release or other communication or hold any press conference with
respect to the offerings of the Shares, or the financial condition, results
of operations, operations, business properties, assets, liabilities, or
prospects of the Company, without your prior consent, which consent shall
not be unreasonably withheld, unless the Company shall conclude upon advice
of counsel that such press release or other communication should be issued
at a time prior to obtaining such consent.
8. Covenants of the Selling Stockholders. Each Selling Stockholder
(other than Signet), severally and not jointly, covenants and agrees with each
Manager that:
(a) For a period of 180 days after the date of this Agreement,
without the prior written consent of Bear, Stearns, such Selling
Stockholder shall not, directly or indirectly, offer or agree to sell, sell
or otherwise dispose of any shares of Common Stock (or any securities
convertible into, exercisable for or exchangeable for or evidencing the
right to purchase shares of Common Stock).
(b) Such Selling Stockholder will not take, directly or indirectly,
prior to the termination of the offering of the Shares contemplated by the
Underwriting Agreements, any action designed to stabilize or manipulate the
price of the Common Stock, or that might reasonably be expected to cause or
result in stabilization or manipulation of the price of the Common Stock.
(c) In order to document the Managers' and the U.S. Underwriters'
compliance with the reporting and withholding provisions of the Internal
Revenue Code of 1986, as amended, such Selling Stockholder shall deliver to
you on or prior to the Closing Date, a properly completed and executed
United States Treasury Department Form W-9 (or other applicable form or
statement specified by Treasury Department Regulations in lieu thereof).
27
<PAGE>
9. Payment of Expenses. Whether or not the transactions
contemplated by the Underwriting Agreements are consummated or this Agreement is
terminated, the Company agrees to pay all costs and expenses incident to the
performance of its obligations under the Underwriting Agreements, including
those in connection with (i) preparing, printing, duplicating, filing and
distributing the Registration Statement (including all amendments thereof and
exhibits thereto), any Preliminary Prospectus, the Prospectuses and any
supplements thereto, the Underwriting Agreements and all related agreements, and
all other documents relating to the public offering of the Shares, (ii) the
issuance, transfer and delivery of the Shares to the Managers and the U.S.
Underwriters, including any transfer or other taxes payable thereon, (iii) the
registration and qualification if any, of the Shares under state securities or
Blue Sky laws or the securities laws of foreign jurisdictions, or where
applicable the obtaining of exemptions therefrom, including the costs of
preparing, printing and distributing to the Managers and the U.S. Underwriters a
preliminary and final Blue Sky Memorandum and the reasonable fees and
disbursements of Underwriters' Counsel in connection therewith, (iv) the
quotation of the Shares on Nasdaq, (v) the review of the terms of the public
offering of the Shares by the National Association of Securities Dealers, Inc.
(the "NASD") and the reasonable fees and disbursements of Underwriters' Counsel
in connection therewith, (vi) the printing of certificates representing the
Shares and (vii) the cost and charges of any transfer agent and registrar for
the Shares.
10. Conditions of the Managers' Obligations. The obligations of the
several Managers to purchase and pay for the International Shares, as provided
herein, shall be subject to (i) the accuracy of the representations and
warranties of the Company and each of the Selling Stockholders herein contained,
as of the date hereof, as of the Closing Date and, with respect to the
Additional International Shares, the accuracy of the representations and
warranties of the Company as of the Additional Closing Date, (ii) to the absence
from any certificates, opinions, written statements or letters furnished
pursuant to this Section 10 to you or to Underwriters' Counsel of any
qualification or limitation not previously approved in writing by you, (iii) to
the performance by the Company and each of the Selling Stockholders of their
respective obligations hereunder and (iv) to the following additional
conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 P.M., New York City time, on the date of this Agreement or at
such later time and date as shall have been consented to in writing by
Bear, Stearns. All post-effective amendments, if any, to the Registration
28
<PAGE>
Statement shall have become effective. If the Company shall have relied
upon Rule 430A of the Regulations, the Prospectuses shall have been filed
with the Commission in a timely fashion in accordance with Section 7(a)
hereof. All filings required by Rule 424 of the Regulations shall have
been made and no such filings shall have been made without your consent.
No stop order suspending the effectiveness of the Registration Statement or
any post-effective amendment thereof shall have been issued by the
Commission or any state securities commission and no proceedings therefor
shall have been initiated or threatened by the Commission or any state
securities commission.
(b) At the Closing Date (and, with respect to the Additional Shares,
the Additional Closing Date), you shall have received the written opinion
of Swidler & Berlin, Chartered, counsel for the Company, dated the date of
its delivery, addressed to the Managers and the U.S. Underwriters, and in
form and scope reasonably satisfactory to Underwriters' Counsel, to the
effect that:
(i) Each of the Company and the subsidiaries listed in Schedule
--------
III hereto (x) has been duly incorporated and is validly existing as a
---
corporation in good standing under the laws of its jurisdiction of
incorporation and is duly qualified and in good standing as a foreign
corporation in each jurisdiction in which the character or location of
its properties (owned, leased or licensed) or the nature or conduct of
its business makes such qualification necessary, except for those
failures to be so qualified or in good standing that will not in the
aggregate have a Material Adverse Effect, and (y) to the knowledge of
such counsel, has all requisite corporate power and authority, and all
necessary consents, approvals, authorizations, orders, registrations,
filings, qualifications, licenses and permits of and from all public,
regulatory or governmental agencies and bodies, to own, lease and
license its respective properties and conduct its business as now
being conducted and as described in the Registration Statement and the
Prospectuses, except for those the absence of which, individually or
in the aggregate, would not have a Material Adverse Effect. All of
the issued and outstanding capital stock (or similar interests) of
each subsidiary have been duly and validly authorized and issued, are
fully paid and nonassessable and were not issued in violation of or
subject to any preemptive rights arising under each such subsidiary's
charter or
29
<PAGE>
by-laws or the laws of its jurisdiction of incorporation or to such
counsel's knowledge, any contractual preemptive rights (collectively,
"Preemptive Rights") and are owned by the Company or a subsidiary,
free and clear of all claims, liens, security interests, pledges,
charges, encumbrances, stockholders' agreements and voting trusts,
except as otherwise described in Schedule III to this Agreement.
------------
(ii) The authorized capital stock of the Company is as set forth
in the Prospectuses under the caption "Capitalization." All of the
outstanding shares of such capital stock have been duly and validly
authorized and issued, are fully paid and nonassessable and were not
issued in violation of or subject to any Preemptive Rights. The
shares of Common Stock to be outstanding on the Closing Date have been
duly authorized and when issued will be validly issued, fully paid and
nonassessable, and will not have been issued in violation of or be
subject to any Preemptive Rights. The Company's obligations under the
Signet Warrant have been duly and validly authorized and are legal and
binding obligations of the Company entitling Signet to acquire shares
of Common Stock upon the terms and in the manner set forth therein.
The Underlying Shares have been duly authorized and validly reserved
for issuance, and when issued and delivered to Signet upon receipt of
the exercise price for the Signet Warrant, the Underlying Shares will
be validly issued, fully paid and nonassessable, and will not have
been issued in violation of or be subject to any Preemptive Rights.
The Shares have been duly authorized and, when issued, delivered and
sold in accordance with the terms of the Underwriting Agreements, will
be validly issued, fully paid and nonassessable and will not have been
issued in violation of or be subject to any Preemptive Rights. To
such counsel's knowledge, there is no outstanding option, warrant or
other right calling for the issuance of any share of capital stock (or
similar interests) of the Company or of any Material Subsidiary or any
security or other instrument that by its terms is convertible into,
exercisable for or exchangeable for or evidencing the right to
purchase capital stock (or similar interests) of the Company or any
Material Subsidiary, except as described in the Registration Statement
and the Prospectuses. Upon delivery of and payment for the Shares to
be sold by the Company to each Manager and U.S. Underwriter in
accordance with the Underwriting Agreements, each Manager and each
U.S.
30
<PAGE>
Underwriter (assuming that it acquires such Shares without notice of
any adverse claim, as such term is used in Section 8-302 of the
Uniform Commercial Code in effect in the State of New York) will
acquire valid title to the Shares so sold and delivered to it, free
and clear of all liens, pledges, charges, claims, security interests,
restrictions on transfer, agreements or other defects of title
whatsoever (other than those resulting from any action taken by such
Manager or such U.S. Underwriter). The capital stock of the Company
conforms in all material respects to the description thereof contained
in the Registration Statement and the Prospectuses.
(iii) The Company has all requisite corporate power and
authority to execute, deliver and perform its obligations under each
of the Underwriting Agreements and to issue, sell and deliver the
Shares in accordance with the terms and conditions thereof. Each of
the Underwriting Agreements has been duly and validly authorized,
executed and delivered by the Company.
(iv) The Company's execution and delivery of, and its
performance of its obligations under, each of the Underwriting
Agreements and the consummation of the transactions contemplated
thereby, and the issuance of the Underlying Shares to Signet upon the
exercise of the Signet Warrant, do not and, when such performance is
required pursuant to the terms thereof, will not (A) conflict with or
result in a breach of any of the terms and provisions of, or
constitute a default under (or an event that with notice or lapse of
time, or both, would constitute a default under) or require approval
or consent under, or result in an acceleration of indebtedness,
termination of rights or the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or
any subsidiary pursuant to the terms of any Material Contract or any
Material Permit, (B) violate or conflict with any provision of the
certificate of incorporation, by-laws or similar governing instruments
of the Company or any subsidiary, or (C) violate or conflict with any
law, rule or regulation of the United States of America or the
Commonwealth of Virginia, applicable to the Company or the
subsidiaries, with any judgment, decree or order known to such counsel
of any court or any public, governmental or regulatory agency or body
having jurisdiction over the Company or any subsidiary or any of its
respective properties or assets.
31
<PAGE>
(v) No consent, approval, authorization, order, registration,
filing, qualification, license or permit of or with any federal or
Virginia court or any public, governmental, or regulatory agency or
body having jurisdiction over the Company or any subsidiary or any of
its respective properties or assets is required for the Company's
execution and delivery of, and its performance of its obligations
under, each of the Underwriting Agreements, and the consummation of
the transactions contemplated thereby, including, without limitation,
the issuance of the Underlying Shares to Signet upon the exercise of
the Signet Warrants and the issuance, sale and delivery of the Shares,
except for (A) such as may be required under state securities or Blue
Sky laws and the securities laws of foreign jurisdictions in
connection with the purchase and distribution of the Shares by the
Managers and the U.S. Underwriters (as to which such counsel need
express no opinion) and (B) such as have been made or obtained under
the Act, the Exchange Act or the rules of Nasdaq.
(vi) Insofar as statements in the Prospectuses purport to
summarize the nature and status of litigation or the provisions of
laws, rules, regulations, orders, judgments or decrees, or the terms
of any Material Contracts or Material Permits, such statements are
correct in all material respects and are fair summaries of the matters
referred to therein.
(vii) To such counsel's knowledge, no person or entity has the
right, by contract or otherwise, to require registration under the Act
of shares of capital stock or other securities of the Company or any
subsidiary solely because of the filing or effectiveness of the
Registration Statement and the consummation of the transactions
contemplated by the Underwriting Agreements, except for such rights as
have been legally and effectively waived.
(viii) The Registration Statement and the Prospectuses (except
for the financial statements and the notes thereto, the financial
statement schedules and the other financial and accounting data
included therein, as to which no opinion need be expressed) comply as
to form in all material respects with the requirements of the Act and
the Regulations.
(ix) The Registration Statement has become effective under the
Act, and such counsel has no
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knowledge of any stop order suspending the effectiveness of the
Registration Statement and to such counsel's knowledge no proceedings
therefor have been initiated or threatened by the Commission, and
there are no other filings on the part of the Company required by the
Act or the Regulations, including those required by Rule 424(b) of the
Regulations, that to such counsel's knowledge have not been made.
(x) The Shares have been duly authorized for trading on
Nasdaq, subject only to official notice of issuance.
(xi) To such counsel's knowledge, there is no litigation,
arbitration or governmental or other action, suit, proceeding or
investigation before any court or before or by any public, regulatory
or governmental agency or body pending or threatened against, or
involving the properties or business of, the Company or any
subsidiary, that, if resolved against the Company or such subsidiary,
individually or, to the extent involving related claims or issues, in
the aggregate, is of a character required to be disclosed in the
Registration Statement and the Prospectuses that has not been properly
disclosed therein; and to such counsel's knowledge, there is no
contract or document concerning the Company or any subsidiary of a
character required to be described in the Registration Statement and
the Prospectuses or to be filed as an exhibit to the Registration
Statement, that is not so described or filed.
(xii) The Company is not an "investment company" or a company
"controlled" by an "investment company" as defined in the Investment
Company Act.
(xiii) the licenses, permits and authorizations attached to such
opinion constitute all of the licenses, permits and authorizations
required by the Federal Communications Commission ("FCC") and the
relevant state public service commissions ("PSCs") for the provision
of telecommunications services by the Company and each of its
Subsidiaries as such counsel understands those services currently to
be provided based on the declaration of an executive officer of the
Company attached to such opinion, where the failure to obtain or hold
such license, permit or authority would materially adversely affect
the ability of the Company or any of its Subsidiaries to provide such
service;
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(xiv) to the best of such counsel's knowledge, after due
inquiry, neither the Company nor any of its Subsidiaries is subject to
any pending or threatened proceeding, complaint or investigation
before the FCC or any PSC based on any alleged violation by the
Company or its Subsidiaries in connection with the provision of or
failure to provide telecommunications services, of a character
required to be disclosed in the Registration Statement which is not
disclosed in the Prospectuses;
(xv) the statements in the Prospectus under the headings
"Risk Factors -- Increasing Competition," "Risk Factors -- Regulatory
and Legislative Risks," "Business -- Industry Overview," "Business --
Regulation," "Description of Capital Stock" and "Certain United States
Tax Considerations," insofar as they purport to summarize provisions
of laws or documents referred to therein, are accurate and correct in
all material respects;
(xvi) no consent, approval, authorization, license,
certificate, permit or order of the FCC or any PSC is required for the
consummation of the transactions contemplated herein;
(xvii) neither the execution and delivery of this Agreement nor
the issue and sale of the Shares contemplated hereby will conflict
with or result in a violation of any order or regulation applicable to
the Company or any of its subsidiaries in connection with the
provision of telecommunications services of the FCC or any PSC, the
conflict with or the violation of which would have a Material Adverse
Effect; and
(xviii) Registration under the Act was not required for
the offer and issuance of Common Stock in connection with the
acquisition of Tel Labs, Inc. and such acquisition has been
consummated in accordance with the terms of the Share Exchange
Agreement dated as of June 1, 1996 between the Company and Tel Labs,
Inc.
In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company,
representatives of the independent certified public accountants of the
Company, representatives of the Managers and the U.S. Underwriters and
Underwriters' Counsel at which the contents of the Registration Statement,
the Prospectuses and any amendments
34
<PAGE>
thereof or supplements thereto and related matters were discussed and,
although such counsel has not undertaken to investigate or verify
independently and are not passing upon, and does not assume any
responsibility for, the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the Prospectuses or
any amendments thereof or supplements thereto (except as to matters
referred to in the last sentence of clause (ii) above), no facts have come
to such counsel's attention which lead such counsel to believe that the
Registration Statement, on the effective date thereof (or any post-
effective amendment thereof as of the date of such amendment), contained an
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading or that the Prospectuses, on the date thereof or the date of
such opinion, contained an untrue statement of a material fact or omitted
to state any material fact required to be stated therein or necessary to
make the statements made therein, in light of the circumstances under which
they were made, not misleading (it being understood that such counsel need
express no view with respect to the financial statements and related notes,
the financial statement schedules and the other financial and accounting
data included therein or omitted therefrom).
In rendering such opinion, such counsel (i) may limit its opinions to
the laws of the District of Columbia, the General Corporation Law of the
State of Virginia, the corporate laws of the State of Delaware and the
federal laws of the United States of America, and (ii) may rely (A) as to
matters involving the application of laws other than the laws of the
District of Columbia, the General Corporation Law of the State of Virginia,
the corporate laws of the State of Delaware and the federal laws of the
United States of America, to the extent such counsel deems proper and to
the extent specified in such opinion letter, if at all, upon a written
opinion or opinions (in form and scope reasonably satisfactory to
Underwriters' Counsel) of other counsel reasonably acceptable to
Underwriters' Counsel, familiar with the applicable laws; and (B) as to
matters of fact, to the extent such counsel may deem proper, on
certificates of responsible officers of the Company and certificates or
other written statements of officers of departments of various
jurisdictions having custody of documents respecting the corporate
existence or good standing of the Company and the subsidiaries. The
opinion of such counsel shall specifically state that the opinion of any
such other counsel is in form and scope satisfactory to such counsel
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and, in such counsel's opinion, such counsel, you and Underwriters' Counsel
are justified in relying thereon. A copy of the opinion of any such other
counsel shall be delivered to Underwriters' Counsel.
(c) At the Closing Date, you shall have received the written opinion
of Swidler & Berlin, Chartered, counsel for each of Henry G. Luken, III,
Donald A. Burns, Thomas J. Cirrito, Natalie J. Marine-Street, Mark J.
Stodter, Janet D. Anastasi, James Sznajder and Dennis Jarman, each of whom
is a Selling Stockholder listed on Schedule II hereto, dated the date of
its delivery, addressed to the Managers and the U.S. Underwriters, and in
form and scope reasonably satisfactory to Underwriters' Counsel, to the
effect that:
(i) Upon the issuance by the Company to the Selling
Stockholder of the number of Shares to be sold by the Selling
Stockholder on or before the Closing Date, the Selling Stockholder
will be the sole owner of such Shares, and, upon delivery of and
payment for the Shares to be sold by the Selling Stockholder to each
Manager and U.S. Underwriter in accordance with the Underwriting
Agreements and the Power of Attorney and Custody Agreement, each
Manager and U.S. Underwriter (assuming that it acquires such Shares
without notice of any adverse claim, as such term is used in
Section 8-302 of the Uniform Commercial Code in effect in the State of
New York) will acquire valid title to such Shares, free and clear of
all liens, pledges, charges, security interests, restrictions on
transfer, agreements or other defects of title whatsoever (other than
those resulting from any action by such Manager or such U.S.
Underwriter).
(ii) The Selling Stockholder has duly executed and delivered a
Power of Attorney and Custody Agreement, and such Power of Attorney
and Custody Agreement is a legal and binding obligation of the Selling
Stockholder.
(iii) Each of the Underwriting Agreements has been duly executed
and delivered by the Attorneys-in-Fact on behalf of the Selling
Stockholder and is a legal and binding obligation of the Selling
Stockholder.
(iv) The execution, delivery and performance by the
Selling Stockholder (or the Attorneys-in-Fact on behalf of the Selling
Stockholder) of the Underwriting
36
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Agreements and the Power of Attorney and Custody Agreement, and the
consummation of the transactions contemplated thereby, will not
(i) conflict with or result in a breach of any of the terms and
provisions of, or constitute a default under (or an event that with
notice or lapse of time, or both, would constitute a default under) or
require approval or consent under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or
assets of the Selling Stockholder pursuant to the terms of any
agreement, contract, indenture, mortgage, lease, license, arrangement
or understanding known to such counsel to which the Selling
Stockholder is a party, or to which any of the Selling Stockholder's
properties is subject or (ii) violate or conflict with any law, rule
or regulation applicable to the Selling Stockholder, or to such
counsel's knowledge, any judgment, decree or order of any court or any
public, governmental or regulatory agency or body having jurisdiction
over the Selling Stockholder or any of the Selling Stockholder's
properties or assets.
(v) No consent, approval, authorization, order, registration,
filing, qualification, license or permit of or with any court or any
public, governmental or regulatory agency or body having jurisdiction
over the Selling Stockholder or any of the Selling Stockholder's
properties or assets is required for the Selling Stockholder's
execution and delivery of, and performance of the Selling
Stockholder's obligation under, the Underwriting Agreements, the Power
of Attorney and Custody Agreement, and the consummation of the
transactions contemplated thereby, except as may be required under the
Act and the Exchange Act, the authorization of the Shares for trading
on Nasdaq and such filings and registration as may be required under
state securities or "Blue Sky" Laws and the securities laws of foreign
jurisdictions in connection with the purchase and distribution of the
Shares by the Managers and the U.S. Underwriters.
In rendering such opinion, such counsel may limit its opinion to the
laws of the jurisdiction in which it is licensed to practice law. The
opinion of counsel shall specifically state that the same may be relied
upon by you and Underwriters' Counsel.
(d) At the Closing Date, you shall have received the written opinion
of McGuire, Woods & Battle, counsel for
37
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Signet, dated the date of its delivery, addressed to the Managers and the
U.S. Underwriters, and in form and scope reasonably satisfactory to
Underwriters' Counsel, to the effect that:
(i) Signet has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the Commonwealth
of Virginia.
(ii) Upon the issuance by the Company to Signet of the number of
Shares to be sold by Signet on or before the Closing Date, Signet will
be the sole owner of such Shares, and, upon delivery of and payment
for the Shares to be sold by Signet to each Manager and U.S.
Underwriter in accordance with the Underwriting Agreements and the
Power of Attorney and Custody Agreement, each Manager and U.S.
Underwriter (assuming that it acquires such Shares without notice of
any adverse claim, as such term is used in Section 8-302 of the
Uniform Commercial Code in effect in the State of New York) will
acquire such Shares, free and clear of all adverse claims (other than
those resulting from any action by such Manager or such U.S.
Underwriter).
(iii) Signet has duly executed and delivered a Power of Attorney
and Custody Agreement, and such Power of Attorney and Custody
Agreement is a legal and binding obligation of Signet.
(iv) Each of the Underwriting Agreements has been duly executed
and delivered by the Attorneys-in-Fact on behalf of Signet.
(v) The execution, delivery and performance by Signet (or the
Attorneys-in-Fact on behalf of Signet) of the Underwriting Agreements
and the Power of Attorney and Custody Agreement, and the consummation
of the transactions contemplated thereby, including the exercise of
the Signet Warrant and the purchase, delivery and sale of the Shares
to be delivered and sold thereunder, will not (i) conflict with or
result in a breach of any of the terms and provisions of, or
constitute a default under (or an event that with notice or lapse of
time, or both, would constitute a default under) or require approval
or consent under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of Signet pursuant
to the terms of any agreement, contract, indenture, mortgage, lease,
license,
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arrangement or understanding known to such counsel to which Signet is
a party, or to which any of its properties is subject or (ii) violate
or conflict with any provision of the articles of incorporation or by-
laws of Signet, any U.S. federal or Commonwealth of Virginia law, rule
or regulation applicable to Signet, or to such counsel's knowledge,
any judgment, decree or order of any court or any public, governmental
or regulatory agency or body having jurisdiction over Signet or any of
its properties or assets.
(vi) No consent, approval, authorization, order, registration,
filing, qualification, license or permit of or with any court or any
public, governmental or regulatory agency or body having jurisdiction
over Signet or any of its properties or assets is required for
(i) Signet's execution and delivery of, and performance of its
obligation under, the Underwriting Agreements, the Power of Attorney
and Custody Agreement, and the consummation of the transactions
contemplated thereby, and (ii) the exercise of the Signet Warrant and
the purchase of the Underlying Shares upon such exercise, except as
may be required under the Act and the Exchange Act, the authorization
of the Shares for trading on Nasdaq and such filings and registration
as may be required under state securities or "Blue Sky" laws and the
securities laws of foreign jurisdictions in connection with the
purchase and distribution of the Shares by the Managers and the U.S.
Underwriters.
In rendering such opinion, such counsel (i) may limit its opinion to
the laws of the jurisdiction in which it is licensed to practice and
(ii) may rely as to matters of fact, to the extent such counsel may deem
proper, on certificates of responsible officers of Signet and certificates
or other written statements of officers of departments of jurisdictions
having custody of documents respecting the corporate existence or good
standing of Signet. The opinion of counsel shall specifically state that
the same may be relied upon by you and Underwriters' Counsel.
(e) At the Closing Date, you shall have received the written opinion
of Arent Fox Kintner Plotkin & Kahn, U.S. counsel for Gold & Appel, S.A.
("Gold & Appel"), dated the date of its delivery, addressed to the Managers
and the U.S. Underwriters, and in form and scope reasonably satisfactory to
Underwriters' Counsel, to the effect that:
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<PAGE>
(i) Gold & Appel has been duly organized and is validly
existing as a corporation in good standing under the laws of the
British Virgin Islands.
(ii) Upon the issuance by the Company to Gold & Appel of
the number of Shares to be sold by Gold & Appel on or before the
Closing Date, Gold & Appel will be the sole owner of such Shares, and,
upon delivery of and payment for the Shares to be sold by Gold & Appel
to each Manager and U.S. Underwriter in accordance with the
Underwriting Agreements and the Power of Attorney and Custody
Agreement, each Manager and U.S. Underwriter (assuming that it
acquires such Shares without notice of any adverse claim, as such term
is used in Section 8-302 of the Uniform Commercial Code in effect in
the State of New York) will acquire valid title to such Shares, free
and clear of all liens, pledges, charges, security interests,
restrictions on transfer, agreements or other defects of title
whatsoever (other than those resulting from any action by such Manager
or such U.S. Underwriter).
(iii) Gold & Appel has duly executed and delivered a
Power of Attorney and Custody Agreement, and such Power of Attorney
and Custody Agreement is a legal and binding obligation of Gold &
Appel.
(iv) Each of the Underwriting Agreements has been duly
executed and delivered by the Attorneys-in-Fact on behalf of Gold &
Appel and is a legal and binding obligation of Gold & Appel.
(v) The execution, delivery and performance by Gold &
Appel (or the Attorneys-in-Fact on behalf of Gold & Appel) of the
Underwriting Agreements and the Power of Attorney and Custody
Agreement, and the consummation of the transactions contemplated
thereby, will not (i) conflict with or result in a breach of any of
the terms and provisions of, or constitute a default under (or an
event that with notice or lapse of time, or both, would constitute a
default under) or require approval or consent under, or result in the
creation or imposition of any lien, charge or encumbrance upon any
property or assets of Gold & Appel pursuant to the terms of any
agreement, contract, indenture, mortgage, lease, license, arrangement
or understanding known to such counsel to which Gold & Appel is a
party, or to which any of its properties is subject or (ii) violate or
conflict with any provision of the articles of
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incorporation, by-laws or similar governing instruments of Gold &
Appel or any law, rule or regulation applicable to Gold & Appel, or,
to such counsel's knowledge, any judgment, decree or order of any
court or any public, governmental or regulatory agency or body having
jurisdiction over Gold & Appel or any of its properties or assets.
(vi) No consent, approval, authorization, order,
registration, filing, qualification, license or permit of or with any
court or any public, governmental or regulatory agency or body having
jurisdiction over Gold & Appel or any of its properties or assets is
required for Gold & Appel's execution and delivery of, and performance
of its obligation under, the Underwriting Agreements, the Power of
Attorney and Custody Agreement, and the consummation of the
transactions contemplated thereby, except as may be required under the
Act and the Exchange Act or such as may be required under state
securities or "Blue Sky" laws and the securities laws of foreign
jurisdictions in connection with the purchase and distribution of the
Shares by the Managers and the U.S. Underwriters.
In rendering such opinion, such counsel (i) may limit its opinion to
the laws of the jurisdiction in which it is licensed to practice, but such
counsel shall cause to be delivered to you opinion of counsel reasonably
satisfactory to you located in the British Virgin Islands to the extent
relevant to the opinion set forth above and such counsel shall state that
they believe that both you and they are justified in relying upon such
opinion and (ii) may rely as to matters of fact, to the extent such counsel
may deem proper, on certificates of responsible officers of Gold & Appel
and certificates or other written statements of officers of departments of
jurisdictions having custody of documents respecting the corporate
existence or good standing of Gold & Appel. The opinion of counsel shall
specifically state that the same may be relied upon by you and
Underwriters' Counsel.
(f) At the Closing Date (and, with respect to the Additional Shares,
the Additional Closing Date), you shall have received a certificate of the
Company executed by each of the Chief Executive Officer and the Chief
Financial Officer of the Company, dated the date of its delivery, to the
effect that the conditions set forth in subsection (a) of this Section 10
have been satisfied, that as of the date of such certificate the
representations and warranties of
41
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the Company set forth in Section 3 hereof are true and correct as of such
Closing Date and the obligations of the Company to be performed hereunder
on or prior thereto have been duly performed.
(g) At the Closing Date, you shall have received a certificate of
each Selling Stockholder, dated the date of its delivery, to the effect
that as of the date of such certificate the representations and warranties
of such Selling Stockholder set forth in Section 4 hereof are true and
correct as of the Closing Date and the obligations of the Selling
Stockholder to be performed hereunder on or prior thereto, including, in
the case of Signet, the exercise of the Signet Warrants and the purchase of
the Shares to be sold by Signet hereunder, have been duly performed.
(h) At the time this Agreement is executed and at the Closing Date
(and, with respect to the Additional Shares, the Additional Closing Date),
you shall have received a letter, from Deloitte & Touche LLP, dated the
date of its delivery, addressed to the Managers and the U.S. Underwriters
and in form and substance reasonably satisfactory to you, to the effect
that: (i) they are independent accountants with respect to the Company
within the meaning of the Act and the Regulations and stating that the
answer to Item 10 of the Registration Statement is correct insofar as it
relates to them; (ii) in their opinion, the Company Financials audited by
such firm and included in the Registration Statement and the Prospectuses
comply as to form in all material respects with the applicable accounting
requirements of the Act and the applicable published rules and regulations
thereunder; (iii) on the basis of procedures (but not an audit made in
accordance with generally accepted auditing standards) consisting of a
reading of the latest available unaudited interim consolidated financial
statements of the Company and the subsidiaries, a reading of the minutes of
meetings and consents of the stockholders and boards of directors of the
Company and the subsidiaries and the committees of such boards subsequent
to December 31, 1995, inquiries of certain officials of the Company and the
subsidiaries who have responsibility for financial and accounting matters
of the Company and the subsidiaries with respect to transactions and events
subsequent to December 31, 1995, and other specified procedures and
inquiries to a date not more than five days prior to the date of such
letter, nothing has come to their attention that would cause them to
believe that: (A) the unaudited historical financial statements of the
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Company and the subsidiaries included in the Registration Statement and the
Prospectuses do not comply as to form in all material respects with the
applicable accounting requirements of the Act and the published rules and
regulations thereunder or that any material modification should be made to
such unaudited financial statements for them to be in conformity with US
GAAP; (B) with respect to the period subsequent to December 31, 1995 there
were, as of the date of the most recent available monthly financial data of
the Company and the subsidiaries, if any, and as of a specified date not
more than five days prior to the date of such letter, any changes in the
capital stock or long-term indebtedness of the Company or any decrease in
stockholders' equity of the Company, in each case as compared with the
amounts shown in the most recent balance sheet included in the Registration
Statement and the Prospectuses, except for changes or decreases that the
Registration Statement and the Prospectuses disclose have occurred or may
occur; (C) the unaudited pro forma consolidated financial statements of the
Company and the subsidiaries included in the Prospectus do not comply as to
form in all material respects with the applicable accounting requirements
of the Act and the applicable published rules and regulations thereunder or
the pro forma adjustments have not been properly applied to the historical
amounts in the compilation of such financial statements; or (D) that during
the period from December 31, 1995 to the date of the most recent available
monthly consolidated financial data of the Company and the subsidiaries, if
any, and to a specified date not more than five days prior to the date of
such letter, there was any decrease, as compared with the corresponding
period in the prior fiscal year, in total revenues, or total or per share
net income, except for decreases that the Prospectuses disclose have
occurred or may occur; and (iv) stating that they have compared specific
dollar amounts, numbers of shares, percentages of revenues and earnings and
other financial information pertaining to the Company and the subsidiaries
set forth in the Prospectuses, which have been specified by you prior to
the date of this Agreement, to the extent that such dollar amounts,
numbers, percentages and information may be derived from the general
accounting and financial records that are subject to the internal control
structure policies and procedures of the Company's and the subsidiaries'
accounting systems or that have been derived directly from such accounting
records by analysis or computation, and excluding any questions requiring
an interpretation by legal counsel, with the results obtained from the
application of specified readings, inquiries, and other appropriate
procedures specified by you (which
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procedures do not constitute an examination in accordance with generally
accepted auditing standards) set forth in such letter, and found them to be
in agreement.
(i) All proceedings taken in connection with the sale of the Shares
as contemplated by the Underwriting Agreements shall be reasonably
satisfactory in form and substance to you and to Underwriters' Counsel, and
you shall have received from Underwriters' Counsel a written opinion, dated
as of the Closing Date and addressed to the Managers and the U.S.
Underwriters, with respect to the sale of the Firm Shares, and dated as of
the Additional Closing Date with respect to the sale of the Additional
Shares, as to such matters as you reasonably may require, and the Company
shall have furnished to Underwriters' Counsel such documents as
Underwriters' Counsel may reasonably request for the purpose of enabling
Underwriters' Counsel to pass upon such matters.
(j) The NASD, upon review of the terms of the underwriting
arrangements for the public offering of the Shares, shall have raised no
objections thereto.
(k) The Shares shall have been approved for trading on Nasdaq,
subject to official notice of issuance.
(l) At the time this Agreement is executed, the Company shall have
furnished to you the written undertakings referred to in the last sentence
of Section 7(f) hereof, in form and substance satisfactory to Underwriters'
Counsel.
(m) At the time the Underwriting Agreements are executed, each
Selling Stockholder shall have executed and delivered to you (i) a Power-
of-Attorney and Custody Agreement and (ii) other than Signet, a United
States Treasury Department Form W-9 (or other applicable form or statement
specified by Treasury Department Regulations in lieu thereof).
(n) Signet shall have exercised the Signet Warrants and purchased
from the Company the Shares to be sold by Signet under the Underwriting
Agreements.
(o) Prior to the Closing Date and, with respect to the Additional
Shares, the Additional Closing Date, the Company and each Selling
Stockholder shall have furnished to you such further information,
certificates, opinions, agreements and documents as you may reasonably
request.
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(p) The closing of the purchase of the U.S. Shares pursuant to the
U.S. Underwriting Agreement shall occur concurrently with (i) the closing
described in Section 5(a)(ii) hereof, in the case of the Firm International
Shares, and (ii) the closing described in Section 5(b)(ii) hereof, in the
case of the Additional International Shares.
If any of the conditions specified in this Section 10 shall not have
been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements, or letters furnished to you or to
Underwriters' Counsel pursuant to this Section 10 shall not be in all material
respects reasonably satisfactory in form and substance to you and to
Underwriters' Counsel, all obligations of the Managers hereunder not theretofore
discharged may be canceled by you at, or at any time prior to, the Closing Date
and with respect to the Additional International Shares, the Additional Closing
Date. Notice of such cancellation shall be given to the Company in writing, or
by telephone, telex, telephonic facsimile or telegraph, confirmed in writing.
11. Indemnification.
(a) The Company, and each of the Selling Stockholders, jointly and
severally, agree to indemnify and hold harmless each Manager and each person, if
any, who controls any Manager within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, against any and all losses, liabilities,
claims, damages and expenses whatsoever (including but not limited to attorneys'
fees and any and all expenses reasonably incurred in investigating, preparing or
defending against any litigation, commenced or threatened, or any claim
whatsoever, and any and all amounts paid in settlement of any claim or
litigation, provided that such settlement was effected with the Company's or the
Selling Stockholders' written consent in accordance with Section 11(c) hereof),
joint or several, to which they or any of them may become subject under the Act,
the Exchange Act or otherwise, insofar as such losses, liabilities, claims,
damages or expenses (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of a material fact made by
the Company or the Selling Stockholders contained in the Registration Statement
or the International Prospectus or any Preliminary Prospectus, or in any
supplement thereto or amendment thereof, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein (in the case of the
International Prospectus, in light of the circumstances under which they were
made) not misleading; provided, however, that neither the Company nor the
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Selling
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Stockholders shall be liable under this subsection 11(a) to any Manager in any
such case to the extent but only to the extent that any such loss, liability,
claim, damage or expense arises out of or is based upon any such untrue
statement or alleged untrue statement or omission or alleged omission made in
reliance upon and in conformity with written information furnished to the
Company by or on your behalf with respect to the Managers; and provided,
--------
further, that as to any Preliminary Prospectus this indemnity shall not inure to
- -------
the benefit of any Manager or any person controlling such Manager on account of
any loss, liability, claim, damage or expense, or action in respect thereof,
arising from the sale of Shares to any person by that Manager if that Manager
failed to deliver a copy of the International Prospectus, as the same may be
amended or supplemented, to that person within the time required by the Act, and
the untrue statement or alleged untrue statement of a material fact or omission
or alleged omission to state a material fact in such Preliminary Prospectus was
corrected in the International Prospectus, unless such failure resulted from the
Company's noncompliance with Sections 7(b) or (c) hereof or, in the case of
information furnished by Signet, then only with respect to written information
furnished to the Company by Signet specifically stating that such information is
expressly for use in the Registration Statement; and provided, further, that the
-------- -------
obligations of each Selling Stockholder under this subsection 11(a) shall be
limited to the product of the number of International Shares sold by such
Selling Stockholder and the Purchase Price. This indemnity agreement will be in
addition to any liability that the Company and the Selling Stockholders may
otherwise have to any Manager or to any controlling person of such Manager,
including under this Agreement.
(b) Each Manager, severally and not jointly, agrees to indemnify and
hold harmless the Company, each of the directors of the Company, each of the
officers of the Company who shall have signed the Registration Statement, and
each other person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, and the Selling
Stockholders, against any losses, liabilities, claims, damages and expenses
whatsoever (including but not limited to attorneys' fees and any and all
expenses reasonably incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or any claim whatsoever, and any and
all amounts paid in settlement of any claim or litigation, provided that such
settlement was effected with such Manager's written consent in accordance with
Section 11(c) hereof), joint or several, to which they or any of them may become
subject under the Act, the Exchange Act or otherwise, insofar as such losses,
liabilities, claims, damages or expenses (or actions in respect
46
<PAGE>
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or the
International Prospectus or any Preliminary Prospectus, or in any amendment
thereof or supplement thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein (in the case of the International
Prospectus, in light of the circumstances under which they were made) not
misleading, in each case to the extent, but only to the extent, that any such
loss, liability, claim, damage or expense arises out of or is based upon any
such untrue statement or alleged untrue statement or omission or alleged
omission made in reliance upon and in conformity with written information
furnished to the Company by you or on your behalf with respect to such Manager
expressly for use in the Registration Statement or International Prospectus;
provided, however, that in no case shall such Manager be liable or responsible
- -------- -------
for any amount in excess of the aggregate underwriting discounts and commissions
applicable to the International Shares purchased by such Manager hereunder.
This indemnity will be in addition to any liability that the Managers may
otherwise have to the Company or any such director, officer or controlling
person, or the Selling Stockholders, including under this Agreement. The
Company acknowledges that the statements set forth in the last paragraph of the
cover page, the legend concerning stabilization on the inside front cover page
of the International Prospectus and the statements set forth under the captions
"Underwriting" in the International Prospectus constitute the only information
furnished in writing by or on behalf of any Manager expressly for use in the
Registration Statement, any related Preliminary Prospectus and the International
Prospectus.
(c) Promptly after receipt by an indemnified party under subsection
11(a) or (b) above of notice of the assertion of any claim or the commencement
of any action, such indemnified party shall, if a claim in respect thereof is to
be made against the indemnifying party under such subsection, notify each party
against whom indemnification is to be sought in writing of the claim or the
commencement of such action (but the failure so to notify an indemnifying party
shall not relieve it from any liability that it may have under this Section 11
except to the extent that it has been prejudiced in any material respect by such
failure or from any liability that it may have otherwise). In case any such
claim or action is brought against any indemnified party, and it notifies an
indemnifying party thereof, the indemnifying party shall be entitled to
participate therein, and to the extent it may elect by written notice delivered
to the indemnified party promptly after receiving the aforesaid notice
47
<PAGE>
from such indemnified party, to assume the defense thereof with counsel
satisfactory to such indemnified party, including the employment of such counsel
and payment of all fees and expenses. Notwithstanding the foregoing, the
indemnified party or parties shall have the right to employ its or their own
counsel in any such case, but the fees and expenses of such counsel shall be at
the expense of such indemnified party or parties unless (i) the employment of
such counsel shall have been authorized in writing by one of the indemnifying
parties in connection with the defense of such action, (ii) the indemnifying
parties shall not have employed counsel to take charge of the defense of such
action within a reasonable time after notice of commencement of the action, or
(iii) such indemnified party or parties shall have reasonably concluded that
there may be defenses available to it or them that are different from or
additional to those available to one or all of the indemnifying parties (in
which case the indemnifying parties shall not have the right to direct the
defense of such action on behalf of the indemnified party or parties with
respect to such different defenses), in any of which events such fees and
expenses shall be borne by the indemnifying parties. The indemnifying party
under subsection 11(a) or (b) above shall only be liable for the reasonable
legal expenses of one counsel for all indemnified parties in each jurisdiction
in which any claim or action is brought; provided, however, that the
-------- -------
indemnifying party shall be liable for separate counsel for any indemnified
party in a jurisdiction, if counsel to the indemnified parties shall have
reasonably concluded that there may be defenses available to such indemnified
party that are different from or additional to those available to one or more of
the other indemnified parties and that separate counsel for such indemnified
party is prudent under the circumstances. Anything in this subsection to the
contrary notwithstanding, an indemnifying party shall not be liable for any
settlement of any claim or action effected without its written consent;
provided, however, that such written consent was not unreasonably withheld.
- -------- -------
(d) The Company and the Selling Stockholders may agree, as among
themselves and without limiting the rights of the Managers and their controlling
persons under this Agreement against the Company and the Selling Stockholders,
as to the respective amounts of liability under this Section 11 and Section 12
below for which they each shall be responsible.
12. Contribution. In order to provide for contribution in
circumstances in which the indemnification provided for in Section 11(a) hereof
is for any reason held to be unavailable from the Company or the Selling
Stockholders or is insufficient to hold harmless a party indemnified thereunder,
the Company, the Selling Stockholders and the Managers shall
48
<PAGE>
contribute to the aggregate losses, claims, damages, liabilities and expenses of
the nature contemplated by such indemnification provisions (including any
investigation, legal and other expenses reasonably incurred in connection with,
and any amount paid in settlement of, any action, suit or proceeding or any
claims asserted, but after deducting in the case of losses, claims, damages,
liabilities and expenses suffered by the Company and the Selling Stockholders,
any contribution received by the Company and the Selling Stockholders from
persons, other than one or more of the Managers, who may also be liable for
contribution, including persons who control the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, officers of the
Company who signed the Registration Statement and directors of the Company) to
which the Company, the Selling Stockholders and one or more of the Managers may
be subject, in such proportions as are appropriate to reflect the relative
benefits received by the Company and the Selling Stockholders, on the one hand,
and the Managers, on the other hand, from the offering of the International
Shares or, if such allocation is not permitted by applicable law or
indemnification is not available as a result of the indemnifying party not
having received notice as provided in Section 11 hereof, in such proportion as
is appropriate to reflect not only the relative benefits referred to above but
also the relative fault of the Company and the Selling Stockholders, on the one
hand, and the Managers, on the other hand, in connection with the statements or
omissions that resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Selling Stockholders, on the one hand,
and the Managers, on the other hand, shall be deemed to be in the same
proportion as (x) the total proceeds from the offering (net of underwriting
discounts and commissions but before deducting expenses) received by the Company
and the Selling Stockholders and (y) the underwriting discounts and commissions
received by the Managers, respectively, bear to the total proceeds to the public
of the Shares, in each case as set forth in the table on the cover page of the
International Prospectus. The relative fault of the Company and the Selling
Stockholders, on the one hand, and of the Managers, on the other hand, shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or the Selling
Stockholders, as such, on the one hand, or the Managers, on the other hand, and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. The Company, the Selling
Stockholders and the Managers agree that it would not be just and equitable if
contribution pursuant to this Section 12
49
<PAGE>
were determined by pro rata allocation or by any other method of allocation that
does not take account of the equitable considerations referred to above. The
Selling Stockholders' obligations in this Section 12 to contribute are joint and
several and the Managers' Obligations under this Section 12 to contribute are
several and not joint. Notwithstanding the provisions of this Section 12, (i)
in no case shall any Manager be required to contribute any amount in excess of
the amount by which the aggregate public offering price of the International
Shares underwritten by it and distributed to the public exceeds the amount of
any damages that such Manager has otherwise been required to pay by reason of
such untrue or alleged untrue statement or such omission or alleged omission,
(ii) in no case shall any Selling Stockholder be required to contribute any
amount in excess of the amount by which the product of the number of
International Shares sold by such Selling Stockholder and the Purchase Price
exceeds the amount of any damages that such Selling Stockholder has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
such omission or alleged omission and (iii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 12, each person, if any, who
controls any Manager within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act shall have the same rights to contribution as such
Manager and each person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, each officer of the
Company who shall have signed the Registration Statement and each director of
the Company shall have the same rights to contribution as the Company, subject
in each case to clauses (i) and (ii) of this Section 12. Any party entitled to
contribution shall, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect of which a claim for
contribution may be made against another party or parties under this Section 12,
notify such party or parties from whom contribution may be sought, but the
omission to so notify such party or parties shall not relieve the party or
parties from whom contribution may be sought from any obligation it or they may
have under this Section 12 or otherwise. No party shall be liable for
contribution with respect to any action or claim settled without its written
consent; provided, however, that such written consent was not unreasonably
-------- -------
withheld.
13. Survival of Representations and Agreements. All representations
and warranties, covenants and agreements of the Managers, the Company and the
Selling Stockholders contained in this Agreement, including without limitation
the agreements
50
<PAGE>
contained in Sections 7, 8 and 9 hereof, the indemnity agreements contained in
Section 11 hereof and the contribution agreements contained in Section 12
hereof, shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of the Managers or any controlling person of
any Manager or by or on behalf of the Company, any of its officers, directors
and controlling persons, or the Selling Stockholders, and shall survive delivery
of the International Shares to and payment for the International Shares by the
Managers. The representations contained in Sections 3, 4 and 4A hereof and the
agreements contained in Sections 7, 8, 9, 11, 12 and 15(d) hereof shall survive
the termination of this Agreement including pursuant to Section 14 or 15 hereof;
provided, however, that if this Agreement is terminated pursuant to Section 14
- -----------------
or 15 hereof or if for any reason the purchase of the International Shares by
the Managers as contemplated hereunder is not consummated, the agreements
contained in Sections 7 and 8 hereof shall not survive.
14. Default by a Manager.
(a) If any Manager or Managers shall default in its or their
obligation to purchase Firm International Shares or Additional International
Shares hereunder, and if the Firm International Shares or Additional
International Shares with respect to which such default relates do not (after
giving effect to arrangements, if any, made pursuant to subsection 14(b) below)
exceed in the aggregate 10% of the number of shares of Firm International Shares
or Additional International Shares, as the case may be, that all Managers have
agreed to purchase hereunder, then such Firm International Shares or Additional
International Shares to which the default relates shall be purchased by the non-
defaulting Managers in proportion to the respective proportions that the numbers
of Firm International Shares set forth opposite their respective names in
Schedule I hereto bear to the aggregate number of Firm International Shares set
- ----------
forth opposite the names of the non-defaulting Managers.
(b) If such default relates to more than 10% of the Firm
International Shares or Additional International Shares, as the case may be, you
may, in your discretion, arrange for another party or parties (including any
non-defaulting Manager or Managers who so agree) to purchase such Firm
International Shares or Additional International Shares, as the case may be, to
which such default relates on the terms contained herein. If within five (5)
calendar days after such a default you do not arrange for the purchase of the
Firm International Shares or Additional International Shares, as the case may
be, to which such default relates as provided in this Section 14, this Agreement
(or, in
51
<PAGE>
the case of a default with respect to the Additional International Shares, the
obligations of the Managers to purchase and of the Company to sell the
Additional International Shares) shall thereupon terminate, without liability on
the part of the Company or any Selling Stockholder with respect thereto (except
in each case as provided in Sections 9, 11(a) and 12 hereof) or the several non-
defaulting Managers (except as provided in Sections 11(b) and 12 hereof), but
nothing in this Agreement shall relieve a defaulting Manager or Managers of its
or their liability, if any, to the other several Managers, the Company and the
Selling Stockholders for damages occasioned by its or their default hereunder.
(c) If the Firm International Shares or Additional International
Shares to which the default relates are to be purchased by the non-defaulting
Managers, or are to be purchased by another party or parties as aforesaid, you
or the Company shall have the right to postpone the Closing Date or Additional
Closing Date, as the case may be, for a period not exceeding five (5) business
days, in order to effect whatever changes may thereby be made necessary in the
Registration Statement or the International Prospectus or in any other documents
and arrangements, and the Company agrees to file promptly any amendment or
supplement to the Registration Statement or the International Prospectus that,
in the opinion of Underwriters' Counsel, may thereby be made necessary or
advisable. The term "Manager" as used in this Agreement shall include any party
substituted under this Section 14 with like effect as if it had originally been
a party to this Agreement with respect to such Firm International Shares and
Additional International Shares.
15. Effective Date of Agreement; Termination.
(a) This Agreement shall become effective upon the later of (i) when
you and the Company shall have received notification of the effectiveness of the
Registration Statement and (ii) the execution and delivery of this Agreement by
the parties hereto. Until this Agreement becomes effective as aforesaid, this
Agreement may be terminated by the Company by notifying you or by you by
notifying the Company without any liability of any party to any party hereunder.
Notwithstanding the foregoing, the provisions of this Section 15 and of Sections
9, 11, 12 and 13 hereof shall at all times be in full force and effect.
(b) This Agreement and the obligations of the Managers hereunder may
be terminated by you by written notice to the Company at any time at or prior to
the Closing Date (and, with respect to the Additional International Shares, the
Additional
52
<PAGE>
Closing Date), without liability (other than with respect to Sections 11 and 12)
on the part of any Manager to the Company and the Selling Stockholders if, on or
prior to such date, (i) the Company or the Selling Stockholders shall have
failed, refused or been unable to perform in any material respect any agreement
on its part to be performed hereunder, (ii) any other condition to the
obligations of the Managers set forth in Section 10 hereof is not fulfilled when
and as required in any material respect, (iii) trading in securities generally
on the NYSE or the American Stock Exchange or in the over-the-counter market
shall have been suspended or materially limited, or minimum prices shall have
been established on either exchange or such market by the Commission, or by
either exchange or other regulatory body or governmental authority having
jurisdiction, (iv) a general banking moratorium shall have been declared by
Federal or New York State authorities, (v) there shall have occurred any
outbreak or escalation of armed hostilities involving the United States on or
after the date hereof, or if there has been a declaration by the United States
of a national emergency or war, the effect of which shall be, in your judgment,
to make it inadvisable or impracticable to proceed with the sale and delivery of
the Shares on the terms and in the manner contemplated in the Prospectuses, (vi)
in your reasonable opinion any material adverse change shall have occurred since
the respective dates as of which information is given in the Registration
Statement or the Prospectuses affecting the business, prospects, condition
(financial or other) or results of operations of the Company and its
subsidiaries taken as a whole, whether or not arising in the ordinary course of
business other than as set forth in the Prospectuses or contemplated thereby,
(vii) there shall have occurred such a material adverse change in the financial
markets in the United States such as, in your judgment, makes it inadvisable or
impracticable to proceed with the sale and delivery of the Shares on the terms
and in the manner contemplated in the Prospectuses, or (viii) there shall have
been any enactment, proposal, publication, decree or other promulgation of any
foreign or United States federal or state statute, regulation, rule or order of
any court or other governmental authority that would, in your reasonable
judgment, make it inadvisable or impracticable to proceed with the sale and
delivery of the Shares on the terms and in the manner contemplated in the
Prospectuses. Your right to terminate this Agreement will not be waived or
otherwise relinquished by their failure to give notice of termination prior to
the time that the event giving rise to the right to terminate shall have ceased
to exist, provided that notice is given prior to the Closing Date (and, with
respect to the Additional International Shares, the Additional Closing Date).
53
<PAGE>
(c) Any notice of termination pursuant to this Section 13 shall be by
telephone, telex, telephonic facsimile, or telegraph, confirmed in writing by
letter.
(d) If this Agreement shall be terminated pursuant to any of the
provisions hereof (otherwise than pursuant to notification by you as provided in
subsection 15(a) or 15(b) hereof), or if the sale of the International Shares
provided for herein is not consummated because any condition to the obligations
of the Managers set forth herein is not satisfied (other than with respect to
Section 10(q) hereof as a result of a default by the U.S. Underwriters in the
purchase of the U.S. Shares) or because of any refusal, inability or failure on
the part of the Company or the Selling Stockholders to perform any agreement
herein or to comply with any provision hereof (other than by reason of a default
of the Managers), the Company agrees, subject to demand by you, to reimburse the
Managers for all reasonable out-of-pocket expenses (including the reasonable
fees and expenses of Underwriters' Counsel), incurred by the Managers in
connection herewith.
16. Notices. All communications hereunder, except as may be
otherwise specifically provided herein, shall be in writing and, if sent to any
one or more of the Managers, shall be hand delivered, telexed, telegraphed or
faxed to each such Manager in care of Bear, Stearns International Limited, One
Canada Square, London E14 5AD, England, Attention: Corporate Finance Department
(Fax No. 011-44-71-512-4090), with a copy in like manner to Bear, Stearns & Co.
Inc., 245 Park Avenue, New York, New York 10167, Attention: Corporate Finance
Department (Fax No. 212-272-3092); if sent to the Company, shall be hand
delivered, telexed, telegraphed or faxed to the Company, 4219 LaFayette Center
Drive, Chantilly, Virginia 20151, Attention:
_________________________________________________ (Fax No. ________________);
and if sent to any one or more of the Selling Stockholders, shall be hand
delivered, telexed, telegraphed or faxed to the Attorneys-in-Fact, c/o Telco
Communications Group Inc., 4219 LaFayette Center Drive, Chantilly, Virginia
20151, Attention: Donald A. Burns or Bryan K. Rachlin (Fax No. ________).
17. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original but all of which together shall
constitute one instrument.
18. Parties. This Agreement shall inure solely to the benefit of,
and shall be binding upon, each of the Managers, the Company and the Selling
Stockholders, and the controlling persons, directors, officers, employees and
agents referred to in
54
<PAGE>
Sections 11 and 12 hereof, and their respective successors and assigns, and no
other person shall have or be construed to have any legal or equitable right,
remedy or claim under or in respect of or by virtue of this Agreement or any
provision herein contained. The term "successors and assigns" shall not include
a purchaser, in its capacity as such, of International Shares from the Managers.
19. Construction. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York.
20. Definition of Business Day. For the purposes of this Agreement,
"business day" means any day on which the NYSE is open for trading.
If the foregoing correctly sets forth the complete agreement among the
Managers, the Company and the Selling Stockholders, please so indicate in the
space provided below for that purpose, whereupon this letter shall constitute a
binding agreement among us.
Very truly yours,
TELCO COMMUNICATIONS GROUP, INC.
By:
-------------------------------------
Name:
Title:
SELLING STOCKHOLDERS
By:
-------------------------------------
Name:
Attorneys-in-Fact for each
Selling Stockholder listed
in Schedule II annexed hereto
55
<PAGE>
Accepted as of the date first
above written.
BEAR, STEARNS INTERNATIONAL LIMITED
SALOMON BROTHERS INTERNATIONAL LIMITED
Acting severally on behalf
of themselves and the several
Managers named in Schedule I
annexed hereto.
By: BEAR, STEARNS INTERNATIONAL LIMITED
By:
-------------------------------------
Name:
Title:
56
<PAGE>
SCHEDULE I
Number of
Firm International Shares
Name of Manager to be Purchased
- --------------- ---------------
Bear, Stearns International Limited..................
Salomon Brothers International Limited...............
----------
TOTAL
==========
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
Number of Number of
Firm International Firm U.S.
Name of Selling Stockholder Shares to be Sold Shares to be Sold
- --------------------------- ----------------- -----------------
<S> <C> <C>
Donald A. Burns.............. 126,140 378,422
Henry G. Luken, III.......... 126,141 378,422
Gold & Appel Transfer, S.A... 113,232 339,697
Thomas J. Cirrito............ 85,717 257,151
Natalie J. Marine-Street..... 13,953 41,858
Signet Media Capital Group... 170,520 511,562
Mark Stodter................. 3,719 11,156
Janet Anastasi............... 7,703 23,109
James Sznajder............... 892 2,678
Dennis Jarman................ 1,982 5,946
</TABLE>
<PAGE>
SCHEDULE III
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
Percent of
Name Jurisdiction Equity
- ---- ------------ -----------
<S> <C> <C>
Dial & Save of Alabama, Inc. Delaware 100%
Dial & Save of Arizona, Inc. Delaware 100%
Dial & Save of Arkansas, Inc. Delaware 100%
Dial & Save of California, Inc. Delaware 100%
Dial & Save of Colorado, Inc. Delaware 100%
Dial & Save of Connecticut, Inc. Delaware 100%
Dial & Save of Delaware, Inc. Delaware 100%
Dial & Save of Florida, Inc. Delaware 100%
Dial & Save
of Florida, Alpha, Inc. Delaware 100%
Dial & Save
of Florida, Beta, Inc. Delaware 100%
Dial & Save
of Florida, Gamma, Inc. Delaware 100%
Dial & Save
of Florida, Delta, Inc. Delaware 100%
Dial & Save of Georgia, Inc. Delaware 100%
Dial & Save of Idaho, Inc. Delaware 100%
Dial & Save of Illinois, Inc. Delaware 100%
Dial & Save of Indiana, Inc. Delaware 100%
Dial & Save of Iowa, Inc. Delaware 100%
Dial & Save of Kansas, Inc. Delaware 100%
Dial & Save of Kentucky, Inc. Delaware 100%
Dial & Save of Louisiana, Inc. Delaware 100%
Dial & Save of Maine, Inc. Delaware 100%
Dial & Save of Maryland, Inc. Delaware 100%
Dial & Save
of Massachusetts, Inc. Delaware 100%
Dial & Save of Michigan, Inc. Delaware 100%
Dial & Save of Minnesota, Inc. Delaware 100%
Dial & Save of Mississippi, Inc. Delaware 100%
Dial & Save of Missouri, Inc. Delaware 100%
Dial & Save of Montana, Inc. Delaware 100%
Dial & Save of Nebraska, Inc. Delaware 100%
Dial & Save of Nevada, Inc. Delaware 100%
Dial & Save of New Hampshire, Inc. Delaware 100%
Dial & Save of New Jersey, Inc. Delaware 100%
Dial & Save of New Mexico, Inc. Delaware 100%
Dial & Save of New York, Inc. Delaware 100%
Dial & Save
of North Carolina, Inc. Delaware 100%
Dial & Save of North Dakota, Inc. Delaware 100%
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
Percent of
Name Jurisdiction Equity
- ---- ------------ -----------
<S> <C> <C>
Dial & Save of Ohio, Inc. Delaware 100%
Dial & Save of Oklahoma, Inc. Delaware 100%
Dial & Save of Oregon, Inc. Delaware 100%
Dial & Save of Pennsylvania, Inc. Delaware 100%
Dial & Save of Rhode Island, Inc. Delaware 100%
Dial & Save
of South Carolina, Inc. Delaware 100%
Dial & Save of South Dakota, Inc. Delaware 100%
Dial & Save of Tennessee, Inc. Delaware 100%
Dial & Save of Texas, Inc. Delaware 100%
Dial & Save of Utah, Inc. Delaware 100%
Dial & Save of Vermont, Inc. Delaware 100%
Dial & Save of Virginia, Inc. Delaware 100%
Dial & Save of Washington, Inc. Delaware 100%
Dial & Save
of Washington, D.C., Inc. Delaware 100%
Dial & Save of West Virginia, Inc. Delaware 100%
Dial & Save of Wisconsin, Inc. Delaware 100%
Dial & Save of Wyoming, Inc. Delaware 100%
Long Distance Wholesale Club, Inc. Delaware 100%
Telco Development Group
of Delaware, Inc. Delaware 100%
Tel Labs, Inc. Virginia 100%
</TABLE>
Signet Bank has a security interest in all outstanding capital stock of the
foregoing subsidiaries of the Company.
60
<PAGE>
SCHEDULE IV
MATERIAL SUBSIDIARIES
JURISDICTION OF
NAME INCORPORATION
- ---- ---------------
Long Distance Wholesale Club Delaware
Tel Labs, Inc. Virginia
<PAGE>
Exhibit 2.1
SHARE EXCHANGE AGREEMENT
THIS SHARE EXCHANGE AGREEMENT (this "Agreement") is made and entered into
as of this 1st day of June, 1996, by and among Telco Communications Group,
Incorporated, a Virginia corporation ("Telco"), and Henry G. Luken, III, Bryan
Rachlin, Michael Cheng and Kevin Yang (collectively, the "Shareholders").
RECITALS
A. The authorized capital stock of Telco consists of 100,000 shares of
Common Stock, no par value ("Telco Common Stock"), of which 61,197 are issued
and outstanding and 10,000 have been reserved for issuance under the Telco Stock
Option Plan.
B. The authorized capital stock of Tel Labs, Inc., a Virginia corporation
("Tel Labs"), consists of 1,000 issued and outstanding shares of Common Stock,
$1.00 par value ("Tel Labs Common Stock"). The Shareholders own all of the
issued and outstanding shares of Tel Labs Common Stock (the "Shares"), as set
forth on Schedule 1 hereto ("Schedule of Ownership").
C. The Board of Directors of Telco has approved the purchase by Telco of
the Shareholders' shares of Tel Labs Common Stock pursuant to which the Shares
of Tel Labs Common Stock shall be exchanged for 1,396.08 shares of Telco Common
Stock, upon the terms and subject to the conditions and certain adjustments
hereinafter set forth.
AGREEMENTS
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereby agree as follows:
ARTICLE 1
DEFINITIONS
-----------
In addition to capitalized terms defined elsewhere in this Agreement, the
following terms have the meanings specified or referred to in this Article 1:
"Affiliate" means, with respect to any person, any other person who
---------
directly or indirectly controls, is controlled by or is under common control
with such person, and in addition with respect to officers, directors and
stockholders of any person, any relative or spouse (or relative of such spouse)
who resides with any such officer, director or spouse.
1
<PAGE>
"Encumbrance" means any lien, claim, charge, security interest, mortgage,
-----------
pledge, easement, conditional sale or other title retention agreement, defect in
title, covenant or other restrictions of any kind.
"IPO" means an initial public offering of Telco Common Stock.
---
ARTICLE 2
EXCHANGE OF SHARES
------------------
2.1 Exchange of Shares. Subject to the provisions of this Agreement, the
------------------
Shareholders agree to sell, and Telco agrees to purchase, at Closing, the issued
and outstanding shares of Tel Labs Common Stock in exchange for shares of Telco
Common Stock.
2.2 Exchange Price. The exchange price for the shares of Tel Labs Common
--------------
Stock shall be as follows:
(a) With respect to the shares held by Henry G. Luken, III, 887.845
shares of Telco Common Stock, payable at Closing;
(b) With respect to the shares held by Bryan Rachlin, 317.647 shares of
Telco Common Stock, payable at Closing;
(c) With respect to the shares held by Michael Cheng, 127.059 shares of
Telco Common Stock, payable at Closing; and
(d) With respect to the shares held by Kevin Yang, 63.529 shares of Telco
Common Stock, payable at Closing.
2.3 Share Exchange Procedure. (a) At Closing, the Shareholders shall
------------------------
surrender to Telco all of their certificates representing shares of Tel Labs
Common Stock, together with any documents reasonably required by Telco. At
Closing, Telco shall issue to each Shareholder a certificate registered in such
Shareholder's name representing the shares of Telco Common Stock issued in
exchange therefor, and such certificates surrendered shall forthwith be
canceled.
(b) The shares of Telco Common Stock issued to the Shareholders
hereunder shall be deemed to have been exchanged, issued and distributed in full
satisfaction of all rights pertaining to the shares of Tel Labs Common Stock
held by the Shareholders.
2.4 Further Assurances. If at any time after the Closing, Telco or any
------------------
of the Shareholders shall consider or be advised that any agreements, assurances
or any other acts or things are necessary, desirable or proper to carry out the
purposes of this Agreement, each party shall execute and deliver all such
agreements and assurances and do all such other acts and things
2
<PAGE>
reasonably necessary, desirable or proper to carry out the purpose of this
Agreement.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF
---------------------------------
THE SHAREHOLDERS
----------------
As an inducement to Telco to enter into this Agreement and to consummate
the transactions contemplated hereby, each of the Shareholders, severally and
not jointly, represents and warrants to Telco as follows:
3.1 Authority of Shareholders. Each Shareholder is the legal and
-------------------------
beneficial owner of the shares of Tel Labs Common Stock set forth on the
Schedule of Ownership, free and clear of Encumbrance and has all requisite legal
right, power, capacity and authority to enter into this Agreement and to perform
his or her obligations hereunder. This Agreement has been duly executed and
delivered by each Shareholder and constitutes a valid and binding obligation of
such Shareholder enforceable against him or her in accordance with its terms.
Except as set forth in Schedule 3.1, neither the execution and delivery of this
Agreement or any of the other agreements or instruments contemplated hereby or
the consummation of any of the transactions contemplated hereby or thereby nor
compliance with or fulfillment of the terms, conditions and provisions hereof or
thereof does or will:
(a) conflict with, result in a breach of the terms, conditions or
provisions of, or constitute a default, an event of default or an event creating
rights of acceleration, termination or cancellation or a loss of rights under,
or result in the creation or imposition of any Encumbrance upon any of the
properties of any Shareholder, or under any note, instrument, agreement,
mortgage, lease, license, franchise, permit, judgment, order, award, decree or
other authorization, right, restriction or obligation to which a Shareholder is
a party or any of his or her properties is subject or by which any Shareholder
is bound, or any law, rule, regulation or other legal requirement affecting any
Shareholder or his or her properties, or
(b) require the approval, consent, authorization or act of, or the
making by any Shareholder of any declaration, filing or registration with, any
third party or any foreign, federal, state or local court, governmental
authority or regulatory body.
3.2 Disclosure. None of the representations or warranties of the
----------
Stockholders contained herein, none of the information contained in the Schedule
referred to in Article 3, and none of the other information or documents
furnished or to be furnished to Telco or any of its representatives by the
Shareholders or their representatives pursuant to the terms of this Agreement,
is false or misleading in any material respect or omits to state a fact herein
or therein necessary to make the statements herein or therein not misleading in
any material respect.
3
<PAGE>
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
------------------------------
OF TELCO
--------
As an inducement to the Shareholders to enter into this Agreement and to
consummate the transactions contemplated hereby, Telco hereby represents and
warrants to the Shareholders as follows:
4.1 Organization of Telco. Telco is a corporation duly organized,
---------------------
validly existing and in good standing under the laws of the State of Virginia.
Telco is duly qualified to transact business as a foreign corporation and is in
good standing in each of the jurisdictions in which the ownership or leasing of
its properties or the conduct of its business requires such qualification, other
than jurisdictions the failure by Telco to qualify in which would not have a
material adverse effect on Telco, its businesses, operations or financial
condition and no other jurisdiction has demanded, requested or otherwise
indicated that Telco is required so to qualify. Telco has all requisite
corporate power and authority to own or lease and to operate and use its
properties and to carry on its business as now conducted.
4.2 Outstanding Capital Stock. The authorized capital stock of Telco
-------------------------
consists of (i) 100,000 shares of Telco Common Stock, of which 61,197 are
currently issued and outstanding and 10,000 are reserved for issuance under the
Telco Stock Option Plan. The Telco Common Stock to be issued to the holders of
Tel Labs Common Stock pursuant to this Agreement, when so issued, will be duly
and validly authorized, issued and outstanding, fully paid, non-assessable and
free of preemptive rights.
4.3 Options or Other Rights. Except as described in Schedule 4.3, there
------------------------
is no outstanding right, subscription, warrant, call, unsatisfied preemptive
right, option, or other agreement of any kind to purchase or otherwise to
receive from Telco any of the outstanding, authorized but unissued, unauthorized
or treasury shares of the capital stock or any other security of Telco, and
there is no outstanding security of any kind convertible into such capital
stock.
4.4 Articles or Certificate of Incorporation and By-Laws. Telco has
----------------------------------------------------
heretofore delivered to the Shareholders true and complete copies of its
Articles of Incorporation and By-Laws as in effect on the date hereof.
4.5 Authority of Telco. Telco has full power and authority to execute
------------------
and deliver this Agreement and all of the other agreements and instruments
contemplated hereby, to consummate the transactions contemplated hereby and
thereby and to comply with the terms, conditions and provisions hereof and
thereof. The execution, delivery and performance of this Agreement by Telco has
been duly authorized and approved by Telco's Boards of Directors, and no other
corporate proceedings on the part of Telco will be necessary to authorize this
Agreement and the transactions contemplated hereby. This Agreement has been
duly executed and delivered by Telco and is, and each other agreement or
instrument of Telco contemplated hereby will be, the legal,
4
<PAGE>
valid and binding agreement of Telco, enforceable in accordance with their
respective terms. Except as set forth in Schedule 4.5, neither the execution and
delivery of this Agreement or any of the other agreements or instruments
contemplated hereby or the consummation of any of the transactions contemplated
hereby or thereby, nor compliance with or fulfillment of the terms, conditions
and provisions hereof or thereof will:
(1) conflict with, or result in a breach of the terms, conditions or
provisions, or constitute a default, or an event of default or an
event creating rights of acceleration, termination or cancellation or
loss of rights under, or result in the creation or imposition of any
Encumbrance upon any of the properties of Telco, under the Articles
of Incorporation or By-laws of Telco or any note, instrument,
agreement, mortgage, lease, license, franchise, permit, judgment,
order, award, decree or other authorization, right, restriction or
obligation to which Telco is a party, or any of its properties is
subject or by which Telco is bound, or any statute, other law or
regulatory provision affecting Telco or its properties, or
(2) require the approval, consent, authorization or act of, or the making
by Telco of any declaration, filing or registration with, any third
party or any foreign, federal, state or local court, governmental
authority or regulatory body.
4.6 Disclosure. None of the representations or warranties of Telco
----------
contained herein, none of the information contained in the Schedules referred to
in this Article 4, and none of the other information or documents furnished or
to be furnished to the Shareholders or any of their representatives by Telco or
its representatives pursuant to the terms of this Agreement, is false or
misleading in any material respect or omits to state a fact herein or therein
necessary to make the statements herein or therein not misleading in any
material respect.
ARTICLE 5
ACTION PRIOR TO CLOSING
-----------------------
The respective parties hereto covenant and agree to take the following
actions between the date hereof and the Closing:
5.1 Preserve Accuracy of Representations and Warranties. Each of the
---------------------------------------------------
parties hereto shall refrain from taking any action, and the stockholders of
Telco shall refrain from taking any action, which would render any
representation or warranty contained in Article 3 or 4 of this Agreement
inaccurate as of the Closing Date. Each party shall promptly notify the others
of any action, suit or proceeding that shall be instituted or threatened against
such party to restrain, prohibit or otherwise challenge the legality of any
transaction contemplated by this Agreement. Each party shall promptly notify the
other parties of any lawsuit, claim, proceeding or
5
<PAGE>
investigation that may be threatened, brought, asserted or commenced against
such party that would have been listed in a Schedule hereto by such party if
such lawsuit, claim, proceeding or investigation had arisen prior to the date
hereof.
5.2 Consents and Approvals. Each party hereto shall cooperate in using
----------------------
such party's best efforts promptly to obtain all consents and amendments from
parties to contracts, licenses, leases and other agreements and all consents,
amendments or permits from governmental authorities, which are required by the
terms thereof, this Agreement or otherwise for the due and punctual consummation
of the transactions contemplated by this Agreement.
5.3 No Public Announcement. No party hereto (other than Telco) shall,
----------------------
without the approval of the other parties hereto make any press release or other
public announcement concerning the transactions contemplated by this Agreement,
except as and to the extent that any such party shall be so obligated by law, in
which case Telco shall be advised and the parties shall use their best efforts
to cause a mutually agreeable release or announcement to be issued.
ARTICLE 6
CONDITIONS PRECEDENT TO
-----------------------
OBLIGATIONS OF TELCO
--------------------
The obligation of Telco to consummate the share exchange under this
Agreement shall, at the option of Telco, be subject to the satisfaction, on or
prior to the Closing Date, of each of the following conditions:
6.1 No Misrepresentation or Breach of Covenants and Warranties. There
----------------------------------------------------------
shall have been no material breach by any Shareholder in the performance of any
of their respective covenants and agreements herein; each of the representations
and warranties of the Shareholders contained or referred to herein shall be true
and correct in all material respects as of the Closing Date as though made on
the Closing Date, except for changes therein specifically permitted by this
Agreement or resulting from any transaction expressly consented to in writing by
Telco; and there shall have been delivered to Telco a certificate or
certificates to such effect, dated the Closing Date, signed by each Shareholder.
6.2 No Changes or Destruction of Property. Between the date hereof and
-------------------------------------
the Closing Date, there shall have been (a) no material adverse change in the
properties, business or the operations, liabilities, profits, prospects or
condition (financial or otherwise) of Tel Labs; and (b) no material adverse
federal or state legislative or regulatory change affecting Tel Labs or its
services.
6.3 Necessary Consents. Tel Labs shall have received consents, approvals
------------------
and authorizations, in form and substance reasonably satisfactory to Telco, to
the transactions contemplated hereby from all clients, governmental authorities
and other parties to all contracts,
6
<PAGE>
leases, agreements and permits to which Tel Labs is a party and as to which such
consents are necessary. All such consents, approvals and authorizations shall
be in full force and effect.
6.4 Corporate Action. Tel Labs shall have taken all corporate action
----------------
necessary to approve the transactions contemplated by this Agreement.
6.5 No Restraint or Litigation. No action, suit, investigation or
--------------------------
proceeding shall have been instituted or threatened to restrain or prohibit or
otherwise challenge the legality or validity of the transactions contemplated
hereby.
6.6 Employment Agreements. (a) Henry G. Luken, III and Telco shall have
---------------------
entered into the Employment Agreement attached hereto as Exhibit A; (b) Michael
---------
Cheng and Tel Labs shall have entered into the Employment Agreement attached
hereto as Exhibit B; (c) Kevin Yang and Tel Labs shall have entered into the
---------
Employment Agreement attached hereto as Exhibit C; and (d) Bryan Rachlin and
---------
Telco shall have entered into the Employment Agreement attached hereto as
Exhibit D.
- ---------
ARTICLE 7
CONDITIONS PRECEDENT TO
-----------------------
OBLIGATIONS OF SHAREHOLDERS
---------------------------
The obligation of the Shareholders to consummate the share exchange under
this Agreement shall be subject to the satisfaction, on or prior to the Closing
Date, of the following conditions:
7.1 No Misrepresentation or Breach of Covenants and Warranties. There
----------------------------------------------------------
shall have been no material breach by Telco in the performance of any of its
covenants and agreements herein; each of the representations and warranties of
Telco contained or referred to in this Agreement shall be true and correct on
the Closing Date as though made on the Closing Date, and there shall have been
delivered to the Shareholders a certificate or certificates to such effect,
dated the Closing Date and signed on behalf of Telco by its President or
Chairman.
7.2 Corporate Action. Telco shall have taken all corporate action
----------------
necessary to approve the transactions contemplated by this Agreement, and Telco
shall have furnished the Shareholders with certified copies of resolutions
adopted by the Board of Directors of Telco, in form and substance reasonably
satisfactory to counsel for the Shareholders, in connection with such
transactions.
7.3 No Restraint or Litigation. No action, suit or proceeding by any
--------------------------
governmental agency shall have been instituted or threatened to restrain,
prohibit or otherwise challenge the legality or validity of the transactions
contemplated hereby.
7
<PAGE>
7.4 Necessary Governmental Approvals. The parties shall have received
--------------------------------
all governmental and regulatory approvals and actions necessary to consummate
the transactions contemplated hereby, which are either specified in Schedule 3.1
or otherwise required to be obtained prior to the Closing Date by applicable law
or regulation or which are necessary to prevent a material adverse change in the
properties, the business or the operations, liabilities, profits, prospects or
condition (financial or otherwise) of Telco or Tel Labs.
7.5 Employment Agreements. (a) Henry G. Luken, III and Telco shall have
---------------------
entered into the Employment Agreement attached hereto as Exhibit A; (b) Michael
---------
Cheng and Tel Labs shall have entered into the Employment Agreement attached
hereto as Exhibit B; (c) Kevin Yang, and Tel Labs shall have entered into the
---------
Employment Agreement attached hereto as Exhibit C; and Bryan Rachlin and Telco
---------
shall have entered into the Employment Agreement attached hereto as Exhibit D.
----------
ARTICLE 8
CLOSING
-------
8.1 Time and Place. The closing (the "Closing") under this Agreement
--------------
shall be held concurrently with the closing of the IPO (the "Closing Date"), at
the offices of Swidler & Berlin, Chartered, 3000 K Street, N.W., Washington,
D.C., or such other time and place as shall be agreed upon by Telco and the
Shareholders.
8.2 Deliveries. At the Closing, each of the parties hereto shall deliver
----------
to the other parties all of the documents and instruments required to be
delivered by such party pursuant to Articles 6 and 7 hereof.
ARTICLE 9
INDEMNIFICATION
---------------
9.1 Indemnification by Shareholders. Each Shareholder, severally but not
-------------------------------
jointly, agrees to indemnify and hold harmless Telco and its Affiliates
(excluding the Shareholders), successors and assigns from and against any and
all (a) liabilities, losses, costs or damages ("Loss" or "Losses") and (b)
reasonable attorneys' and accountants' fees and expenses, court costs and all
other reasonable out-of-pocket expenses ("Expense" or "Expenses") incurred by
Telco and its Affiliates (excluding the Shareholders), successors and assigns in
connection with or arising from any material breach of any warranty or the
material inaccuracy of any representation of any Shareholder contained or
referred to in this Agreement or any certificate delivered by or on behalf of
any Shareholder pursuant hereto.
9.2 Indemnification by Telco. Telco agrees to indemnify and hold
------------------------
harmless each Shareholder from and against any and all Losses and Expenses
incurred by such Shareholder in
8
<PAGE>
connection with or arising from any material breach of any warranty or the
material inaccuracy of any representation of Telco contained or referred to in
this Agreement or in any certificate delivered by or on behalf of Telco pursuant
hereto.
9.3 Notice of Claims. If Telco or a Shareholder believes that any of the
----------------
persons indemnified under this Article 9 has suffered or incurred any Loss or
incurred any Expense, Telco or such Shareholder shall so notify the other
promptly in writing describing such Loss or Expense, the amount thereof, if
known, and the method of computation of such Loss or Expense, all with
reasonable particularity and containing a reference to the provisions of this
Agreement or other agreement, instrument or certificate delivered pursuant
hereto in respect of which such Loss or Expense shall have occurred. If any
action at law or suit in equity is instituted by or against a third party with
respect to which any of the indemnified persons intends to claim any liability
or expense as Loss or Expense under this Article 9, any such indemnified person
shall promptly notify the indemnifying party of such action or suit.
9.4 Third Party Claims. (a) Subject to paragraph (b) of this Section
------------------
9.4, the persons indemnified under this Article 9 shall have the right to
conduct and control, through counsel (but no more than one law firm) of their
choosing, any third party claim, action or suit, and the persons indemnified may
compromise or settle the same, provided that any of the indemnified persons
shall give the indemnifying party advance notice of any proposed compromise or
settlement. The indemnified persons shall permit the indemnifying party to
participate in the defense of any such action or suit through counsel chosen by
it, provided that the fees and expenses of such counsel shall be borne by the
indemnifying party. Any compromise or settlement with respect to a claim for
money damages effected after the indemnifying party by notice to the indemnified
party shall have disapproved such compromise or settlement shall discharge the
indemnifying party from liability with respect to the subject matter thereof,
and no amount in respect thereof shall be claimed as Loss or Expense under this
Article 9; provided, however, that if the indemnifying party has not elected to
-------- -------
conduct and control an action or suit subject to paragraph (b) of this Section
9.4, such indemnifying party shall have no right to disapprove such compromise
or settlement or to be discharged from liability with respect to the subject
matter thereof.
(b) If the remedy sought in any action or suit referred to in
paragraph (a) of this Section 9.4 is solely money damages and will have no
continuing effect on the business of any indemnified person, the indemnifying
party shall have 5 business days after receipt of the notice referred to in the
last sentence of Section 9.3 to notify the indemnified persons that it elects to
conduct and control such action or suit. If the indemnifying party does not give
the foregoing notice, the indemnified persons shall have the right to defend,
contest, settle or compromise such action or suit in the exercise of their
exclusive discretion, and the indemnifying party shall, upon request from any of
the indemnified persons, promptly pay to such indemnified persons in accordance
with the other terms of this Article 9 the amount of any Loss resulting from its
liability to the third party claimant and all related Expense. If the
indemnifying party gives the foregoing notice, the indemnifying party shall have
the right to undertake, conduct and control, through counsel of its own choosing
and at the sole expense of the indemnifying party, the conduct and
9
<PAGE>
settlement of such action or suit, and the indemnified persons shall cooperate
with the indemnifying party in connection therewith; provided that (x) the
--------
indemnifying party shall not thereby permit to exist any Encumbrance or other
adverse charge upon any asset of any indemnified person; (y) the indemnifying
party shall permit the indemnified persons to participate in such conduct or
settlement through counsel chosen by the indemnified persons, but the fees and
expenses of such counsel shall be borne by the indemnified persons except as
provided in clause (z) below; and (z) the indemnifying party shall agree
promptly to reimburse to the extent required under this Article 9 the
indemnified persons for the full amount of any Loss resulting from such action
or suit and all related Expense incurred by the indemnified persons, except fees
and expenses of counsel for the indemnified persons incurred after the
assumption of the conduct and control of such action or suit by the indemnifying
party. So long as the indemnifying party is contesting any such action or suit
in good faith, the indemnified persons shall not pay or settle any such action
or suit without the express prior written consent of the indemnifying party.
Notwithstanding the foregoing, the indemnified persons shall have the right to
pay or settle any such action or suit, provided that in such event the
indemnified persons shall waive any right to indemnity therefor by the
indemnifying party, and no amount in respect thereof shall be claimed as Loss or
Expense under this Article 9.
ARTICLE 10
TERMINATION
-----------
10.1 Termination. Anything contained in this Agreement to the contrary
-----------
notwithstanding, this Agreement may be terminated at any time prior to the
Closing Date:
(a) by the mutual consent of the Board of Directors of Telco and
the Shareholders; and
(b) by Telco or the Shareholders if the Closing shall not have
occurred on or before September 15, 1996 (or such later date as may be mutually
agreed to by Telco and the Shareholders).
In the event that this Agreement shall be terminated pursuant to
this Article 10, all further obligations of the parties under this Agreement
(other than Sections 5.3, 11.2 and 11.9) shall be terminated without further
liability of any party to the other, provided that nothing herein shall relieve
any party from liability for its breach of this Agreement.
ARTICLE 11
GENERAL PROVISIONS
------------------
11.1 Survival of Obligations. All representations, warranties, covenants
-----------------------
and obligations contained in this Agreement shall survive the consummation of
the transactions
10
<PAGE>
contemplated by this Agreement.
11.2 Confidential Nature of Information. Each party agrees that it will
----------------------------------
treat in confidence all documents, materials and other information that it shall
have obtained regarding the other party during the course of the negotiations
leading to the consummation of the transactions contemplated hereby (whether
obtained before or after the date of this Agreement), and the preparation of
this Agreement and other related documents, and, in the event the transactions
contemplated hereby shall not be consummated, each party will return to the
other party all copies of non-public documents and materials that have been
furnished in connection therewith. The obligation of each party to treat such
documents, materials and other information in confidence shall not apply to any
information that (a) such party can demonstrate was already lawfully in its
possession prior to the disclosure thereof by the other party, (b) is known to
the public and did not become so known through any violation of a legal
obligation, (c) became known to the public through no fault of such party, or
(d) is later lawfully acquired by such party from other sources.
11.3 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of Virginia, without regard to conflicts-of-laws
principles.
11.4 Notices. All notices or other communications required or permitted
-------
hereunder shall be in writing and shall be deemed given or delivered when
delivered personally or when sent by registered or certified mail or by private
courier addressed as follows:
If to a Shareholder, to the address of such shareholder as set
forth in the Schedule of Ownership.
If to Telco, to:
Telco Communications Group, Incorporated
4219 Lafayette Center Drive
Chantilly, VA 22021
Attention: General Counsel
with a copy to:
Swidler & Berlin, Chartered
3000 K Street, N.W.
Suite 300
Washington, D.C. 20007
Attention: John Klusaritz, Esq.
or to such other address as such party may indicate by a notice delivered in
writing to the other parties hereto.
11
<PAGE>
11.5 Successors and Assigns. (a) The rights and obligations of each
----------------------
party under this Agreement shall not be assignable by such party hereto prior
to the Closing Date without the express prior written consent of the other
parties.
(b) This Agreement shall be binding upon and inure to the bene-
fit of the parties hereto and their successors and permitted assigns. Nothing in
this Agreement, expressed or implied, is intended or shall be construed to
confer upon any person other than the parties and successors and assigns
permitted by this Section 11.5 any right, remedy or claim under or by reason of
this Agreement.
11.6 Entire Agreement; Amendments. This Agreement and the Exhibits and
----------------------------
Schedules referred to herein and the documents delivered pursuant hereto contain
the entire understanding of the parties hereto with regard to the subject matter
contained herein or therein. This agreement supersedes all prior and
contemporaneous agreements, understandings or intents between or among any of
the parties hereto with respect to the subject matter contained herein or
therein. The parties hereto, by mutual agreement in writing, may amend, modify
and supplement this Agreement.
11.7 Interpretation. Article titles and headings to sections herein are
--------------
inserted for convenience of reference only and are not intended to be a part of
or to affect the meaning or interpretation of this Agreement. The Schedules and
Exhibits referred to herein shall be construed with and as an integral part of
this Agreement to the same extent as if they were set forth verbatim herein. So
long as the Schedules provide full and clear disclosure, any matter disclosed on
one Schedule shall be deemed disclosed on all other relevant Schedules.
11.8 Waivers. Any term or provision of this Agreement may be waived in
-------
writing, or the time for its performance may be extended in writing, by the
party or parties entitled to the benefit thereof. The failure of any party
hereto to enforce at any time any provision of this Agreement shall not be
construed to be a waiver of such provision, nor in any way to affect the
validity of this Agreement or any part hereof or the right of any party
thereafter to enforce each and every such provision. No waiver of any breach of
this Agreement shall be held to constitute a waiver of any other or subsequent
breach.
11.9 Expenses. Each party hereto will pay all costs and expenses
--------
incident to its negotiation and preparation of this Agreement and to its
performance and compliance with all agreements and conditions contained herein
on its part to be performed or complied with, including the fees, expenses and
disbursements of its counsel and accountants.
11.10 Partial Invalidity. Whenever possible, each provision hereof
------------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but in case any one or more of the provisions contained herein
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provisions of this Agreement, and this Agreement shall be construed as if
such invalid,
12
<PAGE>
illegal or unenforceable provision or provisions had never been contained herein
unless the deletion of such provision or provisions would result in such a
material change as to cause completion of the transactions contemplated hereby
to be unreasonable.
11.11 Execution in Counterparts. This Agreement may be executed in two
-------------------------
or more counterparts, each of which shall be considered an original instrument,
but all of which shall be considered one and the same agreement, and shall
become binding when two or more counterparts have been signed by each of the
parties and delivered to each party hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
TELCO COMMUNICATIONS GROUP, INCORPORATED
By: /s/ Natalie Marine-Street
---------------------------------------
Name: Natalie Marine-Street
-------------------------------------
Its: Vice President
-------------------------------------
/s/ Henry G. Luken
------------------------------------------
Henry G. Luken
/s/ Bryan Rachlin
------------------------------------------
Bryan Rachlin
/s/ Michael Cheng
------------------------------------------
Michael Cheng
/s/ Kevin Yang
------------------------------------------
Kevin Yang
13
<PAGE>
Schedule 1
TEL LABS, INC.
SCHEDULE OF OWNERSHIP
JUNE 1, 1996
<TABLE>
<CAPTION>
Percentage of Total
Shareholder Number of Shares Outstanding Shares
- ----------- ---------------- -------------------
<S> <C> <C>
Henry G. Luken, III 600 60%
15031 Hollyside Drive
Dumphries, VA
Bryan K. Rachlin 250 25%
2646 Woodley Place, N.W.
Washington, D.C.
Michael Cheng 100 10%
21755 Pinewood Court
Sterling, VA
Kevin Yang 50 5%
1600 S. Eads Street
Arlington, VA
----- ----
TOTAL 1,000 100%
</TABLE>
<PAGE>
Schedule 3.1
NONE
<PAGE>
Schedule 4.3
Certain options have been granted under the Telco Stock Option Plan.
Signet Media Capital Group is the holder of a warrant to acquire 2% of
Telco's Common Stock at a nominal exercise price.
<PAGE>
Schedule 4.5
NONE
<PAGE>
EXHIBIT 2.2
SHARE EXCHANGE AGREEMENT
THIS SHARE EXCHANGE AGREEMENT (this "Agreement") is made and entered into
as of the first day of April, 1996 (the "Effective Date"), by and among Telco
Communications Group, Incorporated, a Virginia corporation ("Telco"), and Thomas
Cirrito ("T. Cirrito"), Nicole Cirrito ("N. Cirrito") and Michael Cirrito ("M.
Cirrito" and, collectively with T. Cirrito and N. Cirrito, the "Shareholders").
RECITALS
A. The authorized capital stock of Telco consists of 100,000 shares of
Common Stock, no par value ("Telco Common Stock"), of which 49,192 are issued
and outstanding and 10,000 have been reserved for issuance under the Telco Stock
Option Plan.
B. The authorized capital stock of Long Distance Wholesale Club, a
Delaware corporation and a 56% subsidiary of Telco ("LDWC"), consists of 1,500
shares of Common Stock, no par value ("LDWC Common Stock"), of which 225.26
shares are issued and outstanding and 5.72 shares have been reserved for
issuance under the LDWC Stock Option Plan. Telco and the Shareholders own all
of the issued and outstanding shares of capital stock of LDWC, as set forth on
Schedule 1 hereto ("Schedule of Ownership").
C. The Board of Directors of Telco and LDWC has approved the purchase by
Telco of the Shareholders' respective shares of LDWC Common Stock pursuant to
which each issued and outstanding share of LDWC Common Stock (other than shares
held by Telco) shall be exchanged for 120.05 shares of Telco Common Stock (the
"Exchange Price Per LDWC Share"), upon the terms and subject to the conditions
hereinafter set forth.
AGREEMENTS
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereby agree as follows:
ARTICLE 1
DEFINITIONS
-----------
In addition to capitalized terms defined elsewhere in this Agreement, the
following terms have the meanings specified or referred to in this Article 1:
"Affiliate" means, with respect to any person, any other person who
---------
directly or indirectly
1
<PAGE>
controls, is controlled by or is under common control with such person, and in
addition with respect to officers, directors and stockholders of any person, any
relative or spouse (or relative of such spouse) who resides with any such
officer, director or spouse.
"Encumbrance" means any lien, claim, charge, security interest, mortgage,
-----------
pledge, easement, conditional sale or other title retention agreement, defect in
title, covenant or other restrictions of any kind.
ARTICLE 2
EXCHANGE OF SHARES
------------------
2.1 Exchange of Shares. Subject to the provisions of this Agreement, the
------------------
Shareholders agree to sell, and Telco agrees to purchase, at the Effective Date,
the issued and outstanding shares of LDWC Common Stock in exchange for shares of
Telco Common Stock.
2.2 Exchange Price. The exchange price for the shares of LDWC Common
--------------
Stock shall be as follows:
(a) With respect to the shares held by T. Cirrito, 11,524.8 shares of
Telco Common Stock, payable at Closing;
(b) With respect to the shares held by N. Cirrito, 240.1 shares of Telco
Common Stock, payable at Closing; and
(c) With respect to the shares held by M. Cirrito, 240.1 shares of Telco
Common Stock, payable at Closing;
2.3 Share Exchange Procedure. (a) At Closing, the Shareholders shall
------------------------
surrender to Telco all of their certificates representing shares of LDWC Common
Stock, together with any documents reasonably required by Telco. At Closing,
Telco shall issue to each Shareholder a certificate registered in such
Shareholder's name representing the shares of Telco Common Stock issued in
exchange therefor, and such certificates surrendered shall forthwith be
canceled.
(b) The shares of Telco Common Stock issued to the Shareholders
hereunder shall be deemed to have been exchanged, issued and distributed in full
satisfaction of all rights pertaining to the shares of LDWC Common Stock held by
the Shareholders.
2.4 Further Assurances. If at any time after the Closing, Telco or any
------------------
of the Shareholders shall consider or be advised that any agreements, assurances
or any other acts or things are necessary, desirable or proper to carry out the
purposes of this Agreement, each party shall execute and deliver all such
agreements and assurances and do all such other acts and things reasonably
necessary, desirable or proper to carry out the purpose of this Agreement.
2
<PAGE>
2.5 Appointment of T. Cirrito as Director of Telco. At the Effective
----------------------------------------------
Date, Telco shall cause the Board of Directors of Telco to be expanded and shall
cause T. Cirrito to be appointed as a director of Telco.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF
---------------------------------
THE SHAREHOLDERS
----------------
As an inducement to Telco to enter into this Agreement and to consummate
the transactions contemplated hereby, each of the Shareholders, jointly and
severally, represents and warrants to Telco as follows:
3.1 Authority of Shareholders. Each Shareholder is the legal and
-------------------------
beneficial owner of the shares of LDWC Common Stock set forth on the Schedule of
Ownership, free and clear of Encumbrance and has all requisite legal right,
power, capacity and authority to enter into this Agreement and to perform his or
her obligations hereunder. This Agreement has been duly executed and delivered
by each Shareholder and constitutes a valid and binding obligation of such
Shareholder enforceable against him or her in accordance with its terms. Except
as set forth in Schedule 3.1, neither the execution and delivery of this
Agreement or any of the other agreements or instruments contemplated hereby or
the consummation of any of the transactions contemplated hereby or thereby nor
compliance with or fulfillment of the terms, conditions and provisions hereof or
thereof does or will:
(a) conflict with, result in a breach of the terms, conditions or
provisions of, or constitute a default, an event of default or an event creating
rights of acceleration, termination or cancellation or a loss of rights under,
or result in the creation or imposition of any Encumbrance upon any of the
properties of any Shareholder, or under any note, instrument, agreement,
mortgage, lease, license, franchise, permit, judgment, order, award, decree or
other authorization, right, restriction or obligation to which a Shareholder is
a party or any of his or her properties is subject or by which any Shareholder
is bound, or any law, rule, regulation or other legal requirement affecting any
Shareholder or his or her properties, or
(b) require the approval, consent, authorization or act of, or the
making by any Shareholder of any declaration, filing or registration with, any
third party or any foreign, federal, state or local court, governmental
authority or regulatory body.
3.2 Disclosure. None of the representations or warranties of the
----------
Stockholders contained herein, none of the information contained in the Schedule
referred to in Article 3, and none of the other information or documents
furnished or to be furnished to Telco or any of its representatives by the
Shareholders or their representatives pursuant to the terms of this Agreement,
is false or misleading in any material respect or omits to state a fact herein
or therein necessary to make the statements herein or therein not misleading in
any material respect.
3
<PAGE>
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
------------------------------
OF TELCO
--------
As an inducement to the Shareholders to enter into this Agreement and to
consummate the transactions contemplated hereby, Telco hereby represents and
warrants to the Shareholders as follows:
4.1 Organization of Telco. Telco is a corporation duly organized, validly
---------------------
existing and in good standing under the laws of the State of Virginia. Telco is
duly qualified to transact business as a foreign corporation and is in good
standing in each of the jurisdictions in which the ownership or leasing of its
properties or the conduct of its business requires such qualification, other
than jurisdictions the failure by Telco to qualify in which would not have a
material adverse effect on Telco, its businesses, operations or financial
condition and no other jurisdiction has demanded, requested or otherwise
indicated that Telco is required so to qualify. Telco has all requisite
corporate power and authority to own or lease and to operate and use its
properties and to carry on its business as now conducted.
4.2 Outstanding Capital Stock. The authorized capital stock of Telco
-------------------------
consists of (i) 100,000 shares of Telco Common Stock, of which 49,192 are
currently issued and outstanding and 10,000 are reserved for issuance under the
Telco Stock Option Plan. The Telco Common Stock to be issued to the holders of
LDWC Common Stock pursuant to this Agreement, when so issued, will be duly and
validly authorized, issued and outstanding, fully paid, non-assessable and free
of preemptive rights.
4.3 Options or Other Rights. Except as described in Schedule 4.3, there
------------------------
is no outstanding right, subscription, warrant, call, unsatisfied preemptive
right, option, or other agreement of any kind to purchase or otherwise to
receive from Telco any of the outstanding, authorized but unissued, unauthorized
or treasury shares of the capital stock or any other security of Telco, and
there is no outstanding security of any kind convertible into such capital
stock.
4.4 Articles or Certificate of Incorporation and By-Laws. Telco has
----------------------------------------------------
heretofore delivered to the Shareholders true and complete copies of its
Articles of Incorporation and By-Laws as in effect on the date hereof.
4.5 Authority of Telco. Telco has full power and authority to execute and
------------------
deliver this Agreement and all of the other agreements and instruments
contemplated hereby, to consummate the transactions contemplated hereby and
thereby and to comply with the terms, conditions and provisions hereof and
thereof. The execution, delivery and performance of this Agreement by Telco has
been duly authorized and approved by Telco's Boards of Directors, and no other
corporate proceedings on the part of Telco will be necessary to authorize this
Agreement and the transactions contemplated hereby. This Agreement has been
duly executed and delivered
4
<PAGE>
by Telco and is, and each other agreement or instrument of Telco contemplated
hereby will be, the legal, valid and binding agreement of Telco, enforceable in
accordance with their respective terms. Except as set forth in Schedule 4.5,
neither the execution and delivery of this Agreement or any of the other
agreements or instruments contemplated hereby or the consummation of any of the
transactions contemplated hereby or thereby, nor compliance with or fulfillment
of the terms, conditions and provisions hereof or thereof will:
(1) conflict with, or result in a breach of the terms, conditions or
provisions, or constitute a default, or an event of default or an
event creating rights of acceleration, termination or
cancellation or loss of rights under, or result in the creation
or imposition of any Encumbrance upon any of the properties of
Telco, under the Articles of Incorporation or By-laws of Telco or
any note, instrument, agreement, mortgage, lease, license,
franchise, permit, judgment, order, award, decree or other
authorization, right, restriction or obligation to which Telco is
a party, or any of its properties is subject or by which Telco is
bound, or any statute, other law or regulatory provision
affecting Telco or its properties, or
(2) require the approval, consent, authorization or act of, or the
making by Telco of any declaration, filing or registration with,
any third party or any foreign, federal, state or local court,
governmental authority or regulatory body.
4.6 Disclosure. None of the representations or warranties of Telco
----------
contained herein, none of the information contained in the Schedules referred to
in this Article 4, and none of the other information or documents furnished or
to be furnished to the Shareholders or any of their representatives by Telco or
its representatives pursuant to the terms of this Agreement, is false or
misleading in any material respect or omits to state a fact herein or therein
necessary to make the statements herein or therein not misleading in any
material respect.
ARTICLE 5
ACTION PRIOR TO THE EFFECTIVE DATE
-----------------------------------
The respective parties hereto covenant and agree to take the following
actions between the date hereof and the Effective Date:
5.1 Preserve Accuracy of Representations and Warranties. Each of the
---------------------------------------------------
parties hereto shall refrain from taking any action, and the stockholders of
each party shall refrain from taking any action, which would render any
representation or warranty contained in Article 3 or 4 of this Agreement
inaccurate as of the Effective Date. Each party shall promptly notify the
others of any action, suit or proceeding that shall be instituted or threatened
against such party to restrain, prohibit or otherwise challenge the legality of
any transaction contemplated by this
5
<PAGE>
Agreement. Each party shall promptly notify the other parties of any lawsuit,
claim, proceeding or investigation that may be threatened, brought, asserted or
commenced against such party that would have been listed in a Schedule hereto by
such party if such lawsuit, claim, proceeding or investigation had arisen prior
to the date hereof.
5.2 Consents and Approvals. Each party hereto shall cooperate in using
----------------------
such party's best efforts promptly to obtain all consents and amendments from
parties to contracts, licenses, leases and other agreements and all consents,
amendments or permits from governmental authorities, which are required by the
terms thereof, this Agreement or otherwise for the due and punctual consummation
of the transactions contemplated by this Agreement.
5.3 No Public Announcement. No party hereto (other than Telco) shall,
----------------------
without the approval of the other parties hereto make any press release or other
public announcement concerning the transactions contemplated by this Agreement,
except as and to the extent that any such party shall be so obligated by law, in
which case Telco shall be advised and the parties shall use their best efforts
to cause a mutually agreeable release or announcement to be issued.
ARTICLE 6
CONDITIONS PRECEDENT TO
-----------------------
OBLIGATIONS OF TELCO
--------------------
The obligation of Telco to consummate the share exchange under this
Agreement shall, at the option of Telco, be subject to the satisfaction, on or
prior to the Effective Date, of each of the following conditions:
6.1 No Misrepresentation or Breach of Covenants and Warranties. There
----------------------------------------------------------
shall have been no material breach by any Shareholder in the performance of any
of their respective covenants and agreements herein; each of the representations
and warranties of the Shareholders contained or referred to herein shall be true
and correct in all material respects as of the Effective Date as though made on
the Effective Date, except for changes therein specifically permitted by this
Agreement or resulting from any transaction expressly consented to in writing by
Telco; and there shall have been delivered to Telco a certificate or
certificates to such effect, dated the Effective Date, signed by each
Shareholder.
6.2 No Changes or Destruction of Property. Between the date hereof and
-------------------------------------
the Effective Date, there shall have been (a) no material adverse change in the
properties, business or the operations, liabilities, profits, prospects or
condition (financial or otherwise) of LDWC; and (b) no material adverse federal
or state legislative or regulatory change affecting LDWC or its services.
6.3 Necessary Consents. LDWC shall have received consents, approvals and
------------------
authorizations, in form and substance reasonably satisfactory to Telco, to the
transactions
6
<PAGE>
contemplated hereby from all governmental authorities and third parties, to the
extent necessary to effectuate the transactions contemplated hereby, and all
such consents, approvals and authorizations shall be in full force and effect.
6.4 Corporate Action. LDWC shall have taken all corporate action
----------------
necessary to approve the transactions contemplated by this Agreement.
6.5 No Restraint or Litigation. No action, suit, investigation or
--------------------------
proceeding shall have been instituted or threatened to restrain or prohibit or
otherwise challenge the legality or validity of the transactions contemplated
hereby.
6.6 Employment Agreements. T. Cirrito, Telco and LDWC shall have entered
---------------------
into the Employment Agreement attached hereto as Exhibit A.
---------
6.7 Conversion of Options. Each of the holders of options to purchase
---------------------
LDWC Common Shares shall have entered into an option exchange or other agreement
satisfactory in form and substance to Telco, providing for the exchange of LDWC
options for Telco options to receive the Exchange Price Per LDWC Shares
multiplied by the number of LDWC Common Shares subject to such holder's LDWC
options.
ARTICLE 7
CONDITIONS PRECEDENT TO
-----------------------
OBLIGATIONS OF SHAREHOLDERS
---------------------------
The obligation of the Shareholders to consummate the share exchange under
this Agreement shall be subject to the satisfaction, on or prior to the
Effective Date, of the following conditions:
7.1 No Misrepresentation or Breach of Covenants and Warranties. There
----------------------------------------------------------
shall have been no material breach by Telco in the performance of any of its
covenants and agreements herein; each of the representations and warranties of
Telco contained or referred to in this Agreement shall be true and correct on
the Effective Date as though made on the Effective Date, and there shall have
been delivered to the Shareholders a certificate or certificates to such effect,
dated the Effective Date and signed on behalf of Telco by its President or
Chairman.
7.2 Corporate Action. Telco shall have taken all corporate action
----------------
necessary to approve the transactions contemplated by this Agreement, and Telco
shall have furnished the Shareholders with certified copies of resolutions
adopted by the Board of Directors of Telco, in form and substance reasonably
satisfactory to counsel for the Shareholders, in connection with such
transactions.
7.3 No Restraint or Litigation. No action, suit or proceeding by any
--------------------------
governmental
7
<PAGE>
agency shall have been instituted or threatened to restrain, prohibit or
otherwise challenge the legality or validity of the transactions contemplated
hereby.
7.4 Necessary Governmental Approvals. The parties shall have received
--------------------------------
all governmental and regulatory approvals and actions necessary to consummate
the transactions contemplated hereby, which are either specified in Schedule 3.1
or otherwise required to be obtained prior to the Effective Date by applicable
law or regulation or which are necessary to prevent a material adverse change in
the properties, the business or the operations, liabilities, profits, prospects
or condition (financial or otherwise) of Telco or LDWC.
7.5 Employment Agreements. T. Cirrito, Telco and LDWC shall have entered
---------------------
into the Employment Agreement attached hereto as Exhibit A.
---------
ARTICLE 8
CLOSING
-------
8.1 Time and Place. The closing (the "Closing") under this Agreement
--------------
shall be held on the first day of April, 1996, at the offices of Swidler &
Berlin, Chartered, 3000 K Street, N.W., Washington, D.C., at 10:00 a.m., or such
other time and place as shall be agreed upon by Telco and the Shareholders.
8.2 Deliveries. At the Closing, each of the parties hereto shall deliver
----------
to the other parties all of the documents and instruments required to be
delivered by such party pursuant to Articles 6 and 7 hereof.
ARTICLE 9
INDEMNIFICATION
---------------
9.1 Indemnification by Shareholders. Each Shareholder, jointly and
-------------------------------
severally, agrees to indemnify and hold harmless Telco and its Affiliates
(excluding the Shareholders), successors and assigns from and against any and
all (a) liabilities, losses, costs or damages ("Loss" or "Losses") and (b)
reasonable attorneys' and accountants' fees and expenses, court costs and all
other reasonable out-of-pocket expenses ("Expense" or "Expenses") incurred by
Telco and its Affiliates (excluding the Shareholders), successors and assigns in
connection with or arising from any material breach of any warranty or the
material inaccuracy of any representation of any Shareholder contained or
referred to in this Agreement or any certificate delivered by or on behalf of
any Shareholder pursuant hereto.
9.2 Indemnification by Telco. Telco agrees to indemnify and hold
------------------------
harmless each Shareholder from and against any and all Losses and Expenses
incurred by such Shareholder in connection with or arising from any material
breach of any warranty or the material inaccuracy
8
<PAGE>
of any representation of Telco contained or referred to in this Agreement or in
any certificate delivered by or on behalf of Telco pursuant hereto.
9.3 Notice of Claims. If Telco or a Shareholder believes that any of the
----------------
persons indemnified under this Article 9 has suffered or incurred any Loss or
incurred any Expense, Telco or such Shareholder shall so notify the other
promptly in writing describing such Loss or Expense, the amount thereof, if
known, and the method of computation of such Loss or Expense, all with
reasonable particularity and containing a reference to the provisions of this
Agreement or other agreement, instrument or certificate delivered pursuant
hereto in respect of which such Loss or Expense shall have occurred. If any
action at law or suit in equity is instituted by or against a third party with
respect to which any of the indemnified persons intends to claim any liability
or expense as Loss or Expense under this Article 9, any such indemnified person
shall promptly notify the indemnifying party of such action or suit.
9.4 Third Party Claims. (a) Subject to paragraph (b) of this Section
------------------
9.4, the persons indemnified under this Article 9 shall have the right to
conduct and control, through counsel (but no more than one law firm) of their
choosing, any third party claim, action or suit, and the persons indemnified may
compromise or settle the same, provided that any of the indemnified persons
shall give the indemnifying party advance notice of any proposed compromise or
settlement. The indemnified persons shall permit the indemnifying party to
participate in the defense of any such action or suit through counsel chosen by
it, provided that the fees and expenses of such counsel shall be borne by the
indemnifying party. Any compromise or settlement with respect to a claim for
money damages effected after the indemnifying party by notice to the indemnified
party shall have disapproved such compromise or settlement shall discharge the
indemnifying party from liability with respect to the subject matter thereof,
and no amount in respect thereof shall be claimed as Loss or Expense under this
Article 9; provided, however, that if the indemnifying party has not elected to
-------- -------
conduct and control an action or suit subject to paragraph (b) of this Section
9.4, such indemnifying party shall have no right to disapprove such compromise
or settlement or to be discharged from liability with respect to the subject
matter thereof.
(b) If the remedy sought in any action or suit referred to in
paragraph (a) of this Section 9.4 is solely money damages and will have no
continuing effect on the business of any indemnified person, the indemnifying
party shall have 5 business days after receipt of the notice referred to in the
last sentence of Section 9.3 to notify the indemnified persons that it elects to
conduct and control such action or suit. If the indemnifying party does not give
the foregoing notice, the indemnified persons shall have the right to defend,
contest, settle or compromise such action or suit in the exercise of their
exclusive discretion, and the indemnifying party shall, upon request from any of
the indemnified persons, promptly pay to such indemnified persons in accordance
with the other terms of this Article 9 the amount of any Loss resulting from its
liability to the third party claimant and all related Expense. If the
indemnifying party gives the foregoing notice, the indemnifying party shall have
the right to undertake, conduct and control, through counsel of its own choosing
and at the sole expense of the indemnifying party,
9
<PAGE>
the conduct and settlement of such action or suit, and the indemnified persons
shall cooperate with the indemnifying party in connection therewith; provided
--------
that (x) the indemnifying party shall not thereby permit to exist any
Encumbrance or other adverse charge upon any asset of any indemnified person;
(y) the indemnifying party shall permit the indemnified persons to participate
in such conduct or settlement through counsel chosen by the indemnified persons,
but the fees and expenses of such counsel shall be borne by the indemnified
persons except as provided in clause (z) below; and (z) the indemnifying party
shall agree promptly to reimburse to the extent required under this Article 9
the indemnified persons for the full amount of any Loss resulting from such
action or suit and all related Expense incurred by the indemnified persons,
except fees and expenses of counsel for the indemnified persons incurred after
the assumption of the conduct and control of such action or suit by the
indemnifying party. So long as the indemnifying party is contesting any such
action or suit in good faith, the indemnified persons shall not pay or settle
any such action or suit without the express prior written consent of the
indemnifying party. Notwithstanding the foregoing, the indemnified persons
shall have the right to pay or settle any such action or suit, provided that in
such event the indemnified persons shall waive any right to indemnity therefor
by the indemnifying party, and no amount in respect thereof shall be claimed as
Loss or Expense under this Article 9.
ARTICLE 10
TERMINATION
-----------
10.1 Termination. Anything contained in this Agreement to the contrary
-----------
notwithstanding, this Agreement may be terminated at any time prior to the
Effective Date:
(a) by the mutual consent of the Board of Directors of Telco and the
Shareholders; and
(b) by Telco or the Shareholders if the Closing shall not have
occurred on or before June 1, 1996 (or such later date as may be mutually agreed
to by Telco and the Shareholders).
In the event that this Agreement shall be terminated pursuant to this
Article 10, all further obligations of the parties under this Agreement (other
than Sections 5.3, 11.2 and 11.9) shall be terminated without further liability
of any party to the other, provided that nothing herein shall relieve any party
from liability for its breach of this Agreement.
ARTICLE 11
GENERAL PROVISIONS
------------------
11.1 Survival of Obligations. All representations, warranties, covenants
-----------------------
and obligations contained in this Agreement shall survive the consummation of
the transactions
10
<PAGE>
contemplated by this Agreement.
11.2 Confidential Nature of Information. Each party agrees that it will
----------------------------------
treat in confidence all documents, materials and other information that it shall
have obtained regarding the other party during the course of the negotiations
leading to the consummation of the transactions contemplated hereby (whether
obtained before or after the date of this Agreement), and the preparation of
this Agreement and other related documents, and, in the event the transactions
contemplated hereby shall not be consummated, each party will return to the
other party all copies of non-public documents and materials that have been
furnished in connection therewith. The obligation of each party to treat such
documents, materials and other information in confidence shall not apply to any
information that (a) such party can demonstrate was already lawfully in its
possession prior to the disclosure thereof by the other party, (b) is known to
the public and did not become so known through any violation of a legal
obligation, (c) became known to the public through no fault of such party, or
(d) is later lawfully acquired by such party from other sources.
11.3 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of Delaware, without regard to conflicts-of-laws
principles.
11.4 Notices. All notices or other communications required or permitted
-------
hereunder shall be in writing and shall be deemed given or delivered when
delivered personally or when sent by registered or certified mail or by private
courier addressed as follows:
If to the Shareholders, to:
c/o Long Distance Wholesale Club
1401 Wilson Blvd., Suite 1100
Arlington, VA 22209
Attention: President
If to Telco, to:
Telco Communications Group, Incorporated
4219 Lafayette Center Drive
Chantilly, VA 22021
Attention: General Counsel
with a copy to:
Swidler & Berlin, Chartered
3000 K Street, N.W., Suite 300
Washington, D.C. 20007
Attention: John Klusaritz, Esq.
11
<PAGE>
or to such other address as such party may indicate by a notice delivered in
writing to the other parties hereto.
11.5 Successors and Assigns. (a) The rights and obligations of each
----------------------
party under this Agreement shall not be assignable by such party hereto prior to
the Effective Date without the express prior written consent of the other
parties.
(b) This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their successors and permitted assigns. Nothing in this
Agreement, expressed or implied, is intended or shall be construed to confer
upon any person other than the parties and successors and assigns permitted by
this Section 11.5 any right, remedy or claim under or by reason of this
Agreement.
11.6 Entire Agreement; Amendments. This Agreement and the Exhibits and
----------------------------
Schedules referred to herein and the documents delivered pursuant hereto contain
the entire understanding of the parties hereto with regard to the subject matter
contained herein or therein. This agreement supersedes the Merger Agreement
executed by the parties hereto on April 1, 1996, and this agreement supersedes
all prior and contemporaneous agreements, understandings or intents between or
among any of the parties hereto with respect to the subject matter contained
herein or therein. The parties hereto, by mutual agreement in writing, may
amend, modify and supplement this Agreement.
11.7 Interpretation. Article titles and headings to sections herein are
--------------
inserted for convenience of reference only and are not intended to be a part of
or to affect the meaning or interpretation of this Agreement. The Schedules and
Exhibits referred to herein shall be construed with and as an integral part of
this Agreement to the same extent as if they were set forth verbatim herein. So
long as the Schedules provide full and clear disclosure, any matter disclosed on
one Schedule shall be deemed disclosed on all other relevant Schedules.
11.8 Waivers. Any term or provision of this Agreement may be waived in
-------
writing, or the time for its performance may be extended in writing, by the
party or parties entitled to the benefit thereof. The failure of any party
hereto to enforce at any time any provision of this Agreement shall not be
construed to be a waiver of such provision, nor in any way to affect the
validity of this Agreement or any part hereof or the right of any party
thereafter to enforce each and every such provision. No waiver of any breach of
this Agreement shall be held to constitute a waiver of any other or subsequent
breach.
11.9 Expenses. Each party hereto will pay all costs and expenses
--------
incident to its negotiation and preparation of this Agreement and to its
performance and compliance with all agreements and conditions contained herein
on its part to be performed or complied with, including the fees, expenses and
disbursements of its counsel and accountants.
11.10 Partial Invalidity. Whenever possible, each provision hereof shall
------------------
be interpreted
12
<PAGE>
in such manner as to be effective and valid under applicable law, but in case
any one or more of the provisions contained herein shall, for any reason, be
held to be invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other provisions of this
Agreement, and this Agreement shall be construed as if such invalid, illegal or
unenforceable provision or provisions had never been contained herein unless the
deletion of such provision or provisions would result in such a material change
as to cause completion of the transactions contemplated hereby to be
unreasonable.
11.11 Execution in Counterparts. This Agreement may be executed in two
-------------------------
or more counterparts, each of which shall be considered an original instrument,
but all of which shall be considered one and the same agreement, and shall
become binding when two or more counterparts have been signed by each of the
parties and delivered to each party hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
TELCO COMMUNICATIONS GROUP,
INCORPORATED
By: /s/ Donald A. Burns
----------------------------
Name: Donald A. Burns
----------------------------
Its: President
---------------------------
/s/ Thomas J. Cirrito
----------------------------------
Thomas J. Cirrito
/s/ Michael Cirrito
----------------------------------
Michael Cirrito
/s/ Nicole Cirrito
----------------------------------
Nicole Cirrito
13
<PAGE>
Exhibit 3.1
ARTICLES OF RESTATEMENT OF
TELCO COMMUNICATIONS GROUP, INC.
ONE
The name of the Corporation is TELCO COMMUNICATIONS GROUP, INC. (the
"Corporation")
TWO
The text of the Restated Articles of Incorporation of Telco Communications
Group, Inc. is attached as an Appendix hereto.
THREE
The Restated Articles of Incorporation of the Corporation contain
amendments to the Articles of Incorporation requiring shareholder approval.
FOUR
The Restated Articles of Incorporation of the Corporation and amendments
contained therein were adopted by the Corporation's Board of Directors on
June 12, 1996.
FIVE
The Restated Articles of Incorporation of the Corporation and amendments
contained therein were adopted by unanimous consent of the Corporation's
shareholders.
The undersigned officer of the Corporation declares that the facts stated
herein are true as of July 30, 1996.
TELCO COMMUNICATIONS GROUP, INC.
By: /s/ Bryan K. Rachlin
--------------------------
Bryan K. Rachlin
Chief Operating Officer
and Secretary
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RESTATED ARTICLES OF INCORPORATION
OF
TELCO COMMUNICATIONS GROUP, INC.
FIRST: The name of the Corporation is TELCO COMMUNICATIONS GROUP, INC.
SECOND: The Corporation's initial registered office address, including
street number, is 5511 Staple Mills Road, Richmond, Virginia, 23228. The
registered office is located in the County of Henrico.
THIRD: The name of the Corporation's initial registered agent, whose
business office is identical with the above registered office, is Edward R.
Parker who is a resident of Virginia and a member of the Virginia State Bar.
FOURTH: The Corporation shall have authority to issue One Hundred Fifty
Million (150,000,000) shares of Common Stock, no par value, and Fifteen Million
(15,000,000) shares of Preferred Stock, no par value.
FIFTH: A description of the terms, conditions, rights, privileges and
other provisions regarding the Preferred Stock and the Common Stock is as
follows, viz:
The Board of Directors of the Corporation is authorized to issue the
Preferred Stock of the Corporation from time to time in one or more series, each
series to have such dividend rates, convertibility features, redemption rates
and prices, liquidation preferences, voting rights and other rights, limitations
and qualifications as the Board of Directors may determine, including but not
limited to the following:
(a) the serial designation of each series;
(b) the rate or rates of preferential, non-participating
dividends, if any, payable either in cash or in property, or in the
shares of the same series or another series of Preferred Stock, or in
shares of the Common Stock or in any combination thereof;
(c) the dates of payment of dividends and whether dividends
shall be cumulative and if cumulative the dates from which dividends
shall be cumulative;
(d) the price or prices and the time at which the same may be
redeemed, plus dividend arrearages, if any;
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(e) the notice of redemption required;
(f) the amount and terms of a sinking fund, if any, for the
redemption thereof, provided such sinking fund is payable only out of
funds legally available therefor;
(g) the terms, conditions, rights, privileges and other
provisions, if any, respecting the conversion of any or all series of
Preferred Stock into either Preferred Stock of the same series or
another series of Preferred Stock, or into Common Stock or into any
other class of capital stock which the Corporation may then be
authorized to issue, or into any combination thereof;
(h) the preferential amount or amounts which shall be paid to
the holders thereof in the event of liquidation, dissolution, or
winding up of the Corporation, whether voluntary or involuntary, which
shall be not less than the par value plus dividend arrearages, if any;
(i) the voting powers, if any, rights to participate in meetings
of shareholders, or rights to receive notice of meetings of
shareholders; and
(j) such other designations, preferences and relative,
participating, optional or other special rights, and qualifications,
limitations or restrictions thereof, as are permitted by the
provisions of the Virginia Stock Corporation Act, and all amendments
thereof and additions thereto.
Each series of the Preferred Stock shall have such preferences as to
dividends and assets and amounts distributable on liquidation, dissolution or
winding up as shall be declared by the resolution or resolutions of the Board of
Directors establishing such series. All shares of a series shall have
preferences, limitations and relative rights identical with those of other
shares of the same series and, except to the extent otherwise provided in the
description of the series, of those of other series of the same class.
The shares of any series of Preferred Stock which have been issued and
redeemed, will have the status of authorized and unissued shares and may be
reissued as shares of the series of which they were originally a part or may be
issued as shares of a new series or as shares of any other series, all subject
to the conditions and restrictions of any series of Preferred Stock.
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Subject to the limitations prescribed in this Article Fifth and any further
limitations in accordance herewith, including and preferences and relative,
participating, optional or special rights of any outstanding series of Preferred
Stock, the holders of shares of Common Stock shall be entitled to receive, when
and as declared by the Board of Directors of the Corporation out of the assets
of the Corporation which are by law available therefor, dividends payable either
in cash, or in property, or in shares of any series of Preferred Stock, or in
Common Stock, or in any combination thereof. Each issued and outstanding share
of Common Stock shall entitle the holder thereof to full voting power.
The Board of Directors may authorize the issuance of additional shares of
Common Stock and/or Preferred Stock, not exceeding the number of shares
authorized, and in the event of the issuance of additional shares as aforesaid,
no holder of the Corporation's shares of any class, now or hereafter authorized,
shall have any preferential or preemptive right to subscribe for, purchase or
receive any shares of the Corporation of any class, now or hereafter authorized,
or any options or warrants for such shares, or any rights to subscribe to or
purchase such shares, or any securities convertible into or exchangeable for
such shares, that may at any time or from time to time be issued, sold or
offered for sale by the Corporation; provided, however, that in connection with
the issuance or sale of any such shares or securities, the Board of Directors
may, in its sole discretion, offer such shares or securities, or any part
thereof, for purchase or subscription by the holders of shares of the
Corporation, except as may otherwise be provided by these Articles of
Incorporation as from time to time amended.
SIXTH: 6.1 The number of directors of the Corporation (exclusive of
directors that may be elected by the holders of any one or more series of the
Preferred Stock voting separately as a class or classes) that shall constitute
the entire Board of Directors (the "Entire Board of Directors") shall be not
less than three (3) or more than twelve (12), such number to be determined from
time to time by resolution adopted by the affirmative vote of a majority of the
Entire Board of Directors, except that if an Interested Person (as hereinafter
defined) exists, any vote to change such number of directors must include the
affirmative vote of at least a majority of the Continuing Directors (as
hereinafter defined).
6.2 Except with respect to any directors elected by holders of any one or
more series of Preferred Stock voting separately as a class or classes, the
Board of Directors shall be divided into three (3) classes in respect of term of
office, designated Class I, Class II and Class III. Each class shall contain
one-third (1/3) of the Entire Board of Directors, or such other number that will
cause all three (3) classes to be as nearly equal in number as possible, with
the terms of office of one class expiring each year. Class I directors shall
serve until the annual meeting of shareholders to be held in 1997; Class II
directors shall serve until the annual meeting of shareholders to be held in
1998; and Class III directors shall serve until the annual meeting of
shareholders to be held in 1999; provided that in each case, directors shall
continue to serve until their successors shall be elected and shall qualify or
until their earlier death, resignation or
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removal. Commencing with the 1997 meeting, one (1) class of directors shall be
elected to serve until the annual meeting of shareholders held three (3) years
next following and until their successors shall be elected and shall qualify or
until their earlier death, resignation or removal. No decrease in the number of
directors shall have the effect of shortening the term of office of any
incumbent director. Any increase or decrease in the number of directors shall
be apportioned among the classes so as to make all classes as nearly equal in
number as possible.
6.3 Advance notice of nominations for the election of directors, other
than by the Board of Directors or a committee thereof, shall be given in the
manner provided in the ByLaws.
6.4 Except as otherwise required by law and subject to the terms of any
one or more classes or series of outstanding capital stock of the Corporation,
any director may be removed; provided, however, such removal must be for cause
and must be approved by at least a majority vote of the Entire Board of
Directors or by at least a majority of the votes held by the holders of shares
of the Corporation then entitled to be voted at an election for that director,
except that if an Interested Person exists, such removal must be approved (1) by
at least a majority vote of the Entire Board of Directors, including a majority
of the Continuing Directors, or (2) by at least 80% of the votes held by the
holders of shares of the Corporation then entitled to be voted at an election
for that director, including a majority of the votes held by holders of shares
of the Corporation then entitled to vote at an election for that director that
are not beneficially owned or controlled, directly or indirectly, by any
Interested Person. For purposes of this paragraph, the Entire Board of
Directors will not include the director who is the subject of the removal
determination, nor will such director be entitled to vote thereon. However,
nothing in the preceding sentence shall be construed as preventing a director
who is the subject of a removal determination (but who has not yet actually been
removed in accordance with this Section 6.4) from voting on any other matters
brought before the Board of Directors, including, without limitation, any
removal determination with respect to any other director or directors.
6.5 Except as otherwise provided by the terms of any one or more classes
or series of outstanding capital stock of the Corporation, any vacancy occurring
on the Board of Directors, including any vacancy created by reason of any
increase in the number of directors, shall be filled by the affirmative vote of
at least a majority of the remaining directors, whether or not such remaining
directors constitute a quorum, except that if an Interested Person exists, such
majority of the remaining directors must include a majority of the Continuing
Directors. A director elected to fill a vacancy shall serve for the unexpired
term of his or her predecessor in office.
SEVENTH: The Board of Directors is authorized to adopt, repeal, alter,
amend or rescind the ByLaws of the Corporation by the affirmative vote of at
least a majority of the Entire Board of Directors, except that if an Interested
Person exists, such Board action must be taken by the affirmative vote of at
least a majority of the Entire Board of Directors, including a majority of the
Continuing Directors. The shareholders may adopt, repeal, alter, amend or
rescind the By-Laws of the Corporation by the vote of at least 66-2/3% of the
votes held by holders of shares of Voting Stock (as hereinafter defined) except
that if an Interested Person exists, such shareholder
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action must be taken by the vote of at least 80% of the votes held by holders of
shares of Voting Stock, including an Independent Majority of Shareholders (as
hereinafter defined).
EIGHTH: 8.1 For the purposes of Articles Sixth through Tenth hereof:
(1) The term "beneficial owner" and correlative terms shall have the
meaning as set forth in Rule 13d-3 of the General Rules and Regulations (the
"General Rules") promulgated by the Securities and Exchange Commission (the
"Commission") under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as in effect on June 12, 1996, except that the words "within
sixty days" in Rule 13d-3(d)(1)(i) shall be omitted.
(2) The term "Business Combination" shall mean:
(a) any merger or consolidation of the Corporation or any
Subsidiary (as hereinafter defined) (i) with an Interested Person, any Affiliate
(as hereinafter defined) or Associate (as hereinafter defined) of an Interested
Person or any Person (as hereinafter defined) acting in concert with an
Interested Person (including, without limitation, any Person, which after such
merger or consolidation, would be an Affiliate or Associate of an Interested
Person), in each case irrespective of whether the Corporation, any Subsidiary or
any other Person is the surviving entity in such merger or consolidation, or
(ii) proposed, directly or indirectly, by or on behalf of an Interested Person;
(b) any sale, lease, exchange, transfer, distribution to
shareholders or other disposition, including, without limitation, a mortgage,
pledge or other security device, by the Corporation or any Subsidiary (in a
single transaction or a series of separate or related transactions) of all,
substantially all or any Substantial Part (as hereinafter defined) of the assets
or business of the Corporation or a Subsidiary (including, without limitation,
any securities of a Subsidiary) (i) to or with an Interested Person, or
(ii) proposed, directly or indirectly, by or on behalf of an Interested Person:
(c) the purchase, exchange, lease or other acquisition,
including, without limitation, a mortgage, pledge or other security device, by
the Corporation or any Subsidiary (in a single transaction or a series of
separate or related transactions) of all, substantially all or any Substantial
Part of the assets or business of (i) an Interested Person, or (ii) any Person,
if such purchase, exchange, lease or other acquisition is proposed, directly or
indirectly, by or on behalf of an Interested Person;
(d) the issuance of any securities, or of any rights, warrants
or options to acquire any securities, by the Corporation or a Subsidiary to an
Interested Person (except (i) as a result of a pro rata stock dividend or stock
split, (ii) upon the exercise or conversion of warrants or other rights,
including preemptive rights, or convertible securities acquired by an Interested
Person prior to or simultaneously with becoming an Interested Person or
(iii) upon conversion of publicly traded convertible securities of the
Corporation), or the acquisition by the Corporation
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or a Subsidiary of any securities, or of any rights, warrants or options to
acquire any securities, issued by an Interested Person;
(e) any plan or proposal for, or which has the effect of, the
partial or complete liquidation, dissolution, spin off, split off or split up of
the Corporation or any Subsidiary proposed, directly or indirectly, by or on
behalf of an Interested Person;
(f) any of the following which has the effect, directly or
indirectly, of increasing the proportionate amount of Voting Stock or capital
stock of any Subsidiary which is beneficially owned by an Interested Person: any
reclassification of securities (including, without limitation, any reverse stock
split) of the Corporation, any issuance of any Voting Stock or other securities
of the Corporation, any recapitalization of the Corporation or any merger,
consolidation or other transaction (whether or not with or into or otherwise
involving an Interested Person); and
(g) any agreement, contract, understanding or other
arrangement providing for any of the transactions described in this subsection
(2) of Section 8.1.
(3) The term "Continuing Director" shall mean (i) a director serving
continuously as a director of the Corporation from and including June 12, 1996;
(ii) a person who was a member of the Board of Directors of the Corporation
immediately prior to the time that any then existing Interested Person became an
Interested Person, (iii) a person who is not an Affiliate or Associate of any
Interested Person and who is designated (before or simultaneously with initially
becoming a director) as a Continuing Director by at least a majority of the then
Continuing Directors and (iv) a director deemed to be a Continuing Director in
accordance with the last sentence of this subsection (3) of this Section 8.1.
All references to action by a specified percentage of the Continuing Directors
shall mean a vote of such specified percentage of the total number of Continuing
Directors of the Corporation at a meeting at which at least such specified
percentage of the total number of Continuing Directors shall have been in
attendance. Whenever a condition requires the act of a specified percentage of
Continuing Directors, such condition shall not be capable of fulfillment unless
there is at least one Continuing Director. If all of the capital stock of the
Corporation is beneficially owned by one Person continuously for at least three
consecutive years during which period at least three annual meetings of
shareholders shall have taken place, at which meetings all of the Continuing
Directors as defined in clauses (i) - (iii) above shall not have been reelected,
all directors elected from and after such third consecutive year shall be deemed
Continuing Directors.
(4) The term "Independent Majority of Shareholders" shall mean the
majority of the votes held by holders of shares of the outstanding Voting Stock
that are not beneficially owned or controlled, directly or indirectly, by any
Interested Person.
(5) The term "Interested Person" shall mean (i) any Person, which,
together with its "Affiliates" and "Associates" (as defined in Rule 12b-2 of the
General Rules promulgated by
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the Commission under the Exchange Act, as in effect on June 12, 1996) and
any Person acting in concert therewith, is the beneficial owner, directly or
indirectly, of ten percent (10%) or more of the votes held by the holders of
shares of Voting Stock, (ii) any Affiliate or Associate of an Interested Person,
including, without limitation, a Person acting in concert therewith, (iii) any
Person that at any time within the two year period immediately prior to the date
in question was, together with its Affiliates and Associates and any Person
acting in concert therewith, the beneficial owner, directly or indirectly, of
ten percent (10%) or more of the votes held by the holders of shares of Voting
Stock, or (iv) an assignee of, or successor to, any shares of Voting Stock which
were at any time within the two-year period prior to the date in question
beneficially owned by any Interested Person, if such assignment or succession
shall have occurred in the course of a transaction or series of transactions not
involving a public offering within the meaning of the Securities Act of 1933, as
amended. For purposes of determining the percentage of votes held by a Person,
any Voting Stock not outstanding which is subject to any option, warrant,
convertible security, preemptive or other right held by such Person (whether or
not such option, warrant, convertible or exchangeable security, preemptive or
other right is currently exercisable) shall be deemed to be outstanding for the
purpose of computing the percentage of votes held by such Person.
Notwithstanding anything contained in the immediately preceding paragraph,
the term "Interested Person" shall not include (A) a Subsidiary of the
Corporation or (B) a Continuing Director who beneficially owned, on
June 12, 1996, ten percent (10%) or more of the votes held by the holders of
shares of Voting Stock and any Affiliate or Associate of one or more of such
Continuing Directors. For purposes of Articles Sixth, Seventh and Tenth only of
these Articles of Incorporation, the term "Interested Person" shall not include
any Person which shall have deposited all of its Voting Stock in a voting trust
(only and for so long as the voting trust shall be continuing and all of such
Person's Voting Stock shall remain deposited in the Voting Trust) pursuant to an
agreement with the Corporation providing the Corporation with the power to
appoint a majority of the voting trustees of the voting trust who, in turn,
shall have the power to vote all of the shares of Voting Stock in the voting
trust, in their discretion, for the election of directors of the Corporation and
the amendment of these Articles of Incorporation and the By-Laws. The agreement
by the Corporation with any Person described in the immediately preceding
sentence to use its best efforts to elect one designee of such Person as a
director and to cause the voting trustees appointed by the Corporation to vote
for such designee shall not cause such Person to be deemed an Interested Person
for purposes of Articles Sixth, Seventh and Tenth of these Articles of
Incorporation.
(6) The term "Person" shall mean any individual, corporation, limited
liability company, partnership or other person, group or entity (other than the
Corporation, any Subsidiary or a trustee holding stock for the benefit of
employees of the Corporation or its Subsidiaries, or any one of them, pursuant
to one or more employee benefit plans or arrangements). When two or more
Persons act as a partnership, limited partnership, syndicate, association or
other group for the purpose of acquiring, holding or disposing of securities,
such partnership, syndicate, association or group will be deemed a "Person".
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(7) The term "Subsidiary" shall mean any corporation or other entity
fifty percent (50%) or more of the equity of which is beneficially owned by the
Corporation; provided, however, that for purposes of the definition of
Interested Person set forth in subsection (5) of this Section 8.1 and the
definition of Person set forth in subsection (6) of this Section 8.1, the term
"Subsidiary" shall mean only a corporation of which a majority of each class of
equity security is beneficially owned by the Corporation.
(8) The term "Substantial Part", as used in reference to the assets
or business of any Person, means assets or business having a value of more than
ten percent (10%) of the total consolidated assets of the Corporation and its
Subsidiaries as of the end of the Corporation's most recent fiscal year ending
prior to the time the determination is made.
(9) For the purposes of determining the number of "votes held by
holders" of shares, including Voting Stock, of the Corporation, each share shall
have the number of votes granted to it pursuant to Article Fifth of these
Articles of Incorporation.
(10) The term "Voting Stock" shall mean stock or other securities of
the Corporation entitled to vote generally in the election of directors.
8.2 The Board of Directors of the Corporation, when evaluating any offer
of another Person (the "Offering Person") (i) to make a tender or exchange offer
for any security of the Corporation or (ii) to effect any Business Combination
(as defined in Section 8.1, except that for purposes of this Section 8.4 the
term "Person" shall be substituted for the term "Interested Person"), shall, in
connection with the exercise of the Board's judgment in determining what is in
the best interests of the Corporation as a whole, be authorized to give due
consideration to such factors as the Board of Directors determines to be
relevant, including, without limitation:
(a) the relationships between the consideration offered by the
Offering Person and (x) the market price of the Voting Stock over a
period of years, (y) the current and future value of the Corporation
as an independent entity and (z) political, economic and other factors
bearing on securities prices and the Corporation's financial condition
and future prospects;
(b) the interests of all of the Corporation's shareholders, including
minority shareholders;
(c) whether the proposed transaction might violate federal, state,
local or foreign laws;
(d) the competence, experience and integrity of the Offering Person
and its management; and
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(e) the social, legal and economic effects upon employees, suppliers,
customers, licensors, licensees and other constituents of the
Corporation and its Subsidiaries and on the communities in which the
Corporation and its Subsidiaries operate or are located.
In connection with any such evaluation, the Board of Directors is
authorized to conduct such investigations and to engage in such legal
proceedings as the Board of Directors may determine.
8.3 As to any particular transaction, the Continuing Directors shall have
the power and duty to determine, on the basis of information known to them:
(a) The amount of Voting Stock beneficially owned by any Person;
(b) Whether a Person is an Affiliate or Associate of another;
(c) Whether a Person has an agreement, arrangement or understanding
with, or is acting in concert with, another;
(d) Whether the assets subject to any Business Combination constitute
a Substantial Part as hereinabove defined;
(e) Whether a proposed transaction is proposed, directly or
indirectly, by or on behalf of any Person;
(f) Whether a proposed amendment of any Article of these Articles of
Incorporation would have the effect of modifying or permitting
circumvention of the provisions of Article Sixth through Tenth of
these Articles of Incorporation; and
(g) Such other matters with respect to which a determination is
required under Article Sixth through Tenth of these Articles of
Incorporation.
Any such determination shall be conclusive and binding for all
purposes of Article Sixth through Tenth of these Articles of Incorporation.
8.4 Nothing contained in this Article Eighth shall be construed to relieve
any Interested Person from any fiduciary or other obligation imposed by law.
NINTH: Action shall be taken by the shareholders only by unanimous written
consent or at annual or special meetings of shareholders of the Corporation
except that, if and with the percentage of the outstanding Preferred Stock or
any series thereof (the "Required Percentage") set forth in the resolution or
resolutions adopted by the Board of Directors with respect to the
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Preferred Stock, action may be taken without a meeting, without prior notice and
without a vote, if consent in writing setting forth the action so taken, shall
be signed by the holders of the Required Percentage of the outstanding Preferred
Stock or any series thereof entitled to vote thereon.
TENTH: 10.1 Any amendment, change or repeal of Article Sixth and Articles
Eighth through Tenth (an "Amendment") or any other amendment of these Articles
of Incorporation which would have the effect of modifying or permitting
circumvention of the provisions of Article Sixth and Articles Eighth through
Tenth (an "Other Amendment") shall require approval by the affirmative votes of
at least:
(1) a majority of the Entire Board of Directors, which shall include,
if an Interested Person exists for purposes of this Article Tenth, a
majority of the Continuing Directors; and
(2) a majority of the votes held by the holders of Voting Stock
except that if an Interested Person exists for purposes of this Article Tenth,
the affirmative votes of at least 80% of the votes held by the holders of shares
of Voting Stock including an Independent Majority of Shareholders, shall be
required; provided, however, that if 66 2/3% of the Continuing Directors shall
approve such Amendment or Other Amendment, then notwithstanding the existence of
an Interested Person for purposes of this Article Tenth, such Amendment or Other
Amendment shall require only such affirmative vote as is required by law, by any
other provision of these Articles of Incorporation, by the terms of any
outstanding classes or series of capital stock of the Corporation or by any
agreement with any national securities exchange or association to effect a
Business Combination, but in no event by less than a majority of the votes held
by the holders of Voting Stock.
10.2 Any amendment, change or repeal of Article Seventh of these Articles
of Incorporation or any amendment of these Articles of Incorporation which would
have the effect of modifying or permitting circumvention of the provisions of
Article Seventh shall require approval by the affirmative votes of at least:
(1) a majority of the Entire Board of Directors, which shall include,
if an Interested Person exists for purposes of this Article Tenth, a
majority of the Continuing Directors; and
(2) 66 2/3% of the votes held by holders of Voting Stock, except that
if an Interested Person exists, by the affirmative votes of at least 80% of
the votes held by the holders of shares of Voting Stock, including an
Independent Majority of Shareholders.
ELEVENTH: A director of the Corporation shall not be personally liable to
the
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Corporation or its shareholders for monetary damages, for breach of the
director's duty as a director, except for liability of a director for willful
misconduct or a knowing violation of the criminal law or of any federal or state
securities law, including without limitation, any claim of unlawful insider
trading or manipulation of the market for any security.
Any repeal or modification of the foregoing paragraph by the shareholders
of the Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or modification.
TWELFTH: The provisions of Section 13.1-728.1 et. seq. of the Virginia
Stock Corporation Act relating to "control share acquisitions" shall not apply
to acquisitions of shares of the Corporation.
THIRTEENTH: Except as otherwise provided in these Articles of
Incorporation or by the provisions of Section 13.1-725 et. seq. of the Virginia
Stock Corporation Act relative to affiliated transactions, any amendment to
these Articles of Incorporation, plan of merger or share exchange, sale of
assets of the Corporation, proposal for dissolution or similar action for which
shareholder approval is required by law shall require the approval of the
holders of a majority of all the votes cast by each voting group entitled to
vote on the transaction at a meeting at which a quorum of the voting group
exists.
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Dated: July 30, 1996 TELCO COMMUNICATIONS GROUP, INC.
/s/ Bryan K. Rachlin
-------------------------------
Bryan K. Rachlin
Its: Chief Operating Officer
and Secretary
STATE OF VIRGINIA )
: ss.
COUNTY OF )
At ___________________________ in said county on this ________ day of
__________________, 1996, personally appeared before me
__________________________________, who, being by me first duly sworn, declared
that he is the _______________________________ of Telco Communications Group,
Inc., that he signed the foregoing document as _____________________ of the
Corporation, and that the statements therein contained are true.
-------------------------------
Notary Public
[NOTARIAL SEAL]
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Exhibit 3.2
AMENDED AND RESTATED BYLAWS OF
TELCO COMMUNICATIONS GROUP, INC.
ARTICLE I
Offices
Section 1.1. The registered office of Telco Communications Group, Inc.
(the "Corporation") within the State of Virginia shall be located in Richmond,
Virginia.
Section 1.2. Other Offices. The Corporation may also have offices and
-------------
places of business at such other places within or without the State of Virginia
as the Board of Directors may from time to time determine or the business of the
Corporation may require.
ARTICLE II
Meetings of Shareholders
Section 2.1. Place. All meetings of shareholders of the Corporation
-----
shall be held at such place within or without the State of Virginia as shall be
stated in the notice of the meeting.
Section 2.2. Annual Meeting. Annual meetings of shareholders, commencing
--------------
with the year 1997, shall be held on a date specified by the Board of Directors,
at which the shareholders shall elect directors and transact such other business
as may properly be brought before the meeting.
Section 2.3. Special Meetings. Special meetings of the shareholders of
----------------
the Corporation, for any purpose or purposes, unless otherwise prescribed by
statute or by the Corporation's Restated Articles of Incorporation (the
"Articles of Incorporation"), may be called only by the Chairman of the Board,
the President, or the Board of Directors.
Section 2.4. Notice of Meetings. Written notice of each meeting of
------------------
shareholders of the Corporation stating the place, date and hour thereof, and in
the case of a special meeting of shareholders, specifying the purpose or
purposes thereof, and the person or persons by whom or at whose direction such
meeting has been called, shall be given to each shareholder entitled to vote
thereat, at his address as it appears on the records of the Corporation, not
less than ten (10) nor more than sixty (60) days prior to the meeting.
Section 2.5. List of Shareholders. At least 10 days (but not more than 90
--------------------
days) before any meeting of shareholders, the officer or transfer agent in
charge of the stock transfer books of the Corporation shall prepare and make a
complete alphabetical list of the shareholders entitled to vote at such meeting,
which list shows the address of each shareholder and the number of
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shares registered in the name of each shareholder. The list so prepared shall
be maintained at a place within the city where the meeting is to be held, which
place shall be specified in the notice of the meeting, or, if not so specified,
at the place where the meeting is to be held, and shall be open to inspection by
any shareholder, for any purpose germane to the meeting, during ordinary
business hours during a period of no less than 10 days prior to the meeting.
The list also shall be produced and kept open at the meeting (during the entire
duration thereof) and, except as otherwise provided by law, may be inspected by
any shareholder or proxy of a shareholder who is present in person at such
meeting.
Section 2.6. Presiding Officers. Meetings of shareholders shall be
------------------
presided over by the Chairman of the Board, if any, or, if the Chairman is not
present, by a Vice Chairman, or if a Vice Chairman is not present, by the Chief
Executive Officer, or if the Chief Executive Officer is not present, by the
President, or, if the President is not present, by a Vice President, or, if a
Vice President is not present, by such person who is chosen by the Board of
Directors, or, if none, by a chairperson to be chosen at the meeting by
shareholders present in person or by proxy who own a majority of the shares of
the Corporation entitled to vote and represented at such meeting. The Secretary
of meetings shall be Secretary of the Corporation, or, if the Secretary is not
present, an Assistant Secretary, or, if any Assistant Secretary is not present,
such person as may be chosen by the Board of Directors, or, if none, by such
person who is chosen by the chairperson at the meeting.
Section 2.7. Quorum. At each meeting of the shareholders of the
------
Corporation, the holders of a majority of shares of the Corporation entitled to
vote thereat, present in person or by proxy, shall constitute a quorum, except
as may be otherwise provided by the Articles of Incorporation or these By-Laws.
If, however, a quorum shall not be present on the date specified in the original
notice of meeting, the shareholders entitled to vote thereat, present in person
or by proxy, shall have power to adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
At any such adjourned meeting, at which a quorum shall be present, the
shareholders, present in person or by proxy, may transact any business which
might have been transacted had a quorum been present on the date specified in
the original notice of meeting.
Section 2.8. Voting. At any meeting of the shareholders of the
------
Corporation, each shareholder having the right to vote shall be entitled to vote
in person or by proxy appointed by an instrument in writing subscribed by such
shareholder. Except as may be otherwise provided by the Articles of
Incorporation, each holder of record of Common Stock shall be entitled to one
vote for every share of such stock standing in his name on the books of the
Corporation. All elections of directors by shareholders, and, except as
otherwise provided by statute, the Articles of Incorporation or these By-Laws,
all other matters submitted to a vote of shareholders, shall be decided by the
vote of the holders of a majority of the stock entitled to vote thereon and
represented in person or by proxy at such meeting.
Section 2.9. Proxies. Each proxy shall be executed in writing by the
-------
shareholder or by
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his duly authorized attorney. No proxy shall be valid after the expiration of
eleven (11) months from the date of its execution unless it shall have specified
therein a longer duration. Each proxy shall be revocable at the pleasure of the
person executing it or of his personal representatives, unless specifically
irrevocable by its terms and only in those cases where an irrevocable proxy is
permissible under applicable law.
Section 2.10. Consents. Action shall be taken by the shareholders only
--------
by unanimous written consent or at annual or special meetings of shareholders of
the Corporation except that, if and with the percentage of the outstanding
Preferred Stock or any series thereof (the "Required Percentage") set forth in
the resolution or resolutions adopted by the Board of Directors with respect to
the Preferred Stock, action may be taken without a meeting, without prior notice
and without a vote, if consent in writing setting forth the action so taken,
shall be signed by the holders of the Required Percentage of the outstanding
Preferred Stock or any series thereof entitled to vote thereon.
Section 2.11. Shareholder Proposals. At any annual or special meeting of
---------------------
shareholders, only such business shall be conducted as shall have been properly
brought before a meeting. Business must be (a) specified in the notice of
meeting (or any supplement thereto), (b) brought before the meeting by or at the
direction of the Board of Directors, or (c) properly brought before an annual
meeting by a shareholder, and, if and only if the notice of a special meeting
provides for business to be brought before the special meeting by shareholders,
properly brought before the special meeting by a shareholder. For business to
be properly brought before a meeting by a shareholder, the shareholder must have
given timely notice thereof in writing to the Secretary of the Corporation. To
be timely, a shareholder's notice must be delivered to or mailed and received at
the principal executive offices of the Corporation not less than 60 days prior
to the meeting; provided, however, that if less than 70 days' notice or prior
public disclosure of the date of the meeting is given or made to shareholders,
notice by the shareholder to be timely must be so received not later than the
close of business on the tenth day following the day on which such notice of the
date of the meeting was mailed or such public notice of the date of the meeting
was mailed or such public disclosure was made. Furthermore, shareholders are
not permitted to nominate individuals to serve as directors unless notice of
such nomination is given to the Corporation in accordance with Section 3.4 of
these By-Laws. A shareholder's notice to the Secretary shall set forth as to
each matter the shareholder proposes to bring before the meeting (a) a brief
description of the business desired to be brought before the meeting and the
reasons for conducting such business at the meeting, (b) the name and address,
as they appear on the Corporation's books, of the shareholder proposing such
business, (c) the class and number of shares of the Corporation which are
beneficially owned by the shareholder and (d) any material interest of the
shareholder in such business. Notwithstanding anything in the By-Laws to the
contrary, no business shall be conducted at any meeting of shareholders except
in accordance with the procedures set forth in this Section 2.11. The chairman
of the meeting shall, if the facts warrant, determine and declare to the meeting
that business was not properly brought before the meeting and in accordance with
the provisions of this Section, and if he should so determine, he shall so
declare that any such business not properly brought before the meeting
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shall not be transacted. Notwithstanding anything in the By-Laws to the
contrary, the Corporation shall be under no obligation to submit for action any
shareholder proposal at any meeting of shareholders which proposal the
Corporation would otherwise be permitted to omit in accordance with Rule 14a-8
under the Exchange Act.
ARTICLE III
Directors
Section 3.1. Board of Directors. The property and business of the
------------------
Corporation shall be managed by its Board of Directors, which may exercise all
such powers of the Corporation and do all such lawful acts and things as are
not, by statute or by the Articles of Incorporation or by these By-Laws,
directed or required to be exercised or done by the shareholders. Directors
need not be shareholders.
Section 3.2. Number. The number of directors of the Corporation
------
(exclusive of directors that may be elected by the holders of any one or more
series of the Preferred Stock voting separately as a class or classes) that
shall constitute the entire Board of Directors (the "Entire Board of Directors")
shall be not less than three (3) or more than twelve (12), such number to be
determined from time to time by resolution adopted by the affirmative vote of
a majority of the Entire Board of Directors.
Section 3.3. Election. Directors shall be elected at the annual meeting
--------
of shareholders, or as otherwise provided in the Articles of Incorporation or in
these By-Laws.
Section 3.4. Nomination of Director Candidates. Subject to the rights
---------------------------------
of holders of any class or series of Preferred Shares then outstanding,
nominations for the election of directors may be made by (a) the Board or a
proxy committee appointed by the Board or (b) any shareholder entitled to vote
in the election of directors generally. However, any shareholder entitled to
vote in the election of directors generally may nominate one or more persons for
election as directors at a meeting only if timely notice of such shareholder's
intent to make such nomination or nominations has been given in writing to the
Secretary of the Corporation. To be timely, a shareholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation not fewer than 60 days prior to the meeting; provided, however, that
if less than 70 days' notice or prior public disclosure of the date of the
meeting is given or made to shareholders, notice by the shareholder to be timely
must be so received not later than the close of business on the tenth day
following the day on which such notice of the date of the meeting was mailed or
such public disclosure was made. Each such notice shall set forth (a) the name
and address of the shareholder who intends to make the nomination and of the
person or persons to be nominated, (b) a representation that the shareholder is
a holder of record of shares of the Corporation entitled to vote for the
election of directors on the date of such notice and intends to appear in person
or by proxy at the meeting to nominate the person or persons specified in the
notice, (c) a description of all arrangements or understandings between the
shareholder and each nominee and any other person or persons (naming such person
or
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persons) pursuant to which the nomination or nominations are to be made by the
shareholder, (d) such other information regarding each nominee proposed by such
shareholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange Commission, had the
nominee been nominated, or intended to be nominated, by the Board of Directors
and (e) the consent of each nominee to serve as a director of the Corporation if
so elected.
If a person is validly designated as a nominee in accordance with this
Section 3.4 and shall thereafter become unable or unwilling to stand for
election to the Board of Directors, the Board of Directors or the shareholder
who proposed such nominee, as the case may be, may designate a substitute
nominee upon delivery, not fewer than 20 days prior to the date of the meeting
for the election of such nominee, of a written notice to the Secretary setting
forth such information regarding such substitute nominee as would have been
required to be delivered to the Secretary pursuant to this Section 3.4 had such
substitute nominee been initially proposed as a nominee. Such notice shall
include a signed consent to serve as a director of the Corporation, if elected,
of each such substitute nominee.
If the chairman of the meeting for the election of directors determines
that a nomination of any candidate for election as a director at such meeting
was not made in accordance with the applicable provisions of this Section 3.4,
such nomination shall be void.
ARTICLE IV
Meetings of the Board
Section 4.1. Time and Place. Meetings of the Board of Directors may be
--------------
held either within or without the State of Virginia. Regular meetings of the
Board of Directors may be held without notice at such time and place as shall
from time to time be determined by the Board. Each special meeting of the Board
of Directors shall be held at such time and place as shall be stated in the
notice of the meeting.
Section 4.2. First Meeting. The first meeting of each newly elected
-------------
Board of Directors shall be held within ten (10) days following each annual
meeting of the shareholders, at such time and place either within or without the
State of Virginia, as shall be announced at the annual meeting of shareholders,
and no notice of such meeting shall be necessary to the newly elected directors
in order legally to constitute the meeting, provided a quorum shall be present.
Section 4.3. Special Meetings. Special meetings of the Board of
----------------
Directors may be called by the Chairman of the Board, the Chief Executive
Officer or the President, or at the written request of any two (2) directors.
Written notice of each special meeting of directors, stating the time and place
thereof, shall be served upon each director, personally (including by overnight
courier), by mail or by facsimile, at least two (2) days before such meeting.
Section 4.4. Quorum and Voting. At all meetings of the Board of
-----------------
Directors a
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majority of the Entire Board of Directors shall be necessary and sufficient to
constitute a quorum for the transaction of business and the act of a majority of
the directors present at any meeting at which a quorum is present shall be the
act of the Board of Directors, except as may be otherwise specifically provided
by statute, by the Articles of Incorporation or by these By-Laws. If a quorum
shall not be present at any meeting of the Board of Directors, the directors
present thereat may adjourn the meeting from time to time, without further
notice other than announcement at the meeting, until a quorum shall be present.
Section 4.5. Telephone Conference Meetings. Meetings of the directors
-----------------------------
may be held by means of a telephone or similar communications equipment, by
which all persons participating in the meeting can hear each other at the same
time and participation by such means shall constitute presence in person at a
meeting.
Section 4.6. Consents. Any action allowed or required to be taken at a
--------
meeting of the Board of Directors or by any committee thereof, may be taken
without a meeting if a consent in writing, setting forth the action so taken, is
signed before or after such action by all of the directors, or all or the
members of the committee, as the case may be.
ARTICLE V
Committees of Directors
Section 5.1. Designation; Powers. The Board of Directors may, by
-------------------
resolution or resolutions adopted by a majority of the Entire Board of
Directors, designate from among its members an Executive Committee, Audit
Committee, Compensation Committee or other Committees, each consisting of two
(2) or more directors, and each of which, to the extent provided in any such
resolution, shall have all the authority of the Board, except as provided by
law, the Articles of Incorporation or these By-Laws. The Board of Directors may
designate one or more directors as alternate members of any such Committee who
may replace any absent member or members at any meeting of such Committee.
Section 5.2. Tenure and Reports. Each such Committee shall serve at the
------------------
pleasure of the Board of Directors. It shall keep minutes of its meetings and
report the same to the Board.
ARTICLE VI
Notices
Section 6.1. Delivery of Notices. Notices to directors and shareholders
-------------------
shall be in writing and may be delivered personally (which shall include
delivery by overnight courier service) or by mail. Notice by mail shall be
deemed to be given at the time when the same shall be deposited in the post
office or a letter box, in a postpaid, sealed wrapper, and shall be addressed to
directors or shareholders at their addresses appearing on the books of the
Corporation. Notice to directors may also be given by telecopy.
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Section 6.2. Waiver of Notice. Whenever any notice is required to be
----------------
given by law, the Articles of Incorporation or these By-Laws, a waiver thereof
in writing, signed by the person or persons entitled to said notice, whether
before or after the time stated therein, shall be deemed equivalent thereto.
Any shareholder attending a meeting of shareholders in person or by proxy, or
any director attending a meeting of the Board of Director or any committee
thereof, without protesting such lack of notice prior to the meeting or at its
commencement, shall be deemed conclusively to have waived notice of such
meeting. Any shareholder signing a unanimous or other written consent pursuant
to Section 2.10 hereof or any director signing a unanimous written consent
pursuant to Section 4.6 hereof shall be deemed conclusively to have waived
notice of the action taken by such consent.
ARTICLE VII
Officers
Section 7.1. Officers. The officers of the Corporation shall be a
--------
Chairman of the Board, one or more Vice Chairmen, a Chief Executive Officer, a
President, a Chief Operating Officer, one or more Vice Presidents, a Chief
Financial Officer and Treasurer, a Controller and a Secretary, each of whom
shall be elected annually by the directors at their annual meeting, and shall
hold office at the pleasure of the Board of Directors. The same individual may
simultaneously hold more than one office in the Corporation.
Section 7.2. Additional Officers. The Board of Directors may appoint
-------------------
such other officers and agents, including, without limitation, Assistant Vice
Presidents, Assistant Secretaries, Assistant Treasurers and Assistant
Controllers with such powers and duties as it shall deem necessary or
appropriate. All such officers or agents shall hold office at the pleasure of
the Board of Directors.
Section 7.3. Authorities and Duties. All officers, as between themselves
----------------------
and the Corporation, shall have such authority and perform such duties in the
management of the Corporation as may be provided in these By-Laws, or, to the
extent not so provided, as may be prescribed by the Board of Directors.
Section 7.4. Salaries. The salaries or other compensation of all
--------
officers of the Corporation shall be fixed by the Board of Directors. The
salaries or other compensation of all other employees and agents of the
Corporation may be fixed by the Board of Directors. However, the Board of
Directors may delegate to a committee of the Board of Directors or to one or
more officers or employees authority to employ and to fix the salaries or other
compensation of any such employees or agents.
Section 7.5. The Chairman of the Board. The Chairman of the Board shall
preside at all meetings of the shareholders and all meetings of the Board of
Directors and shall have such powers and perform such duties as may from time to
time be assigned to him by the Board of Directors.
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Section 7.6. The Vice Chairman. In the absence of the Chairman of the
-----------------
Board, the Vice Chairman (and if there is more than one Vice Chairman, the Vice
Chairmen in order of their seniority or as otherwise determined by the Board)
shall preside at all meetings of the shareholders and all meetings of the Board
of Directors and shall have such powers and perform such duties as may from time
to time be assigned to him by the Board of Directors.
Section 7.7. The Chief Executive Officer. In the absence of the Chairman
---------------------------
of the Board and any Vice Chairman, the Chief Executive Officer shall preside at
all meetings of the shareholders and all meetings of the Board of Directors.
The Chief Executive Officer shall be the principal executive officer of the
Corporation and shall have such powers and perform such duties as may from time
to time be assigned to him by the Board of Directors.
Section 7.8. The President. In the absence of the Chairman of the Board,
-------------
any Vice Chairman and the Chief Executive Officer, the President shall preside
at all meetings of the shareholders and all meetings of the Board of Directors
and shall have such powers and perform such duties as may from time to time be
assigned to him by the Board of Directors.
Section 7.9. The Chief Operating Officer. The Chief Operating Officer
---------------------------
shall be responsible for management of the operations of the Corporation in
accordance with the directions of the Board, the Chief Executive Officer and the
President. The Chief Operating Officer shall report to the President.
Section 7.10. The Vice Presidents. The Vice Presidents in the order of
-------------------
their seniority, as indicated by their titles (Executive, Senior, etc.) or as
otherwise determined by the Board of Directors, shall, in the absence of the
Chairman of the Board, any Vice Chairman, the Chief Executive Officer and the
President, perform the duties and exercise the powers of the Chairman of the
Board, the Vice Chairman, the Chief Executive Officer and the President, shall
perform such other duties as the Board of Directors shall prescribe and shall
generally assist the Chairman of the Board, the Vice Chairmen, the Chief
Executive Officer and the President.
Section 7.11. The Secretary. The Secretary shall attend meetings of the
-------------
Board of Directors and shareholders and record all votes and the minutes of all
proceedings in a book to be kept for that purpose and shall perform like duties
for the standing committees of the Board of Directors when required. He shall
give, or cause to be given, notice of meetings of the shareholders and special
meetings of the Board of Directors, and shall perform such other duties as may
be prescribed by the Board of Directors, the Chairman of the Board, the Vice
Chairmen, the Chief Executive Officer and the President, under whose collective
supervision he shall be. He shall keep in safe custody the seal of the
Corporation and, when authorized by the Board of Directors, affix the same to
any instrument requiring it and, when so affixed, it shall be attested by his
signature or by the signature of the Treasurer or an Assistant Secretary or
Treasurer. He shall keep in safe custody the certificate books and stock books
and such other books and papers as the Board of Directors may direct and shall
perform all other duties incident to the office of Secretary.
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Section 7.12. Assistant Secretaries. The Assistant Secretaries shall, in
---------------------
the absence or disability of the Secretary, perform the duties and exercise the
powers of the Secretary and shall perform such other duties as the Board of
Directors shall prescribe.
Section 7.13. The Chief Financial Officer and Treasurer. The Chief
-----------------------------------------
Financial Officer and Treasurer shall have the care and custody of the corporate
funds, and other valuable effects, including securities, and shall keep full and
accurate accounts of receipts and disbursements in books belonging to the
Corporation and shall deposit all monies and other valuable effects in the name
and to the credit of the Corporation in such depositories as may be designated
by the Board of Directors. The Chief Financial Officer and Treasurer shall
disburse the funds of the Corporation as may be ordered by the Board, taking
proper vouchers for such disbursements, and shall render to the Chairman of the
Board, the Vice Chairmen, the Chief Executive Officer, the President and the
Board of Directors, at the regular meetings of the Board, or whenever they may
require it, an account of all his transactions as Chief Financial Officer and
Treasurer and of the financial condition of the Corporation. If required by the
Board of Directors, the Chief Financial Officer and Treasurer shall give the
Corporation a bond for such term, in such sum and with such surety or sureties
as shall be satisfactory to the Board for the faithful performance of the duties
of his office and for the restoration to the Corporation, in case of his death,
resignation, retirement or removal from office, of all books, papers, vouchers,
money and other property of whatever kind in his possession or under his control
belonging to the Corporation.
Section 7.14. Assistant Treasurers. The Assistant Treasurer shall, in
--------------------
the absence or disability of the Treasurer, perform the duties and exercise the
powers of the Treasurer and shall perform such other duties as the Board of
Directors may prescribe.
Section 7.15. Execution of Instruments. Each of the Chairman of the
------------------------
Board, the Vice Chairmen, the Chief Executive Officer, the President, the Chief
Operating Officer, the Chief Financial Officer and the Executive Vice Presidents
shall have the power to sign on behalf of the Corporation bonds, notes, deeds,
mortgages, guarantees and any and all contracts, agreements and instruments of a
contractual nature pertaining to matters which arise in the normal conduct and
ordinary course of the business of the Corporation, except in cases in which the
signing and execution thereof shall have been expressly delegated by the Board
of Directors of the Corporation to some other officer or agent of the
Corporation.
ARTICLE VIII
Certificates of Stock
Section 8.1. Form. The certificates of stock of the Corporation shall be
----
in such form as shall be determined by the Board of Directors and shall be
numbered consecutively and entered in the books of the Corporation as they are
issued. Each certificate shall exhibit the registered holder's name and the
number and class of shares, and shall be signed by the Chairman of the Board,
any Vice Chairman, the Chief Executive Officer, the President, any
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Executive Vice President, Senior Vice President, or Vice President and by the
Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary,
and shall bear the seal of the Corporation or an engraved or printed facsimile
thereof. Where any such certificate is signed by a transfer agent or by a
registrar, the signature of the Chairman of the Board, any Vice Chairman, the
Chief Executive Officer, the President, Executive Vice President, Senior Vice
President, Vice President, Treasurer, Assistant Treasurer, Secretary or
Assistant Secretary may be a facsimile. In case any officer, transfer agent or
registrar, who has signed, or whose facsimile signature or signatures have been
used on, any such certificate or certificates, shall cease to be such officer,
transfer agent or registrar of the Corporation, whether because of death,
resignation or otherwise, before such certificate or certificates have been
delivered by the Corporation, such certificate or certificates may nevertheless
be issued and delivered as though the person or persons who signed such
certificate or certificates or whose facsimile signature or signatures have been
used thereon had not ceased to be such officer, transfer agent or registrar of
the Corporation.
Section 8.2. Registered Shareholders. The Corporation shall be entitled
-----------------------
to (1) recognize the exclusive right of a person registered on its books as the
owner of shares as entitled to receive dividends and notices of meetings of
shareholders and to vote as such owner; and (2) hold liable for calls and
assessments a person registered on its books as the owner of shares; and the
Corporation shall not be bound to recognize any equitable or other claim to or
interest in such shares on the part of any other person, whether or not it shall
have express or other notice thereof, except as otherwise required by law.
Section 8.3. Lost Certificates. The Board of Directors may direct a new
-----------------
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed, and upon such
other terms as the Board of Directors may prescribe; and the Board of Directors
may, in its discretion and as a condition precedent to the issuance of a new
certificate of certificates, require the owner of such lost, stolen or destroyed
certificate or certificates, or his legal representative, to give the
Corporation a bond in such sum and with such surety or sureties as it may direct
as indemnity against any claim that may be made against the Corporation with
respect to the certificate alleged to have been lost, stolen or destroyed.
Section 8.4. Record Date.
-----------
(a) For the purpose of determining the shareholders entitled to notice of
or to vote at any meeting of shareholders or any adjournment thereof, or to
express consent to or dissent from any proposal without a meeting, or for the
purpose of determining shareholders entitled to receive payment of any dividend
or the allotment of any rights, or for the purpose of payment of any dividend or
the allotment of any rights, or for the purpose of any other action, the Board
may fix, in advance, a date as the record date for any such determination of
shareholders. Such date shall not be more than sixty (60) nor less than ten
(10) days before the date of such meeting, nor more than sixty (60) days prior
to any other action.
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(b) If no record date is fixed:
(1) The record date for the determination of shareholders entitled to
notice of or to vote at a meeting of shareholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if no
notice is given, the day on which the meeting is held.
(2) The record date for determining shareholders for any purpose other
than that specified in subparagraph (1) shall be at the close of business on the
day on which the resolution of the Board relating thereto is adopted.
(c) When a determination of shareholders of record entitled to notice of or
to vote at any meeting of shareholders has been made as provided in this
section, such determination shall apply to any adjournment thereof, unless the
Board fixes a new record date under this section for the adjourned meeting.
Section 8.5. Fractional Shares. The Corporation may (1) issue fractions
-----------------
of a share, (2) arrange for the disposition of fractional interests by those
entitled thereto, (3) pay in cash the fair value of fractions of a share as of
the time when those entitled to receive such fractions are determined, or (4)
issue scrip in registered or bearer form which shall entitle the holder to
receive a certificate for a full share upon the surrender of such scrip
aggregating a full share. A certificate for a fractional share shall, but scrip
shall not, unless otherwise provided therein, entitle the holder to exercise
voting rights, to receive dividends thereon, and to participate in any of the
assets of the Corporation in the event of liquidation. The Board of Directors
may cause scrip to be issued subject to the condition that it shall become void
if not exchanged for certificates representing full shares before a specified
date, or subject to the condition that the shares for which scrip is
exchangeable for may be sold by the Corporation and the proceeds thereof
distributed to the holders of scrip, or subject to any other conditions which
the Board of Directors may deem advisable.
ARTICLE IX
General Provisions
Section 9.1. Dividends. Subject to applicable law and the Articles of
---------
Incorporation, the Board of Directors shall have full power to determine whether
any, and if any, what part of any, funds legally available for the payment of
dividends shall be declared in dividends and paid to shareholders; the division
of the whole or any part of such funds of the Corporation shall rest wholly
within the lawful discretion of the Board of Directors, and it shall not be
required at any time, against such discretion, to divide or pay any part of such
funds among or to the shareholders as dividends or otherwise; and the Board of
Directors may fix a sum which may be set aside or reserved over and above the
paid in capital of the Corporation as working capital for the Corporation or as
a reserve for any proper purpose, and from time to time may increase, diminish,
and vary the same in its absolute judgment and discretion.
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Section 9.2. Fiscal Year. The fiscal year of the Corporation shall be
-----------
determined by the Board of Directors.
Section 9.3. Seal. The corporate seal shall have inscribed thereon the
----
name of the Corporation, the year of its organization and the words "Corporate
Seal, Virginia". The seal may be used by causing it or a facsimile thereof to
be impressed, affixed or in any manner reproduced.
Section 9.4. Instruments for the Payment of Money. All checks or other
------------------------------------
instruments for the payment of money and notes of the Corporation shall be
signed by such officer or officers or such other person or persons as the Board
of Directors may from time to time designate.
ARTICLE X
Indemnification
Section 10.1. Definitions. In this Section 10.1:
-----------
(a) "expenses" includes, without limitation, counsel fees;
(b) "employee" shall include, without limitation, any employee,
including any professionally licensed employee of the Corporation.
Such term shall also include, without limitation, any employee,
including any professionally licensed employee, of a subsidiary or
affiliate of the Corporation who is acting on behalf of the
Corporation;
(c) "liability" means the obligation to pay a judgment,
settlement, penalty, fine, including any excise tax assessed with
respect to any employee benefit plan, or reasonable expenses incurred
with respect to a proceeding;
(d) "official capacity" means, (i) when used with respect to a
director, the office of director in the Corporation; or (ii) when used
with respect to an individual other than a director, the office in the
Corporation held by the officer or the employment or agency
relationship undertaken by the employee or agent on behalf of the
Corporation. "Official capacity" does not include service for any
other foreign or domestic corporation or any partnership, joint
venture, trust, employee benefit plan, or other enterprise whether at
the request of the Corporation or otherwise;
(e) "party" includes an individual who was, is, or is
threatened to be made a named defendant or respondent in a proceeding;
(f) "proceeding" means any threatened, pending, or completed
action, suit, or proceeding, whether civil, criminal, administrative
or investigative
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and whether formal or informal, including all appeals.
Section 10.2. Indemnification. The Corporation shall indemnify any
---------------
person who was or is a party to any proceeding by reason of the fact that such
person is or was a director or officer of the Corporation or any subsidiary or
affiliate of the Corporation or is or was serving at the request of the
Corporation as a director, trustee, partner, officer, employee, or agent of
another foreign or domestic corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, against any liability incurred by
such person in connection with such proceeding if (a) such person conducted him
or herself in good faith; and (b) such person believed, in the case of conduct
in his or her official capacity, that his or her conduct was in the best
interests of the Corporation, and in all other cases that his or her conduct was
at least not opposed to the Corporation's best interests; and (c) in the case of
any criminal proceeding, such person had no reasonable cause to believe his or
her conduct was unlawful; and (d) such person was not grossly negligent or
guilty of willful misconduct. Indemnification required under this Section 10 in
connection with a proceeding by or in the right of the Corporation is limited to
reasonable expenses incurred in connection with the proceeding. A person is
considered to be serving an employee benefit plan at the Corporation's request
if such person's duties to the Corporation also impose duties on, or otherwise
involve services by, such person to the plan or to participants in or
beneficiaries of the plan. A person's conduct with respect to an employee
benefit plan for a purpose such person believed to be in the interests of the
participants and beneficiaries of the plan is conduct that satisfies the
requirements of this Section 10. The termination of any proceeding by judgment,
order, settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not of itself create a presumption that the standard of
conduct described in this Section 10.2 has not been met.
Section 10.3. Limitations Upon Indemnification. Notwithstanding the
--------------------------------
provisions of Section 10.2, no indemnification shall be made in connection with:
(a) any proceeding by or in the right of the Corporation in which the person
seeking indemnification was adjudged liable to the Corporation; or (b) any
proceeding charging any person with improper benefit to him or herself, whether
or not involving action in such person's official capacity, in which such person
was adjudged liable on the basis that personal benefit was improperly received
by such person.
Section 10.4. Determination and Authorization of Indemnification. In any
--------------------------------------------------
case in which a director, officer or employee of the Corporation requests
indemnification, upon such person's request, the Board of Directors shall meet
within sixty (60) days thereof to determine whether such person is eligible for
indemnification in accordance with the applicable standards of conduct set forth
in Sections 10.2 and 10.3. Such determination shall be made as follows:
(a) By the Board of Directors by a majority vote of a quorum
consisting of directors not at the time parties to the proceeding;
(b) If a quorum cannot be obtained under paragraph (a) of this
Section 10.4, by majority vote of a committee duly designated by the
Board of Directors
13
<PAGE>
(in which designation directors who are parties may participate),
consisting of two or more directors not at the time parties to the
proceeding;
(c) By special legal counsel;
(i) Selected by the Board of Directors or its committee
in the manner prescribed in paragraphs (a) or (b) of
this Section 10.4;
(ii) If a quorum of the Board of Directors cannot be
obtained under paragraph (a) of this Section 10.4 and
a committee cannot be designated under paragraph (b)
of this Section 10.4, selected by majority vote of
the full Board of Directors, in which selection
directors who are parties may participate; or
(d) By the shareholders, but shares owned by or voted under the
control of directors, officers or employees who are at the time
parties to the proceeding may not be voted on the determination; or
(e) By the Chairman of the Board if the person seeking
indemnification is neither a director nor an officer of the
Corporation.
Authorization of indemnification and evaluation as to reasonableness of
expenses shall be made in the same manner as the determination that
indemnification is permissible, except that if the determination is made by
special legal counsel, authorization of indemnification and evaluation as to
reasonableness of expenses shall be made by those entitled under paragraph (c)
of this Section 10.4 to elect counsel.
Section 10.5. Advancement of Expenses. To the fullest extent permitted
-----------------------
by law, the Corporation shall promptly advance expenses as they are incurred by
any person who is a party to any proceeding, whether by or in the right of the
Corporation or otherwise, by reason of the fact that such person is or was a
director, officer or employee of the Corporation or of any subsidiary or
affiliate of the Corporation, or is or was serving at the request of the
Corporation as a director, trustee, partner, officer, or employee of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, upon request of such person and receipt of an undertaking by or on
behalf of such director, officer or employee to repay amounts advanced to the
extent that it is ultimately determined that such person was not eligible for
indemnification in accordance with the standards set forth in Sections 10.2 and
10.3.
Section 10.6. Non-exclusivity of Indemnification: Contractual
------------------------------------------------
Indemnification. The foregoing provisions of this Section 10 shall be deemed to
- ---------------
be a contract between the Corporation and each director, officer or employee of
the Corporation, or its subsidiaries or
14
<PAGE>
affiliates, and any modification or repeal of this Section 10 or any of the
provisions of Article 10 of the Virginia Stock Corporation Act shall not
diminish any rights or obligations existing prior to such modification or repeal
with respect to any proceeding theretofore or thereafter brought; provided,
however, that the right of indemnification provided in this Section 10 shall not
be deemed exclusive of any other rights to which any director, officer or
employee of the Corporation or its subsidiary or affiliate may now be or
hereafter become entitled apart from this Section 10, under any applicable law
including the Code of Virginia. Irrespective of the provisions of this Section
10, the Board of Directors may, at any time from time to time, approve
indemnification of directors, officers, employees or agents to the full extent
permitted by the Code of Virginia at the time in effect, whether on account of
past or future actions or transactions. Notwithstanding the foregoing, the
Corporation shall enter into such additional contracts providing for
indemnification and advancement of expenses with directors, officers or
employees of the Corporation or its subsidiaries or affiliates as the Board of
Directors shall authorize, provided that the terms of any such contract shall be
consistent with the provisions of the Code of Virginia.
Section 10.7. Miscellaneous Indemnification Provisions.
----------------------------------------
(a) The indemnification provided by this Section 10 shall be limited with
respect to directors, officers and controlling persons to the extent provided in
any undertaking entered into by the Corporation or its subsidiaries or
affiliates, as required by the Securities and Exchange Commission pursuant to
any rule or regulation of the Securities and Exchange Commission now or
hereafter in effect.
(b) The Corporation may purchase and maintain insurance on behalf of any
person described in this Section 10 against any liability which may be asserted
against such person whether or not the Corporation would have the power to
indemnify such person against such liability under the provisions of this
Section 10.
(c) Every reference in this Section 10 to directors, officers or employees
shall include former directors, officers and employees and their respective
heirs, executors and administrators.
(d) If any provision of this Section 10 shall be found to be invalid or
limited in application by reason of any law, regulation or proceeding, it shall
not affect any other provision or the validity of the remaining provisions
hereof.
(e) The provisions of this Section 10 shall be applicable to claims,
actions, suits or proceedings made, commenced or pending after the adoption
hereof, whether arising from acts or omissions to act occurring before or after
the adoption hereof.
ARTICLE XI
Amendments
15
<PAGE>
Section 11.1. Power to Amend. The Board of Directors is authorized to adopt,
--------------
repeal, alter, amend or rescind these By-Laws by the affirmative vote of at
least a majority of the Entire Board of Directors.. The shareholders may adopt,
repeal, alter, amend or rescind the By-Laws of the Corporation by the vote of at
least 66 2/3% of the votes held by holders of shares of Voting Stock (as defined
in the Articles of Incorporation).
16
<PAGE>
Exhibit 4.1
================================================================================
NUMBER SHARES
[LOGO OF TELCO COMMUNICATIONS GROUP APPEAR HERE]
COMMON STOCK COMMON STOCK
NO PAR VALUE NO PAR VALUE
INCORPORATED UNDER THE LAWS OF THE COMMONWEALTH OF VIRGINIA
THIS CERTIFICATE IS TRANSFERABLE IN THE CUSIP 879205 10 2
CITIES OF CRANFORD, NJ OR NEW YORK, NY SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK OF
------------------ -----------------
- ------------------------TELCO COMMUNICATIONS GROUP, INC.------------------------
------------------ -----------------
transferable on the books of the Corporation by the holder hereof, in person or
by duly authorized attorney, upon surrender of this Certificate properly
endorsed. This Certificate is not valid unless countersigned by the Transfer
Agent and registered by the Registrar.
Witness the facsimile seal of said Corporation and the facsimile signatures of
its duly authorized officers.
Dated: [SEAL OF TELCO APPEARS HERE]
Countersigned and Registered
REGISTRAR AND TRANSFER COMPANY
Transfer Agent and Registrar
By
/s/ Bryan Rachlin /s/ Donald A. Burns
AUTHORIZED SIGNATURE SECRETARY PRESIDENT
================================================================================
Proof of July 29, 1995 . Thomas De La Rue Inc. . (703) 502-0200
<PAGE>
The following abbreviations, when used in the inscription on the face of this
Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - ______Custodian_______
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform Gifts to Minors Act
JT TEN - as joint tenants with right ___________________________
of survivorship and not as (State)
tenants in common
Additional abbreviations may also be used though not in the above list.
For Value received, hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE
- ------------------------------------
________________________________________________________________________________
________________________________________________________________________________
(NAME AND ADDRESS OF TRANSFEREE SHOULD BE PRINTED OR TYPEWRITTEN)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated:____________________________ ___________________________________________
NOTICE: The signature to this assignment
must correspond with the name as written
upon the face of this Certificate in every
particular, without alteration or
enlargement of any change whatever.
Signature(s) Guaranteed.
By________________________________
THE SIGNATURE(S) SHOULD BE
GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (Banks,
Stockbrokers, Savings and Loan
Associations and Credit Unions)
WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION
PROGRAM PURSUANT TO S.E.C. RULE
17Ad-15
<PAGE>
Exhibit 5.1
[LETTERHEAD OF SWIDLER & BERLIN, CHARTERED APPEARS HERE]
August 5, 1996
Telco Communications Group, Inc.
4219 Lafayette Center Drive
Chantilly, Virginia 20151
Re: Issuance of Shares of Common Stock by
Telco Communications Group, Inc.
-------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Telco Communications Group, Inc.
(the "Company") in connection with the Company's filing pursuant to the
Securities Act of 1933, as amended (the "Act"), of a registration statement on
Form S-1, File No. 333-5857 (the "Registration Statement"), relating to (i) the
issuance of 6,100,000 shares of common stock, no par value per share (the
"Common Stock"), of the Company and the possible issuance of up to an additional
1,305,000 shares pursuant to the exercise of an over-allotment option by the
underwriters and managers, and (ii) the sale of up to 2,600,000 shares of Common
Stock by certain shareholders of the Company. You have requested our opinion as
to certain matters with respect to the issuance of the Common Stock.
We have examined such corporate records of the Company, including its
Restated Articles of Incorporation, its Amended and Restated Bylaws, and
resolutions of the Board of Directors and shareholders of the Company as well as
such other documents as we deem necessary for rendering the opinion hereinafter
expressed.
On the basis of the foregoing, we are of the opinion that the Common
Stock has been duly authorized by the Board of Directors of the Company and,
when issued and sold as described in the Registration Statement, the Common
Stock will be legally issued, fully paid, and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of the name of our firm therein under the
caption "Legal Matters" in the Prospectus filed as a part of the Registration
Statement.
Sincerely yours,
SWIDLER & BERLIN,CHARTERED
<PAGE>
EXHIBIT 10.19
TELCO COMMUNICATIONS GROUP, INC.
AMENDED AND RESTATED 1994 STOCK OPTION PLAN
1. Purpose
-------
This Amended and Restated 1994 Stock Option Plan for Telco
Communications Group, Inc. (the "Company") amends and restates the Company's
1994 Stock Option Plan. It is intended to provide incentive to directors,
officers and key employees of the Company and its Subsidiaries by providing
those persons with opportunities to purchase shares of the Company's Common
Stock under (a) Incentive Stock Options and (b) other stock options.
2. Definitions
-----------
Except as otherwise expressly provided herein or unless the context
otherwise requires, as used in this Plan, the following words and phrases shall
have the meanings set forth in this Section 2.
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Common Stock" shall mean the Common Stock, no par value, of the
Company.
(d) "Company" shall mean Telco Communications Group, Inc., the
employer which has established this Plan.
(e) "Disinterested" shall mean disinterested within the meaning of
any applicable regulatory requirements, including Rule 16b-3, as amended
from time to time, as promulgated by the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934, as amended from time to
time.
(f) "Fair Market Value" per share as of a particular date shall mean
(i) the closing sales price per share of Common Stock on the principal
national securities exchange, if any, on which the Common Stock shall then
be listed for the last preceding date on which there was a sale of such
Common Stock on such exchange, or (ii) if the Common Stock is not then
listed on a national securities exchange, the last sales price per share of
Common Stock entered on a national inter-dealer quotation system for the
last preceding date on which there was a sale of such Common Stock on such
national inter-dealer quotation system, or (iii) if no closing or last
sales price per share of Common Stock is entered on a national inter-dealer
<PAGE>
quotation system, the average of the closing bid and asked prices for the
Common Stock in the over-the-counter market for the last preceding date on
which there was a quotation for such Common Stock in such market or (iv) if
no price can be determined under the preceding alternatives, then the price
per share as determined by the Committee in good faith.
(g) "Incentive Stock Option" shall mean one or more options to
purchase Common Stock which, at the time such options are granted under
this Plan or any other such plan of the Company, qualify as incentive stock
options under Section 422 of the Code.
(h) "IPO" shall mean the initial public offering of the Company's
Common Stock.
(i) "Non-Incentive Stock Option" shall mean any option or options
that are not Incentive Stock Options.
(j) "Option" shall mean any option, including any SAR, Incentive
Stock Option or other option issued pursuant to this Plan.
(k) "Optionee" shall mean any person to whom an Option is granted
under this Plan.
(l) "Parent" shall mean any corporation (other than the Company) in
an unbroken chain of corporations ending with the Company if, at the time
of granting an Option, each of the corporations other than the Company owns
stock possessing fifty percent (50%) or more of the total combined voting
power of all classes of stock in one of the other corporations in such
chain.
(m) "Plan" shall mean this Amended and Restated 1994 Stock Option
Plan.
(n) "Reliance Period Termination Date" shall mean the date that is
the earlier of:
(1) The date of expiration or termination of the Plan;
(2) The date of any material modification of the Plan, within
the meaning of Treasury Regulation section 1.162-27(h)(1)(iii);
(3) The first date as of which all Options provided for under
the Plan have been issued; and
(4) The date of the first meeting of shareholders of the Company
at which Directors are to be elected that occurs after the year 1999.
(o) "Stock Appreciation Right" or "SAR" shall mean a right included
in an award under this Plan to receive upon exercise of the SAR a payment
equal to the amount of the appreciation in the Fair Market Value of a share
of Common Stock above the exercise price which is set forth in the SAR,
provided that the exercise price is not less than the Fair Market Value of
a share of Common Stock on the date the SAR is granted. Payment upon
exercise of an SAR may be awarded separately or in combination with other
awards and Options under this Plan.
(p) "Subsidiary" shall mean any corporation (other than the Company)
in an unbroken chain of corporations beginning with the Company if, at the
time of granting an Option, each of the corporations other than the last
corporation in the unbroken chain owns stock possessing fifty percent (50%)
or more of the total combined voting power of all classes of stock in one
of the other corporations in such chain.
(q) "Ten Percent Shareholder" shall mean an Optionee who, at the time
an Option is granted, owns directly or indirectly (within the meaning of
Section 424(d) of the Code) stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company, its
Parent or a Subsidiary.
-2-
<PAGE>
3. General Administration
----------------------
(a) The Plan shall be administered by the Compensation Committee (the
"Committee"), consisting of not less than two members of the Board. From
and after the consummation of the IPO, no person may serve as a member of
the Committee unless such person is both a Disinterested person as well as
an "outside director" within the meaning of Treasury Regulation section
1.162-27(e)(3)(i).
(b) The Committee shall have the authority in its discretion, subject
to the terms and conditions hereof, to administer this Plan and to exercise
all the powers and authorities either specifically granted to it hereunder
or that are necessary or that are advisable in the administration of the
Plan, including, without limitation, the authority to grant Options; to
determine the purchase price of shares of Common Stock covered by each
Option (the "Option Price"); to determine the persons to whom, and the time
or times at which, Options shall be granted; to determine the number of
shares of Common Stock to be covered by each Option; to interpret the Plan;
to prescribe, amend and rescind rules and regulations relating to the Plan;
and to determine the terms and provisions of the Option agreements (which
need not be identical) entered into in connection with Options granted
under the Plan ("Option Agreements").
(c) The Board shall fill all vacancies, however caused, in the
Committee. The Board may from time to time appoint additional members to
the Committee and may at any time, under the terms and conditions of the
Company's Bylaws, remove one or more Committee members and substitute
others.
(d) No member of the Board or Committee shall be liable for any
action taken or determination made in good faith with respect to this Plan
or any Option granted hereunder.
4. Restrictions on Grants to Committee Members
-------------------------------------------
From and after the IPO, directors serving on the Committee are not
eligible to receive Options pursuant to the Plan.
5. Granting of Options
-------------------
Options may be granted under this Plan at any time prior to June 12,
2006.
6. Eligibility
-----------
(a) Subject to Section 4, Options may be granted to any director,
officer or key employee of the Company or any Subsidiary. In determining
from time to time the officers and employees to whom Options shall be
granted and the number of shares of Common Stock to be covered by each
Option, the Committee shall consider the duties of the respective
-3-
<PAGE>
officers and employees, their present and potential contributions to the
success of the Company and its Subsidiaries and such other factors as the
Committee shall deem relevant in connection with accomplishing the purposes
of the Plan.
(b) At the time each Option is granted under the Plan the Committee
shall determine whether such Option is to be designated as an Incentive
Stock Option. Incentive Stock Options shall not be granted to a director
who is not an employee of the Company.
(c) An Option designated an Incentive Stock Option can, prior to its
exercise, be changed to a non-incentive Option if the Optionee consents to
amend his Option Agreement to provide that the exercise period of such
Option will be governed by Section 8(e)(2) hereof.
7. Stock
-----
(a) The stock subject to the Options shall be shares of Common Stock.
Such shares may, in whole or in part, be authorized but unissued shares
contributed directly by the Company or shares which shall have been or
which may be acquired by the Company. The aggregate number of shares of
Common Stock for which Options may be granted from time to time under this
Plan shall be 7,500,000 shares (determined after the Company's planned 425
to 1 split), subject to adjustment as provided in Section 8(g) hereof. The
maximum number of shares of Common Stock for which any one person may be
granted Options under the Plan is 7,500,000 shares (determined after the
Company's planned 425 to 1 split).
(b) If any outstanding Option under the Plan for any reason expires
or is terminated without having been exercised in full, the shares of
Common Stock allocable to the unexercised portion of such Option shall
(unless this Plan shall have been terminated) become available for
subsequent grants of Options hereunder.
8. Terms and Conditions of Options
-------------------------------
Each Option granted pursuant to this Plan shall be evidenced by one or
more Option Agreements in such forms as the Committee may from time to time
approve. Options shall comply with and be subject to the following terms and
conditions:
(a) Incentive Stock Option Price. Each Incentive Stock Option shall
----------------------------
state the Option Price, which shall be not less than one hundred percent
(100%) of the Fair Market Value of the shares of Common Stock on the date
of grant of the Option; provided, however, that in the case of an Incentive
Stock Option granted to a Ten Percent Shareholder, the Option Price shall
not be less than one hundred ten percent (110%) of such Fair Market Value.
The Option Price shall be subject to adjustment as
-4-
<PAGE>
provided in Section 8(h) hereof. The date on which the Committee adopts a
resolution expressly granting an Option shall be considered the day on
which such Option is granted.
(b) Non-Incentive Stock Option Price. Each Option that is not an
--------------------------------
Incentive Stock Option shall state the Option Price. In the case of
Non-Incentive Stock Options granted on or before the Reliance Period
Termination Date, the Option Price shall not be less than fifty percent
(50%) of the Fair Market Value of the shares of Common Stock on the date of
grant of the Option. In the case of Non-Incentive Stock Options granted
after the Reliance Period Termination Date, the Option Price shall not be
less than one hundred percent (100%) of the Fair Market Value of the shares
of Common Stock on the date of grant of the Option. The Option Price shall
be subject to adjustment as provided in Section 8(h) hereof. The date on
which the Committee adopts a resolution expressly granting an Option shall
be considered the day on which such Option is granted.
(c) Restrictions. Any Common Stock issued under this Plan may contain
------------
restrictions and limitations including, but not limited to, limitations on
transferability that may constitute substantial risks of forfeiture, as the
Committee may determine.
(d) Value of Shares. Options may be granted to any eligible person
---------------
for shares of Common Stock of any value, provided that the aggregate Fair
Market Value (determined at the time the Option is granted) of the Common
Stock with respect to which Incentive Stock Options are exercisable for the
first time by the Optionee during any calendar year (under all the plans of
the Company, its Parent and its Subsidiaries) shall not exceed $100,000.
(e) Medium and Time of Payment. The Option Price shall be paid in
--------------------------
full, at the time of exercise, in cash or, with the approval of the
Committee, in shares of Common Stock having a Fair Market Value in the
aggregate equal to such Option Price or in a combination of cash and such
shares.
(f) Term and Exercise of Options.
----------------------------
(1) Incentive Stock Options. Incentive Stock Options shall be
-----------------------
exercisable over the exercise period specified by the Committee in an
Option Agreement, but in no event shall such period exceed ten (10)
years from the date of the grant of each such Incentive Stock Option;
provided, however, that in the case of an Incentive Stock Option
granted to a Ten Percent Shareholder, the exercise period shall not
exceed five (5) years from the date such Option is granted. An
Incentive Stock Option may be exercised, as to any or all full shares
of Common Stock as to which the Incentive Stock Option has become
exercisable, by giving written notice of such exercise to the
Committee; provided, that an Incentive Stock Option may not be
exercised at any one (1) time for less than one hundred (100) shares
of Common Stock (or such number of shares as to which the Incentive
Stock Option is then exercisable if such number of shares is less than
100).
(2) Non-Incentive Stock Options. Options which have not been
---------------------------
designated by the Committee as Incentive Stock Options shall be
exercisable over a period of ten (10) years.
(g) Nontransferability of Options. Options granted under this Plan
-----------------------------
are not transferable other than by will or by the laws of descent and
distribution, and, during Optionee's lifetime, Options may be exercised
only by the Optionee.
-5-
<PAGE>
(h) Effect of Certain Changes.
-------------------------
(1) If there is any change in the number of shares of Common
Stock through the declaration of stock dividends, recapitalization
resulting in stock splits, or combinations or exchanges of such
shares, then the number of shares of Common Stock available for
Options, the number of such shares covered by outstanding Options, and
the Option Price of such Options shall be proportionately adjusted to
reflect any increase or decrease in the number of issued shares of
Common Stock; provided, however, that any fractional shares resulting
from such adjustment shall be eliminated.
(2) In the event of a proposed dissolution or liquidation of the
Company, each Option granted under this Plan shall terminate as of a
date to be fixed by the Committee, provided, however, that each
Optionee shall have the right, immediately prior to such termination,
to exercise the Options as to all or any part of the shares of Common
Stock covered thereby, including shares as to which such Options would
not otherwise be exercisable.
(3) In the event of any merger, consolidation or reorganization
of the Company, the Committee shall promptly make an appropriate
adjustment to the number and class of shares of Common Stock available
for Options, and to the amount and kind of shares or other securities
or property receivable upon exercise of any outstanding Options after
the effective date of such transaction, and the price thereof (subject
to the limitations of Section 424 of the Code), to preserve each
Optionee's proportionate interest therein and to preserve unchanged
the aggregate Option Price.
(4) In the event of a change in the Common Stock as presently
constituted, which is limited to a change of all of its authorized
shares without par value into the same number of shares with a par
value or, if such shares have a par value, then with a different par
value, the shares resulting from any such change shall be deemed to be
Common Stock within the meaning of the Plan.
(5) To the extent that the foregoing adjustments relate to stock
or securities of the Company, such adjustments shall be made by the
Committee, whose determination in that respect shall be final, binding
and conclusive, provided that each Option granted pursuant to this
Plan and designated an Incentive Stock Option shall not be adjusted in
a manner that causes the Option to fail to continue to qualify as an
Incentive Stock Option within the meaning of Section 422 of the Code.
(6) Except as expressly provided in this Section 8(h), the
Optionee shall have no rights by reason of any subdivision or
consolidation of shares of stock of any class or the payment of any
stock dividend or any other increase or decrease in the
-6-
<PAGE>
number of shares of stock of any class or by reason of any
dissolution, liquidation, merger, or consolidation, and any issue by
the Company of shares of stock of any class, or securities convertible
into or exchangeable for shares of stock of any class, shall not
affect, and no adjustment by reason thereof shall be made with respect
to, the number or Option Price of shares of Common Stock subject to an
Option. The grant of an Option pursuant to this Plan shall not affect
in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or
business structure or to merge, consolidate, or dissolve, liquidate,
sell or transfer all or any part of its business or assets.
(i) Rights as a Shareholder. An Optionee or a transferee of an Option
-----------------------
shall have no rights as a shareholder with respect to any shares covered by
an Option until the date of the issuance of a stock certificate to such
Optionee for such shares. No adjustments shall be made for dividends
(ordinary or extraordinary, whether in cash, securities or other property)
or distributions or other rights for which the record date is prior to the
date such stock certificate is issued, except as expressly provided in
Section 8(h) hereof.
(j) Other Provisions. The Option Agreements authorized under this
----------------
Plan shall contain such other provisions, including, without limitation,
(i) the imposition of restrictions upon the exercise of an Option and (ii)
the inclusion of any condition not inconsistent with such Option qualifying
as an Incentive Stock Option, as the Committee shall deem advisable,
including provisions with respect to compliance with federal and applicable
state securities laws.
9. Agreement by Optionee Regarding Withholding Taxes
-------------------------------------------------
(a) No later than the date of exercise of any Option granted
hereunder, the Optionee will pay to the Company or make arrangements
satisfactory to the Committee regarding payment of any federal, state
and/or local taxes of any kind required by law to be withheld upon the
exercise of such Option, and
(b) The Company shall, to the extent permitted or required by law,
have the right to deduct from any payment of any kind otherwise due to the
Optionee any federal, state and/or local taxes of any kind required by law
to be withheld upon the exercise of such Option.
10. Term of Plan
------------
Options may be granted pursuant to this Plan from time to time within
a period of ten (10) years from the date on which this Plan is adopted by the
Board, provided that no Options granted under this Plan shall become exercisable
unless and until this Plan shall have been approved by the Company's
shareholders.
-7-
<PAGE>
11. Savings Clause
--------------
Notwithstanding any other provision hereof, this Plan is intended to
qualify as a plan pursuant to which Incentive Stock Options may be issued under
Section 422 of the Code. If this Plan or any provision of this Plan shall be
held to be invalid or to fail to meet the requirements of Section 422 of the
Code or the regulations promulgated thereunder, such invalidity or failure shall
not affect the remaining parts of this Plan, but rather it shall be construed
and enforced as if the Plan or the affected provision thereof, as the case may
be, complied in all respects with the requirements of Section 422 of the Code.
12. Amendment and Termination of the Plan
-------------------------------------
The Committee may at any time and from time to time suspend,
terminate, modify or amend this Plan, provided that any amendment that would
increase the aggregate number of shares of Common Stock as to which Options may
be granted under this Plan or the maximum number that may be granted to any
individual person shall be subject to the approval of the holders of a majority
of the Common Stock issued and outstanding, except that any such increase or
modification that may result from adjustments authorized by Section 8(h) hereof
shall not require such approval. Except as provided in Section 8 hereof, no
suspension, termination, modification or amendment of this Plan may adversely
affect any Option previously granted unless the written consent of the Optionee
is obtained.
Adopted by the Board of Directors on June 12, 1996.
Attest:
/s/ Andrew M. Ray /s/ Bryan Rachlin
- --------------------------------- ---------------------------------
Secretary
-8-
<PAGE>
EXHIBIT 10.39
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of the 10th
day of July, 1996 between Telco Communications Group, Incorporated, a
Virginia corporation (the "Company"), and Henry G. Luken, III (the "Executive").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Company desires to employ the Executive, and the Executive
desires to be employed by the Company, on the terms and subject to the
conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual promises herein contained,
the parties agree as follows:
1. Employment.
----------
(a) The Company hereby employs the Executive as chairman and the
Executive hereby accepts such employment, on the terms and subject to the
conditions hereinafter set forth. The Company will use its best efforts to
include Executive in its slate of candidates for membership on the Company's
Board of Directors (the "Board") and the Executive Committee, if any.
(b) Executive shall report directly to the Board, and shall perform
such duties consistent with his positions as President and Chief Executive
Officer pursuant to the direction of the Board.
(c) Attention and Effort. The Executive shall perform his duties
--------------------
hereunder primarily at Executive's offices in Bradenton, Florida or at such
other location determined by Executive, but shall, upon the Board's reasonable
request and on reasonable notice, perform his duties hereunder at Company's
offices or such other places as reasonably requested by the Board and as
appropriate for the performance of such duties. The Executive's daily schedule
and hours worked under this Agreement on any given day shall be subject to the
Executive's reasonably exercised discretion. The Executive shall devote
sufficient time as he determines is reasonably necessary to fulfill the spirit
and purpose of this Agreement. The Executive agrees to use all of his skills and
business judgment and render services to the best of his ability to serve the
interests of the Company. Subject to the terms of Section 6, this shall not
preclude Executive from serving on community and civic boards, participating in
industry associations, pursuing his personal financial and legal affairs, or
otherwise engaging in other activities, so long as such activities do not
unreasonably interfere with his duties to the Company.
<PAGE>
(d) Support Services. The Executive shall be entitled to all of the
----------------
administrative, operational and facility support customary for a similarly
situated executive. This support shall include, without limitation, a suitably
appointed private office, a secretary or administrative assistant, and payment
of or reimbursement for reasonable cellular telephone expenses, business, travel
and entertainment expenses, expenses of the Executive maintaining his
professional license and standing and any and all other business expenses
reasonably incurred on behalf of or in the course of performing duties for the
Company, all in accordance with the expense reimbursement policies established
from time to time by the Company. The Executive agrees to provide such
documentation of these expenses as may be reasonably required.
2. Term. Subject to the provisions for termination hereinafter provided,
----
the Term shall begin on the date hereof, shall continue through the fifth
anniversary of the date hereof, and shall automatically renew each year unless
notice of termination is given by either party hereto at least three hundred
sixty (360) days prior to the end of each annual renewal term.
3. Compensation.
------------
Throughout the Term the Company shall pay or provide, as the case may
be, to the Executive the compensation and other benefits and rights set forth in
this Section 3.
(a) The Company shall pay to the Executive a "Base Salary," payable
in accordance with the Company's usual pay practices (and in any event no less
frequently than monthly), of $400,000 per annum. The Board shall annually
review Executive's Base Salary in light of the Base Salaries paid to other
executives of the Company and the performance of the Executive and the Company
and may, in its discretion, increase such Base Salary by an amount it determines
is appropriate. Once Executive's Base Salary is increased, it shall not
thereafter be reduced.
(b) The Company shall pay to the Executive bonus compensation for
each fiscal year, or part thereof that he is employed by the Company, at the
discretion of the Board, provided that such bonus shall be commensurate with
other bonuses paid to employees of the Company and shall take into account the
total compensation paid to executives of other companies which would be
competitive for Executive's services.
(c) The Company shall provide medical, hospitalization, disability
and dental insurance for Executive, his spouse and eligible family members,
subject to and in accordance with the Company's policy, the proportion of the
cost thereof to be borne by the Company and the Executive to be in accordance
with such policy.
(d) The Executive shall participate in all retirement and other
benefit plans of the Company generally available from time to time to employees
of the Company and for which the Executive qualifies under the terms thereof
(and nothing in this Agreement shall, or shall be
-2-
<PAGE>
deemed to, in any way affect the Executive's right and benefits thereunder
except as expressly provided herein).
(e) The Executive shall be entitled to at least twenty two (22)
days of vacation allowance each year and a sick leave allowance as provided
under the Company's vacation and sick leave policy for executive officers.
(f) The Executive shall be entitled to participate in any equity
or other employee benefit plan that is generally available to senior executive
officers, as distinguished from general management, of the Company, at the
highest level provided for any employee. The Executive's participation in and
benefits under any such plan shall be on the terms and subject to the conditions
specified in the governing document of the particular plan.
4. Permanent Disability.
--------------------
(a) For purposes of this Agreement, the Executive's "Permanent
Disability" shall be deemed to have occurred one day after one hundred eighty
(180) days in the aggregate during any consecutive twelve (12) month period, or
one day after one hundred twenty (120) consecutive days, during which one
hundred eighty (180) or one hundred twenty (120) days, as the case may be, the
Executive, by reason of his physical or mental disability or illness, shall have
been unable to discharge fully his duties under this Agreement.
(b) If either the Company or the Executive, after receipt of notice
of the Executive's Permanent Disability from the other, disputes that the
Executive's Permanent Disability shall have occurred, the Executive shall
promptly submit to a physical examination by the chief of medicine of any major
accredited hospital in the metropolitan Washington, D.C. area or such other area
as the Executive selects, and, unless such physician shall issue his written
statement to the effect that, in his opinion, based on his diagnosis, the
Executive is capable of resuming his employment and devoting his full time and
energy to discharging fully his duties hereunder within thirty (30) days after
the date of such statement, such Permanent Disability shall be deemed to have
occurred on the day above specified.
5. Termination.
-----------
(a) The Executive's employment under this Agreement and the Term
shall be terminated immediately on the death of the Executive and may be
terminated by the Board, with the concurrence of the Chairman of the Board (or
the Vice Chairman of the Board):
(i) at any time after the Permanent Disability of the Executive;
(ii) at any time for "Cause" (as defined below); or
(iii) at any time without Cause.
-3-
<PAGE>
For purposes hereof, Cause shall mean:
(A) Active participation by the Executive in fraudulent conduct
against the Company, a felony involving manual turpitude, an act or
series of deliberate acts which were not taken in good faith by Executive
and which, in the reasonable judgment of the Board, results or will
likely result in material injury to the business, operations or business
reputation of the Company, or an act or series of acts constituting
willful malfeasance or gross misconduct or the Executive's continued
willful failure to perform any of his duties under this Agreement.
(B) A substantial and continual refusal by Executive in breach
of this Agreement to perform the duties, responsibilities or obligations
assigned to Executive pursuant to the terms hereof, which breach has not
been cured (if it is of a nature that can be cured) to the Board's
reasonable satisfaction within ten (10) days after the Company gives
written notice thereof to the Executive;
(C) Excessive absenteeism by the Executive; provided that
absenteeism (i) related to illness or otherwise covered by Section 4(a)
hereof, (ii) required to be permitted under applicable federal or state
laws, or (iii) permitted under Company policy, shall not be deemed to be
excessive; or
(D) The voluntary resignation of the Executive without "Good
Reason" (as defined below) and without the prior consent of the Board.
Executive shall be permitted to respond and defend himself before the Board
within thirty (30) days after delivery to Executive of written notification of
any proposed termination for Cause which specifies in detail the reasons for
such termination. If the majority of the members of the Board (excluding
Executive) do not confirm that the Company had grounds for a "Cause"
termination, Executive shall have the option to treat his employment as not
having terminated or as having been terminated pursuant to a termination without
Cause.
(b) Termination by Death. If the Executive's employment is
--------------------
terminated by death, the Executive's estate shall be entitled to receive (i)
life insurance benefits pursuant to any life insurance purchased by the Company,
(ii) a pro rata portion of the bonus applicable to the calendar year in which
such termination occurs, payable when and as such bonus is determined under
Section 3(b) but no less than a pro rata portion of Executive's bonus for the
prior year, (iii) other benefits, payable within ninety (90) days after the date
of death, accrued by him hereunder up to and including the date of Executive's
death and (iv) reimbursement for all expenses incurred by Executive pursuant to
Section 1(d) prior to his death.
(c) Termination for Cause. If the Executive's employment is
---------------------
terminated by the Company for Cause, the Company shall not have any other or
further obligations to the Executive under this Agreement (except (i) as may be
provided in accordance with the terms of
-4-
<PAGE>
retirement and other benefit plans pursuant to Section 3(d), (ii) as to that
portion of any unpaid Base Salary and other benefits accrued and earned under
this Agreement through the date of such termination, (iii) as to benefits, if
any, provided by any insurance policies in accordance with their terms, and (iv)
reimbursement for all expenses incurred by Executive pursuant to Section 1(d)
prior to his termination). In addition, if the Executive's employment is
terminated by the Company for Cause at any time during the Term, the Executive
shall immediately forfeit any and all other unvested stock rights and stock
options and other such unvested incentives or awards previously granted to him
by the Company. The foregoing sentence shall be in addition to, and not in lieu
of, any and all other rights and remedies which may be available to the Company
under the circumstances, whether at law or in equity.
(d) Termination without Cause. If the Executive's employment is
-------------------------
terminated by the Company without Cause, the Executive shall be entitled to
receive (i) severance compensation equal to what would have been his Base Salary
under Section 3(a), payable at such times as his Base Salary would have been
paid if his employment had not been terminated (or, at the election of the
Executive, in a lump sum without discount), for the longer of one (1) year or
the remainder of what would have been the Term (but not longer than three (3)
years, (ii) other benefits, payable within ninety (90) days after the date of
such termination, accrued by him hereunder up to and including the date of such
termination, (iii) continuation of the insurance provided by the Company
pursuant to Section 3(c) for the longer of one (1) year and the remainder of the
Term (but not longer than three (3) years), or if not available a lump sum
payment of an amount equal to the fair value of such insurance, (iv) a pro rata
portion of the bonus applicable to the calendar year in which such termination
occurs, payable when and as such bonus is determined under Section 3(b), but no
less than a pro rata portion of Executive's bonus for the preceding calendar
year, and (v) reimbursement for all expenses incurred by Executive pursuant to
Section 1(d) prior to his termination.
(e) Termination for Permanent Disability. If the Executive's
------------------------------------
employment is terminated by the Company for Permanent Disability, the Executive
shall be entitled to receive (i) severance compensation equal to what would have
been his Base Salary under Section 3(a) for the longer of one (1) year or the
remainder of what would have been the Term (but not longer than three (3)
years), payable at such times as his Base Salary would have been paid if his
employment had not been terminated (or, at the election of the Executive, a lump
sum without discount), less any disability insurance benefits pursuant to any
disability insurance provided by the Company or purchased by Executive, the cost
of which is reimbursed by the Company, which are payable in respect of the
period after such termination, (ii) other benefits, payable within ninety (90)
days after termination for Permanent Disability, accrued by him hereunder up to
and including the date of termination for Permanent Disability, (iii)
continuation of the insurance provided by the Company pursuant to Section 3(c)
for the longer of one (1) year and the remainder of the Term (but not longer
than three (3) years), or if not available a lump sum payment of an amount equal
to the fair value of such insurance, (iv) a pro rata portion of the bonus
applicable to the calendar year in which such termination occurs, payable when
and as such bonus is determined under Section 3(b), but no less than a pro rata
portion of Executive's bonus
-5-
<PAGE>
for the preceding calendar year, and (v) reimbursement for all expenses incurred
by Executive pursuant to Section 1(d) prior to his termination.
(f) Termination by Executive for Good Reason. If the Executive
----------------------------------------
terminates his employment for "Good Reason", the Executive shall be entitled to
receive (i) severance compensation equal to what would have been his Base Salary
under Section 3(a), payable at such times as his Base Salary would have been
paid if his employment had not been terminates (or, at the election of the
Executive, in a lump sum without discount), for the longer of one (1) year and
the remainder of what would have been the Term (but not longer than three (3)
years), (ii) a pro rata portion of the bonus applicable to the calendar year in
which such termination occurs, payable when and as such bonus is determined
under Section 3(b), but no less than a pro rata portion of Executive's bonus for
the preceding calendar year, (iii) other benefits, payable within ninety (90)
days after the date of such termination, accrued by him hereunder up to and
including the date of such termination and (iv) reimbursement for all expenses
incurred by Executive pursuant to Section 1(d) prior to his termination. "Good
Reason" means a termination of Executive's employment by Executive within ninety
(90) days following (i) a reduction in Executive's annual Base Salary or
incentive compensation or equity participation opportunity, (ii) a material
reduction in Executive's positions, duties and responsibilities or reporting
lines from those described in Section 1 hereof, (iii) a material breach of this
Agreement by the Company. Notwithstanding the foregoing, a termination shall not
be treated as a termination for Good Reason (i) if Executive shall have
consented in writing to the occurrence of the event giving rise to the claim of
termination for Good Reason or (ii) unless Executive shall have delivered a
written notice to the Board within thirty (30) days of his having actual
knowledge of the occurrence of one of such events stating that he intends to
terminate his employment for Good Reason and specifying the factual basis for
such termination, and such event, if capable of being cured, shall not have been
cured within ten (10) days of the receipt of such notice.
(g) Mitigation. The Executive is not required to mitigate the
----------
amount of any payments to be made by the Company pursuant to this Agreement
following his termination by seeking other employment or otherwise. In addition,
the amount of any post-termination payments provided for in this Agreement shall
not be reduced by any remuneration earned by the Executive during the period
following the termination of his employment as a result of employment by another
employer or otherwise after the date of termination of his employment with the
Company.
6. Covenants and Confidential Information.
--------------------------------------
(a) The Executive acknowledges the Company's reliance on and
expectation of the Executive's continued commitment to performance of his duties
and responsibilities during the Term. In light of such reliance and expectation
on the part of the Company, during the periods hereafter specified in Section
6(b), the Executive shall not, directly or indirectly, do or suffer either of
the following:
-6-
<PAGE>
(i) Own, manage, control or participate in the ownership,
management or control of, or be employed or engaged by or otherwise
affiliated or associated as a consultant, independent contractor or
otherwise with, any other corporation, partnership, proprietorship,
firm, association or other business entity engaged in the business of,
or otherwise engage in the business of, marketing or providing
telecommunication services within the United States in competition with
the Company; provided, however, that the beneficial and/or record
ownership of not more than four and nine-tenths percent (4.9%) of any
class of publicly traded securities of any entity shall not be deemed a
violation of this covenant; or
(ii) Disclose, divulge, discuss, copy or otherwise use or
suffer to be used in any manner, other than in accordance with the
Executive's duties hereunder, any confidential or proprietary
information relating to the Company's business, prospects, finances,
operations, properties or otherwise to its particular business or other
trade secrets of the Company, it being acknowledged by the Executive
that all such information regarding the business of the Company
compiled or obtained by, or furnished to, the Executive while the
Executive shall have been employed by or associated with the Company is
confidential and/or proprietary information and the Company's exclusive
property; provided, however, that the foregoing restrictions shall not
apply to the extent that such information:
(A) is clearly obtainable in the public domain;
(B) becomes obtainable in the public domain, except by reason of
the breach by the Executive of the terms hereof; or
(C) is required to be disclosed by rule of law or by order of a
court or governmental body or agency.
(b) The applicable periods shall be: (i) so long as the
Executive is an employee of the Company; (ii) as to clause (ii) of Section 6(a),
at any time after the Executive is no longer an employee of the Company; and
(iii) upon the payment by the Company to the Executive of $1,000,000 in cash as
severance (which shall be paid at termination) in addition to payments otherwise
required under this Agreement, for a period of three years after termination of
employment for Cause or for Permanent Disability or without Good Reason.
(c) The Executive agrees and understands that the remedy at law for
any breach by him of this Section 6 will be inadequate and that the damages
flowing from such breach are not readily susceptible to being measured in
monetary terms. Accordingly, it is acknowledged that the Company shall be
entitled to immediate injunctive relief and may obtain a temporary order
restraining any threatened or further breach. Nothing in this Section 6 shall be
deemed to limit the Company's remedies at law or in equity for any breach by the
Executive of any of the provisions of this Section 6 which may be pursued or
availed of by the Company.
-7-
<PAGE>
(d) THE EXECUTIVE HAS CAREFULLY CONSIDERED THE NATURE AND EXTENT OF
THE RESTRICTIONS UPON HIM AND THE RIGHTS AND REMEDIES CONFERRED UPON THE COMPANY
UNDER THIS SECTION 6, AND HEREBY ACKNOWLEDGES AND AGREES THAT THE SAME ARE
REASONABLE IN TIME AND TERRITORY, ARE DESIGNED TO ELIMINATE COMPETITION WHICH
OTHERWISE WOULD BE UNFAIR TO THE COMPANY, DO NOT STIFLE THE INHERENT SKILL AND
EXPERIENCE OF THE EXECUTIVE, WOULD NOT OPERATE AS A BAR TO THE EXECUTIVE'S SOLE
MEANS OF SUPPORT, ARE FULLY REQUIRED TO PROTECT THE LEGITIMATE INTERESTS OF THE
COMPANY AND DO NOT CONFER A BENEFIT UPON THE COMPANY DISPROPORTIONATE TO THE
DETRIMENT TO THE EXECUTIVE.
(e) The Executive acknowledges that the Executive's obligations under
this Section 6 shall survive in accordance with paragraph (b) above regardless
of whether the Executive's employment by the Company is terminated, voluntarily
or involuntarily, by the Company or the Executive, with Cause or without Cause,
or the Executive with or without Good Reason.
7. Indemnification. During the Term, the Company shall indemnify
---------------
Executive and hold Executive harmless from and against any claim, loss or cause
of action arising from or out of Executive's performance as an officer, director
or employee of the Company or any of its subsidiaries or in any other capacity,
including any fiduciary capacity, in which Executive serves at the request of
the Company to the maximum extent permitted by applicable law. If any claim is
asserted hereunder with respect to which Executive reasonably believes in good
faith he is entitled to indemnification, the Company shall pay Executive legal
expenses (or cause such expenses to be paid) on a monthly basis, provided that
Executive shall reimburse the Company for such amounts if Executive shall be
found by a court of competent jurisdiction not to have been entitled to
indemnification. In addition, the Company agrees to provide Executive with
coverage under a directors and officers liability insurance policy.
8. Miscellaneous.
-------------
(a) The Executive represents and warrants that he is not a party
to any agreement, contract or understanding, whether employment or otherwise,
which would restrict or prohibit him from undertaking or performing employment
in accordance with the terms and conditions of this Agreement.
(b) The provisions of this Agreement are severable and if any one
or more provisions may be determined to be illegal or otherwise unenforceable,
in whole or in part, the remaining provisions and any partially unenforceable
provision to the extent enforceable in any jurisdiction nevertheless shall be
binding and enforceable.
-8-
<PAGE>
(c) The rights and obligations of the Company under this Agreement
shall inure to the benefit of, and shall be binding on, the Company and, if in
connection with a transfer of substantially all of its business, its successors
and assigns, and the rights and obligations (other than obligations to perform
services) of the Executive under this Agreement shall inure to the benefit of,
and shall be binding upon, the Executive and his heirs, personal representatives
and assigns.
(d) Any controversy or claim arising out of or relating to this
Agreement, or the breach thereof, shall be settled by arbitration in accordance
with the Voluntary Labor Arbitration Rules of the American Arbitration
Association, and the arbitration shall be held in the metropolitan Washington,
D.C. area. The arbitrator shall be acceptable to both the Company and
Executive. If the parties cannot agree on an acceptable arbitrator, the dispute
shall be heard by a panel of three (3) arbitrators, one appointed by each of the
parties and the third appointed by the other two arbitrators. Judgment upon the
award rendered by the arbitrator or arbitrators may be entered in any court
having jurisdiction thereof. The arbitrator or arbitrators shall be deemed to
possess the powers to issue mandatory orders and restraining orders in
connection with such arbitration; provided, however, that nothing in this
Section 8(d) shall be construed so as to deny the Company the right and power to
seek and obtain injunctive relief in a court of equity for any breach or
threatened breach by the Executive of any of his covenants contained in Section
6 of this Agreement.
(e) All notices and other communications required or permitted
under this Agreement shall be in writing, and shall be deemed properly given if
delivered personally, mailed by registered or certified mail in the United
States mail, postage prepaid, return receipt requested, sent by facsimile, or
sent by Express Mail, Federal Express or other nationally recognized express
delivery service, as follows:
If to the Company or the Board:
Telco Communications Group, Incorporated
4219 Lafayette Center Drive
Chantilly, VA 22021-1209
Attn: General Counsel
Fax Number: (703) 803-3430
With a copy to:
Swidler & Berlin, Chartered
3000 K Street, N.W.
Suite 300
Washington, D.C. 20007
Attn: John J. Klusaritz, Esq.
Fax Number: (202) 424-7643
-9-
<PAGE>
If to the Executive:
Henry G. Luken, III
5010-28 Court E
Bradenton, Florida 34203
With a copy to:
Debevoise & Plimpton
875 Third Avenue
New York, N.Y. 10022
Attn: Robert F. Quaintance, Jr.
Fax Number: (212) 909-6836
Notice given by hand, certified or registered mail, or by Express Mail, Federal
Express or other such express delivery service, shall be effective upon actual
receipt. Notice given by facsimile transmission shall be effective upon actual
receipt if received during the recipient's normal business hours, or at the
beginning of the recipient's next business day after receipt if not received
during the recipient's normal business hours. All notices by facsimile
transmission shall be confirmed promptly after transmission in writing by
certified mail or personal delivery.
Any party may change any address to which notice is to be given to it by
giving notice as provided above of such change of address.
(f) The failure of either party to enforce any provision or
provisions of this Agreement shall not in any way be construed as a waiver of
any such provision or provisions as to any future violations thereof, nor
prevent that party thereafter from enforcing each and every other provision of
this Agreement. The rights granted the parties herein are cumulative and the
waiver of any single remedy shall not constitute a waiver of such party's right
to assert all other legal remedies available to it under the circumstances.
(g) This Agreement supersedes all prior agreements and
understandings between the parties as to the subject hereof and may not be
modified or terminated orally. No modification or attempted waiver shall be
valid unless in writing and signed by the party against whom the same is sought
to be enforced.
(h) This Agreement shall be governed by, and construed in
accordance with the provisions of, the law of the State of Virginia, without
reference to provisions that refer a matter to the law of any other
jurisdiction. Each party hereto hereby irrevocably submits itself to the non-
exclusive personal jurisdiction of the federal and state courts sitting in
Virginia; accordingly, subject to the provisions for arbitration provided in
Section 8(d), any justiciable matters involving the Company and the Executive
with respect to this Agreement may be adjudicated only in a federal or state
court sitting in Virginia.
-10-
<PAGE>
(i) All payments required to be made by the Company hereunder to
the Executive shall be subject to the withholding of such amounts relating to
taxes and other government assessments as the Company may reasonably determine
it should withhold pursuant to any applicable law, rule or regulation.
(j) Captions and section headings used herein are for convenience
and are not a part of this Agreement and shall not be used in construing it.
(k) Where necessary or appropriate to the meaning hereof, the
singular and plural shall be deemed to include each other, and the masculine,
feminine and neuter shall be deemed to include each other.
(l) If the Company fails to make any payment to Executive within
ten (10) days of the date due, the payment shall be made with interest from the
date due to the date of payment, at the rate, compounded annually, from time to
time specified as its prime rate by Citibank, N.A.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first set forth above.
TELCO COMMUNICATIONS GROUP,
INCORPORATED, a Virginia corporation
By:/s/ Donald A. Burns
---------------------------------------------
Name: Donald A. Burns
--------------------------------------
Title: President
------------------------------------------
/s/ Henry G. Luken, III
-------------------------------------------------
Henry G. Luken, III
4060942.3
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<PAGE>
EXHIBIT 10.40
INDEMNIFICATION AGREEMENT
This Indemnification Agreement (this "Agreement"), effective as of
__________, 1996, between Telco Communications Group, Inc., a Virginia
corporation (The "Company") and _________ (the "Indemnitee").
Whereas, Indemnitee is a director or officer of the Company:
Whereas, both the Company and Indemnitee recognize the increased risk of
litigation and other claims being asserted against directors and officers of
public companies;
Whereas, the Company's Restated Articles of Incorporation (the
"Articles") and ByLaws require the Company to indemnify its directors and
officers to the full extent permitted by law and Indemnitee serves as a director
or officer of the Company in reliance on such Articles and ByLaws;
Whereas, in recognition of Indemnitee's need for substantial protection
against personal liability in order to enhance Indemnitee's continued service to
the Company in an effective manner, and Indemnitee's reliance on the aforesaid
Articles and ByLaws, and to provide Indemnitee with specific contractual
assurance that the protection afforded by such Articles and ByLaws will be
available to Indemnitee (regardless of, among other things, any amendment to or
revocation of such Articles or ByLaws or any change in the composition of the
Board of Directors of the Company (the "Board") or acquisition transaction
relating to the Company), the Company wishes to provide in this Agreement for
the indemnification of and the advancing of expenses to Indemnitee to the full
extent (whether partial or complete) permitted by law and as set forth in this
Agreement, and, to the extent insurance is maintained, for the continued
coverage of Indemnitee under the Company's directors' and officers' liability
insurance policies;
Now, therefore, in consideration of the premises and of Indemnitee's
service to the Company, directly or indirectly, and intending to be legally
bound hereby, the parties hereto agree as follows:
1. Certain Definitions
(a) Approved Legal Counsel: shall mean any law firm having 100
or more attorneys and rated "av" by Martindale-Hubbell Law Directory; provided
that such law firm shall not, for a five-year period prior to the Indemnifiable
Event, have been engaged by the Company, the Acquiring Person or the Indemnitee.
(b) Change in Control: shall be deemed to have occurred if (i)
any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), other than (x) Donald
A. Burns, Henry G. Luken, III, and Thomas J. Cirrito (collectively, the
"Principals"), or (y) a trustee or other fiduciary holding securities under an
employee benefit plan of the Company in substantially the same proportions as
their ownership of common stock of the Company, is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly,
<PAGE>
of securities of the Company representing [50%] or more of the combined voting
power of the Company's then outstanding Voting Securities (such person being
referred to herein as an "Acquiring Person"), or (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board and any new director whose election by the Board or nomination for
election by the Company's stockholders was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were directors
at the beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority thereof,
or (iii) the shareholders of the Company approve a merger or consolidation of
the Company with any other corporation, partnership, unincorporated association
or other entity, other than a merger or consolidation which would result in the
Voting Securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
in Voting Securities of the surviving entity) at least 80% of the combined
voting power of the Voting Securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or (iv) the
shareholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company (in one
transaction or a series of transactions) of all or substantially all the
Company's assets.
(c) Claim: shall mean any threatened, pending or completed action suit
or proceeding, or any inquiry or investigation, whether conducted by the Company
or any other party, that Indemnitee in good faith believes might lead to any
such action, suit or proceeding, whether civil, criminal, administrative,
investigative or otherwise and whether formal or informal.
(d) Expenses: shall include attorneys' fees and all other costs,
expenses and obligations paid or incurred by Indemnitee in connection with
investigating, preparing for and defending, responding to or participating in
the defense of or response to (including an appeal) any Claim relating to any
Indemnifiable Event actually and reasonably incurred by Indemnitee.
(e) Indemnifiable Event: shall mean any event or occurrence related to
the fact that Indemnitee is or was a director, officer, employee, agent or
fiduciary of the Company, or is or was serving at the request of the Company as
a director, officer, partner, employee, trustee, agent or fiduciary of another
foreign or domestic corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, or by reason of anything done or not done by
Indemnitee in any such capacity.
(f) VSCA: shall mean the Virginia Stock Corporation Act.
(g) Potential Change In Control: shall be deemed to have occurred if
(i) the Company enters into an agreement, the consummation of which would result
in the occurrence of a Change in Control; (ii) any person (including the
Company) publicly announces an intention to take or to consider taking actions
which if consummated would constitute a Change in Control: (iii) any person,
other than the Principals or a trustee or other fiduciary holding securities
under an employee benefit plan of the Company, who is or becomes the beneficial
owner, directly or indirectly, of securities of the Company representing [50%]
or more of the combined voting power of the Company's then outstanding Voting
Securities, increases his beneficial ownership of such securities by five
percentage points (5%) or more over the percentage so owned by such person; or
(iv) the Board adopts a resolution to the effect that, for purposes of this
Agreement, a Potential Change in Control has occurred.
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<PAGE>
(h) Reviewing Party: shall be (i) the Board acting by quorum
consisting of directors who are not parties to the particular Claim with respect
to which Indemnitee is seeking indemnification, or (ii) if such a quorum is not
obtainable or, even if obtainable, if a quorum of disinterested directors so
directs, (A) the Board upon the written opinion of independent legal counsel
that indemnification is proper in the circumstances because the applicable
standard of conduct set forth in Article 10 of the VSCA has been met by the
Indemnitee or (B) the shareholders upon a finding that the Indemnitee has met
the applicable standard of conduct referred to in clause (ii)(A) of this
definition.
(i) Voting Securities: shall mean, with respect to a corporation,
securities of any class or series generally entitled to vote on the election of
its directors and, with respect to any other entity, any equity interest
generally entitled to vote on the election of the governing body of such entity.
2. Indemnification. In the event Indemnitee was, is or becomes a party
to, or a witness or other participant, or is threatened to be made a party to,
or a witness or other participant in, a Claim by reason of (or arising in part
out of) an Indemnifiable Event, the Company shall indemnify Indemnitee and hold
Indemnitee harmless, to the full extent permitted by law as soon as practicable
but in any event no later than ten days after written demand is presented to the
Company, from and against any and all Expenses, judgments, fines, (including,
excise taxes assessed Indemnitee with respect to an employee benefit plan)
penalties and amounts paid in settlement (including all, interest, assessments
and other charges paid or payable in connection with or in respect of such
judgments, fines or penalties) of such Claim.
3. Expense Advances. If so requested by Indemnitee, the Company shall
advance (within four days after written demand is presented to the Company) any
and all such Expenses to Indemnitee; provided, however, that if, when and to
the extent the Reviewing Party determines that Indemnitee would not be permitted
to be so indemnified under applicable law, the Company shall be entitled to be
reimbursed by Indemnitee (who hereby agrees and undertakes to reimburse the
Company to the full extent required by Section 13.1-699 of the VSCA) for all
such amounts theretofore paid and the Company shall cease to advance Expenses
(unless Indemnitee has commenced or thereafter commences legal proceedings in a
court of competent jurisdiction to secure a determination that Indemnitee should
be indemnified under applicable law, in which event Indemnitee shall be entitled
to have his Expenses advanced and shall not be required to so reimburse the
Company until a final judicial determination requiring such reimbursement is
made with respect thereto as to which all rights of appeal therefrom have been
exhausted or lapsed).
4. Payment. Notwithstanding the provisions of Section 2 hereof, the
obligations of the Company under Section 2 shall be subject to the condition
that the Reviewing Party shall have determined in the specific case that
indemnification of Indemnitee is proper under the applicable standard of conduct
set forth in applicable law. The Company shall promptly call a meeting of the
Board with respect to a Claim relating to an Indemnifiable Event and agrees to
use its best efforts to facilitate a prompt determination by the Reviewing Party
with respect to any such Claim. Indemnitee shall be afforded the opportunity to
make submissions to the Reviewing Party with respect to any such Claim. If, by
the expiration of the applicable written demand periods set forth in Sections 2
and 3 hereof, Indemnitee has not been indemnified or received Expense advances
or the Reviewing Party determines that Indemnitee would not be permitted to be
indemnified or be entitled to Expense advances in whole or in part under
applicable law, Indemnitee shall have the right to commence litigation seeking
from the court a finding that Indemnitee is entitled to indemnification and
Expense advances or enforcement of Indemnitee's entitlement to indemnification
and
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<PAGE>
Expense advances or challenging any determination by the Reviewing Party or any
aspect thereof that Indemnitee is not entitled to be indemnified or receive
Expense advances; any determination by the Reviewing Party otherwise shall be
conclusive and binding on the Company and Indemnitee. Indemnitee agrees to
bring any such litigation in any court in the Commonwealth of Virginia having
subject matter jurisdiction thereof and in which venue is proper, and the
Company hereby consents to service of process and to appear in any such
proceeding.
5. Change in Control. The Company agrees that if there is a Change
in Control of the Company (other than a Change in Control which has been
approved by a majority of the Board who were directors immediately prior to such
Change in Control) then all determinations by the Company concerning the rights
of Indemnitee to indemnity payments and Expense advances under this Agreement or
any other agreement or the Articles or ByLaws now or hereafter in effect
relating to Claims for Indemnifiable Events: (i) arising prior to or
concurrently with such Change in Control shall be made pursuant to subsections
(B)(1), (2) or (3) of Section 13.1-701 of the VSCA; and (ii) arising after such
Change in Control shall be made pursuant to subsection (B)(3) of Section
13.1-701 of the VSCA. In the event that the Company elects or is required
(pursuant to this Section 5) to make an indemnification determination pursuant
to subsection (B)(3) of Section 13.1-701 of the VSCA, the Company (and the
Board) shall seek legal advice from (and only from) special, independent counsel
selected by Indemnitee and approved by the Company (which approval shall not be
unreasonably withheld or delayed). Unless Indemnitee has selected counsel
pursuant to this Section 5 and such counsel has been approved by the Company
(which approval shall not be unreasonably withheld or delayed), the Approved
Legal Counsel shall be deemed to satisfy the requirements set forth above. Such
counsel, among other things, shall determine whether and to what extent
Indemnitee is permitted to be indemnified, is entitled to Expense advances under
applicable law, or is obligated to reimburse the Company for Expenses advanced
and shall render its written opinion to the Company and Indemnitee to such
effect. The Company agrees to pay the reasonable fees and expenses of the
special, independent counsel referred to above and to fully indemnify such
counsel and hold such counsel harmless from and against any and all expenses
(including attorneys' fees), claims, liabilities and damages arising out of or
relating to this Agreement or its engagement pursuant hereto except for willful
misconduct or gross negligence.
6. Potential Change in Control. In the event of a Potential Change
in Control which has not ceased to exist, the Company shall, upon written
request by Indemnitee, create a trust for the benefit of Indemnitee and from
time to time upon written request of Indemnitee shall fund such trust in an
amount sufficient to satisfy any and all Expenses reasonably anticipated at the
time of each such request to be incurred in connection with investigating,
preparing for, responding to, defending or participating in the defense of or
response to any Claim relating to an Indemnifiable Event, and any and all
judgments, fines, penalties and settlement amounts of any and all Claims
relating to an Indemnifiable Event from time to time actually paid or claimed,
reasonably anticipated or proposed to be paid. The amount or amounts to be
deposited in the trust pursuant to the foregoing funding obligation shall be
determined by the Reviewing Party, in any case in which the independent legal
counsel referred to above is involved. The terms of the trust shall provide
that upon a Change in Control (i) the trust shall not be revoked or the
principal thereof invaded, without the express prior written consent of
Indemnitee, (ii) the trustee shall advance, within four days of a request by
Indemnitee, any and all Expenses to Indemnitee (and Indemnitee hereby agrees to
reimburse the trust under the circumstances under which Indemnitee would be
required to reimburse the Company under Section 3 of this Agreement), (iii) the
trust shall continue to be funded by the Company in accordance with the funding
obligation set forth above, (iv) the trustee shall promptly pay to Indemnitee
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<PAGE>
amounts for which Indemnitee shall be entitled to indemnification pursuant to
this Agreement or otherwise, and (v) all unexpended funds in such trust shall
revert to the Company upon a final determination by the Reviewing Party or a
court of competent jurisdiction, as the case may be, that Indemnitee has been
fully indemnified under the terms of this Agreement. The trustee shall be a
bank organized under the laws of the United States of America or of any state
and having a combined capital surplus of at least $50,000,000 and shall be
chosen by Indemnitee. Nothing in this Section 6 shall relieve the Company of
any of its obligations under this Agreement.
7. Assumption of Defense. In the event the Company shall be
obligated hereunder to pay Expenses of any action, suit or proceeding against or
otherwise involving or affecting Indemnitee, the Company shall be entitled to
assume the defense thereof, with counsel approved by Indemnitee (such approval
not to be unreasonably withheld or delayed) upon the delivery to Indemnitee of
written notice of its election to do so. After delivery of such notice,
approval of such counsel by Indemnitee and the retention of such counsel by the
Company, the Company will not be liable to Indemnitee under this Agreement for
any fees or expenses of counsel subsequently incurred by Indemnitee with respect
to the same matter; provided that (i) Indemnitee shall have the right to employ
separate counsel in any such proceeding at Indemnitee's expense and (ii) if (A)
the employment of counsel by Indemnitee has been previously authorized by the
Company, (B) Indemnitee shall have reasonably concluded, upon the advice of
independent legal counsel, that there may be a conflict of interest between the
Company and Indemnitee in the conduct of any such defense or (C) the Company
shall not, in fact, have employed counsel to assume the defense of such
proceeding, then the Company shall pay the reasonable fees and expenses of
Indemnitee's counsel; provided that the Company's obligation shall be limited to
the fees and expenses of one law firm for Underwriters.
8. Indemnification of Additional Expenses. The Company shall
indemnify Indemnitee and hold Indemnitee harmless from and against any and all
expenses (including reasonable attorneys' fees and expenses) and, if requested
by Indemnitee, shall (within four days of such request) advance such expenses to
Indemnitee, which are incurred by Indemnitee in connection with any claim
asserted or action brought by Indemnitee for (i) indemnification or advance
payment of Expenses by the Company under this Agreement or any other agreement
or the Articles or ByLaws now or hereafter in effect relating to Claims for
Indemnifiable Events and/or (ii) recovery under any directors' and officers'
liability insurance policies maintained by the Company, regardless of whether
the Indemnitee ultimately is determined to be entitled to such indemnification,
advance payment of Expenses or insurance recovery, as the case may be.
9. Partial Indemnity. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of the Expenses, judgments, fines, penalties and amounts paid in
settlement of a Claim but not, however, for all of the total amount thereof, the
Company shall nevertheless indemnify Indemnitee for the portion thereof to which
Indemnitee is entitled. Moreover, notwithstanding any other provision of this
Agreement, to the extent that Indemnitee has been successful on the merits or
otherwise in defense of any or all Claims relating in whole or in part to an
Indemnifiable Event or in defense of any issue or matter therein, including
dismissal without prejudice, Indemnitee shall be indemnified and hold harmless
from and against all Expenses incurred in connection therewith. In connection
with any determination by the Reviewing Party or otherwise as to whether
Indemnitee is entitled to be indemnified hereunder the burden of proof shall be
on the Company to establish that Indemnitee is not so entitled.
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<PAGE>
10. No Presumption. For purposes of this Agreement, the termination
of any Claim by judgment, order, settlement (whether with or without court
approval) or conviction, or upon a plea of nolo contendere, or its equivalent,
shall not create a presumption that Indemnitee did not meet any particular
standard of conduct or have any particular belief or that a court has determined
that Indemnitee is not entitled to indemnification or expense advances or that
indemnification or expense advances are not permitted by applicable law. In
addition, neither the failure of the Reviewing Party to have made a
determination as to whether Indemnitee has met any particular standard of
conduct or had any particular belief, nor an actual determination by the
Reviewing Party that Indemnitee has not met such standard of conduct or did not
have such belief, prior to the commencement of legal proceedings by Indemnitee
to secure a judicial determination that Indemnitee should be indemnified under
applicable law, shall be a defense to Indemnitee's claim or create a presumption
that Indemnitee has not met any particular standard of conduct or did not have
any particular belief.
11. Nonexclusivity. The rights of Indemnitee hereunder shall be in
addition to any other rights Indemnitee may have under the Company's Articles or
ByLaws as in effect on the date of this Agreement or the VSCA or otherwise. To
the extent a change in the VSCA (whether by statute or judicial decision)
permits greater indemnification by agreement than would be afforded currently
under the Company's Articles, ByLaws and this Agreement, it is the intent of the
parties hereto that Indemnitee shall enjoy by this Agreement the greater
benefits so afforded by such change.
12. Notification; Period of Limitations. Indemnitee shall promptly
notify the Company in writing of the institution of any action, suit,
proceeding, inquiry or investigation that is or may be subject to this
Agreement. Indemnitee shall give the Company such information and cooperation
as it may reasonably require and as shall be within Indemnitee's power. No
legal action under this Agreement shall be brought and no cause of action under
this Agreement shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company under this
Agreement shall be extinguished and deemed released unless asserted by the
timely filing of a legal action within such two-year period; provided, however,
that, if any shorter period of limitations is otherwise applicable to any such
cause of action, such shorter period shall govern.
13. Liability Insurance. To the extent the Company maintains an
insurance policy or policies providing directors and officers liability
insurance, Indemnitee shall be covered by such policy or policies, in accordance
with its or their terms, to the maximum extent of the coverage available for any
Company director or officer.
14. Amendments. No supplement, modification or amendment of this
Agreement shall be binding unless executed in writing by both of the parties
hereto. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provisions hereof (whether or not
similar) nor shall such waiver constitute a continuing waiver.
15. Subrogation. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
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<PAGE>
16. No Duplication of Payments. The Company shall not be liable
under this Agreement to make any payment in connection with any claim made
against Indemnitee to the extent Indemnitee has otherwise actually received
payment (under any insurance policy, the Company's Articles or ByLaws or
otherwise) of he amounts otherwise indemnifiable hereunder.
17. Specific Performance. The Company recognizes that if any
provision of this Agreement is violated by the Company, Indemnitee may be
without an adequate remedy at law. Accordingly, in the event of any such
violation, the Indemnitee shall be entitled, if Indemnitee so elects, to
institute proceedings, either in law or at equity, to obtain damages, to enforce
specific performance, to enjoin such violation, or to obtain any relief or any
combination of the foregoing as Indemnitee may elect to pursue.
18. Binding Effect. This Agreement shall be binding upon and inure
to the benefit of and be enforceable by he parties hereto and their respective
successors, assigns, including any direct to indirect successor by purchase,
merger, consolidation or otherwise to all or substantially all of the
business and/or assets of the Company, spouses, heirs, executors and personal
and legal representatives. This Agreement shall continue in effect regardless of
whether Indemnitee continues to serve as an officer or director or the Company
or of any other enterprise at the Company's request.
19. Severability. The provisions of this Agreement shall be
severable in the event that any of the provisions hereof (including any
provision within a single section, paragraph or sentence) are held by a court of
competent jurisdiction to be invalid, void or otherwise unenforceable, and the
remaining provisions shall remain enforceable to the fullest extent permitted by
law.
20. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the Commonwealth of Virginia
applicable to contracts made and to be performed exclusively in such state, but
excluding any conflicts of law, rule or principle which might refer such
governance, construction or enforcement to the laws of another state country.
IN WITNESS WHEREOF, the Company and Indemnitee have caused this
Agreement to be executed as of the date first above written.
TELCO COMMUNICATIONS GROUP, INC.
By:
---------------------------------
Name:
-------------------------
Title:
-------------------------
INDEMNITEE
By:
---------------------------------
Name:
-------------------------
Title:
-------------------------
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<PAGE>
Exhibit 10.41
REGISTRATION RIGHTS AGREEMENT
-----------------------------
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and entered
into as of ________________, 1996 by and between TELCO COMMUNICATIONS GROUP,
INC. (the "Company") and the holders of certain shares of common stock of the
Company ("Common Stock") and certain options to purchase common stock (the
"Stock Options") set forth in Exhibit A attached hereto (the "Investors").
RECITALS:
WHEREAS, certain Investors currently are members of the Company's Board of
Directors and/or are officers of the Company; and
WHEREAS, the Company is contemplating a public offering of its Common Stock
(the "Offering") and, as a condition to such Offering, the parties are willing
to enter into the agreements contained herein.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, and
intending to be legally bound hereby, the parties hereto agree as follows:
Section 1. Definitions.
"Affiliate" means, with respect to any Person, any other Person which,
directly or indirectly, controls, is controlled by or is under common control
with such Person.
"Agreement" is defined in the Preamble to this Agreement.
"Common Stock" is defined in the Preamble to this Agreement.
"Company" is defined in the Preamble to this Agreement.
"Demand Period" is defined in Section 2.1 hereof.
"Demand Registration" is defined in Section 2.1 hereof.
"Demand Registration Request" is defined in Section 2.2.1 hereof.
"Demanding Shareholders" is defined in Section 2.2.1 hereof.
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"Fair Market Value" means, per share of Common Stock, (i) if the Common
Stock is traded on a national securities exchange or system, or is actively
traded over-the-counter, the average of the closing sales prices for the Common
Stock on such exchange or system or format for the two (2) trading days
preceding, but not including, the date of a Demand Registration Request, or (ii)
if the Common Stock is not so traded, the fair market value as determined in the
discretion of the Board of Directors of the Company.
"Holder" means any holder of Registrable Securities.
"Investors" is defined in the Preamble to this Agreement.
"Offering" is defined in the Recitals to this Agreement.
"Other Holders" is defined in Section 3.3 hereof.
"Other Registration Rights" is defined in Section 4.1 hereof.
"Other Registration Rights Recipients" is defined in Section 4.2 hereof.
"Person" means an individual, a partnership, a joint venture, a
corporation, a trust, an unincorporated organization, any other entity or a
government or agency or political subdivision thereof.
"Piggyback Notice" is defined in Section 3.1 hereof.
"Piggyback Registration" is defined in Section 3.1 hereof.
"Registering Shareholders" is defined in Section 2.2.4.
"Registrable Securities" means (i) the Common Stock issued or issuable to
the Investors as of the date hereof, including Common Stock issued or issuable
pursuant to the Stock Options held by the Investors as of the date hereof, and
(ii) any Common Stock or other securities issued or issuable with respect to the
Common Stock or other securities referred to in clause (i) above, by way of
replacement, share dividend, share split, conversion or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization. As to any particular Registrable Securities, such securities
will cease to be Registrable Securities when they have been sold to the public
pursuant to an offering registered under the Securities Act (as defined below)
or sold to the public in compliance with Rule 144 under the Securities Act (or
any similar rule then in force). For purposes of this Agreement, a Person will
be deemed to be a holder of Registrable Securities whenever such Person has the
right to acquire directly or indirectly such Registrable Securities (upon
conversion or exercise in connection with a transfer of securities or otherwise,
but disregarding any restrictions or limitations upon the exercise of such
right), whether or not such acquisition has actually been effected. Investors
holding Stock
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<PAGE>
Options shall be entitled to exercise the rights granted hereunder with respect
to the registration of Registrable Securities without having first to exercise
the Stock Options. No such exercise of Stock Options shall be required by the
Company until the registration of the Common Stock into which the Stock Options
are exercisable shall have been declared or ordered "effective" by the SEC and
the holder of the Stock Options shall have elected to sell such common stock
pursuant to such registration.
"Registration Expenses" is defined in Section 7.1 hereof.
"Representative" means Bear Stearns & Co., Inc.
"S-3 Eligibility Date" means the date on which the Company becomes eligible
to register its securities by means of a registration statement on Form S-3.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended, or any
similar federal law then in force.
"Stock Options" is defined in the Preamble to this Agreement.
Section 2. Demands for Registration.
2.1 Demand Period. From the S-3 Eligibility Date until the date which is
-------------
the fifth anniversary of the S-3 Eligibility Date (the "Demand Period"), subject
to the terms and conditions set forth herein, the Holders, in the aggregate,
shall have two opportunities, in addition to other rights enumerated in this
Agreement, to have a registration effected under the Securities Act of all or
part of their Registrable Securities (a "Demand Registration").
2.2 Demand Procedure.
----------------
2.2.1 Subject to Subsection 2.2.2 below, during the Demand Period any
Holder or combination of Holders (the "Demanding Shareholders") may deliver to
the Company a written request (a "Demand Registration Request") requesting that
the Company register any or all of such Holders' Registrable Securities;
provided, however, that the Company shall not be required to comply with any
- -------- -------
Demand Registration Request unless (i) the Demanding Shareholders are the
Holders of at least 47% of the Registrable Securities and (ii) the Demanding
Shareholders request the registration of Registrable Securities having an
aggregate Fair Market Value in excess of (i) $500,000, with respect to the
initial Demand Registration, or (ii) $250,000, with respect to the second Demand
Registration.
2.2.2 No Demand Registration Request may be made within six months after
any other Demand Registration is declared effective. The Company shall only be
required to file
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one registration statement (as distinguished from supplements or pre-effective
or post-effective amendments thereto) in response to each Demand Registration
Request.
2.2.3 A Demand Registration Request from any Demanding Shareholders shall
(i) set forth the number and ownership of Registrable Securities intended to be
sold pursuant to the Demand Registration Request, (ii) disclose whether all or
any portion of a distribution pursuant to such registration will be sought by
means of an underwriting, and (iii) identify any underwriter or underwriters
proposed for the underwritten portion, if any, of such registration.
2.2.4 If the Company receives a Demand Registration Request in compliance
with the terms of this Agreement, then the Company shall, subject to the
limitations in Subsections 2.2.5 and 2.2.6 hereof, (i) use its reasonable best
efforts to prepare and file as soon as practicable with the SEC a registration
statement under the Securities Act with respect to all the Registrable
Securities that the Demanding Shareholders requested to be registered in the
Demand Registration Request and all other Registering Shareholders that the
Company has been requested to register by the Holders having delivered a
Supplemental Demand Registration Request in accordance with Section 2.2.6 hereof
(such Holders, together with the Demanding Shareholders, the "Registering
Shareholders"), (ii) use its reasonable best efforts to cause such registration
statement to become effective, and (iii) if such registration can be
accomplished by means of a registration statement on Form S-3, keep such
registration statement effective until the earlier of (x) such time as the
Registering Shareholders shall have sold or otherwise disposed of all of their
Registrable Securities included in the registration, or (y) three months
following the effective date of such registration statement. A registration
requested pursuant to this Section 2.2.4 shall not be deemed to have been
effected (i) unless a registration statement with respect thereto has become
effective or (ii) if after it has become effective, such registration is
interfered with by any stop order, injunction or other order or requirement of
the Commission or other governmental agency or court for any reason, unless (a)
such order, injunction or requirement is implemented after the period specified
in clause (iii) of the immediately preceding sentence or (b) such order,
injunction or requirement is lifted or stayed within 30 days. If such
registration cannot be accomplished by means of a registration statement on Form
S-3, the Company shall use its reasonable best efforts to keep such registration
statement effective for up to 45 days.
2.2.5 It is anticipated that the registration contemplated under this
Section 2 will be accomplished by means of the filing of a Form S-3 (or such
other appropriate registration form under the Securities Act (i) as shall be
selected by the Company and as shall be reasonably acceptable to a majority of
the Registering Shareholders and (ii) as shall permit the disposition of the
securities being registered in accordance with the intended method or methods of
disposition) and that registration on such a form will allow for different means
of distribution, including sales by means of an underwriting as well as sales
into the open market. If the managing underwriter shall notify the Company in
writing that in the judgment of such underwriter the use of a more detailed form
or the inclusion in such form of a more detailed prospectus than would be
required by such form is necessary to effectuate the offering successfully, the
Company shall use its best efforts to utilize such more detailed form or include
such more detailed prospectus, as the case
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<PAGE>
may be, provided that such action does not require the Company to incur any
unreasonable cost. The Company agrees to include in any such registration
statement all information that Holders of Registrable Securities being
registered shall reasonably request, consistent with all applicable laws. If
the Demanding Shareholders desire to distribute all or part of the Registrable
Securities covered by their request by means of an underwriting, they shall so
advise the Company in writing in their initial Demand Registration Request as
described in Section 2.2.3 above. A determination of whether all or part of the
distribution will be by means of an underwriting shall be made by Holders
holding a majority of the Registrable Securities to be included in the
registration. If all or part of the distribution is to be by means of an
underwriting, all subsequent decisions concerning the underwriting which are to
be made by the Registering Shareholders pursuant to the terms of this Agreement,
which shall include the selection of the underwriter or underwriters to be
engaged and the representative, if any, of the underwriters so engaged, shall be
made by the Holders who hold a majority of the Registrable Securities to be
included in the underwriting, subject to approval by the Board of Directors of
the Company.
2.2.6 Upon the receipt by the Company of a Demand Registration Request in
accordance with Subsection 2.2.4 hereof, the Company shall, within ten (10) days
following receipt of such Demand Registration Request, give written notice of
such request to all Holders. The Company shall include in such notice
information concerning whether all, part or none of the distribution is expected
to be made by means of an underwriting and, if more than one means of
distribution is contemplated, may require Holders to notify the Company of the
means of distribution of their Registrable Securities to be included in the
registration. If any Holder who is not a Demanding Shareholder desires to sell
any Registrable Securities owned by such Holder, such holder may elect to have
all or any portion of their Registrable Securities included in the registration
statement by notifying the Company in writing (a "Supplemental Demand
Registration Request") within fifteen (15) days of the date of delivery of
notice of the Demand Registration Request by the Company. The right of any
Holder to include all or any portion of its Registrable Securities in an
underwriting shall be conditioned upon the Company's having received a timely
written request for such inclusion by way of a Demand Registration Request or
Supplemental Demand Registration Request (which right shall be further
conditioned to the extent provided in this Agreement). All Holders proposing to
distribute their Registrable Securities through an underwriting shall enter into
an underwriting agreement consistent with the provisions of this Agreement and
otherwise in customary form with the underwriter or underwriters selected for
such underwriting.
2.2.7 Notwithstanding any other provision of this Section 2, if an
underwriter advises the Company in writing that marketing factors require a
limitation on the number of shares to be underwritten, then the number of shares
of Registrable Securities that may be included in the underwriting shall be
allocated among the Holders in proportion (as nearly as practicable) to the
respective amounts of Registrable Securities each Holder otherwise sought to
have registered pursuant to its Demand Registration Request for Supplemental
Demand Registration Request (or in such other proportion as they shall mutually
agree). Registrable Securities excluded or withdrawn from the underwriting in
accordance with this Section 2.2.7
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<PAGE>
shall be withdrawn from the registration.
2.3 Priority on Demand Registration The Company will not include in any
-------------------------------
Demand Registration any securities which are not Registrable Securities without
the prior written consent of the Holders of a majority of the shares of
Registrable Securities included in such registration. If a Demand Registration
is an underwritten offering and the managing underwriters advise the Company in
writing that in their opinion the number of Registrable Securities and, if
permitted hereunder, other securities requested to be included in such offering
exceeds the number of securities that can be sold in an orderly manner in such
offering within a price range acceptable to the Holders holding a majority of
the Registrable Securities to be included in the underwritten registration, the
Company will include in such registration, prior to the inclusion of any
securities which are not Registrable Securities, the number of shares of
Registrable Securities requested to be included which, in the opinion of such
underwriters, can be sold in an orderly manner within such acceptable price
range.
Section 3. Piggyback Registrations.
3.1 Right to Piggyback. If the Company proposes to file any registration
------------------
statement under the Securities Act for purposes of a public offering of
securities of the Company (including, but not limited to, registration
statements relating to secondary offerings of securities of the Company, but
excluding (i) registration statements filed pursuant to Section 2 of this
Agreement or (ii) registration statements relating to employee benefit plans or
with respect to corporate reorganizations or other transactions under Rule 145
of the Securities Act) (a "Piggyback Registration"), the Company will give
prompt written notice to all Holders of Registrable Securities of its intention
to effect such a registration (each, a "Piggyback Notice") and, subject to
Sections 3.3 and 3.4 hereof, the Company will include in such registration all
Registrable Securities with respect to which the Company has received written
requests for inclusion therein within 15 days after the date of delivery of the
Piggyback Notice.
3.2 Priority on Primary Registrations. If a Piggyback Registration is an
---------------------------------
underwritten primary registration on behalf of the Company, and the managing
underwriters advise the Company in writing that in their opinion the number of
securities requested to be included in such registration exceeds the number that
can be sold in an orderly manner within a price range acceptable to the Company,
the Company will include in such registration, subject to the provisions of
Section 4 hereof, (a) first, the securities the Company proposes to sell, (b)
second, the Registrable Securities requested to be included in such
registration, pro rata among the Holders of such Registrable Securities on the
basis of the number of shares owned by each such Holder, and (c) third, other
securities requested to be included in such registration, pro rata on the basis
of the number of shares of such securities owned by each holder thereof.
3.3 Priority on Secondary Registrations. If a Piggyback Registration is
-----------------------------------
an underwritten secondary registration on behalf of holders of the Company's
securities other than the Holders of Registrable Securities (the "Other
Holders"), and the managing underwriters
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<PAGE>
advise the Company in writing that in their opinion the number of securities
requested to be included in such registration exceeds the number that can be
sold in an orderly manner in such offering within a price range acceptable to
the Other Holders requesting such registration, the Company will include in such
registration (a) first, the securities requested to be included therein by the
Other Holders requesting such registration, and (b) second, the Registrable
Securities requested to be included in such registration hereunder, pro rata
among the Holders of such Registrable Securities requesting such registration on
the basis of the number of shares of such securities owned by each such Holder.
3.4 Selection of Underwriters. In the case of an underwritten Piggyback
-------------------------
Registration, the Company will have the right to select the investment banker(s)
and manager(s) to administer the offering.
Section 4. Other Registration Rights.
4.1 Granting of Other Registration Rights. Except (a) as provided in
-------------------------------------
this Agreement and (b) with respect to registration rights granted to employees
of the Company pursuant to or in connection with the Company's stock option plan
and any other employee benefit plan or compensatory arrangement of the Company,
which requests will be on such terms as the Company deems appropriate, the
Company will not grant to any Persons the right to request the Company to
register any equity securities of the Company, or any securities convertible or
exchangeable into or exercisable for such securities (the "Other Registration
Rights"), without the prior written consent of the Holders of at least a
majority of the then outstanding shares of Registrable Securities [(which
consent shall not be unreasonably withheld)] so long as the initial Holders of
Registrable Securities have continuously held in the aggregate at least fifty
percent (50%) of the Registrable Securities held by such Holders on the date
hereof.
4.2 Priority of Other Registration Rights. Unless otherwise agreed in
-------------------------------------
writing by the Holders of at least a majority of the then outstanding shares of
Registrable Securities, any Other Registration Rights granted after the date of
this Agreement to any Person (collectively, the "Other Registration Rights
Recipients") shall be junior in priority to the registration rights granted
herein, except as otherwise specified in Section 3.3. Except as specified in
Section 3.3, if, in connection with any registration, the underwriters advise
the Company in writing that in their opinion the number of securities requested
to be included in such registration exceed the number that can be sold in an
orderly manner within a price range acceptable to the Person(s) responsible for
initiating the registration, the Company will include in such registration,
subject to other provisions of this Agreement, (a) first, the securities
requested to be included therein by the Person(s) responsible for initiating
such registration, (b) second, the Registrable Securities requested to be
included in such registration, pro rata among the Holders of such Registrable
Securities on the basis of the number of shares owned by each such Holder, (c)
third, the securities requested to be included therein by the Other Registration
Rights Recipients, pro rata on the basis of the number of shares owned by each
such Other Registration Rights Recipient, and (d) fourth, other securities
requested to be included in such registration, pro rata on the basis
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<PAGE>
of the number of shares of such securities owned by each holder thereof.
Section 5. Holdback Agreements. The Company agrees (a) not to effect any
-------------------
public sale or distribution of its equity securities, or any securities
convertible into or exchangeable or exercisable for such securities, during the
25-day period prior to and during the 60-day period following the effective date
of any underwritten Demand Registration (except pursuant to (i) registrations on
Form S-8 or any successor form, (ii) registrations on Form S-4 or any successor
form, and (iii) registrations of securities in connection with a dividend
reinvestment plan, if any, of the Company on form(s) applicable to such
securities) unless the underwriters managing the registered public offering
otherwise agree, and (b) to use its reasonable best efforts to obtain agreements
from its officers, directors, Affiliates (including holders of five percent (5%)
or more of the outstanding Common Stock), to agree not to effect any public sale
or distribution (excluding sales pursuant to Rule 144) of any such securities
during such period (except as part of such underwritten registration, if
otherwise permitted), unless the underwriters managing the registered public
offering otherwise agree.
Section 6. Registration Requirements.
6.1 Registration Procedures. Whenever the Holders of Registrable
-----------------------
Securities have requested that any Registrable Securities be registered pursuant
to this Agreement, the Company will use its reasonable best efforts to effect
the registration and the sale of such Registrable Securities in accordance with
the intended method of disposition thereof, and pursuant thereto the Company
will as expeditiously as possible:
6.1.1 Registration Statement. Prepare and file with the SEC a
----------------------
registration statement with respect to such Registrable Securities and use its
reasonable best efforts to cause such registration statement to become
effective;
6.1.2 Amendments and Supplements. Prepare and file with the SEC such
--------------------------
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective for the period required by the intended method of
disposition, and the terms of this Agreement and comply with the provisions of
the Securities Act with respect to the disposition of all securities covered by
such registration statement during such period in accordance with the intended
methods of disposition by the sellers thereof set forth in such registration
statement;
6.1.3 Provision of Copies. Furnish to each seller of Registrable
-------------------
Securities the number of copies of such registration statement, each amendment
and supplement thereto, the prospectus included in such registration statement
(including each preliminary prospectus) and such other documents as such seller
may reasonably request in order to facilitate the disposition of the Registrable
Securities owned by such seller;
6.1.4 Blue Sky Laws. Use its reasonable best efforts to register or
-------------
qualify such
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<PAGE>
Registrable Securities under the securities or blue sky laws of such
jurisdictions as any seller reasonably requests and do any and all other acts
and things which may be reasonably necessary or advisable to enable such seller
to consummate the disposition in such jurisdictions of the Registrable
Securities owned by such seller, provided, that the Company will not be required
--------
to (a) qualify generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this Subsection 6.1.4, (b) subject
itself to taxation in any such jurisdiction, or (c) consent to general service
of process in any such jurisdiction, or (d) qualify such Registrable Securities
in a given jurisdiction where, in the reasonable discretion of the Company,
expressions of investment interest are not sufficient in such jurisdiction to
reasonably justify the expense of qualification in that jurisdiction or where
such qualification would require the Company to register as a broker or dealer
in such jurisdiction.
6.1.5 Antifraud Rules. Notify each seller of such Registrable Securities
---------------
when a prospectus relating thereto is required to be delivered under the
Securities Act, or the happening of any event as a result of which the
prospectus included in such registration statement contains an untrue statement
of a material fact or omits any material fact necessary to make the statements
therein not misleading, and in such event, at the request of any such seller,
the Company will prepare a supplement or amendment to such prospectus so that,
as thereafter delivered to the purchasers of such Registrable Securities, such
prospectus will not contain an untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein not misleading;
6.1.6. Securities Exchange Listings. Use its reasonable best efforts to
----------------------------
cause all such Registrable Securities to be listed on each securities exchange
on which securities of the same class issued by the Company are then listed and
use its reasonable best efforts to qualify such Registrable Securities for
trading on each system on which securities of the same class issued by the
Company are then qualified;
6.1.7 Transfer Agent and Registrar. Provide a transfer agent and
----------------------------
registrar for all such Registrable Securities not later than the effective date
of such registration statement and thereafter maintain such a transfer agent and
registrar;
6.1.8 Underwriting Agreements. Enter into such customary agreements
-----------------------
(including underwriting agreements in customary form) and take all such other
actions as the holders of a majority of the shares of Registrable Securities
being sold or the underwriters, if any, reasonably request in order to expedite
or facilitate the disposition of such Registrable Securities (If the Piggyback
Registration is an underwritten primary registration on behalf of the Company,
the Company will, if requested by any Holder of Registrable Securities as
provided in Section 3 and subject to the provisions of Section 3, use its
reasonable best efforts to arrange for such underwriters to include all the
Registrable Securities to be distributed by such underwriters. Any such Holder
of Registrable Securities shall not be required to make any representations or
warranties to or agreements with the Company or the underwriters other than
representations, warranties or agreements regarding such Holder, such Holder's
Registrable Securities, such
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<PAGE>
Holder's authority to enter into the underwriting agreement and such Holder's
intended method of distribution and any other representation required by law or
reasonably requested by the underwriters.)
6.1.9 Due Diligence. Make available for inspection by any underwriter
-------------
participating in any disposition pursuant to such registration statement and any
attorney, accountant or other agent retained by any such underwriter, all
financial and other records, pertinent corporate documents and properties of the
Company, and cause the Company's officers, directors, employees and independent
accountants to supply all information reasonably requested by any such
underwriter, attorney, accountant or agent in connection with such registration
statement;
6.1.10 Earning Statement. Otherwise use its best efforts to comply with
-----------------
all applicable rules and regulations of the SEC, and make available to its
securityholders, as soon as reasonably practicable, an earning statement
covering the period of at least twelve months beginning with the first day of
the Company's first full calendar quarter after the effective date of the
registration statement, which earning statement shall satisfy the provisions of
Section 11(a) of the Securities Act and Rule 158 thereunder;
6.1.11 Deemed Underwriters or Controlling Persons. Permit any Holder of
------------------------------------------
Registrable Securities which Holder, in such Holder's reasonable judgment, might
be deemed to be an underwriter or a controlling person of the Company, to
participate in the preparation of such registration or comparable statement and
to require the insertion therein of material in form and substance satisfactory
to such Holder and to the Company and furnished to the Company in writing, which
in the reasonable judgment of such Holder and its counsel should be included;
6.1.12 Management Availability. In connection with underwritten
-----------------------
offerings, make available appropriate management personnel for participation in
the preparation and drafting of such registration or comparable statement, for
due diligence meetings and for "road show" meetings;
6.1.13 Stop Orders. In the event of the issuance of any stop order
-----------
suspending the effectiveness of a registration statement, or of any order
suspending or preventing the use of any related prospectus or suspending the
qualification of any Registrable Securities included in such registration
statement for sale in any jurisdiction, the Company will use its reasonable best
efforts promptly to obtain the withdrawal of such order; and
6.1.14 Comfort Letter. Obtain a cold comfort letter from the Company's
--------------
independent public accountants addressed to the selling Holders of Registrable
Securities in customary form and covering such matters of the type customarily
covered by cold comfort letters as the Holders of a majority of the Registrable
Securities being sold reasonably request.
6.1.15 Opinion. Furnish, at the request of Holders of a majority of the
-------
-x-
<PAGE>
Registrable Securities participating in the registration, to each seller of
Registrable Securities a signed counterpart, addressed to such seller (and
underwriters, if any) of an opinion of counsel for the Company, dated the
effective date of such registration statement (or, if such registration includes
an underwritten public offering, dated the date of the closing under the
underwriting agreement), reasonably satisfactory in form and substance to such
seller covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) as are customarily covered in
opinions of issuer's counsel to underwriters in underwritten public offerings.
6.2 Further Assurances. The Company may require each Holder of
------------------
Registrable Securities to furnish to the Company in writing such information
regarding the proposed distribution by such Holder of such Registrable
Securities as the Company may from time to time reasonably request.
6.3 Notice to Suspend Offers and Sales. Each Investor severally agrees
----------------------------------
that, upon receipt of any notice from the Company of the happening of any event
of the kind described in Subsections 6.1.5 or 6.1.13 hereof, such Investor will
forthwith discontinue disposition of shares of Common Stock pursuant to a
registration hereunder until receipt of the copies of an appropriate supplement
or amendment to the prospectus under Subsection 6.1.5 or until the withdrawal of
such order under Subsection 6.1.13. If any such registration or comparable
statement refers to any Holder by name or otherwise as the holder of any
securities of the Company and if, in the Holder's reasonable judgment, such
Holder is or might be deemed to be a controlling person of the Company, such
Holder shall have the right to require (a) the insertion therein of language in
form and substance satisfactory to such Holder and the Company and presented to
the Company in writing, to the effect that the holding by such Holder of such
securities is not to be construed as a recommendation by such holder of the
investment quality of the Company's securities covered thereby and that such
holding does not imply that such Holder will assist in meeting any future
financial requirements of the Company, or (b) in the event that such reference
to such Holder by name or otherwise is not required by the Securities Act or
similar Federal statute then in force, the deletion of the reference to such
Holder; provided that with respect to this clause (b) such Holder shall furnish
--------
to the Company an opinion of counsel to such effect, which opinion and counsel
shall be reasonably satisfactory to the Company.
6.4 Company's Ability to Postpone. Notwithstanding anything to the
-----------------------------
contrary contained herein, the Company shall have the right to postpone the
filing of any registration statement under Sections 2, 3, or 4 hereof for a
reasonable period of time (not exceeding 75 days) if the Company furnishes the
Holders of Registrable Securities a certificate signed by the Chairman of the
Board of Directors or the President of the Company stating that, in its good
faith judgment, the Company's Board of Directors (or the executive committee
thereof) has determined that effecting the registration at such time would
adversely affect a material financing, acquisition, disposition or asset of
stock, merger or other comparable transaction, or would require the Company to
make public disclosure of information the public disclosure of which would have
a material adverse effect upon the Company.
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<PAGE>
Section 7. Registration Expenses.
7.1 Expenses Borne by Company. Except as specifically otherwise provided
-------------------------
in Section 7.2 hereof, the Company will be responsible for payments of all
expenses incident to any registration hereunder, including, without limitation,
all registration and filing fees, fees and expenses of compliance with
securities or blue sky laws, printing expenses, messenger and delivery expenses,
and fees and disbursements of counsel for the Company and all independent
certified public accountants and other Persons retained by the Company in
connection with such registration (all such expenses borne by the Company being
herein called the "Registration Expenses.").
7.2 Expenses Borne by Selling Securityholders. The selling
-----------------------------------------
securityholders will be responsible for payment of their own legal fees,
underwriting fees and brokerage discounts, commissions and other sales expenses
incident to any registration hereunder, with any such expenses which are common
to the selling securityholders divided among such securityholders (including the
Company and holders of the Company's securities other than Registrable
Securities, to the extent that securities are being registered on behalf of such
Persons) pro rata on the basis of the number of shares being registered on
behalf of each such securityholder, or as such securityholders may otherwise
agree.
Section 8. Indemnification.
8.1 Indemnification by Company. The Company agrees to indemnify, and
--------------------------
hold harmless to the extent permitted by law, each Holder of Registrable
Securities, the partners, officers, directors and each Person who controls
(within the meaning of the Securities Act) each such Holder against all losses,
claims, damages, liabilities and expenses caused by, arising out of or based
upon any untrue or alleged untrue statement of material fact contained in any
registration statement, prospectus or preliminary prospectus or any amendment
thereof or supplement thereto or any omission or alleged omission of a material
fact required to be stated therein or necessary to make the statements therein
not misleading and the Company will reimburse each such Holder, director,
officer and controlling person for any legal or any other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, liability, action or proceeding, except insofar as the same are caused by
or contained in (i) any information furnished in writing to the Company by such
Holder expressly for use therein, (ii) such Holder's failure to deliver a final
prospectus, as the same may be then supplemented or amended, to the Person
asserting an untrue statement or alleged untrue statement or omission or alleged
omission at or prior to the written confirmation of the sale of Registrable
Securities to such Person if such statement or omission was corrected in such
final prospectus, or (iii) such Holder's failure to discontinue disposition of
shares after receiving notice from the Company pursuant to Section 6.3 hereof.
In connection with an underwritten offering, the Company will indemnify such
underwriters, their officers and directors an each Person who controls (within
the meaning of the Securities Act) such underwriters at least to the same extent
as provided above with respect to the indemnification of the Holders of
Registrable
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<PAGE>
Securities.
8.2 Indemnification by Holder. In connection with any registration
-------------------------
statement in which a Holder of Registrable Securities is participating, each
such Holder will furnish to the Company in writing such information as the
Company reasonably requests for use in connection with any such registration
statement or prospectus and, to the extent permitted by law, will indemnify and
hold harmless the Company, its directors, officers and each Person who controls
(within the meaning of the Securities Act) the Company from and against any
losses, claims, damages, liabilities and expenses resulting from, arising out of
or based upon any untrue or alleged untrue statement of material fact contained
in the registration statement, prospectus or preliminary prospectus or any
amendment thereof or supplement thereto or any omission or alleged omission of a
material fact required to be stated therein or necessary to make the statements
therein not misleading, but only to the extent that such untrue statement or
omission is contained in any information so furnished in writing by such Holder
expressly for use therein; and such Holder will reimburse the Company and each
director, officer and controlling person of the Company for any legal or any
other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, liability, action or proceeding; provided that
--------
the obligation to indemnify will be individual to each Holder and will be
limited to the net amount of proceeds received by such Holder from the sale of
Registrable Securities pursuant to such registration statement. In connection
with an underwritten offering, each such Holder will indemnify such
underwriters, their officers and directors and each Person who controls (within
the meaning of the Securities Act) such underwriters to the same extent as
provided above with respect to the indemnification of the Company.
8.3 Assumption of Defense by Indemnifying Party. Any Person entitled to
-------------------------------------------
indemnification hereunder will (a) give prompt written notice to the
indemnifying party of any claim with respect to which it seems indemnification;
provided that the failure of any indemnified party to give notice as provided
- --------
herein shall not relieve the indemnifying party of its obligations under this
Section 8, except to the extent that the indemnifying party is actually
prejudiced by such failure to give notice, and (b) unless in such indemnified
party's reasonable judgment a conflict of interest between such indemnified and
indemnifying parties may exist with respect to such claim, permit such
indemnifying party to assume the defense of such claim with counsel reasonably
satisfactory to the indemnified party. If such defense is assumed, the
indemnifying party will not be subject to any liability for any settlement made
by the indemnified party without its consent (but such consent will not be
unreasonably withheld). No indemnifying party shall, without the consent of the
indemnified party, consent to entry of any judgment or enter into any settlement
that does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such indemnified party of a release from all liability
in respect to such claim or litigation. An indemnifying party who is not
entitled to, or elects not to, assume the defense of a claim will not be
obligated to pay the fees and expenses of more than one counsel for all parties
indemnified by such indemnifying party with respect to such claim, unless in the
reasonable judgment of any indemnified party a conflict of interest may exist
between such indemnified party and any other of such indemnified parties with
respect to such
-xiii-
<PAGE>
claim.
8.4 Binding Effect. The indemnification provided for under this
--------------
Agreement will remain in full force and effect regardless of any investigation
made by or on behalf of the indemnified party or any officer, director or
controlling Person of such indemnified party and will survive the transfer of
securities. The Company also agrees to make such provisions, as are reasonably
requested by an indemnified party, for contribution to such party in the event
the Company's indemnification is unavailable for any reason. Each Holder of
Registrable Securities also agrees to make such provisions, as are reasonably
requested by any indemnified party, for contribution to such party in the event
such Holder's indemnification is unavailable for any reason; provided that the
amount of such contribution shall not exceed the net amount of proceeds received
by such Holder from the relevant sale of Registrable Securities.
Section 9. Certain Registrations
9.1 Participation in Underwritten Registrations. No Person may
-------------------------------------------
participate in any registration hereunder which is underwritten unless such
Person (a) agrees to sell such Person's securities on the basis provided in any
underwriting arrangements approved by the Person or Persons entitled hereunder
to approve such arrangements and (b) subject to the limitations on Holders'
obligations set forth in this Agreement, completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents required under the terms of such underwriting arrangements.
9.2 Rule 144 Reporting. With a view to making available to the Holders
------------------
the benefits of certain rules and regulations of the Commission which may permit
the sale of the Registrable Securities to the public without registration, the
Company agrees to use its reasonable best efforts to:
9.2.1 Make and keep public information available, as those terms are
understood and defined in Securities Act Rule 144 or any similar or analogous
rule promulgated under the Securities Act, at all times after the effective date
of the first registration filed by the Company for an offering of its securities
to the general public;
9.2.2 File with the Commission, in a timely manner, all reports and
other documents required of the Company under the Exchange Act, the Securities
Act and the rules and regulations adopted by the Commission thereunder; and
9.2.3 So long as a Holder owns any Registrable Securities, furnish to
such Holder forthwith upon request: a written statement by the Company as to its
compliance with the reporting requirements of Securities Act Rule 144 and of the
Exchange Act; a copy of the most recent annual or quarterly report of the
Company; and such other reports, documents and information as a Holder may
reasonably request in availing itself of any rule or regulation of the
Commission allowing it to sell any such securities without registration.
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<PAGE>
Section 10. Miscellaneous.
10.1 No Inconsistent Agreements. The Company will not hereafter enter
--------------------------
into any agreement with respect to its securities which violates the rights
granted to the Holders of Registrable Securities in this Agreement.
10.2 Remedies. Any Person having rights under any provision of this
--------
Agreement will be entitled to enforce such rights specifically to recover
damages caused by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law. The parties hereto agree and
acknowledge that money damages may not be an adequate remedy for any breach of
the provisions of this Agreement and that any party may in its sole discretion
apply to any court of law or equity of competent jurisdiction (without posting
any bond or other security) for specific performance and for other injunctive
relief in order to enforce or prevent violation of the provisions of this
Agreement.
10.3 Term. Except as specifically otherwise provided herein, the
----
provisions of this Agreement shall apply until such time as all Registrable
Securities have ceased to be Registrable Securities hereunder but in no event
later than five (5) years from the date of this Agreement.
10.4 Amendments and Waivers. Except as otherwise specifically provided
----------------------
herein, this Agreement may be amended or waived only upon the prior written
consent of the Company and the Holders of a majority of the then outstanding
Registrable Securities.
10.5 Successors and Assigns. The Company and the Investors hereby agree
----------------------
that any subsequent holder of Registrable Securities shall be entitled to all
benefits hereunder as a holder of such securities; provided that an express
assignment of such rights shall have been made, a copy of which shall have been
delivered to the Company. All covenants and agreements in this Agreement by or
on behalf of any of the parties hereto will bind and inure to the benefit of the
respective successors and assigns of the parties hereto whether so expressed or
not. In addition, whether or not any express assignment has been made, the
provisions of this Agreement which are for the benefit of purchasers or Holders
of Registrable Securities are also for the benefit of, and enforceable by, any
subsequent holder of such securities.
10.6 Severability. Whenever possible, each provision of this Agreement
------------
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be prohibited by or
invalid under applicable law, such provision will be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder of
this Agreement.
10.7 Counterparts. This Agreement may be executed simultaneously in
------------
multiple counterparts, any one of which need not contain the signatures of more
than one party, but all such counterparts taken together will constitute one and
the same Agreement.
-xv-
<PAGE>
10.8 Descriptive Headings. The descriptive headings of this Agreement
--------------------
are inserted for convenience only and do not constitute a part of this
Agreement.
10.9 Governing Law. All questions concerning the construction, validity
-------------
and interpretation of this Agreement will be governed by and construed in
accordance with the domestic laws of the Commonwealth of Virginia, without
giving effect to any choice of law or conflict of law provision or rule (whether
of the Commonwealth of Virginia or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than the Commonwealth of
Virginia.
10.10 Entire Agreement. This Agreement is intended by the parties as a
----------------
final expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto with respect
to the subject matter contained herein. This agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.
10.11 Notices. All notices, demands or other communications to be given
-------
or delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been delivered when delivered personally to
the recipient, sent to the recipient by reputable express courier service
(charges prepaid) or mailed to the recipient by certified or registered mail,
return receipt requested and postage prepaid. Such notices, demands and other
communications will be sent to each Investor at the address indicated on the
records of the Company and to the Company at the address indicated below:
(a) If to the Company:
--------------------------------------
--------------------------------------
--------------------------------------
--------------------------------------
with a copy, which shall not constitute notice to:
--------------------------------------
--------------------------------------
--------------------------------------
--------------------------------------
(b) If to the Investors:
--------------------------------------
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<PAGE>
--------------------------------------
--------------------------------------
--------------------------------------
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
TELCO COMMUNICATIONS GROUP, INC.
By:
-----------------------------------------
Its:
----------------------------------------
THE INVESTORS WHOSE SIGNATURES ARE
ATTACHED HERETO
-xvii-
<PAGE>
EXHIBIT A
---------
-xviii-
<PAGE>
Pages where confidential treatment has been requested are stamped
"Confidential Treatment Requested. The redacted material has been
seperately filed with the Commission." The redacted portions are
indicated by a "(*)".
EXHIBIT 10.42
AGREEMENT FOR THE PROVISION
OF
BILLING AND COLLECTION SERVICES
BETWEEN
GTE TELEPHONE OPERATIONS
AND
TELCO DEVELOPMENT GROUP INC.
IC Contract and Policy Development
600 Hidden Ridge, Irving, TX
<PAGE>
TELCO DEVELOPMENT GROUP INC.
BILLING AND COLLECTION SERVICES AGREEMENT
GTE/TELCO DEVELOPMENT GROUP PROPRIETARY INFORMATION
Not for outside disclosure or discussion
beyond those persons or agents of TELCO DEVELOPMENT GROUP or GTE
having direct involvement with the
development of this Agreement.
Not intended for internal distribution
beyond those persons with a need to know.
IC Contract and Policy Development
600 Hidden Ridge Irving, Texas
<PAGE>
TELCO DEVELOPMENT GROUP INC.
BILLING AND COLLECTION SERVICES AGREEMENT
INDEX
<TABLE>
<CAPTION>
Agreement Title Page
- --------- ----------
<S> <C> <C>
Section 1. Scope of This Agreement and Relationship
to Other Documents......................................1
Section 2. Detariffing of the Services.............................2
Section 3. Term....................................................2
Section 4. Cancellation and Termination of
the Agreement and Attachments...........................2
Section 5. Remedies Cumulative.....................................3
Section 6. Denial of Service Authorization.........................3
Section 7. Confidentiality and Publicity...........................3
Section 8. Notification to End Users...............................4
Section 9. Transfer of Funds.......................................4
Section 10. Billing for Services Rendered...........................4
Section 11. Minimum Charges.........................................5
Section 12. Late Payment Charge.....................................5
Section 13. Audit of GTE by TELCO DEVELOPMENT GROUP.................6
Section 14. Taxes...................................................6
Section 15. Data Retention..........................................6
Section 16. Independent Contractors.................................6
Section 17. Claims and Dispute Resolution...........................6
Section 18. Claims Limitation.......................................6
Section 19. Dispute Resolution......................................7
Section 20. Limitation of Liability.................................7
Section 21. Assignment..............................................8
Section 22. Force Majeure...........................................8
Section 23. Severability............................................8
Section 24. Third Party Beneficiaries...............................8
Section 25. Governing Law and Venue.................................8
Section 26. Executed in Counterparts................................8
Section 27. Headings................................................8
Section 28. Attachments to the Agreement............................8
Section 29. Entire Agreement........................................9
Section 30. Amendments and Waivers..................................9
Section 31. Construction............................................9
Section 32. Execution...............................................9
Section 33. Notices and Demands.....................................9
Section 34. Program Development.....................................9
Section 35. Regulatory Cooperation.................................11
</TABLE>
<PAGE>
TELCO DEVELOPMENT GROUP INC.
BILLING AND COLLECTION SERVICES AGREEMENT
INDEX
ATTACHMENTS
-----------
<TABLE>
<CAPTION>
Attachment
Number Title Page(s)
- ------ ----- -------
<S> <C> <C>
A GTE Telephone Operating Companies 1
B Definition of Terms 1 through 4
C Proprietary Billing Information 1
D List of Contacts 1
E Charges for the Services 1 through 11
</TABLE>
<PAGE>
BILLING AND COLLECTION SERVICES AGREEMENT
THIS AGREEMENT ("Agreement"), is made between TELCO DEVELOPMENT GROUP INC., with
an address at 4219 Lafayette Center Plaza, Chantilly, VA 22021-1209 ("TELCO
DEVELOPMENT GROUP"), and GTE Telephone Operations, consisting of the GTE
Telephone Operating Companies listed in Attachment A, with an address at 600
Hidden Ridge, Irving, Texas 75038 ("GTE").
WHEREAS, GTE desires to provide Billing and Collection Services ["Service(s)"]
pursuant to this Agreement, its attachments and, when applicable, to tariffs
filed with regulatory bodies (collectively "Tariffs"); and
WHEREAS, TELCO DEVELOPMENT GROUP desires to purchase the Services listed
below, in accordance with the terms and conditions of this Agreement;
Service Service Attachment
------- ------------------
BillingPlus(SM) Service Service Attachment 2
PrimeTarget(SM) Services Service Attachment 5
Billing Analysis Service Service Attachment 6
Sub-CIC Service Service Attachment 8
NOW, THEREFORE, in consideration of the mutual obligations of the Parties, GTE
and TELCO DEVELOPMENT GROUP agree as follows:
Section 1. Scope of This Agreement and Relationship to Other Documents
1.1 This Agreement specifies the rights and obligations of each Party with
respect to GTE's provision of end-user billing and collection for
services provided by TELCO DEVELOPMENT GROUP to End-Users.
1.2 Services are provided pursuant to the terms and conditions of this
Agreement, unless governed by tariff(s), orders or regulations. In such
case, the Service shall be provided pursuant to the tariff(s), orders,
or regulations. Should a conflict exist between the provisions contained
in this Agreement and the applicable tariff, order or regulation, the
provisions of the tariff, order or regulation shall prevail.
1.3 If an action by a legislative or regulatory body results in an increase
in GTE's Billing and Collection expenses related to the provisioning of
the Services, GTE may increase its rates commensurately upon ninety (90)
calendar days written notice to TELCO DEVELOPMENT GROUP.
1.4 On the effective date of this Agreement, this Agreement shall supersede
all previous agreements between TELCO DEVELOPMENT GROUP and GTE or
---
former Contel Operating Companies where applicable. GTE Telephone
Operating Areas are set forth in Section 10 of Attachment E. Rates for
all GTE and former Contel areas are shown in Attachment E.
1.5 TELCO DEVELOPMENT GROUP warrants that all credit card and third number
messages to be billed and collected by GTE have had the Billing
Telephone Number validated through a Query Response Service or Line
Identification Database Service.
1.6 TELCO DEVELOPMENT GROUP shall not submit Pay Per Call message traffic
for billing and collection unless TELCO DEVELOPMENT GROUP has selected
Service Attachment 1 and has submitted the appropriate PON to commence
Pay Per Call billing. In the event GTE receives Pay Per Call messages
prior to TELCO DEVELOPMENT GROUP ordering PrimeLink(SM) Service and
submitting the requisite PON, the Pay Per Call
GTE PROPRIETARY
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charges will be recoursed to TELCO DEVELOPMENT GROUP without further
obligation, and GTE shall adjust such messages off of the End User's
bill. GTE may reject any additional Pay Per call messages received.
1.7 GTE reserves the right to modify or replace billing systems by giving
TELCO DEVELOPMENT GROUP six (6) months written notice.
1.8 TELCO DEVELOPMENT GROUP may add Services to this Agreement during its
term by executing a Service Attachment as an amendment to the Agreement.
The additional Services shall continue in effect until the termination
of the Agreement.
1.9 The terms used in this Agreement, unless otherwise referenced, shall
have the meanings set forth in Attachment B - Definition of Terms.
Section 2. Detariffing of the Services
Should it be determined by any appropriate regulatory body or
legislative authority that any of the Services provided pursuant to
Tariff shall no longer be offered under Tariff, and provided that it is
otherwise permissible, the Parties agree to continue such Service(s)
under the rates, terms and conditions set forth in this Agreement.
Section 3. Term
The term of this Agreement shall be for a period of three (3) years
("Term") effective for GTE South Area, GTE North Area, and GTE Central
Area on June 1, 1995 ("Effective Date") and effective for GTE West Area
on August 1, 1995 and terminating in all Areas on May 31, 1998.
Section 4. Cancellation or Termination of the Agreement and Attachments
4.1 In the event that any regulatory, legislative or legal action prohibits
or substantially impairs GTE's ability to provide the Service(s) in the
manner and under the terms set forth in this Agreement, either Party may
terminate this Agreement upon ninety (90) calendar days written notice
to the other Party without further obligation, other than the obligation
of TELCO DEVELOPMENT GROUP to pay GTE for Services rendered and of GTE
to remit to TELCO DEVELOPMENT GROUP amounts collected from End Users on
TELCO DEVELOPMENT GROUP's behalf.
4.2 In the event of breach of any provision of this Agreement by either
Party, the non-defaulting Party shall give the defaulting Party written
notice, and the defaulting Party shall cure the breach within ninety
(90) calendar days of such notice. If the defaulting Party does not cure
such breach, the non-defaulting Party may, at its sole option, terminate
this Agreement and shall be entitled to pursue all available remedies
for such breach. In the event either Party terminates this Agreement
under this Section, prior to the expiration of the term as set forth in
Section 3 of this Agreement, the liability for costs shall be as
follows:
4.2.1 If GTE breaches the Agreement TELCO DEVELOPMENT GROUP shall be
entitled to a refund of some development costs paid or credit
amounts due to GTE for the development of systems or
procedures. This amount is calculated by dividing the number
of months remaining in the Term of the Agreement following the
last month Services are rendered, by the number of months in
the Term and multiplying that result by the total actual
development costs paid or due.
4.2.2 If TELCO DEVELOPMENT GROUP breaches the Agreement, as
described in this Section 4.2, TELCO DEVELOPMENT GROUP shall
reimburse GTE for the system development and installation
cost, less the net salvage value of equipment and material
either ordered, provided or installed, plus the non-
recoverable cost (i.e., reinstatement of software, removal of
system code) of system development and installation not to
exceed the total development costs authorized in writing by
TELCO DEVELOPMENT GROUP and the Minimum Monthly Charge for the
remainder of the term of this Agreement as specified in
Sections 4.3 and 11.
4.3 If TELCO DEVELOPMENT GROUP terminates this Agreement for any reason
other than as set forth in Section 4.1, before the end of the Term set
forth in Section 3, TELCO DEVELOPMENT GROUP shall be liable for the
Minimum Monthly Charge shown in Section 10 of Attachment E for the
unexpired term of the Agreement. Total Minimum Monthly Charge for the
months remaining in the unexpired term of the Agreement shall be due and
payable within thirty (30) calendar days from the termination of this
Agreement.
GTE PROPRIETARY
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<PAGE>
4.4 Notwithstanding any other provision of this Agreement, GTE may
terminate this Agreement without any further liability if TELCO
DEVELOPMENT GROUP admits insolvency, makes an assignment (other than
as provided for in Section 21) for the benefit of creditors, is unable
to pay debts as they mature, or has a trustee or receiver appointed
over all or a substantial portion of its assets.
4.5 The obligation set forth in Section 7 shall survive the termination of
this Agreement.
Section 5. Remedies Cumulative
Except for Sections 17, 18, and 20, all rights of termination,
cancellation, or other remedies in this Agreement are cumulative. Use
of any remedy shall not preclude any other remedy in this Agreement.
Section 6. Denial of Service Authorization
TELCO DEVELOPMENT GROUP authorizes GTE to disconnect end-user service
for non-payment in accordance with applicable laws, regulatory orders
and GTE policy and procedures presently in effect or established in
the future.
Section 7. Confidentiality and Publicity
7.1 All proprietary or confidential information ("Proprietary
Information") disclosed by either Party during the negotiations and
the term of this Agreement shall be protected by the other Party in
accordance with the terms of this Section.
7.2 The term "Proprietary Information") means written, recorded and
machine readable information, such as TELCO DEVELOPMENT GROUP end-user
information as set forth in Attachment C, TELCO DEVELOPMENT GROUP
system or new product specifications, audits and examinations or
other information provided in tangible form to one Party by the other
Party regarding the above referenced subject matter and which is
marked proprietary or confidential with the appropriate owner
corporation name, i.e. "GTE Proprietary". Information disclosed orally
shall not be considered proprietary unless such information is reduced
to writing by the providing Party and a copy is delivered to the
receiving Party within thirty (30) business days after such oral
disclosure. This writing shall also state the place, date and
person(s) to whom disclosure was made.
7.3 The Parties shall not disclose any Proprietary Information of the
other Party in whole or in part, including derivations, to any third
party for a period of three (3) years from the date of disclosure. If
the Parties agree to a different nondisclosure period for a specific
document, the disclosing party shall mark the document with the non-
disclosure period. The Parties shall not be liable for inadvertent or
accidental disclosure of Proprietary Information of the other provided
that: (a) each Party uses at least the same degree of care in
safeguarding such Proprietary Information as it uses for its own
proprietary information of like importance which shall be reasonably
calculated to prevent such inadvertent disclosure; (b) it limits
access to such Proprietary Information to its employees and agents who
are directly involved in the consideration of the Proprietary
Information and informs its employees and agents who have access to
such Proprietary Information of the Party's duty not to disclose; and
(c) upon discovery of any such inadvertent disclosure of Proprietary
Information, it shall endeavor to prevent any further inadvertent
disclosure.
7.4 Information shall not be deemed proprietary and the receiving Party
shall have no obligation with respect to any information which:
(a) is or becomes publicly known through no wrongful act, fault or
negligence of the receiving Party; or
(b) was known by the receiving Party or by any other affiliate or
subsidiary of the receiving Party prior to disclosure, or is
at any time developed by the receiving Party independently of
any such disclosure; or
(c) was disclosed to the receiving Party by a third party who was
free of obligations of confidentiality to the Party providing
the information; or
(d) is disclosed or used by the receiving Party, more than three
(3) years following its initial disclosure unless otherwise
agreed upon; or
(e) is approved for release by written authorization of the
disclosing Party; or
(f) is disclosed pursuant to a requirement or request of a
governmental agency or regulator or if disclosure is required
by operation of law; or
(g) is furnished to a third party by the disclosing Party without
a similar restriction on the third party's rights.
GTE PROPRIETARY
-PA-3-
<PAGE>
7.5 Since either party may choose not to use or announce any services,
products or marketing techniques relating to this Agreement or
information gained or exchanged during the negotiations, both Parties
acknowledge that one is not responsible or liable for any business
decisions made by the other in reliance upon any disclosures made
during any meeting between the Parties or in reliance on any results
of the negotiations. The furnishing by either Party of Proprietary
information to the other shall not obligate either Party to enter into
any further agreement or negotiation with the other. This Section does
not relieve either Party of its contractual obligations under this
Agreement.
7.6 Nothing contained in this Agreement shall be construed as granting to
a Party a license, either express or implied, under any patent,
copyright or trademark, now or hereafter owned, obtained, controlled
or which is or may be licensable by the other Party.
7.7 All publicity regarding this Agreement and its Attachments is subject
to the Parties' prior written consent.
7.8 Unless otherwise agreed upon, neither Party shall publish or use the
other Party's name, language, pictures, or symbols from which the
other Party's name may be reasonably inferred or implied in any
advertising, promotion, or any other publicity matter relating
directly or indirectly to this Agreement.
7.9 The Parties acknowledge that this Agreement contains commercially
confidential information that may be considered proprietary by either
or both Parties, and agree to limit distribution of this Agreement to
those individuals in their respective companies with a need to know
the contents of this Agreement.
7.10 The Parties further agree to seek commercial confidential status for
this Agreement with any regulatory commission with which this
Agreement must be filed, to the extent such a designation can be
secured.
Section 8. Notification to End Users
The Parties shall agree in advance and in writing to any notification
to End Users concerning the billing arrangements between TELCO
DEVELOPMENT GROUP and GTE under this Agreement. GTE may notify End
Users of the termination of this Agreement without prior agreement of
TELCO DEVELOPMENT GROUP.
Section 9. Transfer of Funds
9.1 Any payment from either Party to the other Party of one hundred
thousand dollars ($100,000.00) or more shall be transmitted to the
bank account designated by the receiving Party by electronic funds
transfer. Any payment by either Party to the other Party of less than
one hundred thousand dollars ($100,000.00) may be paid by check,
draft or electronic funds transfer to the payee's address. If any
portion of the amount due either Party is received by the other Party
in funds that are not immediately available to the payee, then a late
payment charge shall be due the payee.
9.2 Where the Parties have made arrangements for a bank or other third
party to remit funds to the other, proper identification of the
bank/third party, to include the account number, shall be furnished.
The remitting Party shall cooperate in correcting any bank or other
third party errors and shall not be relieved of its payment
responsibilities because of such errors.
Section 10. Billing for Services Rendered
10.1 GTE shall bill TELCO DEVELOPMENT GROUP for Services rendered in
accordance with this Agreement on a monthly basis. Each invoice shall
be for a period of approximately thirty (30) calendar days, depending
upon data processing cutoff dates used by GTE in each state or
Company.
10.2 If TELCO DEVELOPMENT GROUP fails to pay or file a claim for an amount
by the payment due date appearing on the GTE invoice, late payment
charges may apply as set forth in Section 12.
10.3 The payment due date for each Service Invoice shall be determined by
adding thirty (30) calendar days to the invoice preparation date. GTE
shall use its best efforts to mail the invoice on the invoice
preparation date.
10.4 If the payment due date on the Invoice causes such payment to be due
on a Saturday, Sunday or Holiday for GTE, payment for the amount due
GTE shall be as follows:
a. If such payment due date falls on a Sunday or Holiday which is
observed on a Monday, the payment date shall be the first non-
Holiday following such Sunday or Holiday.
b. If such payment due date falls on a Saturday or the Holiday is
observed on Tuesday, Wednesday, Thursday or Friday, the payment
date shall be the last non-Holiday preceding such
GTE PROPRIETARY
-PA-4-
<PAGE>
Saturday or Holiday.
10.5 In the event that (i) TELCO DEVELOPMENT GROUP files for bankruptcy,
makes a general assignment for the benefit of creditors or is acquired
by another entity or (ii) undisputed amounts are not paid by TELCO
DEVELOPMENT GROUP within ninety (90) calendar days of receiving the
invoice, GTE may net the amounts of the invoices against the purchase
of accounts receivable amounts due TELCO DEVELOPMENT GROUP under this
Agreement.
Section 11. Minimum Charges
If total amounts incurred by TELCO DEVELOPMENT GROUP for Services
rendered in any month are less than the Minimum Monthly Charge as set
forth in Section 10 of Attachment E, (including Zero (0) amounts) the
Minimum Monthly Charge shall be billed by GTE and shall be payable by
TELCO DEVELOPMENT GROUP. A separate Minimum Monthly Charge applies for
each GTE operating Area. Attachment E shows the Minimum Monthly Charge
for each Area. The Minimum Monthly Charge shall be applied by GTE
beginning with the first full calendar month after the Effective Date.
Section 12. Late Payment Charge
12.1 Any amount not received by the payment due date shall be subject to a
late payment charge unless otherwise specified in an applicable tariff
or prohibited by law. The late payment charge shall be the balance
overdue times the lesser of:
12.1.1 The highest interest rate (in decimal value) allowed by state
law or regulation for commercial transactions in each state
covered under this Agreement, for the number of calendar days
from the day following the payment due date up to and
including the date payment is actually made; or,
12.1.2 twelve per cent (12%) per annum simple interest for the
number of calendar days from the day following the payment
due date up to and including the date payment is actually
made.
12.2 If any adjustment that reduces an end-user balance is received by GTE
from TELCO DEVELOPMENT GROUP after the date GTE billed the charges to
be adjusted to the End User plus forty-five (45) calendar days, then
TELCO DEVELOPMENT GROUP may be subject to a late Payment charge due
GTE if it is determined that GTE was not the sole cause of the delay.
The late payment charge shall be the adjustment amount times a late
factor, shown in Section 12.1, unless otherwise specified in an
applicable tariff or prohibited by law.
12.3 Late Payment Charges shall not be levied on claimed or disputed
amounts until resolution. If the claim or dispute is resolved in GTE's
favor, TELCO DEVELOPMENT GROUP shall pay the Late Payment Charges on
the claimed or disputed amounts previously deducted. If the claim or
dispute is resolved in TELCO DEVELOPMENT GROUP's favor, GTE shall pay
interest on the amounts already paid to GTE using the factors shown in
Section 12.1.
12.4 Late Payment Charge shall not be applied to amounts involved in bank
or third party errors, rather the discrepancy shall be resolved by the
banks or other third parties involved. The Parties shall notify the
banks/third parties involved and coordinate resolution.
12.5 Late payment charges shall be included on the next settlement
statement, but will be excluded in factoring new late payment charges.
Section 13. Audit of GTE by TELCO
DEVELOPMENT GROUP
13.1 TELCO DEVELOPMENT GROUP may request an audit or examination of GTE
upon prior sixty (60) calendar days written notice. The Audit or
Examination shall be conducted during the normal business hours and
shall be limited to records and procedures containing information
bearing upon (1) amounts being billed to End Users by GTE as part of
its provision of Services, and (2) charges to TELCO DEVELOPMENT GROUP
for Services provided by GTE pursuant to this Agreement. TELCO
DEVELOPMENT GROUP may request one (1) audit per twelve (12) month
period. TELCO DEVELOPMENT GROUP may request one examination per Area,
per six (6) month period.
13.2 An Audit is a comprehensive review that may encompass multiple
departments and multiple services, without limitation as to scope
except as provided in Section 13.1.
13.3 An Examination is an inquiry on a single issue or a specific topic. By
way of illustration only, and not by way of limitation, an Examination
may consist of an inquiry into any of the following issues or topics:
Conversion to TELCO DEVELOPMENT GROUP billing, adjustments,
reconciliation of interface output to end-user records, or monitoring
or testing of new or
GTE PROPRIETARY
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updated interfaces.
13.4 The Parties shall agree on a date upon which the audit or examination
is to commence, the estimated duration, the location, the subject
matter of the audit or examination and the materials to be audited or
examined.
13.5 Each Party shall bear its own expenses in connection with the conduct
of an audit or examination. Special Data Extractions required by TELCO
DEVELOPMENT GROUP to conduct the audit or examination shall be paid
for by TELCO DEVELOPMENT GROUP.
13.6 GTE materials reviewed by TELCO DEVELOPMENT GROUP in the course of an
audit or examination shall be deemed confidential and their use shall
be limited to the conduct of the audit or examination and preparation
of a report for appropriate distribution within TELCO DEVELOPMENT
GROUP to those with a need to have the results of the audit or
examination. TELCO DEVELOPMENT GROUP agrees to provide a copy of
Section 7 of this Agreement to employees and or agents acting on its
behalf and to require their compliance with its provisions.
Section 14. Taxes
Tax applications and procedures are set forth in the Service
Attachments for each Service provided.
Section 15. Data Retention
All data associated with the provision and receipt of Service(s)
pursuant to this Agreement shall be maintained for the greater of, (a)
the retention time required by law or regulation for maintaining
information, or (b) two (2) years.
Section 16. Independent Contractors
16.1 Each Party is engaged in a business which is independent of the other
Party and each Party shall perform its obligations as an independent
contractor.
16.2 Neither Party shall employ any person to perform Services who that
Party knows is a full or part-time employee of the other Party.
Section 17. Claim Resolution
17.1 A claim is a monetary amount that is disputed by a Party with respect
to the terms and conditions of this Agreement or any subject matter
referred to in or governed by this Agreement. A claim may be for
either an amount that was withheld from payment by a Party, or an
amount that was paid by a Party and subsequently identified as a
disputed amount.
17.2 If either Party shall have any claim, that Party shall provide written
notification to the other Party, as outlined in Section 33,
identifying the issue or amount disputed, including a detailed
explanation of the circumstances.
17.2.1 The written notification regarding the claim shall be sent by
the moving Party within thirty (30) calendar days from the
date of discovery.
17.2.2 TELCO DEVELOPMENT GROUP or GTE shall not be bound to pay for
the amounts disputed until such time as the claim is
resolved. At the time of resolution of the claim, if any
money is to be paid by either Party to the other, interest
shall be paid to the Party receiving the disputed monies to
compensate for the lapsed time between the payment due date
and payment date.
17.2.3 The Party receiving the claim shall respond in writing within
thirty (30) calendar days from the date notification is
received.
17.2.4 The Party filing the claim shall have an additional thirty
(30) calendar days after the receipt of the response to
either accept the resolution offered by the other Party or
request implementation of the Dispute Resolution procedures
set forth in Section 19 of this Agreement.
17.3 Either Party may bring to the attention of the other Party any claim
that has not been satisfactorily resolved following the procedures
described above. Both Parties agree to negotiate resolution in good
faith. To this end TELCO DEVELOPMENT GROUP and GTE agree to escalate
any and all unresolved disputes by following the procedures set forth
in Section 19, Dispute Resolution.
Section 18 Claims Limitation
18.1 GTE shall bill TELCO DEVELOPMENT GROUP for Billing and Collection
Services within two (2) years of the rendering of the service
otherwise governed by tariff or law. TELCO DEVELOPMENT GROUP shall
submit claims for Billing and Collection Services within two (2) years
of the bill date unless otherwise governed
GTE PROPRIETARY
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by tariff or law. Service is considered rendered when the Purchase of
Accounts Receivable Report is submitted to TELCO DEVELOPMENT GROUP.
18.2 No claims may be made under this Agreement or referred to the dispute
resolution procedures set forth in Section 19 of this Agreement, more
than two (2) years after the bill date of the ancillary bill or the
Purchase of Accounts Receivable (PAR) Report date. Failure to make
such claim within two (2) years shall bar any course of action before
a judicial or regulatory body. If a claim is made within the two (2)
year period, a cause of action shall not be filed before a judicial or
regulatory body until at least ninety (90) calendar days after the
completion of the dispute resolution process or statutory limitation
of actions whichever is shorter. Claims for indemnity under Section 20
shall not be limited by the two (2) year limitation provided, but
shall be governed by the appropriate statutory limitation of actions.
Section 19 Dispute Resolution
19.1 A dispute between the Parties may arise from a claim that has not been
resolved using the claims resolution process specified in Section 17,
or any other disagreement or controversy that may arise concerning the
terms and conditions of this Agreement or any subject matter referred
to in or governed by this Agreement.
19.2 The Parties desire to resolve any dispute arising out of this
Agreement without litigation. Accordingly, except for action seeking a
temporary restraining order or injunction related to the purposes of
this Agreement, or suit to compel compliance with this dispute
resolution process, the Parties agree to use the following alternative
dispute resolution procedure as their sole remedy with respect to any
claim, dispute or other controversy arising out of or relating to this
Agreement or its breach.
19.3 At the written request of a Party, each Party shall appoint a
knowledgeable,responsible representative to meet and negotiate in good
faith to resolve any dispute arising under this Agreement. The Parties
intend that these negotiations be conducted by non-lawyer, business
representatives. The location, format, frequency, duration and
conclusion of these discussions shall be left to the discretion of the
representatives. Upon agreement,the representatives may utilize other
alternative dispute resolution procedures such as mediation to assist
in the negotiations. Discussions and correspondence among the
representatives for purposes of these negotiations shall be treated as
confidential information developed for purposes of settlement, exempt
from discovery and production, which shall not be admissible in the
arbitration described below or in any lawsuit without the concurrence
of all Parties. Documents identified in or provided with such
communications, which are not prepared for purposes of the
negotiations, are not so exempted and may, if otherwise admissible, be
admitted in evidence in the arbitration or lawsuit.
19.4 If the negotiations do not resolve the dispute within sixty (60)
calendar days of the initial written request, the dispute shall be
submitted to binding arbitration by a single arbitrator pursuant to
the Commercial Arbitration Rules of the American Arbitration
Association. A Party may demand such arbitration in accordance with
the procedures set out in those rules. Discovery shall be controlled
by the arbitrator and shall be permitted to the extent set out in this
section. Each Party may submit in writing to a Party, and that Party
shall so respond, to a maximum of any combination of thirty-five (35)
(none of which may be subparts) of the following: Interrogatories,
demands to produce documents, and requests for admission. Each Party
is also entitled to take the oral disposition of one individual of
another Party. Additional discovery may be permitted upon mutual
agreement of the Parties. The arbitration hearing shall be commenced
within sixty (60) calendar days of the demand for arbitration. The
arbitration shall be held in the city where this Agreement was
executed by GTE. The arbitrator shall control the scheduling so as to
process the matter expeditiously. The Parties may submit written
briefs. The arbitrator shall rule on the dispute by issuing a written
opinion within thirty (30) calendar days after the close of hearings.
The times specified in this section may be extended upon mutual
agreement of the Parties or by the arbitrator upon a showing of good
cause. Judgement upon the award rendered by the arbitrator may be
entered in any court having jurisdiction.
19.5 Each Party shall bear its own costs of these procedures. A Party
seeking discovery shall reimburse the responding Party the costs of
production of documents (to include search time and reproduction
costs). The Parties shall equally split the fees of the arbitration
and the arbitrator.
Section 20. Limitation of Liability
20.1 Each Party's liability to the other for any loss, cost, claim, injury,
liability or expense; including reasonable attorney fees, relating to
or arising out
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of any negligent act or omission in its performance of obligations
arising out of this Agreement, shall be limited to the amount of
direct damage actually incurred. With respect to claims arising out
of this Agreement, either Party's cumulative liability, whether in
contract, tort, or otherwise, shall not exceed the total charges
applicable to the billing and collection services rendered under this
Agreement. GTE's liability for service interruptions or for errors
or omissions in the provision of the service shall be limited to a
credit allowance of the charges for the service for the period of
interruption.
20.2 In no event shall either Party be liable to the other for any
indirect, special, or consequential damage of any kind whatsoever.
Claims for loss of revenue based on unbillable messages (as specified
in the Service Attachments) shall constitute claims for direct
damages.
Section 21. Assignment
21.1 Any assignment by either Party without the prior written consent of
the other Party shall be void, except either Party may assign all or
part of its rights and obligations to any legal entity which is a
subsidiary or affiliate of that Party without consent, but with
written notification. Such written consent shall not be unreasonably
withheld or delayed. All obligations and duties of any Party under
this Agreement shall be binding on all successors in interest and
assigns of such Party.
21.2 The assignment of any right by TELCO DEVELOPMENT GROUP under this
Agreement shall not impact any of GTE's rights under law or regulation
including the right of set-off.
Section 22. Force Majeure
Neither Party shall be held liable for any delay or failure in
performance of any part of this Agreement from any cause beyond its
control and without its fault or negligence, such as acts of God, acts
of civil or military authority, government regulations, embargoes,
epidemics, war, terrorist acts, riots, insurrections, fires,
explosions, earthquakes, nuclear accidents, floods, strikes, power
blackouts, unusually severe weather conditions, failure to secure
products or services of other persons or transportation facilities, or
acts or omissions of transportation common carriers.
Section 23. Severability
In the event that any one or more of the provisions shall for any
reason be held to be unenforceable in any respect under law or
regulation, such unenforceability shall not affect any other provision
of this Agreement, but this Agreement shall be construed as if such
unenforceable provision or provisions had never been contained.
Section 24. Third-Party Beneficiaries
The provisions of this Agreement are for the benefit of the Parties
and not for any other person. However, should any third party
institute proceedings, this Agreement shall not provide any such
person with any remedy, claim, liability, reimbursement, cause of
action, or other right in excess of those provided in this Agreement.
Section 25. Governing Law and Venue
Unless as otherwise expressly provided in this Agreement, this
Agreement shall be deemed to be a contract made under the laws of the
State of Texas and subject to the exclusive jurisdiction of its courts
in Texas.
Section 26. Executed in Counterparts
This Agreement may be executed in counterparts, each of which shall be
an original, but such counterparts shall together constitute but one
and the same document.
Section 27. Headings
The headings and numbering of sections and paragraphs in the Agreement
are for convenience only and shall not be construed to define or limit
any of the terms or affect the meaning or interpretation of this
Agreement.
Section 28. Attachments to the Agreement
28.1 The following and Attachments are incorporated in this Agreement.
Attachment A - GTE Operating Companies
Attachment B - Definition of Terms
Attachment C - Proprietary Billing Information
Attachment D - List of Contacts
Attachment E - Rates and Charges for the
Services
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Service Attachment 2 BillingPlus/SM/ Service
Service Attachment 5 Prime Target/SM/ Services
Service Attachment 6 Billing Analysis Service
Service Attachment 8 Sub Carrier Identification Code Billing
28.2 To the extent that any of the Attachments may be inconsistent
with or in conflict with this Agreement, the Attachments shall
prevail.
Section 29. Entire Agreement
This Agreement, including all attachments as referenced constitute the
entire Agreement between the Parties and supersedes all prior oral or
written agreements, representations, statements, negotiations,
understanding, proposals and undertakings with respect to the
Service(s) provided.
Section 30. Amendments and Waivers
30.1 Amendments, modifications and supplements to this Agreement are
allowed and shall be binding on both Parties after the effective date,
provided such amendments, modifications or supplements (1) are in
writing, signed by the authorized representatives of both Parties and
(2) by reference incorporate this Agreement and identify the specific
sections and clauses which are amended, modified or supplemented or
indicate that the material is new. The term "this Agreement" includes
any future amendments, modifications and supplements.
30.2 No course of dealing or failure of any Party to strictly enforce any
term, right or condition of this Agreement shall be construed as a
waiver of such term, right or condition.
30.3 Waiver by either Party of any default by the other Party shall not be
deemed a waiver of any other default.
30.4 No waiver of any provision or consent to default of any term shall be
effective unless the same shall be in writing and signed by or on
behalf of the Party against whom such waiver or consent is claimed.
Section 31. Construction
This Agreement and the provisions contained herein shall not be
construed or interpreted for or against any Party because the Party
drafted or caused its legal representative to draft any of its
provisions.
Section 32. Execution
32.1 The Parties hereto acknowledge that each has read this Agreement,
that each fully understands its rights, privileges and duties under
this Agreement, and that each enters this Agreement freely and
voluntarily. Each Party further acknowledges that it has had an
opportunity to consult with an attorney of its own choosing to explain
the terms of this Agreement and the consequences of signing it.
32.2 The persons executing this Agreement for the respective Parties
expressly represent and warrant that each of them has authority to
execute this Agreement upon the behalf of his or her principal.
Section 33. Notices and Demands
33.1 Except as otherwise provided under this Agreement, all notices,
demands or requests which may be given by any Party to the other Party
shall be in writing and shall be deemed to have been given on the
date delivered in person, or sent via fascsimile, telex, cable or
electronic mail service used by TELCO DEVELOPMENT GROUP, or on the
date of the third business day after deposit, postage prepaid, in the
United States Mail via Certified Mail return receipt requested, and
addressed as set forth in Attachment D.
33.2 If personal delivery is selected as the method of giving notice under
this Section, a receipt of such delivery shall be obtained.
33.3 The address to which such notices, demands, requests, elections or
other communications given by either Party may be changed by written
notice given by such Party to the other Party pursuant to this
Section.
Section 34. Program Development
34.1 Program Development consists of meeting TELCO DEVELOPMENT GROUP's
software requirements and changing the bill format when requested by
TELCO DEVELOPMENT GROUP and agreed to by GTE. Program Development
also includes converting the message data, transmitted to GTE by TELCO
DEVELOPMENT GROUP or another entity, into GTE standard format for
processing.
34.1.1 A Program Development Charge applies for the programming
hours required for software designing coding and testing.
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34.1.2 A Program Implementation Charge may apply for such items as
table updating, administration, documenting program changes
and other implementation activities.
34.1.3 Changes in rate levels, such as taxes, of TELCO DEVELOPMENT
GROUP charges to be billed shall normally be implemented
within thirty (30) calendar days after receipt of an order
from TELCO DEVELOPMENT GROUP requesting such change.
34.1.4 When modification to the rating program is required, a
Program Development Charge shall also apply. Changes in rate
structure shall normally be completed within six (6) months
of a TELCO DEVELOPMENT GROUP order. The complexity of the
structural change shall determine the exact length of time
necessary to fulfill the request.
Rate structure changes shall be made only when GTE can accommodate
such changes.
34.2 Program Development Procedures are initiated through a Purchase Order
Number ("PON") request in writing. A PON document is created when
TELCO DEVELOPMENT GROUP submits a request to GTE for a cost estimate
and time frame relating to a GTE billing system modification for new
or revised end-user Services, or for marketing information.
34.3 In certain instances, such as when TELCO DEVELOPMENT GROUP requests
PrimeTarget(SM) Services, the costs for the project may be known and
included in the PON. These are called preauthorized PONS. GTE shall
accept a preauthorized PON as an authorization to work the request and
bill TELCO DEVELOPMENT GROUP without further authorization unless the
costs overrun the authorization.
34.4 At the time of execution of this Agreement, GTE is not charging for
evaluation, however, GTE may charge for evaluation upon thirty (30)
calendar days prior written notice to TELCO DEVELOPMENT GROUP by
setting forth in the notice such charges and procedures.
34.5 Requests submitted by TELCO DEVELOPMENT GROUP must include the
information needed by GTE to develop an accurate quote. For example, a
complete package may include, but not be limited to, the following
items:
(A) Billing Specifications
(B) Illustrative Tariff
(C) Methods and Procedures
(D) Account Codes
(E) Journal Account Codes
(F) Bill Format
(G) Service Order Examples
(H) Customer Notification Requirements
(I) Name and Address of TELCO DEVELOPMENT GROUP contact to
be billed for general services
(J) Data Requirements
34.6. GTE prepared Time and Cost ("T&C") estimates shall include a
projection of hours to be expended. The costs shall be estimated and
presented to TELCO DEVELOPMENT GROUP, including but not limited to:
(A) Design/Development
(B) Testing/Implementation
(C) Sample Bill Format (when applicable)
34.7 If, upon receipt of a PON estimate from GTE, TELCO DEVELOPMENT GROUP
believes, in good faith, that the estimated charges are excessive,
TELCO DEVELOPMENT GROUP may notify GTE in writing and request a
detailed breakdown of the estimate. GTE shall provide such breakdown
within ten (10) business days of the receipt of such request.
34.8 If, at any time, GTE determines that its expenses may exceed the
authorized amount, it shall promptly notify TELCO DEVELOPMENT GROUP in
writing of the amount by which the authorized amount shall be
exceeded. GTE shall not charge TELCO DEVELOPMENT GROUP in excess of
the authorized amount unless TELCO DEVELOPMENT GROUP has expressly
approved such additional amount in writing in advance. In the event
TELCO DEVELOPMENT GROUP does not authorize the additional amount, GTE
shall be under no obligation to continue the work covered by the
change request. TELCO DEVELOPMENT GROUP shall be billed for the
performed work.
34.9 GTE may also submit additional deviations from specifications or
procedures that are discovered after TELCO DEVELOPMENT GROUP has
accepted a PON estimate from GTE. TELCO DEVELOPMENT GROUP need not
accept any such deviations if:
(A) They materially alter the implementation, the estimated cost or
the firm implementation date that had been accepted by TELCO
DEVELOPMENT GROUP, or:
(B) They result from incorrect evaluation of
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TELCO DEVELOPMENT GROUP specifications by GTE.
(C) In the event of (A) or (B) above, TELCO DEVELOPMENT GROUP shall
have the right to terminate the PON project and TELCO
DEVELOPMENT GROUP shall not be liable for any charges and TELCO
DEVELOPMENT GROUP shall be reimbursed for any charges paid for
such terminated PON project.
(D) If such additional deviations result from error or omission on
the part of TELCO DEVELOPMENT GROUP while assisting GTE with the
documentation of specifications for a PON project, GTE may
submit a revised PON estimate. If TELCO DEVELOPMENT GROUP does
not accept the revised PON estimate, TELCO DEVELOPMENT GROUP
shall compensate GTE for its expenses incurred up to the point
of cancellation. GTE may bill for work in progress and shall
bill TELCO DEVELOPMENT GROUP for its actual expenses in
performing the PON request if its actual expenses are equal to
or less than the authorized amount
(E) All deviations must be agreed to in writing by the Parties.
34.10 Except for PONs quoted as Major PONs, GTE shall implement the changes
within six (6) months of authorization, or as mutually agreed upon in
the event of an unusual increase of TELCO DEVELOPMENT GROUP PON
activity.
34.10.1 For PON requests that involve new recurring charges, GTE may
provide TELCO DEVELOPMENT GROUP estimates of the recurring
charges.
34.10.2 GTE shall notify TELCO DEVELOPMENT GROUP within five (5)
working days if it fails to implement a billing change in one
or more of its Areas as committed to in its PON.
34.11 GTE shall provide a separate bill to TELCO DEVELOPMENT GROUP for
Program Development Charges.
34.12 GTE may refuse in writing to provide a quote on a PON request.
34.13 GTE shall perform the necessary software design, development and
testing functions to ensure the software product operates to TELCO
DEVELOPMENT GROUP's specifications.
34.14 GTE shall accept modifications to the original specifications in
writing from TELCO DEVELOPMENT GROUP, whereby, GTE shall quote the
additional costs associated with the modifications and upon TELCO
DEVELOPMENT GROUP's written acceptance of GTE quoted costs, TELCO
DEVELOPMENT GROUP agrees to pay the contracted and approved amount for
the changes. Upon request of the modified specifications, GTE shall
design, develop, test and implement the necessary software
modifications within an agreed period of time. Such deviations may
impact the initial implementation date provided in the T & C estimate.
34.15 The Parties shall consult with one another for clarification of
specifications during software design, development, testing and
implementation stages.
34.16 Program Development charges are billed on a separate statement from
other billing and collection charges
Section 35. Regulatory or Legislative Action
35.1 To the extent that any state statute, order, rule or regulation or any
state regulatory agency having competent jurisdiction over one or both
Parties to this Agreement shall require that this Agreement be
approved by such regulatory agency before the Agreement may be
effective, this Agreement shall not be effective in such state
notwithstanding the Parties' signature until the first business day
after such approval shall have been obtained.
35.2 The Parties agree to cooperate with each other and with any regulatory
agency so that any approval necessary to provide the Service(s) under
this Agreement is obtained. During the term of this Agreement, the
Parties agree to continue to cooperate with each other and with any
regulatory agency so that the benefits of this Agreement may be
achieved.
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IN WITNESS WHEREOF, the Parties have executed this Agreement on the date or
dates indicated below.
For TELCO DEVELOPMENT GROUP INC. For GTE Telephone Operating Companies
<TABLE>
<CAPTION>
<S> <C> <C> <C>
By: /s/ Bryan Rachlin By: /s/ Larry J. Sparrow
------------------------- --------------------------
Name: Bryan Rachlin Name: Larry J. Sparrow
-------------------------
Title: President Title: Lawful Agent and
------------------------- President - Carrier Markets
Date: 2/21/95 Date: 3/15/95
------------------------- --------------------------
</TABLE>
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BILLING AND COLLECTION SERVICES AGREEMENT
ATTACHMENT A
GTE TELEPHONE OPERATING COMPANIES
*GTE Arkansas Incorporated
*GTE California Incorporated
GTE Florida Incorporated
GTE Hawaiian Telephone Company Incorporated
*GTE Midwest Incorporated
GTE North Incorporated
*GTE Northwest Incorporated
GTE South Incorporated
*GTE Southwest Incorporated
**Contel of California, Inc. d/b/a GTE California
Contel of Minnesota, Inc. d/b/a GTE Minnesota
Contel of the South, Inc. d/b/a GTE Systems of the South
*Contel of Texas, Inc. d/b/a GTE Texas
Contel of the West, Inc. d/b/a GTE West
*GTE is transferring all or a portion of its local exchange telephone franchises
held by these companies and will provide Services only until the date the
transfer is completed.
**Contel of California will be included under this Agreement 90 days after the
California Public Utilities Commission approves the Contel of California/GTE
merger.
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BILLING AND COLLECTION SERVICES AGREEMENT
ATTACHMENT B
DEFINITION OF TERMS
Adjustments -
Adjustments are full or partial credits or debits of toll or other charges
given to an End User.
Adjustment Voucher -
An Adjustment Voucher is issued by GTE to adjust end-user charges at the
request of TELCO DEVELOPMENT GROUP or End User. An Adjustment Voucher is
issued at the single line and multiline account level. Each Adjustment
Voucher can be used to adjust up to ninety-nine (99) calls and up to four
(4) call types.
Billing Analysis Services -
Billing Analysis Services consists of the detection, investigation and
deterrent Services associated with fraudulent use of the telephone
network.
Billing Cycle Schedule -
The Billing Cycle Schedule is a schedule of dates within a month when
accounts are processed by GTE's billing system and end-user bills are
produced.
Billing Name and Address -
The Billing Name and Address is the name and address used for mailing the
end-user bill.
BillingPlus(SM) Service -
BillingPlus(SM) Service is the preparation of bills for TELCO DEVELOPMENT
GROUP message billed Service, mailing of the statements and collection of
the payments and deposits. The Service automatically includes posting of
rated calls, the preparation activities for billing and customer
masterfile information.
Billing Telephone Number (BTN) -
The Billing Telephone Number (BTN) is the primary end-user number
representing the account responsible for invoice payment. The BTN may link
multiple telephone lines and calling card numbers for billing purposes and
may or may not be an dialable number.
Business Days -
Business days are regular Monday through Friday weekdays which are
customary working days, but excludes days such as (but not limited to) New
Year's Day, President's Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas.
Calendar Days -
Calendar days are all days including Saturdays, Sundays and national
holidays.
Call Recording Service -
Call Recording Service is the entering on magnetic tape or other
acceptable media, the details of customer messages originated through
Switched Access Service or switched access like services for which answer
and disconnect supervision have been received. Call Recording Service is
available with Feature Group C (FGC) and Feature Group D (FGD) Services or
similar offerings by GTE or other local exchange carriers when used for
provision of usage based services.
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Class of Service -
Class of Service is a GTE code used to identify the service purchased by
the End User, such as residence, business, public or official and may also
specify the number of party lines, FX service, etc.
Customer Master File -
The Customer Master File is GTE's file containing standard information for
End Users that have GTE telecommunications service.
Customer Service Order Center (CSOC)/Business Service Order Center (BSOC) -
Customer Service Order Center (CSOC)/Business Service Order Center (BSOC)
is the GTE business office responsible a particular customer account. CSOC
handles residential customer service orders/inquiries. BSOC handles
business customer service orders/inquiries.
Directory Assistance Exemption -
Directory Assistance Exemption is an identification of an account that is
exempt from directory assistance charges.
EC Memo -
Exchange Carrier (EC) Memos are used to pass adjustments and toll
investigation requests manually from TELCO DEVELOPMENT GROUP to GTE. The
following are examples of the types of inquiries and adjustments which may
be received;
Adjustments:
Intrastate Optional Calling Plans
Accounts not found in TELCO DEVELOPMENT GROUP's Database
InterLATA Directory Assistance Charges
Duplicate Billing
Foreign Exchange Charges
Requests to rebill toll calls when a customer claims previously
adjusted call is valid.
Flat-Rate adjustments as a result of carrier selection problems,
adjustments over several months billing, and any adjustment that is
not directly tied to an itemized charge.
Inquiries for:
Wire checks
Suspected fraud billing of toll calls
End User-
An End User is a residential or business customer with a GTE account.
End User PIC -
The End User PIC is the Presubscribed Interexchange Carrier (PIC) code
that indicates the carrier selected by the End User to provide 1 +
interexchange long distance service.
Exchange Message Interface (EMI) Record -
An EMI Record is a layout of data to be exchanged between Exchange
Carriers and Interexchange Carriers.
Final Account Date -
The Final Account Date is the date the service was disconnected for an end-
user account.
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Generic Tax Area Codes -
The Generic Tax Area Codes are the values used to indicate the rate of tax
or type of tax applicable to a particular End User.
Master Service Date -
The Master Service Date is the date when a billing account was established
for a specified End User in GTE's billing system.
Network Data Mover (NDM) -
NDM is a transmission medium used for direct transfer data files between
TELCO DEVELOPMENT GROUP and GTE.
Non Pub Indicators -
The Non Pub Indicators are identification values that indicate that the
End User has requested that his telephone number not appear in the
telephone directory and that the number not be provided via directory
assistance.
Number Change -
Number Change means the information that indicates End User's telephone
number has been changed. This information includes the "from" number, the
"to" number and the date of the change.
Pay Per Call Service
Pay Per Call Service is any service:
1. in which any person provides or purports to provide:
(A) Audio information or audio entertainment produced or
packaged by such person;
(B) Access to simultaneous voice conversation services; or
(C) Any service, including the provision of a product, the
charges for which are assessed on the basis of the completion
of the call
2. for which the caller pays a per call or per time interval charge
that is greater than, or is in addition to, the charge for
transmission of the call; and
3. which is accessed through use of a 900 number.
Such term does not include directory services provided by a common carrier
or its affiliate or by a local exchange carrier or its affiliage, or any
service the charge for which is tariffed, or any service for which users
are assessed charges only after entering into a presubscription
or comparable arrangement with the provider of the service.
PrimeBilling(SM) Service -
PrimeBilling(SM) Service is the acceptance of TELCO DEVELOPMENT GROUP
message data in an invoice-ready format for inclusion in the GTE end-user
bill. TELCO DEVELOPMENT GROUP shall preform accumulation, guiding of
messages and the application of taxes.
PrimeLink(SM) Service -
PrimeLink(SM) Service is the preparation of bills for Customer Message
Billed Service for pay per call (700, 900, etc.) type calls, mailing of
the statement, and collection of the payments and deposits. The Service
automatically includes posting of rated calls, the preparation activities
for billing and Customer Masterfile information.
PrimeTarget(SM) Services -
PrimeTarget(SM) Services consist of the provision of communications to
TELCO DEVELOPMENT GROUP End Users in the form of Bill Inserts, Bill
Message Page, Bill Phrases and Direct mail. TELCO DEVELOPMENT GROUP may
elect to use one or more of these communications options each month or
only a few times a year.
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Service Address -
Service Address is the address where the End User telephone service is
actually installed (which may be different from the billing address).
Special Data Extraction
A Special Data Extraction is the creation of an output record from
existing data files that cannot normally be created from software programs
or the processing of a software program that is resident on the production
library and that requires CPU utilization in excess of two (2) hours
(i.e., 7200 CPU seconds).
Tax Exempt Status -
Tax Exempt Status is any special identification value that is used to omit
tax from a End User's bill.
Temporary Denial of Service Indicator -
Temporary Denial of Service Indicator is any special identification value
that indicates that the End User's service is temporarily suspended at the
End User's request.
The terms used in the Attachments and Services Attachments, but not specifically
defined herein, are understood by the Parties to have their ordinary meanings.
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BILLING AND COLLECTION SERVICE AGREEMENT
ATTACHMENT C
PROPRIETARY BILLING INFORMATION
The following TELCO DEVELOPMENT GROUP billing items are considered proprietary
by GTE and TELCO DEVELOPMENT GROUP and should be limited to those individuals in
their respective corporations with a need to know.
TELCO DEVELOPMENT GROUP MTS Usage
Identification of TELCO DEVELOPMENT GROUP Services in GTE's Records
As used in this Attachment C, the following terms shall have the following
meanings:
Identification of TELCO DEVELOPMENT GROUP Services in GTE's Records -
means an indicator or similar notation in GTE's billing system or records
that specifies that an End User or account subscribes to one or more TELCO
DEVELOPMENT GROUP services and may identify such service or services.
Usage - includes international, interstate and intrastate interLATA
message telephone usage and, where approved by the appropriate regulatory
body, IntraLATA usage.
Joint GTE- TELCO DEVELOPMENT GROUP
Billing Information
The following billing items to be jointly shared are considered proprietary by
GTE and TELCO DEVELOPMENT GROUP and should be treated as Proprietary Information
in accordance with the provisions of Section 10 of the Agreement. Other GTE
billing data is considered confidential by GTE and shall not be shared with
TELCO DEVELOPMENT GROUP.
Billing Name and Address
Billing Telephone Number
Billing Cycle Schedules
Class of Service
Directory Assistance Exemption
End User PIC
Final Account Date
Generic Tax Area Codes
Master Service Date
Non Pub Indicators
Number Change
Service Address
Tax Exempt Status
Temporary Denial of Service Indicator
The terms used above are defined in Attachment B.
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BILLING AND COLLECTION SERVICES AGREEMENT
ATTACHMENT D
LIST OF CONTACTS
GTE TELCO DEVELOPMENT GROUP INC.
--- ----------------------------
1. Notices and Demands Section 33.1
AVP - IC National Accounts Mark Stodter
GTE Telephone Operations Telco Development Group Inc.
600 Hidden Ridge HQE02M50 4219 Lafayette Center Drive
PO Box 152092 Chantilly, Va 22021-1209
Irving, TX 75038-2092
2. PON Process - Section 34
Manager IC Billing Services Mark Stodter
GTE Telephone Operations Telco Development Group Inc.
600 Hidden Ridge HQE02L22 4219 Lafayette Center Drive
Box 152092 Chantilly, VA 22021-1209
Irving, TX 75038-2092
3. End User Referrals - Service Attachment 2, Section 18.2
Residential - 800-787-3333
Commercial - 800-787-3333
4. Billing Analysis Services - Service Attachment 6
Manager - Security Mark Stodter
GTE Telephone Operations Telco Development Group Inc.
600 Hidden Ridge HQEOlA56 4219 Lafayette Center Drive
PO Box 152092 Chantilly, VA 22021-1209
Irving, TX 75038-2092
5. Tax Rates, Applications and Tax Surcharge Updates, Service Attachments 1, 2,
3.
Section Manager -Sales/Use Tax Mark Stodter
GTE North Telco Development Group Inc.
19845 North U. S. 31 4219 Lafayette Center Drive
P. 0. Box 407 Chantilly, VA 22021-1209
Westfield, In. 46074
GTE PROPRIETARY
AD - 1
<PAGE>
Confidential Treatment Requested. The redacted
material has been separately filed with the
Commission.
BILLING AND COLLECTION SERVICES AGREEMENT
ATTACHMENT E
RATES AND CHARGES FOR THE SERVICES
Section 1 Term of Charges
1.1 The following charges for the Services provided under this Agreement are
effective from the Effective Date of the Agreement through the last day of
the Covered Period as specified Section 3 of the Agreement.
Section 2 PrimeLink(SM) Service This service can only be ordered with
PrimeBilling and/or BillingPlus.
OPTIONAL LANGUAGE - either:
2.1 Systems preparation charge, to prepare GTE systems to provide PrimeLink'
Service:
<TABLE>
<CAPTION>
<S> <C>
For each individual GTE Area [*]
For all GTE Areas: [*]
2.1.1 Message Processing charge, per message processed [*]
OR
2.1 Message Processing charge:
2.1.1 Message Processing charge, per message processed [*]
2.2 EMI 41 and 42 Records:
One-Time non-recurring charge
For each individual GTE Area [*]
For all GTE Areas [*]
Per record charge [*]
</TABLE>
The Call Record Provision rate per call shown in Section 2.3 is also
applicable.
Charges for non-standard text code phrases are shown in Section 9.
2.3 Call Record Provision rate per call record (Charge to receive and return
records):
for direct interface [*]
for magnetic tape or cartridge [*]
2.4 Bill Processing and Collection rate per message billed, for pay per call
traffic such as, but not limited to, 700 and 900 Services:
GTE PROPRIETARY
<PAGE>
Confidential Treatment Requested. The redacted
material has been separately filed with the
Commission
<TABLE>
<S> <C>
Alabama $ [*]
Kentucky $ [*]
North Carolina $ [*]
South Carolina $ [*]
Virginia $ [*]
Florida $ [*]
Illinois $ [*]
Indiana $ [*]
Iowa $ [*]
Michigan $ [*]
Missouri $ [*]
Minnesota $ [*]
Nebraska $ [*]
Ohio $ [*]
Pennsylvania $ [*]
Wisconsin $ [*]
California $ [*]
Hawaii $ [*]
California (WC) $ [*]
Idaho $ [*]
Oregon $ [*]
Washington $ [*]
Arkansas $ [*]
New Mexico $ [*]
Oklahoma $ [*]
Texas $ [*]
</TABLE>
2.5 Service Order Change Charge shall apply when a billing service order is
accepted by GTE to update (add, change or delete) its billing file.
Rate per order processed $ [*]
2.6 Exchange Carrier Memorandum (EC Memo) Charge shall apply when TELCO
DEVELOPMENT GROUP requests a manual adjustment to an end-user account or
when any Legal Requirement mandates a manual adjustment to an End User
account.
Rate per manual adjustment per account (with Inquiry) $ [*]
Rate per manual adjustment per account (without Inquiry) $ [*]
2.7 Complementary Services
2.7.1 Inquiry Service consists of answering end user questions about
charges billed for the TELCO DEVELOPMENT GROUP's services, applying
credits and adjustments to end user accounts, and reviewing messages
removed from end user bills.
GTE PROPRIETARY
AE - 2
<PAGE>
Confidential Treatment Requested. The redacted
material has been separately filed with the
Commission.
Inquiry rate per message billed $ [*]
Inquiry rate per Adjustment Voucher $ [*]
Any adjustment to end-user billing resulting from end-user Inquiry
and any subsequent investigation, as set forth above, shall be made
utilizing GTE internal adjustment procedures.
2.7.2.1 When TELCO DEVELOPMENT GROUP does not subscribe to Inquiry
Service and requests message investigation, the charge is
shown in Section 7.2.
Section 3 Rates and Charges to TELCO DEVELOPMENT GROUP by GTE for
BillingPlus(SM) Service
3.1 Call Record Provision rate per call record (Charge to receive and
return records):
for direct interface $ [*]
for magnetic tape $ [*]
3.2 EMI 41 and 42 Records:
One-Time non-recurring charge:
For each individual GTE Area $ [*]
For all GTE Areas $ [*]
Per record charge $ [*]
The Call Record Provision rate per call shown in Section 3.1 is also
applicable.
Charges for nonstandard text code phrases are shown in Section 9.
3.3 Bill Processing and Collection rate per message billed, for mixed
traffic including but not limited to 0+, 0-, 1+ and 1OXXX+:
<TABLE>
<S> <C>
Alabama $ [*]
Kentucky $ [*]
North Carolina $ [*]
South Carolina $ [*]
Virginia $ [*]
Florida $ [*]
Illinois $ [*]
Indiana $ [*]
Iowa $ [*]
Michigan $ [*]
Missouri $ [*]
Minnesota $ [*]
Nebraska $ [*]
Ohio $ [*]
Pennsylvania $ [*]
</TABLE>
GTE PROPRIETARY
AE - 3
<PAGE>
Confidential Treatment Requested. The redacted
material has been separately filed with the
Commission.
<TABLE>
<S> <C>
Wisconsin $ [*]
California $ [*]
Hawaii $ [*]
California (WC) $ [*]
Idaho $ [*]
Oregon $ [*]
Washington $ [*]
Arkansas $ [*]
New Mexico $ [*]
Oklahoma $ [*]
Texas $ [*]
</TABLE>
3.4 Service Order Change Charge shall apply when a billing service order is
accepted by GTE to update (add, change or delete) its billing file.
Rate per order processed $ [*]
3.5 Exchange Carrier Memorandum (EC Memo) Charge shall apply when TELCO
DEVELOPMENT GROUP requests a manual adjustment to an end-user account or
when any Legal Requirement mandates a manual adjustment to an End User
account.
Rate per manual adjustment per account $ [*]
Rate per manual adjustment per account $ [*]
3.6 Complementary Services
3.6.1 Inquiry Service consists of answering end-user questions about
charges billed for the TELCO DEVELOPMENT GROUP's services, applying
credits and adjustments to end-user accounts, and reviewing messages
removed from end-user bills.
Inquiry rate per message billed $ [*]
Inquiry rate per Adjustment Voucher $ [*]
Any adjustment to end-user billing resulting from end-user Inquiry
and any subsequent investigation, as set forth above, shall be made
utilizing GTE internal adjustment procedures.
3.6.1.1 When TELCO DEVELOPMENT GROUP does not subscribe to Inquiry
Service and requests message investigation, the charge is
shown in Section 7.2
3.6.2 Charge for EMI 46 Record per record $ [*]
Section 4 Rates and Charges for PrimeBilling(SM) Service Rates
GTE PROPRIETARY
AE - 4
<PAGE>
Confidential Treatment Requested. The redacted
material has been separately filed with the
Commission.
4.1 Rates
<TABLE>
<CAPTION>
4.1.1 PrimeBilling(SM) Service
Per Invoice Band Per Invoice Rate
--------------------------------------------------------
<S> <C>
[*] to [*] million invoices per year $[*] per invoice
[*] to [*] million invoices per year $[*] per invoice
over [*] million invoices per year $[*] per invoice
Per Message Band Per Message Rate
--------------------------------------------------------
[*] to [*] messages per invoice $[*] per message
[*] and above messages per invoice $[*] per message
4.1.2 Adjustments
Exchange Carrier Memo (EC Memo)
Per account manually adjusted per
EC Memo.............................. $[*]
4.1.3 Call Record Provision
Per call record/direct interface..... $[*]
Per call record/Magnetic tape........ $[*]
4.1.4 Quality Control Review
Per Invoice.......................... $[*]
4.1.5 EMI 46 Record per record............. $[*]
</TABLE>
4.2 Rate Application
4.2.1 For PrimeBilling(SM) Service rates shall include a bill
rendering charge (per invoice band), per invoice per month
and a message billing charge per message (per message band).
The per Invoice Band rate will be determined based on TELCO
DEVELOPMENT GROUP's forecast in November of the prior year
and trued up by April 30th of the following year.
4.2.2 Adjustments
4.2.2.1 The EC Memo charge shall be assessed each time TELCO
DEVELOPMENT GROUP requests a manual adjustment to an
end-user account. The EC Memo charge applies per
account adjusted per
GTE PROPRIETARY
AE - 5
<PAGE>
Confidential Treatment Requested. The redacted
material has been separately filed with the
Commission
memo. A factor based on actual interstate and intrastate
billed messages shall be used to apportion the EC Memo
Charge by jurisdiction.
4.2.3 Call Record Provision shall apply when message detail is
transmitted to or received from TELCO DEVELOPMENT GROUP, another
telephone company or billing entity.
4.2.4 Quality Control Review charges apply per invoice requested by TELCO
DEVELOPMENT GROUP pursuant to Section 4 of Service Attachment 3.
Section 5 Rates and Charges for Call Recording Service
5.1 Call Recording Service Charges
5.1.1 Recording rate per completed
message recorded............................... $ [*]
5.1.2 Assembly and Editing rate per message
assembled and edited........................... $ [*]
5.1.3 Call Record Provision rate per call record
(Charged to transmit records):
for direct interface.................. $ [*]
for magnetic tape..................... $ [*]
Section 6 Rates and Charges for PrimeTarget(SM) Services
6.1 PrimeTarget(SM) Services Charges
6.1.1 Bill Message Page Charge assessed per page
per bill: $ [*]
Set up charge per Area per order........ $ [*]
6.1.2 Bill Insert Charge assessed per insert per bill:
Single Sheet Folded Sheet
............................... $ [*] $ [*]
Set-up Fee per area per order ... $ [*]
6.1.3 Direct Mail Charge assessed per hour on an
ICB basis......................................... [*]
6.1.4 Bill Phrase Charge, one to fifteen lines, per line
of text (Used with BillingPlus(SM) Service).......... $ [*]
GTE PROPRIETARY
AE - 6
<PAGE>
Confidential Treatment Requested. The redacted
material has been separately filed with the
Commission.
6.1.5 Marketing Message, one to fifteen lines, per line
of text (Used with PrimeBilling(SM) Service)...... $ [*]
Section 7 Rates and Charges for Billing Analysis Services
7.1 Detection Services:
Originating line identification
equipment:
Establishment per line per office................. $ [*]
Per day (per line per office)..................... $ [*]
Terminating line identification
equipment:
Establishment per line per office................. $ [*]
Per day (per line per office)..................... $ [*]
Early toll retrieval charge per directory number
per retrieval .......................................... $ [*]
Security Personnel hourly rate (All time associated with
establishing, monitoring, removing analyzing and
preparing documentation and correspondence) ............. $ [*]
Mileage charge (All travel over 25 miles one-way associated
with establishing, monitoring and removing line
identification equipment ................................ [*]
Expenses (Meals, lodging, etc. associated with travel to
establish, monitor and remove line identification
equipment ............................................ As Incurred
7.2 Investigative Services
Centralized Toll Fraud investigation rate per message
investigated ............................................ $ [*]
Security personnel rate per hour ........................ $ [*]
7.3 Deterrence Services:
Security personnel rate per hour ........................ $ [*]
Mileage charge (All travel over 25 miles one-way to perform
deterrence services) .................................... [*]
Expenses (Meals, lodging, etc. associated with travel to
perform deterrence services).............................As Incurred
GTE PROPRIETARY
AE - 7
<PAGE>
Confidential Treatment Requested. The redacted
material has been separately filed with the
Commission.
Section 8 Message Processing Service
8.1 Message Processing Service
per message processed .................................. $ [*]
8.2 Assembly and Editing rate per message assembled and
edited.................................................. $ [*]
Section 9 Program Development Charges
9.1 Program Development Charges
9.1.1 Program Development rate per hour ............ $ [*]
Program Development charge applies
for the programming hours required
for software design and development.
9.1.2 Program Implementation rate per hour.......... $ [*]
Program Implementation charge
applies for table updating, testing,
administration, documenting program
changes and other implementation
activities.
9.2 The following rate matrix was developed for use when TELCO DEVELOPMENT
GROUP requests a routine change to GTE's billing system. These rates may
be used by TELCO DEVELOPMENT GROUP for a pre-authorized PON as described
in Section 34 of the Agreement. A PON must be sent to GTE by TELCO
DEVELOPMENT GROUP in order for any change request to be implemented.
GTE Entity CA FL HI North Northwest South Central
- ---------- -- -- -- ----- --------- ----- -------
PON Implementation
[*] [*] [*] [*] [*] [*] [*]
IC Name Change
[*] [*] [*] [*] [*] [*] [*]
Pack Threshold Error Rate Change after initial implementation of B & C Service
[*] [*] [*] [*] [*] [*] [*]
Media Change for Sending Rated Messages to GTE
[*] [*] [*] [*] [*] [*] [*]
Media Change for Unbillable Tapes:
[*] [*] [*] [*] [*] [*] [*]
GTE PROPRIETARY
AE - 8
<PAGE>
Confidential Treatment Requested. The redacted
material has been separately filed with the
Commission.
Ad Hoc Data Requests:
Unbillables Report
[*] [*] [*] [*] [*] [*] [*]
Uncollectibles Report
[*] [*] [*] [*] [*] [*] [*]
Market Share Report
[*] [*] [*] [*] [*] [*] [*]
IC Logo Placed on End-user Billing Statement
GTE Area Central North South West
- -------- ------- ----- ----- ----
[*] [*] [*] [*]
ONE TIME INITIAL SET-UP CHARGE = [*]
9.3 Non Standard EMI 41 and 42 Text Code Phrases
Number of non-standard
EMI 41 & 42 Text Code
Phrases Requested Charge
----------------------- --------
[*] $ [*]
[*]-[*] $ [*]
[*]-[*] $ [*]
[*]-[*] $ [*]
[*]-[*] $ [*]
[*]-[*] $ [*]
[*]-[*] $ [*]
[*]-[*] $ [*]
[*]-[*] $ [*]
[*]-[*] $ [*]
[*]-[*] $ [*]
[*]-[*] $ [*]
[*]-[*] $ [*]
[*]-[*] $ [*]
[*]-[*] $ [*]
[*]-[*] $ [*]
[*]-[*] $ [*]
[*]-[*] $ [*]
[*]-[*] $ [*]
[*]-[*] $ [*]
[*]-[*] [*]
[*]-[*] [*]
[*]
GTE PROPRIETARY
AE - 9
<PAGE>
Confidential Treatment Requested. The redacted
material has been separately filed with the
Commission.
9.4 When TELCO DEVELOPMENT GROUP wishes to have GTE start immediately on a
project while the final costs and implementation date are being
determined, TELCO DEVELOPMENT GROUP may issue a PON to GTE to
preauthorize a portion of the total cost of the project. The Minimum
amount(s) to be included in TELCO DEVELOPMENT GROUP's request are the
following:
9.4.1 For a new Optional Calling Plan $ [*]
9.4.2 For Revisions to Existing Optional Calling Plan $ [*]
9.4.3 For non-Optional Calling Plan changes $ [*]
Section 10 Minimum Monthly Charge
10.1 Minimum Monthly Charge for Services rendered under this
Agreement per GTE Area $ [*]
Section 11 GTE Telephone Operating Areas
GTE Central Area
Operates in the States of:
Arkansas Iowa Minnesota Missouri
Nebraska New Mexico Oklahoma Texas
GTE North Area
Operates in the States of:
Illinois Indiana Michigan Ohio
Pennsylvania Wisconsin
GTE South Area
Operates in the States of:
Alabama Florida Kentucky North Carolina
South Carolina Virginia
GTE PROPRIETARY
AE - 10
<PAGE>
GTE West Area
Operates in the States of:
California Hawaii Idaho Oregon
Washington
Section 12 Tariff Rates
12.1 Call Recording, Message Processing and Bill Processing and
Collection charges set forth above are interstate rates and in
nontariffed states, intrastate rates. In states where such Services are
tariffed the intrastate rates contained in such tariffs are applicable.
GTE PROPRIETARY
AE - 11
<PAGE>
TELCO DEVELOPMENT GROUP INC.
BILLING AND COLLECTION SERVICES AGREEMENT
INDEX
SERVICE ATTACHMENTS
-------------------
<TABLE>
<CAPTION>
Service
Attachment
Number Title Page(s)
- ------ ----- -------
<C> <S> <C>
2 BillingPlus(SM) Service 1 through 19
5 PrimeTarget(SM) Service 1 through 3
6 Billing Analysis Service 1 through 2
8 Sub CIC Service 1
</TABLE>
<PAGE>
BILLING AND COLLECTION SERVICES AGREEMENT
SERVICE ATTACHMENT 2
BillingPlus(SM) SERVICE
INDEX
<TABLE>
<CAPTION>
Section Title Page
- ---------------------------------------------------------------------
<C> <S> <C>
Section 1 Service Description.............................. 2
Section 2 Charges for Service.............................. 2
Section 3 Service Estimates................................ 2
Section 4 Billing for Services Rendered.................... 3
Section 5 Accounts Receivable Settlement and
Payment Procedures............................... 3
Section 6 True-up Procedures............................... 3
Section 7 End User Payment Procedures...................... 4
Section 8 End User Adjustments............................. 5
Section 9 End User Invoice Formats......................... 6
Section 10 Taxes............................................ 6
Section 11 Taxes - Gross Receipts Taxes..................... 7
Section 12 Tax Audit........................................ 7
Section 13 Taxes - Indemnity and Recourse................... 7
Section 14 Tax Application Procedures....................... 8
Section 15 Transmission..................................... 9
Section 16 Accounting and Management Reports................ 9
</TABLE>
GTE PROPRIETARY
SA2-1
<PAGE>
BILL PROCESSING AND COLLECTION SERVICES AGREEMENT
SERVICE ATTACHMENT 2
BillingPlus(SM) SERVICE
TELCO DEVELOPMENT GROUP agrees to order and GTE agrees to provide
BillingPlus(SM) Service without Inquiry Service and without Message
Investigation ("Services") under the terms and conditions set forth in the
Agreement and within this Service Attachment as follows:
Section 1 Service Description
1.1 BillingPlus(SM) Service is the preparation of bills for TELCO
DEVELOPMENT GROUP message billed service, mailing of the statements
and collection of the payments and deposits. The Service automatically
includes posting of rated calls, the preparation activities for
billing and customer masterfile information.
1.2 BillingPlus(SM) Service is provided on a per message basis ("Message-
Billed"). GTE shall process Calling Plans that require the application
of a discount to aggregate usage as a part of the Message-Billed
billing (e.g. Directory Assistance and Optional Calling Plans),
pursuant to Program Development procedures as set forth in the
Agreement.
1.3 BillingPlus(SM) Service shall be provided in accordance with operating
procedures found in Sections 4 through 16 of this Service Attachment.
To any extent that these Sections may be inconsistent or in conflict
with the Agreement, the Service Attachment shall prevail.
1.4 GTE shall accumulate, guide and post rated messages in preparation for
billing, including the application of appropriate taxes. GTE shall
print and mail end-user bills showing amounts due to TELCO DEVELOPMENT
GROUP from End Users for the services provided by TELCO DEVELOPMENT
GROUP.
1.5 GTE shall receive payments from End Users, provide treatment of their
receivables, provide treatment of their accounts, maintain the
Customer Masterfile and collect deposits as appropriate. GTE shall
collect deposits in accordance legal and regulatory requirements and
with its deposit regulations.
1.6 When necessary, GTE may deny the End User TELCO DEVELOPMENT GROUP's
services and/or GTE local exchange services, in accordance with the
GTE treatment procedures. Whenever GTE local exchange service is
denied to an End User, TELCO DEVELOPMENT GROUP service shall also be
denied to that End User.
1.7 BillingPlus(SM) Service shall only be provided in conjunction with the
purchase of TELCO DEVELOPMENT GROUP receivables. GTE shall not be
responsible for any TELCO DEVELOPMENT GROUP's balance due from End
Users prior to the Commencement Date of this Service Attachment.
1.8 GTE shall purchase TELCO DEVELOPMENT GROUP receivables as set forth in
Section 5.
1.9 BillingPlus(SM) Service does not include the purchase of receivables,
billing or collection for pay per call (900, 976, etc) messages.
Purchase of receivables for pay per call messages are only provided
when TELCO DEVELOPMENT GROUP has purchased PrimeLink(SM) Service as a
part of this Agreement. Any pay per call messages sent to GTE by TELCO
DEVELOPMENT GROUP when TELCO DEVELOPMENT GROUP has not purchased
PrimeLink(SM) will be recoursed to TELCO DEVELOPMENT GROUP.
1.10 TELCO DEVELOPMENT GROUP may order the following complementary services
in addition to BillingPlus(SM) Service: Call Record Provision, Inquiry
Service and Message Investigation Service as described in Sections 17
through 18 of this Service Attachment. Call Recording Service
including Assembly and Editing, Prime Target(SM) Services,
PrimeLink(SM) Service, PrimeBilling(SM) Service, Billing Analysis
Services, Message Processing Service and Sub CIC Billing Service as
described in Service Attachments 1 and 3 through 8 may also be ordered
with BillingPlus(SM) Service.
Section 2 Charges for Services
GTE rates and charges for BillingPlus(SM) Service are in Section 3 of
Attachment E.
Section 3 Service Estimates
TELCO DEVELOPMENT GROUP shall furnish GTE with an estimated number of
messages per year
GTE PROPRIETARY
SA2 - 2
<PAGE>
(message capacity) to be billed by GTE for TELCO DEVELOPMENT GROUP.
Such estimates shall be furnished to GTE within thirty (30) calendar
days of the execution of this Service Attachment and thirty (30)
calendar days prior to the beginning of each subsequent annual period
of the Service Attachment, each such period beginning on the
anniversary of the execution date. TELCO DEVELOPMENT GROUP shall
furnish such estimates to GTE separately identified for message
telephone service (MTS) and bulk-billed (WATS-like) messages.
Section 4 Billing for Services Rendered
4.1 Billing for Services rendered shall be provided as set forth in
Section 10 of the Agreement.
4.2 Late Payment Charge shall be applied as set forth in Section 12 of the
Agreement.
4.3 A Customer Invoice Format sample and explanation is shown in Exhibit
SA2-2.
Section 5 Accounts Receivable Settlement and Payment Procedures
5.1 This section details the procedure for computing the amount of
accounts receivable purchased from TELCO DEVELOPMENT GROUP and the
date payment is to be made by GTE to TELCO DEVELOPMENT GROUP. GTE
agrees to purchase only those accounts receivable of End Users who are
within the operating territories of GTE. Purchase of Accounts
Receivable Reports shall be prepared by state.
5.2 GTE shall purchase accounts receivable from TELCO DEVELOPMENT GROUP on
a monthly basis when the billable messages are received from TELCO
DEVELOPMENT GROUP, processed into GTE's toll billing system and
subsequently billed. The settlement date, i.e., actual cash flow to
TELCO DEVELOPMENT GROUP, shall be in accordance with the "Payment Date
Calculation" Procedure described herein.
5.3 Purchase of Accounts Receivable Report sample and explanation are
shown in Exhibit SA2-lA.
5.3.1 The Purchase of Accounts Receivable Report shall be used to
show the accumulated monthly amount due TELCO DEVELOPMENT GROUP
for purchase of TELCO DEVELOPMENT GROUP's accounts receivable.
A "month" shall be GTE's normal 10-cycle processing period.
(Refer to Exhibit SA2-1A)
5.4 Payment Date Calculation is shown Exhibit SA2-1B with an explanation
of the entries.
5.4.1 Monthly settlement with TELCO DEVELOPMENT GROUP shall be
governed by a calculation that uses julian dates [i.e., actual
day of the year beginning with 1 on January 1, and ending with
365 (or 366) on December 31].
5.5 GTE shall forward the Purchase of Accounts Receivable Report and the
Payment Date Calculation form to TELCO DEVELOPMENT GROUP as specified
by the fifteenth (15) calendar day following the settlement period.
5.6 These procedures provide the process for the purchase of TELCO
DEVELOPMENT GROUP's accounts receivable.
5.6.1 Any payment to TELCO DEVELOPMENT GROUP from GTE shall identify
the accounts receivable statements being paid.
5.6.2 If the payment date for the receivables purchase amount due
TELCO DEVELOPMENT GROUP from GTE causes such payment to be due
on a Saturday, Sunday or Holiday of GTE, payment for the amount
due TELCO DEVELOPMENT GROUP shall be as follows:
a. If such payment date falls on a Sunday or Holiday which
is observed on a Monday, the payment date shall be the
first non-Holiday day following such Sunday or Holiday.
b. If such payment date falls on a Saturday or the Holiday
is observed on Tuesday, Wednesday, Thursday or Friday,
the payment date shall be the last non-Holiday day
preceding such Saturday or Holiday.
5.6.3 Late Payment Charge shall be applied as set forth in Section 12
of the Agreement.
Section 6 True-up Procedures
6.1 Uncollectible (bad debt) is a dollar amount not paid on an end-user
account which has been disconnected.
GTE PROPRIETARY
SA2 - 3
<PAGE>
6.2 The Uncollectible Factor is designed to recover an amount representing
TELCO DEVELOPMENT GROUP's toll that shall be written-off as
uncollectible in GTE's billing system. The factor is applied to the
amount of TELCO DEVELOPMENT GROUP's toll purchased, less adjustments
and unbillables.
6.3 The Uncollectible Factor is applicable only for MTS or MTS-like
services that are included under this Service Attachment.
6.4 TELCO DEVELOPMENT GROUP authorizes GTE to disconnect end user service
for nonpayment in accordance with applicable laws, regulatory orders
and established GTE procedures.
6.5 The initial uncollectible factor shall be mutually agreed upon and
shall be used for the first nine (9) months of the contract period. A
new uncollectible factor shall be computed every six (6) months
thereafter based on actual write-off of TELCO DEVELOPMENT GROUP's
toll. The new estimate for the ensuing six (6) months shall be the
actual uncollectible experience for the preceding six (6) month
period. Any difference between the estimated uncollectible amount and
the actual uncollectible amount for a six (6) month period shall be
settled between the Parties based on the true-up procedures below and
included on Line G of the monthly Purchase of Accounts Receivable
Report (See Exhibit SA2-1A).
6.6 Where uncollectible write-off information is not available, the
uncollectible amount shall be based on a study. GTE shall perform a
study to determine TELCO DEVELOPMENT GROUP's individual state
uncollectible bad debt percentages. This study shall be accomplished
by reviewing at least five percent (5%) of all accounts that were
written off to uncollectible by GTE at the time of the study or by
reviewing 100% of all accounts that were written off by GTE each
month. The factor shall be separated into BillingPlus(SM) Service,
PrimeLink(SM) Service and PrimeBilling(SM) Service, where system
capabilities are present. In areas where these capabilities are not
present, a composite rate shall be developed for all Services until
such capabilities are developed. Documentation of GTE's apportionment
study shall be supplied to TELCO DEVELOPMENT GROUP before the first
semiannual true-up. All invoice records and notes pertaining to this
study should be maintained for the time periods consistent with the
data retention provisions of the Agreement.
6.7 Each six (6) month period, GTE shall accumulate actual amounts written
off, less recoveries and apportion an amount to TELCO DEVELOPMENT
GROUP based upon the study obtained percentage. This amount shall be
TELCO DEVELOPMENT GROUP's uncollectible.
6.8 Where actual uncollectible write-off information is available, this
actual amount shall be TELCO DEVELOPMENT GROUP's uncollectible amount.
Where actual uncollectible write-off information is not available, GTE
shall use its best effort to develop a system that shall provide this
data.
6.9 GTE shall compare the estimated uncollectible amounts with the
uncollectible amounts for the previous six (6) month period. The
difference shall be included on the next monthly Purchase of Accounts
Receivable Statement. Proper documentation of GTE's new factor
calculation and supporting detail for the calculation of TELCO
DEVELOPMENT GROUP's uncollectibles shall be provided to TELCO
DEVELOPMENT GROUP with the Purchase Of Accounts Receivable Statement
that includes the true-up.
Section 7 End User Payment Procedures
7.1 GTE shall use existing treatment, collection and denial procedures to
control and collect appropriate outstanding balances for current or
previously billed charges.
7.2 Total amount due is defined as charges for GTE's local, equipment,
directory and intraLATA services, and all TELCO DEVELOPMENT GROUP
services for which GTE performs BillingPlus(SM) Services.
7.3 The total amount due on the End User's bill shall be the amount used
to determine treatment, collection and denial activities consistent
with applicable regulatory or legal requirements.
7.4 GTE shall provide Payment and Remittance Processing Services to TELCO
DEVELOPMENT GROUP utilizing standard procedures.
7.5 GTE shall apply all cash transactions to a single balance due on an
end-user's account. Consistent with applicable regulatory
requirements, neither TELCO DEVELOPMENT GROUP nor the End User shall
be permitted to designate a specific application for partial payments.
7.6 GTE shall accept TELCO DEVELOPMENT GROUP gift certificates for end-
user payment of the total balance due and shall process these in the
same manner as End User's checks. The gift certificates shall conform
to the American Banking standards. TELCO DEVELOPMENT GROUP shall
submit a void certificate to GTE for review thirty (30) calendar days
in advance of
GTE PROPRIETARY
SA2 - 4
<PAGE>
initiating its use with the public. If for any reason, TELCO
DEVELOPMENT GROUP Gift Certificates are rejected by GTE's financial
institution, including but not limited to a determination that
certificates are fraudulent, TELCO DEVELOPMENT GROUP shall redeem such
gift certificates upon receipt of endorsed certificates from GTE.
Section 8 End User Adjustments
8.1 When TELCO DEVELOPMENT GROUP does not order Inquiry Service from GTE,
GTE shall refer all contacts by TELCO DEVELOPMENT GROUP's End Users,
concerning crediting, adjusting or investigating TELCO DEVELOPMENT
GROUP's charges to TELCO DEVELOPMENT GROUP at the address and
telephone number shown in Attachment D. Message Investigation may be
ordered by TELCO DEVELOPMENT GROUP as described in Section 18 at
rates shown in Section 3 of Attachment E.
8.2 At the request of TELCO DEVELOPMENT GROUP, GTE shall adjust the End
User bill. Requests for such adjustments shall be forwarded to GTE on
an Exchange Carrier Memorandum (EC Memo) or via GTE accepted credit
EMI records. Adjustments for only one account shall be included on
each memo. GTE shall bill and TELCO DEVELOPMENT GROUP shall pay an EC
Memo Charge per EC Memo, unless TELCO DEVELOPMENT GROUP shall have
purchased Inquiry Service from GTE, in which case TELCO DEVELOPMENT
GROUP shall pay the appropriate Inquiry charges.
8.3 Disputed Billed Amounts - Disputed Billed Amounts occur when a dispute
arises between TELCO DEVELOPMENT GROUP and an End User over the
billing for a long distance call or calls on TELCO DEVELOPMENT GROUP's
portion of the end-user bill, and the End User refers the matter to
GTE.
8.4 Dispute Notification and Recourse - When an End User and TELCO
DEVELOPMENT GROUP cannot resolve a dispute and the dispute is referred
to GTE by the End User, GTE shall follow the Dispute Notification and
Recourse procedures set forth below in Paragraph 8.5. The Parties
shall review the effectiveness of this procedures on a regular basis
or as requested by either Party.
8.5 Dispute Notification and Recourse Procedures
8.5.1 When the End User refuses to contact TELCO DEVELOPMENT GROUP,
or is unable to resolve a dispute with TELCO DEVELOPMENT GROUP,
and appeals the matter to GTE, GTE shall review the dispute. If
after such review GTE determines the Disputed Billed Amount
should not be included in the GTE bill, GTE shall recourse the
charge to TELCO DEVELOPMENT GROUP via an EC Memorandum (initial
Recourse Memorandum or "IRM"). The IRM shall include the date,
end-user name, address, billing telephone number and Disputed
Billed Amount with appropriate detail. GTE shall charge TELCO
DEVELOPMENT GROUP the EC Memorandum charge for each IRM issued.
The IRM shall be sent via US Mail or facsimile to TELCO
DEVELOPMENT GROUP by GTE no later than the end of the next
business day following the end-user contact.
8.5.2 TELCO DEVELOPMENT GROUP shall respond to the IRM within fifteen
(15) calendar days. When TELCO DEVELOPMENT GROUP notifies GTE
that the adjustment has been approved, the IRM shall be
completed and the matter shall be considered closed. If
TELCO DEVELOPMENT GROUP sustains the Disputed Billed Amount,
and the End User agrees, the IRM shall be withdrawn and the
matter considered closed. When TELCO DEVELOPMENT GROUP sustains
the Disputed Billed Amount, and the End User appeals the matter
to GTE for further consideration, GTE shall proceed with a
final recourse EC Memorandum (Final Recourse Memorandum or
"FRM"). GTE may also proceed with final recourse if TELCO
DEVELOPMENT GROUP does not respond to the IRM within twenty
(20) calendar days. TELCO DEVELOPMENT GROUP may request up to
thirty (30) additional calendar days to complete its
investigation. Such requests shall be made within the initial
fifteen (15) calendar days after TELCO DEVELOPMENT GROUP has
received the IRM.
8.5.3 When GTE proceeds with final recourse, it shall prepare and
send an FRM to TELCO DEVELOPMENT GROUP via facsimile or US
Mail. The FRM shall include the same information as the IRM,
and in addition, the IRM Number and the appropriate detail.
8.5.4 GTE shall adjust the Disputed Billed Amount off the end-user's
bill. GTE shall notify the End User of the adjustment. At the
same time GTE shall
GTE PROPRIETARY
SA2 - 5
<PAGE>
also notify the End User that TELCO DEVELOPMENT GROUP may pursue
collection of the Disputed Billed Amount. Such notification shall
be verbal if the Disputed Billed Amount is fifty dollars ($50.00)
or less, and shall be in writing when the Disputed Billed Amount
is more than fifty dollars ($50.00).
8.5.5 TELCO DEVELOPMENT GROUP reserves the right to pursue, independent
of this Agreement, collection and treatment of the Disputed
Billed Amount with the End User.
8.5.6 GTE may provide Expanded Message Interface (EMI 45) post billing
adjustment records to TELCO DEVELOPMENT GROUP at TELCO
DEVELOPMENT GROUP's option. EMI 45-01-01 is for message detail,
and EMI 45-50-01 is for summary transactions.
8.5.7 Processing of EMI 41 and 42 Records which are in Standard
Bellcore format may be requested through the PON process. The
records must be transmitted to GTE via NDM, tape, or cartridge
through a local splitter or the Central Splitter process. TELCO
DEVELOPMENT GROUP can select the codes to be included from the
miscellaneous text codes listed in Exhibit SA2-4. The PON must
include any additional phrases or text codes that TELCO
DEVELOPMENT GROUP requests. GTE reserves the right to reject
phrases or text codes that do not conform to GTE requirements.
The EMI 41 and 42 Records will not be identified on the Purchase
of Accounts Receivable Statement (PARS).
Section 9 End User Invoice Formats
9.1 GTE shall bill toll messages placed by TELCO DEVELOPMENT GROUP End Users
and forwarded to GTE for BillingPlus(SM) activities.
9.2 TELCO DEVELOPMENT GROUP toll message data and charges shall appear in
standard detail format, and shall be printed on GTE's bill stock.
9.3 TELCO DEVELOPMENT GROUP's charges shall be included in the total amount
due from the End User on the summary page.
9.4 GTE shall bill TELCO DEVELOPMENT GROUP toll calls to End Users in
accordance with GTE's normal billing schedule.
9.5 GTE shall retain billed toll message data for the period of time
consistent with applicable regulatory or legal requirements. See Section
15 of the Agreement for the retention time periods. Upon request and
mutual agreement, GTE shall retain billed toll message data longer than
the applicable regulatory or legal requirements.
Section 10 Taxes
10.1 All taxes including but not limited to state, local, federal, gross
receipt, sales, use, excise or other taxes and tax like charges imposed
on or with respect to TELCO DEVELOPMENT GROUP's services including TELCO
DEVELOPMENT GROUP computed tax surcharges are collectively referred to
as "Tax" or "Taxes".
10.2 GTE shall charge the applicable Taxes to the End Users on TELCO
DEVELOPMENT GROUP's behalf for appropriate Services. GTE shall compute
and charge the TELCO DEVELOPMENT GROUP tax surcharges as instructed by
TELCO DEVELOPMENT GROUP within thirty (30) calendar days of written
request pursuant to Section 34 of the Agreement. TELCO DEVELOPMENT GROUP
shall not change the Tax Surcharge rate more than once per any thirty
(30) calendar day period for each taxing jurisdiction. Details such as,
but not limited to, tax data, reporting requirements, GTE responsibility
or any exceptions to these tax guidelines are outlined in the Operating
Procedures. GTE shall not remit Taxes to TELCO DEVELOPMENT GROUP when it
is not able to do so as a result of legal restrictions or system
incompatibility.
10.3 GTE shall use the Tax information in GTE's possession for the Tax status
of End Users where GTE performs Tax calculations.
10.4 GTE shall maintain such Tax exempt information in a reasonably accurate
and complete manner. The process of sharing Tax exemption documentation
shall be addressed in Section 14.
10.5 GTE shall not be entitled to retain or receive from TELCO DEVELOPMENT
GROUP any statutory fee or share of Taxes to which the person collecting
such Taxes is entitled under applicable law.
10.6 TELCO DEVELOPMENT GROUP shall provide GTE with the appropriate Tax rates
and Tax applications. In addition, TELCO DEVELOPMENT GROUP shall provide
GTE, on a going forward basis, written authorization for newly enacted
Taxes, new applications for existing Taxes and tariffed gross receipts
surcharge rates. Semiannually TELCO DEVELOPMENT GROUP shall
GTE PROPRIETARY
SA2 - 6
<PAGE>
provide GTE an updated list of applicable Tax rates, applications and
Tax surcharges.
10.7 TELCO DEVELOPMENT GROUP shall advise GTE in writing of tax procedures
with respect to application, billing, recording and collection of Taxes
on new Services, including any changes in the law affecting Taxes on
such Services.
Section 11 Taxes - Gross Receipts Taxes
As a billing agent, GTE is billing TELCO DEVELOPMENT GROUP's revenues
for a specific fee. GTE shall not report these billings as its own
receipts for gross receipts Tax purposes or any other Tax purpose,
unless otherwise required by law.
Section 12 Tax Audit
GTE shall notify TELCO DEVELOPMENT GROUP of audits when in the course of
the audit, an auditor's inquiries may lead to a proposed assessment of
additional taxes, penalties or interest due on taxes.
Section 13 Taxes - Indemnity and Recourse
13.1 TELCO DEVELOPMENT GROUP agrees to pay and hold GTE harmless from any
liability or loss resulting from any Tax, penalty, interest, addition to
Tax, tax surcharge, or other charge payable by GTE as a result of:
A. The delay or failure of TELCO DEVELOPMENT GROUP to pay any Tax or
file any return or other information as required by law or this
Agreement, unless GTE fails to comply with Section 10 of this
Service Attachment;
B. GTE complying with any determination or direction by or advice of
TELCO DEVELOPMENT GROUP or correctly using information provided
by TELCO DEVELOPMENT GROUP in performing any Tax-related service;
or
C. GTE acting or failing to take any action with respect to any Tax
which is the subject of the Agreement, unless such action or
inaction constitute willful misconduct or gross negligence, in
the absence of such direction by TELCO DEVELOPMENT GROUP in this
Agreement or otherwise.
D. Any audit or investigation by any governmental unit or agency
with respect to said Taxes on TELCO DEVELOPMENT GROUP Services
for which TELCO DEVELOPMENT GROUP is responsible under this
Agreement.
The indemnity payable shall be payable in all events and without regard
to any determination that GTE is the Party obligated to collect and
remit such Taxes or file the Tax returns. The indemnity provided in this
subsection shall be the sole indemnification provided by TELCO
DEVELOPMENT GROUP to GTE with respect to the Tax matters covered in this
subsection; the indemnification provisions in Section 20 of the
Agreement shall not apply to the Tax matters covered in this subsection.
Notwithstanding the above, such indemnity is conditioned upon GTE
providing TELCO DEVELOPMENT GROUP timely notification of any proposed
assessment of any additional Taxes, penalty, or interest due by GTE to
enable TELCO DEVELOPMENT GROUP the opportunity to seek administrative
relief, a ruling, judicial review (original or appellate) or other
appropriate review as to the applicability of any such Taxes prior to
any assessment of additional Taxes.
13.2 If TELCO DEVELOPMENT GROUP disagrees that any Taxes are payable by GTE,
disagrees with an assessment of any additional Taxes, penalty, addition
to Tax, tax surcharge, interest or other charges due by GTE as a result
of GTE's performance of any obligation under this Agreement, or
disagrees with a determination that an additional charge is applicable
to GTE's billing to TELCO DEVELOPMENT GROUP for Services under this
Agreement, TELCO DEVELOPMENT GROUP shall, at its option and expense
(including, if required by law, payment of any such assessment prior to
final resolution of the issue) have the right to seek administrative
relief, a ruling or judicial review (original and appellate) as to the
applicability of any tax and to protest the same and direct any legal
challenge, but shall be liable for any taxes or additional charge,
penalty, tax surcharge, and interest ultimately determined to be due.
When requested by TELCO DEVELOPMENT GROUP, GTE shall provide cooperation
and support, at TELCO DEVELOPMENT GROUP's expense, but shall not become
a Party unless legally required.
13.3 GTE agrees to pay and hold TELCO DEVELOPMENT GROUP harmless from any
liability or loss resulting from Tax, penalties, interest, additions to
Tax, tax surcharges or other charges or payable expenses incurred by
TELCO DEVELOPMENT GROUP as a result of the willful misconduct or gross
negligence of GTE to provide
GTE PROPRIETARY
SA2 - 7
<PAGE>
TELCO DEVELOPMENT GROUP, pursuant to Section 10, accurate and complete
information, including accurate calculations and billing appropriate
taxes with which to file its Tax returns and remit payment.
13.4 TELCO DEVELOPMENT GROUP shall provide pursuant to Program Development
procedures in Section 34 of the Agreement, thirty (30) calendar days
prior written notice to GTE of any Tax billing changes. GTE shall make a
reasonable effort to implement such changes in accordance with the
Agreement and notice. Changes requiring billing system modifications
shall be paid for by TELCO DEVELOPMENT GROUP as set forth in Section 34.
13.5 Should any Federal, State or local jurisdiction determine that sales,
use or other taxes (including interest, penalties and tax surcharges)
are due by GTE to the taxing authority as a result of GTE's performance
of any obligation under this Agreement that have not been paid by TELCO
DEVELOPMENT GROUP, GTE shall so advise TELCO DEVELOPMENT GROUP. TELCO
DEVELOPMENT GROUP shall be liable for any such tax, interest, penalty
and tax surcharge, but retains the right to protest the assessment. If
TELCO DEVELOPMENT GROUP disagrees with any assessment of taxes due by
GTE or disagrees with an assessment of any additional tax, penalty, tax
surcharge and interest due by GTE as a result of GTE's performance of
any obligation under this Agreement, TELCO DEVELOPMENT GROUP shall, at
its option and expense (including payment of any such assessment prior
to final resolution of the issue), have the right to seek a ruling as to
the applicability of any such tax or to protest any assessment and
participate in any legal challenge to such assessment, but shall be
liable for any tax, penalty, tax surcharge and interest ultimately
determined to be due. GTE shall, when requested by TELCO DEVELOPMENT
GROUP and at TELCO DEVELOPMENT GROUP's expense, cooperate or participate
with TELCO DEVELOPMENT GROUP in any such proceeding, protest or legal
challenge. Provided, however, GTE may in its sole discretion decline to
participate if such participation would be without merit or may result
in contempt proceedings against GTE.
Section 14 Tax Application Procedures
14.1 Unless otherwise required by law or stated in Section 10.5, and as soon
as practicable after the execution date hereof, TELCO DEVELOPMENT GROUP
shall file all returns for taxes imposed on or with respect to TELCO
DEVELOPMENT GROUP's services and pay or remit all such taxes, and other
items including any applicable interest or penalties. GTE shall furnish
to TELCO DEVELOPMENT GROUP, on a timely basis, all information in GTE's
possession reasonably necessary for TELCO DEVELOPMENT GROUP to file its
tax returns.
14.2 Billing of Taxes on Behalf of TELCO DEVELOPMENT GROUP:
14.2.1 GTE shall calculate the amount of taxes to be billed to End
Users for TELCO DEVELOPMENT GR0UP's telecommunications services.
GTE shall remit payment to TELC0 DEVELOPMENT GROUP for the
collected taxes as part of the monthly purchase of receivables
payment (refer to Purchase of Accounts Receivable Report - Line
C, Exhibit SA2-1A).
14.2.2 GTE's contact representatives shall accept and resolve End User
tax inquiries in accordance with service procedures when TELCO
DEVELOPMENT GROUP has purchased Inquiry Service.
14.2.3 GTE's representatives shall maintain the tax exempt status on
End User accounts and shall maintain such exemptions in a
reasonably accurate and complete manner, including the
maintenance of exemption certificates.
14.2.4 GTE's representatives shall calculate and apply the appropriate
taxes on rebills, however, if the adjustments are mechanical,
the taxes will be generated by the system.
14.3 TELCO DEVELOPMENT GROUP shall provide GTE details, including the tax
exempt status of services and End Users, as to taxes to be calculated,
billed and collected in connection with TELCO DEVELOPMENT GROUP's
services.
14.4 TELCO DEVELOPMENT GROUP shall provide timely written notice to GTE of
any tax billing changes, and GTE shall make a reasonable effort to
implement such changes in accordance with the Agreement. Prior to the
changes being introduced, GTE and TELCO DEVELOPMENT GROUP shall mutually
agree to a period of time (which shall vary depending on the nature and
complexity of the tax change) in which GTE shall implement the changes
requested by TELCO DEVELOPMENT GROUP. Changes in tax rates requiring
billing system modifications shall be made in accordance with TELCO
DEVELOPMENT GROUP desires via the Program Development as set forth in
Section 34 of the Agreement.
GTE PROPRIETARY
SA2 - 8
<PAGE>
14.5 GTE shall provide tax reports to TELCO DEVELOPMENT GROUP in support of
the taxes billed TELCO DEVELOPMENT GROUP's End Users in order that TELCO
DEVELOPMENT GROUP may file its tax returns. These tax reports are
identified in Section 16 of this Service Attachment. The reports shall
be enclosed with the monthly Purchase of Accounts Receivables Report
sent to TELCO DEVELOPMENT GROUP where not limited by system processes.
(Refer to Exhibit SA2-1A of the Agreement and the forms defined in
Section 16 of this Service Attachment).
Section 15 Transmission
15.1 TELCO DEVELOPMENT GROUP shall transmit rated messages to GTE via a
transmission medium (e.g., direct via the Network Data Mover or other
similar system agreed to by the Parties, or to GTE via magnetic tape
either cartridge or reel). The messages shall be presented to GTE in GTE
standard format.
15.2 Upon receipt of TELCO DEVELOPMENT GROUP toll message detail, GTE shall
ensure that the proper tape or transmission has been received using the
control number procedures that have been developed between GTE and TELCO
DEVELOPMENT GROUP. Amounts that are received direct from TELCO
DEVELOPMENT GROUP shall be verified to ensure that the total reported by
TELCO DEVELOPMENT GROUP is the total received and entered into GTE's
system. Differences shall be reconciled between GTE and TELCO
DEVELOPMENT GROUP based on a mutually agreeable procedure.
15.3 Amounts that are received via the transmission medium shall be
identified by TELCO DEVELOPMENT GROUP and entered into GTE's toll
system. Control of TELCO DEVELOPMENT GROUP's data shall begin upon
receipt.
15.4 When the amount is verified by GTE (direct), or identified by TELCO
DEVELOPMENT GROUP, and entered into GTE's toll system, that amount shall
be considered TELCO DEVELOPMENT GROUP "Message Revenue" and entered on
the Purchase of Accounts Receivables Report, (Exhibit SA2-1A).
15.5 When TELCO DEVELOPMENT GROUP chooses magnetic tape, any magnetic tape
received from TELCO DEVELOPMENT GROUP which is determined to be
unreadable, or containing data which cannot be processed by GTE's
billing systems, or otherwise damaged, shall be returned to TELCO
DEVELOPMENT GROUP. GTE shall not be held liable for magnetic tapes
received in this condition.
15.6 If TELCO DEVELOPMENT GROUP message detail is determined to be lost,
damaged or destroyed as a result of GTE's tape processing, GTE shall use
the procedure set forth in Exhibit SA2-lA to determine the volume of
messages determined to be lost, damaged or destroyed.
15.7 The age of toll to be billed by GTE shall be consistent with legal and
regulatory requirements and with local GTE procedures.
15.8 The Call Record Provision rate element is charged for all data
transmissions. The Call Record Provision rate element is found in
Section 3.1 of Attachment E.
Section 16 Accounting and Management Reports
GTE shall provide the following accounting/management reports:
-Casual User File Receipt Report OCSO1011
-Casual User File Receipt Wrap Report OCS02011
-Monthly CRB tax reports:
Federal Tax Report 357 RIB
State Tax 1 Report 357 RHZ
State Tax 2 Report 357 RIC
Local Tax 1 Report 357 RIA
Local Tax 2 Report 357 RID
Local Tax 3 Report 357 RIE
-Monthly CBSS tax reports:
Federal Tax Report CBS01811
State Tax 1 Report CBS01814
State Tax 2 Report CBS01815
Local Tax 1 Report CBS01818
Local Tax 2 Report CBS01819
Local Tax 3 Report CBS01820
Surcharge Report CBS01824
GTE PROPRIETARY
SA2 - 9
<PAGE>
Service Attachment 2
Exhibit SA2 1A
Page 1 of 3
S A M P L E
GTE OTHER CARRIER SETTLEMENTS SYSTEM
PURCHASE OF ACCOUNTS RECEIVABLE REPORT
REPORT #: XXXXXXXX PAGE:
RUN DATE: XX/XX/XX OCS/MOD 1-013-OCSS
RUN TIME: XX:XX:XX
GTE TELEPHONE OPERATIONS DIRECT INQUIRIES TO:
P. 0. BOX_______ CUSTOMER ACCOUNTING
Telephone number:
Town, State, Zip Code Settlement Period:
Preparation Date:
State Code: Prepared by:
Type of Account: Purchase of accounts receivable - BillingPlus(SM) Service
Carrier:
P.O. Box XXXXX
City, State, Zip Code
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONFIRMED MESSAGES CONFIRMED REVENUE
<S> <C> <C> <C>
A TOTAL MESSAGES AND REVENUE 999,999,999,999 $999,999,999.99
B REBILLS $999,999,999.99
C TAXES - GTE CALCULATED
FEDERAL $999,999,999.99
STATE $999,999,999.99
LOCAL $999,999,999.99
SURCHARGE $999,999,999.99
---------------
TOTAL GTE CALCULATED TAXES $999,999,999.99
D UNBILLABLES $999,999,999.99
E ADJUSTMENTS - GTE $999,999,999.99
FEDERAL TAXES $999,999,999.99
STATE TAXES $999,999,999.99
LOCAL TAXES $999,999,999.99
SURCHARGE TAXES $999,999,999.99
---------------
TOTAL GTE ADJUSTMENTS $999,999,999.99
F TOTAL ACCOUNTS RECEIVABLE $999,999,999.99
G UNCOLLECTIBLE FACTOR (XX.XX% $999,999,999.99
H UNCOLLECTIBLE TRUE-UP
BASE TRUE-UP AMOUNT $999,999,999.99
FEDERAL $999,999,999.99
STATE $999,999,999.99
LOCAL $999,999,999.99
SURCHARGE $999,999,999.99
TOTAL TRUE-UP AMOUNT $999,999,999.99
UNCOLLECTIBLE ESTIMATE $999,999,999.99
UNCOLLECTIBLE TRUE-UP AMOUNT $999,999,999.99
I LATE PAYMENT CHARGES $999,999,999.99
J AMOUNT DUE $999,999,999.99
</TABLE>
GTE PROPRIETARY
SA2 - 10
<PAGE>
Service Attachment 2
Exhibit SA2-lA
Page 2 of 3
EXPLANATION OF
PURCHASE OF ACCOUNTS RECEIVABLE REPORT
Line A: Accumulate the total amount purchased from TELCO DEVELOPMENT
GROUP. The "purchased amount" represents the accepted amounts
received direct from TELCO DEVELOPMENT GROUP and the amounts
processed into GTE's toll system from TELCO DEVELOPMENT GROUP's
transmissions.
(a) If GTE loses or damages a data transmission or tape that contains
TELCO DEVELOPMENT GROUP's BillingPlus/sm/ messages, GTE shall
request backup data from TELCO DEVELOPMENT GROUP. If the data
cannot be recovered, and the actual amount is not available, an
estimated amount must be included on Line A as due TELCO
DEVELOPMENT GROUP and "purchased" by GTE. GTE shall estimate the
messages and associated revenues based upon previously known
values using a method which is agreed to by the Parties.
(b) Total Message Revenue equals the total gross toll purchased from
TELCO DEVELOPMENT GROUP for the applicable month (i.e., 10
billing cycles).
Line B: Any adjustment that is rebilled either to another End User, or
back to the same End User, must be added to the purchase of
accounts computation as message revenue if it had previously been
deducted as an adjustment.
Line C: Taxes for TELCO DEVELOPMENT GROUP's services shall be computed by
GTE and billed to TELCO DEVELOPMENT GROUP's End User. Applicable
federal, state and local taxes and/or surcharges shall be
computed on TELCO DEVELOPMENT GROUP's services when subject to
the tax as long as the End User is not exempt from the tax. TELCO
DEVELOPMENT GROUP's taxes shall be separated by GTE and forwarded
to TELCO DEVELOPMENT GROUP, where not prohibited by system
processes. TELCO DEVELOPMENT GROUP shall prepare its own tax
returns and pay the tax due to the taxing authority.
Line D: Unbillables represent amounts that cannot be billed to End Users.
GTE may encounter problems with toll as received, which must be
returned to TELCO DEVELOPMENT GROUP for correction. If the
unbillable is caused by an error on the part of GTE, GTE shall
not recourse to TELCO DEVELOPMENT GROUP.
Line E: When it is necessary to adjust any TELCO DEVELOPMENT GROUP toll
amount on the End User's bill, total adjusted amounts for the
month, along with the applicable taxes shall appear in Line E as
an adjustment to the purchased receivables.
(a) Adjustments generally are reported by the Operations Department
based on End User Contact; however, GTE shall also accept
adjustments from TELCO DEVELOPMENT GROUP which are to be included
on an End User's next bill.
GTE PROPRIETARY
SA2 - 11
<PAGE>
Service Attachment 2
Exhibit SA2-lA
Page 3 of 3
(b) Total adjustments include message amount and tax amount(s)
whether debit or credit, and should be included when
adjusted on the End User's bill. Also, details of the
adjustment(s) should be available for audit by TELCO
DEVELOPMENT GROUP.
Line F: Total amount of End User receivables. This represents Line A
+ B + C - (D + E) F.
Line G: This amount represents an estimate of uncollectible amounts
as defined in Section 7 of this Service Attachment. The
uncollectible factor is multiplied by the total accounts
receivable to compute the estimated uncollectible amount
deducted from the purchased receivables.
Line H: Include on this line the amount due TELCO DEVELOPMENT GROUP,
or the amount due GTE, based on the six (6) month true-up of
uncollectibles detailed in Section 6. The base true-up
amount is the realized uncollectible amount for the true-up
period. The federal, state, local and surcharge taxes are
associated with the base true-up amounts. The total true-up
is the addition of the uncollectible and tax true-ups. The
uncollectible estimate is deducted from the purchase of
accounts receivables during the true-up period. The
uncollectible true-up amount is the difference between the
total and estimated uncollectible amounts.
Line 1: Late payment charge due TELCO DEVELOPMENT GROUP. If GTE is
late in payment of purchase of receivables GTE shall pay an
amount equal to the late payment charge as shown in Section
1 2 of the Agreement.
Line J: The monthly amount due to TELCO DEVELOPMENT GROUP,
representing receivables purchased, shall be paid on the
date indicated by the "Payment Date Calculation"
procedure described below.
GTE PROPRIETARY
SA2-12
<PAGE>
Service Attachment 2
Exhibit SA2-lB
Page 1 of 2
S A M P L E
REPORT #: OCS05001 GTE OTHER CARRIER SETTLEMENT SYSTEM PAGE: 1
RUN DATE: 90/09/19 BillingPlus/SM/ BILLING DCS/MOD#:1-013-OCS
SETTLEMENT PAYMENT DATE CALCULATION
RUN TIME: 16:34:59
20CS05001003333ID 900919
DOMINIC SAGAR'S TELEPHONE CO. DIRECT INQUIRIES TO: DOMINIC
THE FIRST ADDRESS LINE TITLE : HARD WORKER
THE SECOND ADDRESS LINE TELEPHONE NUMBER: (123) 456-7890
THIS CITY, THAT STATE
SETTLEMENT PERIOD: 90/07
STATE CODE: ID PREPARATION DATE : 90/09/19
PREPARED BY : A ROBOT
CALCULATED PAYMENT DATE :90/08/22
ADJUSTED PAYMENT DATE :90/08/22
PAYMENT WILL BE MADE TO CARRIER 00333 ON THE ABOVE DATE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(A) (B) (C) (D) (E) (F) (G) (H) (I) (J)
TAPE RECEIVED FIRST (B-C) REVENUE [(D)-(E)] (F)/(E) AVERAGE AVERAGE PAYMENT
NO. DATEIN DAYS TO DAYS TO DATE
COL. B BILL DATE CUST.PAYM'T
(C+G+H+I)
1 1990 182 1990 182 0 100.00 0.00
2 1990 183 1990 182 1 100.00 100.10
3 1990 184 1990 182 2 100.10 200.20
20 1990 207 1990 182 25 999,999,999.99 24,399,999,999.75
21 1990 208 1990 182 26 999,999,999.99 25.999,999,999.74
22 1990 209 1990 182 27 999,999,999.99 26,999,999,999.73
---- --------- ------------
1990 182 10,000,001,102.00 225,000,009,421.15 22 015 015 1990 234
====================================================================
</TABLE>
.......... END OF REPORT ..........
.......... END OF REPORT ..........
GTE PROPRIETARY
SA2 - 13
<PAGE>
Service Attachment 2
Exhibit SA2-1B
Page 2 of 2
EXPLANATION OF
PAYMENT DATE CALCULATION
"Transmissions/Date Received" refers to the individual transmissions received
from TELCO DEVELOPMENT GROUP. The numbers merely refer to the number of times
toll is processed from TELCO DEVELOPMENT GROUP each cycle/month beginning with
one (1) for the first receipt each month. The date processed represents the
julian date TELCO DEVELOPMENT GROUP toll was received into GTE's toll system.
Such processing date shall not be more than one (1) business day after the date
of receipt. Receipt of transmissions must correspond to the number of entries
in Line A of the monthly Purchase of Accounts Receivable Report (Exhibit
SA2-l A).
Col A) Input the number of the transmission, tapes or cartridges received.
Col B) Input the julian date the transmission and the associated messages
were processed by GTE.
Col C) Enter the earliest date transmissions and their associated messages
were processed for the settlement period (earliest date in Column B).
Col D) Column B less Column C reflects the day the specific tape was
received in relation to the day the first tape/transmission of the
settlement period was received.
Col E) The revenue amount of the messages received on each transmission.
These amounts must agree with Line A (Total Messages and Receivables)
on the Purchase of Accounts Receivable Report.
Col F) Column D times Column E, weights the revenue amount and the time of
the month that each tape/transmission was received.
Col G) The total of Column F divided by the total of Column E which provides
the estimated days settlement period for which GTE received the
transmission of messages.
Col H) This is the average number of days it takes to bill all toll on a
transmission. A normal monthly average shall be fifteen (15)
calendar days; however, if GTE can justify another "average days"
and TELCO DEVELOPMENT GROUP agrees, the revised average shall be
used.
Col I) This is the average length of time it takes End Users to pay their
telephone bill. GTE shall perform studies to determine this average.
This study may be updated by GTE and verified by TELCO DEVELOPMENT
GROUP and any change to the "average days to customer payment" shall
be implemented.
Col J) The total of Columns C, G, H and I. This is the calculated payment
date.
Col K) Calendar date payment will be made by GTE to TELCO DEVELOPMENT GROUP.
GTE PROPRIETARY
SA2 - 14
<PAGE>
Service Attachment 2
Exhibit SA2-2
Page 1 of 2
SAMPLE
ANCILLARY BILL
GTE Telephone Operations Billing Inquiries:
Address Contact Person's Title:
City, State, Zip Code Telephone Number:
State Code; (1) Billing Account Number:
Type of Account: (2) Invoice Number:
Ancillary (3) Billing Period:
Services (4) Bill Month:
Preparation Date:
Prepared By:
CUSTOMER NAME
Customer Address
City, State Zip Code
<TABLE>
<CAPTION>
INTRASTATE INTERSTAT TOTAL
Unit Rate Dollars Unit Rate Dollars
<S> <C> <C> <C> <C> <C> <C> <C>
Previous Bill (5) XX.XX XX.XX XX.XX
Payments Applied XX.XX XX.XX XX.XX
Adjustments Applied (see attached XX.XX XX.XX XX.XX
. . .
--- -- --- -- --- --
Balance after Payments and Adjustments XX.XX XX.XX XX.XX
Ancillary Charges (6)
Bill Processing and Collection Service XX XX.XX XX.XX XX XX.XX XX.XX
1 - 1O calls XX XX.XX XX.XX XX XX.XX XX.XX
1 1 - 100 Calls XX XX.XX XX.XX XX XX.XX XX.XX
101 - 600 Calls XX XX.XX XX.XX XX XX.XX XX.XX
Over 600 Calls XX XX.XX XX.XX XX XX.XX
WATS/800 Calls XX XX.XX XX.XX XX XX.XX XX.XX
Call Recording Service XX XX.XX XX.XX XX XX.XX XX.XX
Call Assembly & Edit XX XX.XX XX.XX XX XX.XX XX.XX
Call Record Provision XX XX.XX XX.XX XX XX.XX XX.XX
Magnetic Tape XX XX.XX XX.XX XX XX.XX XX.XX
Direct Interface XX XX.XX XX.XX XX XX.XX XX.XX
Total Current Charges XX.XX XX.XX
Applicable Taxes and/or Surcharges XX.XX XX.XX
Late Payment Charges XX.XX XX.XX
TOTAL AMOUNT OUTSTANDING (7) XX.XX XX.XX XX.XX
TOTAL CURRENT AMOUNT DUE BY: YY/MM/DD (8)
</TABLE>
GTE PROPRIETARY
SA2 - 15
<PAGE>
Service Attachment 2
Exhibit SA2-2
Page 2 of 2
NOTES ON THE ANCILLARY BILL FORMAT
(1) This is a Billing Account Number by state by company. The format is
3-3-4-3 (1 3 charactersalphanumeric) and once established does not change.
It provides a descriptive and unique number for each company and quick
reference number for TELCO DEVELOPMENT GROUP and GTE. For consistency the
following scheme will be used for the 3-3-4-3 format:
GTE-ICC-XXXX-ANC
In the field marked by X's, the following will be inserted to provide a
unique identifier for each state.
<TABLE>
<S> <C> <C> <C>
1101 California 1505 South Carolina
1201 Florida 1507 Virginia
1301 Iowa 1601 Arkansas
1302 Minnesota 1602 New Mexico
1303 Missouri 1603 Oklahoma
1304 Nebraska 1604 Texas
1401 California 1701 Hawaii
1402 Idaho 1801 Illinois
1403 Oregon 1802 Indiana
1404 Montana 1803 Michigan
1405 Washington 1804 Ohio
1501 Alabama 1805 Pennsylvania
1503 Kentucky 1806 Wisconsin
1504 North Carolina
</TABLE>
(2) No more than 14 characters; current format as determined by GTE
(3) Frequency of billing will be monthly or upon such other schedule as is
mutually agreed upon between GTE and TELCO DEVELOPMENT GROUP.
(4) A separate column will be shown for Interstate and Intrastate. This is
combined here for consistency in printing, i.e., 72 columns wide.
(5) This total includes all outstanding amounts due from TELCO DEVELOPMENT
GROUP.
(6) Rate elements to be included on the ancillary bill only as applicable for
TELCO DEVELOPMENT GROUP.
(7) The payment date is determined by adding thirty (30) days to the
preparation date. Invoice is to be received by TELCO DEVELOPMENT GROUP no
later than twenty-four (24) days prior to the payment date. This includes
the total amount for current month's billing.
(8) Total of all outstanding amounts due GTE.
GTE PROPRIETARY
SA2 - 16
<PAGE>
Service Attachment 2
Exhibit SA2-3
Page 1 of 1
S A M P L E
DETAIL OF ADJUSTMENTS
GTE Billing Inquiries: Name
P.O. Box XXX Contact Person's Title
City, State, Zip Code Telephone Number
(1) Billing Account Number: XXX-XXX-XXXX-XXX
State Code: XXXX (2) Invoice Number: IXCYR-MM-DD-AN
Type of Account: (3) Billing Period: YY-MM-DD thru YY-MM-DD
Adjustments Bill Month: YY-MM
Preparation Date: YY-MM-DD
Prepared By: Customer Accounting
CUSTOMER NAME
ADDRESS
DETAIL OF ADJUSTMENTS
<TABLE>
<CAPTION>
Description (ordered by month) Intrastate Interstate
- ----------- ---------- ----------
<S> <C> <C>
The description should include all relevant
information pertaining to the adjustment, such as
1 .The category of the adjustment
2. A description of the adjustment
3. The period to which it pertains
4. Any rates or units involved
5. Interstate/Intrastate categorization
6. Original Invoice Number(s) from/to which
adjustment is being made.
. .
--------- -- --------- --
TOTAL ADJUSTMENTS PAYABLE (RECEIVABLE) XXX,XXX.XX XXX,XXX.XX
---------- ----------
</TABLE>
Notes: (1), (2) and (3) These notes are the same as the same numbers for the
Ancillary Invoice notes. The Billing Account number and the Invoice
Number should be the same as the Ancillary Billing Account number and
Invoice number on the Ancillary Bill.
GTE PROPRIETARY
SA2 - 17
<PAGE>
Service Attachment 2
Exhibit SA2-4
Page 1 of 2
GENERALLY ACCEPTABLE EMI 41 AND 42 TEXT CODES
<TABLE>
<CAPTION>
PHRASE CODE
------ ----
<S> <C>
Billing Adjustment 00111
Long Distance Service Adjustment 00112
Telegram(s) 00113
Call(s) Rebilled 00114
Timing Adjustment 00115
Denied Knowledge of Call(s) 00116
Interrupt Charge Adjustment 00117
Busy Verification Adjustment 00118
Check Returned By Bank 00119
Interruption of Service Credit 00120
Commission Adjustment 00121
Usage/Service Adjustment 00122
Billing Correction 00123
Call Trace Charge 00124
Optional Calling Plan Adjustment 00125
Service Guarantee Adjustment 00126
Non-Recurring Charge Adjustment 00127
Local Service Billing Adjustment 00128
Refund 00129
Payment Adjustment 00130
Balance Transferred 00131
Deposit Refund Adjustment 00132
Federal Tax Adjustment 00133
911 State Tax Adjustment 00134
County Tax Adjustment 00135
Tax Adjustment 00136
State Sales Tax Adjustment 00137
City Tax Adjustment 00138
Surcharge Billing Adjustment 00139
Re-Connection Charge Adjustment 00140
Directory Assistance Adjustment 00141
Service Visit 00142
Monthly Service Billing Adjustment 00143
Special Service Adjustment 00144
Late Payment Charge Adjustment 00145
Deregulated Activity Adjustment 00146
WATS Adjustment 00147
Returned Check Charge 00148
Payment Adjustment 00149
Advanced Payment Adjustment 00150
Rating of Call Adjustment 00151
Timing Adjustment 00152
</TABLE>
GTE PROPRIETARY
SA2-18
<PAGE>
Service Attachment 2
Exhibit SA2-4
Page 2 of 2
GENERALLY ACCEPTABLE EMI 41 AND 42 TEXT CODES
<TABLE>
<CAPTION>
PHRASE CODE
------ ----
<S> <C>
Call Processing Equipment Malfunction 00153
Denied Knowledge of Call(s) 00154
Duplicate Billing 00155
Call(s) Not Completed 00156
Reached Wrong Number 00157
Unsatisfactory Connection 00158
Customer Disconnected 00159
Collect/3rd Number Calls Not Accepted 00160
Telegrams Not Delivered 00161
Telegrams Service Credit 00162
Correction of Long Distance Credit 00163
Equipment Returned Service Credit 00164
Refund Check Issued 00165
Adjustments to Advertising Charges 00166
Local Tax Adjustments 00167
City Tax Billing Adjustment 00168
One-Time Charge Adjustment 00169
WATS Usage Adjustment 00170
Post Billing Adjustment 00171
Repair of Customer Equipment 00172
Voice Message Service Adjustment 00173
Mobile AIRTIME Adjustment 00174
Deregulated Service Charge Adjustment 00175
976/900 Call(s) Adjustment 00176
Miscellaneous Bill Adjustment 00177
Adjustment to Enhanced Service Provider Bill 00178
</TABLE>
GTE PROPRIETARY
SA2-19
<PAGE>
BILLING AND COLLECTION SERVICES AGREEMENT
SERVICE ATTACHMENT 5
PrimeTarget(SM) SERVICES
TELCO DEVELOPMENT GROUP may order and GTE agrees to provide PrimeTarget(SM)
Services ("Service") under the terms and conditions set forth in the Agreement
and within this Service Attachment as follows:
Section 1 - Service Description
1.1 PrimeTarget(SM) Services are communications to End Users in the form of
Direct Mail, Bill Inserts, Bill Message Page, Marketing Messages and Bill
Phrases. TELCO DEVELOPMENT GROUP may use one or more of these
communications options each month or only a few times a year.
1.2 These Services are described as follows:
1.2.1 Direct Mail - Direct Mail is independent of the GTE billing cycle.
TELCO DEVELOPMENT GROUP can target specific end-user groups and
specific mail dates which fall during off-peak mailing times,
subject to availability. TELCO DEVELOPMENT GROUP provides the
mailing pieces and envelopes, and instruction on list selection.
TELCO DEVELOPMENT GROUP retains full creative control of the direct
mail piece.
1.2.2 Bill Insert - TELCO DEVELOPMENT GROUP provides GTE with the insert
and GTE encloses it in the GTE billing envelope with End User's
bill. Ordering of this service is subject to technical and capacity
limitations of GTE's inserting equipment.
1.2.3 Bill Message Page - A Bill Message Page may contain up to eighty-one
(81) lines of approximately fifty-four (54) characters per line
[seventy (70) lines for California]. Bill Message Pages are
positioned before or after the TELCO DEVELOPMENT GROUP bill page and
before any other carrier's statement. Bill Message Pages are
available monthly to TELCO DEVELOPMENT GROUP's presubscribed End
Users.
1.2.4 Bill Phrase - A Bill Phrase contains from one to fifteen lines of
text of approximately fifty-four (54) characters each and appears on
the TELCO DEVELOPMENT GROUP bill page preceding the detail of
itemized calls. This service is a "broadcast" feature to all of
TELCO DEVELOPMENT GROUP's End Users receiving a bill in the month
the phrase appears.
1.3 The Bill Phrase is only offered when TELCO DEVELOPMENT GROUP has ordered
BillingPlus(SM) Service.
Section 2 Ordering Procedures
2.1 Bill Phrase, Bill Message Page, Bill Insert, Marketing Message or Direct
Mail may be ordered utilizing a preauthorized Purchase Order Number
("PON"). The PON must be received forty (40) business days in advance of
the bill date of the end-user bill in which the PrimeTarget(SM) Services
are to be included. GTE shall accept actual bill inserts from TELCO
DEVELOPMENT GROUP five (5) business days prior to the first day of the bill
cycle month during which the inserts are to be enclosed in end-user bills.
Inserts must be delivered directly to each of GTE's designated bill
enclosing centers. See Section 5 below for a list of the bill enclosing
centers.
2.2 Bill Message Page to "casual use" End Users may be ordered subject to space
availability and technical limitations.
2.3 Bill Phrase, Bill Message Page and Bill Insert reservation requests may be
made by TELCO DEVELOPMENT GROUP no less than two (2) months prior to but no
more than twelve (12) months in advance. Reservation requests shall
specify the GTE operating area and month being requested.
2.4 If there are more requests than can be accommodated, a lottery process
shall be used by GTE for bill inserts or the casual usage caller
GTE PROPRIETARY
SA5 - 1
<PAGE>
message option of the Bill Message Page Service. TELCO DEVELOPMENT GROUP
shall be contacted immediately if selected or for alternative dates if it
is not awarded its choice of date. GTE shall assess TELCO DEVELOPMENT
GROUP a ten per cent (10%) charge, based on the estimated order value, if
TELCO DEVELOPMENT GROUP cancels the order after such order has been
selected through the lottery process and the slot is not utilized.
2.5 All requested text must be included with each PON for the Bill Phrase, Bill
Message Page or Bill Insert. GTE agrees to use its best efforts to provide
a response to the requested text within five (5) business days but in no
event more than ten (10) business days to TELCO DEVELOPMENT GROUP's
conceptual review request. GTE shall review the type of service or product
being advertised as well as the content of such advertisement. GTE shall
have the right to reject any Bill Phrase, Bill Message Page, Marketing
Message or Bill Insert, provided, however, such right of rejection shall
not be unreasonably exercised. TELCO DEVELOPMENT GROUP agrees that no Bill
Phrase, Bill Message or Bill Insert shall either directly or indirectly
imply an endorsement of TELCO DEVELOPMENT GROUP services by GTE. If
text is not acceptable, GTE shall notify TELCO DEVELOPMENT GROUP with
suggestions for acceptable text. TELCO DEVELOPMENT GROUP shall have five
(5) business days to meet GTE's requirements otherwise TELCO DEVELOPMENT
GROUP's request for service shall be denied.
2.6 Bill Inserts, Bill Phrases, Marketing Messages and Bill Message Pages shall
comply with GTE's graphic, printing and production format standards.
GTE's Bill Insert specifications are set forth in Section 4 below.
2.7 GTE agrees to provide targeting of Bill Message Page, Bill Phrases and Bill
Inserts to TELCO DEVELOPMENT GROUP subject to Program Development and
associated charges set forth in Section 6 of Attachment E. Targeting
capabilities for Bill Inserts may vary by GTOC. At a minimum TELCO
DEVELOPMENT GROUP's presubscribed end-user base shall be available at a
state level. When the Bill Insert order is evaluated by the GTOC, a
determination shall then be made as to whether TELCO DEVELOPMENT GROUP's
targeting requirements can be met.
2.8 Upon request, GTE shall supply TELCO DEVELOPMENT GROUP with a test bill
prior to sending End Users bills with Bill Message Page. TELCO DEVELOPMENT
GROUP shall review the information on the test bill or validation media and
advise GTE within one (1) business day of receipt whether the information
on the test bill or other validation media is approved or rejected. Should
such approval or rejection not be given within the time period specified in
the preceding sentence, GTE shall proceed as if requested by TELCO
DEVELOPMENT GROUP in the preauthorized PON. Upon request, GTE shall send
TELCO DEVELOPMENT GROUP a list of the billing telephone numbers ("BTN") of
all End Users who received the service. This list shall be sent to TELCO
DEVELOPMENT GROUP within ten (10) business days after the PON is completely
implemented. This request is subject to Program Development Charges.
2.9 When TELCO DEVELOPMENT GROUP purchases GTE's PrimeBilling(SM) Service,
TELCO DEVELOPMENT GROUP must choose either the Ten (10) Line Bill phrase,
One Five-Line Marketing Message or Two Five-Line Marketing Messages at that
Time. If TELCO DEVELOPMENT GROUP wishes to change this choice at a later
date, a PON must be received by GTE and applicable Program Development
Charges shall be accessed and communicated to TELCO DEVELOPMENT GROUP.
2.10 When TELCO DEVELOPMENT GROUP orders their chosen option, TELCO DEVELOPMENT
GROUP Marketing Messages shall be sent to GTE in the form of text files.
GTE shall review the text, and if any changes are required, GTE shall
notify TELCO DEVELOPMENT GROUP of the changes within ten (10) business
days. TELCO DEVELOPMENT GROUP shall have five (5) business days to respond
to GTE with acceptance or the request shall be denied.
Section 3 Limitation of Liability
3.1 GTE assumes no liability for orders not filled resulting from
circumstances beyond its control, including, but not limited to, action of
State or Federal regulatory bodies. If GTE cancels any scheduled TELCO
DEVELOPMENT GROUP Bill Message, Bill Phrase, Marketing Message or Bill
Insert within its control, it shall assume liability for timely delivery
through a separate mailing, at the discretion of TELCO DEVELOPMENT GROUP.
If TELCO DEVELOPMENT GROUP chooses not to have GTE deliver the Bill Message
Page, Bill Phrase or Bill Insert through a separate mailing, TELCO
DEVELOPMENT GROUP shall provide GTE a detailed accounting of the printing
and production costs that are unrecoverable as a result of the
cancellation, as well as the costs associated with the portion of the order
omitted, for the purposes of reimbursement to TELCO DEVELOPMENT GROUP (GTE
shall pay for any such claims within thirty (30) business days of receipt
of such claims).
GTE PROPRIETARY
SA5 - 2
<PAGE>
Section 4 - Charges and Specification for the Service
4.1 All PrimeTarget(SM) Services shall be priced according to the schedules
shown in Section 6 of Attachment E.
4.2 Bill Insert Specifications are as follows:
Insert Size Weight Requirement
Length Width Single Sheet Folded Sheet
no folds maximum of 2 folds
------ ----- ------------ ------------------
All
Areas 6 3/4" 4" 70 lb. 60 lb.
No Staples, no accordion folds, uncoated paper
No bleeds
Packaging 4" stack/2" paper band
NOTE: TELCO DEVELOPMENT GROUP must assign a code number to bill inserts sent to
GTE bill enclosing centers. Today the code is generally printed on the back
left hand corner at the bottom of the bill insert. This numbering system
assists the bill enclosing center to accurately identify the TELCO DEVELOPMENT
GROUP insert.
Section 5 - Bill Enclosing Centers
Below are listed the GTE bill enclosing centers:
GTE North GTE Central
Bill Distribution Center Bill Distribution Center
3301 Wayne Trace 3332 Loop 306
Fort Wayne, IN 46806 San Angelo, TX 76904
GTE South GTE West
Bill Distribution Center Bill Distribution Center
3632 Roxboro Road 1845 Camino dos Rios
Durham, NC 27704 Newbury Park, CA 91320
GTE PROPRIETARY
SA5 - 3
<PAGE>
BILLING AND COLLECTION SERVICES AGREEMENT
SERVICE ATTACHMENT 6
BILLING ANALYSIS SERVICES
TELCO DEVELOPMENT GROUP may order and GTE agrees to provide Billing Analysis
Services ("Service") under the terms and conditions set forth in the Agreement
and within this Service Attachment as follows:
Section 1 - Service Description
1.1 Billing Analysis Services consist of Detection Service, Investigative
Service, and Deterrence Service. Billing Analysis Services shall be
provided to the extent that such services can be made available with
reasonable effort.
1.2 Detection Service
1.2.1 GTE shall provide Detection Service to TELCO DEVELOPMENT GROUP
through the use of equipment that identifies numbers and collects
information on billing evasion activities. TELCO DEVELOPMENT
GROUP shall order Detection Services on an Individual Case Basis
("ICB").
1.2.2 Detection Services shall include, but is not necessarily limited to,
Documentation Scan per line.
1.2.3 A documentation scan on an individual line may be provided when an
authorized TELCO DEVELOPMENT GROUP representative provides a written
request for such a scan.
1.2.4 Detection information produced by GTE shall be secured, protected
and reviewed only with authorized personnel.
1.2.5 Detection information produced by GTE for TELCO DEVELOPMENT GROUP
shall remain the property of GTE. Copies may be provided to the
authorized TELCO DEVELOPMENT GROUP representative but shall not be
released to any other person or non-GTE company without the written
consent of GTE Security, except under legal process.
1.2.6 TELCO DEVELOPMENT GROUP and GTE shall designate and identify
authorized representatives who shall be responsible for protecting
the information by Detection Services.
1.2.7 The period of time for which a scan on an individual line shall be
conducted shall be agreed upon on an individual case basis.
1.2.8 A statement of Detection Services provided by GTE shall be rendered
to TELCO DEVELOPMENT GROUP each month.
1.3 Investigative Service
1.3.1 GTE shall provide Investigative Service through its centralized toll
fraud investigation groups for suspected fraud billing evasion
activities. This service may be requested either on an ICB directly
by TELCO DEVELOPMENT GROUP or as part of the error correction
process with direct referral for GTE's Centralized Toll
Investigation ("CTI") function.
1.3.1.1 Investigative Service provided as requested on an ICB
directly by TELCO DEVELOPMENT GROUP shall be billed at the
rate specified
GTE PROPRIETARY
<PAGE>
in Section 7 of Attachment E.
1.3.1.2 G T E and T E L C 0 DEVELOPMENT GROUP shall negotiate
suspected fraud investigation levels and charges when the
Service is requested as part of the error correction
process with direct referral from GTE's CTI function.
1.3.2 Investigative Service shall include the following activities:
A. Analysis of suspected fraud messages
B. Contact with billed and called parties
C. Contact with known or suspected responsible parties
D. Rebilling, where practical, of fraud losses to responsible
parties
1.3.3 TELCO DEVELOPMENT GROUP and GTE shall designate and identify
authorized representatives who shall be responsible to protect the
information provided by GTE Investigative Service.
1.4 Deterrence Service
1.4.1 GTE shall provide Deterrence Service for suspected billing evasion
activities on an ICB.
1.4.2 Deterrence Service shall include, but not necessarily be limited to,
the following activities:
A. In-person contact and interview of known or suspected
responsible parties
B. In-person contact and interview of witnesses
C. Preparation of formal reports of investigation for criminal or
civil actions
D. Provision of deposition or court testimony
E. Collection of evidentiary material
F. Recovery of fraud enabling devices
G. Publicity assistance
H. Presentations of deterrence/crime awareness programs
1.4.3 TELCO DEVELOPMENT GROUP and GTE shall designate and identify
authorized Security representatives who shall be responsible for
protecting the information provided by GTE Deterrence Service.
1.4.4 GTE shall not prematurely terminate Deterrence Service
ordered by TELCO DEVELOPMENT GROUP if GTE begins to incur
costs for services that are not specifically described in the
rates and charges as set forth in Section 7 of Attachment E,
or have not been previously anticipated or defined. Instead,
GTE may, on a per case basis, charge up to $100.00 dollars,
without concurrence from TELCO DEVELOPMENT GROUP. For
individual charges over $100.00 dollars, GTE must obtain
concurrence from the authorized representative of TELCO
DEVELOPMENT GROUP. All miscellaneous expenses must be defined
on the statement of deterrent services.
1.4.5 A statement of the Deterrence Service provided by GTE shall
be rendered to TELCO DEVELOPMENT GROUP on a monthly basis.
Section 2 - Charges for the Service
GTE's rates for Billing Analysis Services are set forth in Section 7
of Attachment E.
GTE PROPRIETARY
SA6 - 2
<PAGE>
BILLING AND COLLECTION SERVICES AGREEMENT
SERVICE ATTACHMENT 8
SUB CIC SERVICE
TELCO DEVELOPMENT GROUP agrees to order and GTE agrees to provide Sub Carrier
Identification Code ("Sub CIC") Service under the terms and conditions set forth
in the Agreement and within this Service Attachment as follows:
Section 1 - Service Description
1.1 Sub CIC Service provides separated identification of a clearinghouse and
their customer on the enduser's bill. Sub CIC Service is required when
TELCO DEVELOPMENT GROUP is a clearinghouse and orders BillingPlus(SM)
Service and PrimeLink(SM) Service from GTE.
1.2 GTE does not charge for Sub CIC Service except that when TELCO DEVELOPMENT
GROUP requests a copy of the Sub CIC table a charge will apply. Copies of
the Sub CIC tables may be ordered via the Program Development procedures
outlined in Section 34 of the Agreement.
Section 2 - Service Ordering
2.1 Initial Sub CIC set up and subsequent changes shall be initiated by TELCO
DEVELOPMENT GROUP via the Program Development procedures set forth in
Section 32 of the Agreement. Each PON (both initial and subsequent) shall
be applicable on a national basis by the clearinghouse, regardless of call
activity.
2.2 PON quote and approval are not required for implementation of Sub CIC
Service. GTE shall establish or update tables within five (5) to thirty
(30) business days of receiving the PON.
2.3 Message data shall be sent by TELCO DEVELOPMENT GROUP in either:
a. Fixed Length Records. The CIC of the Interexchange Carrier (IXC) is
placed in the rerate field (positions 153-157) of the Exchange message
Interface (EMI) record with indicator 5 set to a value of 3, or;
b. Variable Length Records. The Sub CIC is carried in the Secondary
Billing Entity Number field (positions 9-13) of the Secondary Billing
Entity Module 002-B. (A module is a group of data elements associated
with a billing record.) This is the only module GTE accepts today. This
module identifies the IXC when a clearinghouse creates the rated EMI
records.
2.4 If TELCO DEVELOPMENT GROUP requires testing prior to Sub CIC
implementation, TELCO DEVELOPMENT GROUP shall request testing in the
initial PON.
2.5 GTE shall provide TELCO DEVELOPMENT GROUP with written verification that
the PON has been implemented. Other verification methods (i.e., table
dumps, bill format production samples) shall be requested by TELCO
DEVELOPMENT GROUP via Program Development. GTE shall notify and assess
TELCO DEVELOPMENT GROUP charges for these verifications.
Section 3 - Limitations
Sub CIC Billing Service shall not be separated by Clearinghouse (CIC) or
clearinghouse customer (Sub CIC) on the monthly Purchase of Accounts
Receivable Report (PAR).
GTE PROPRIETARY
<PAGE>
EXHIBIT 11.1
TELCO COMMUNICATIONS GROUP, INC.
Statement Regarding Computation of Per Share Earnings
WEIGHTED AVERAGE NUMBER OF SHARES
The weighted average number of shares of common stock and common stock
equivalents, after adjusting for the 425-to-1 stock split, was determined as
follows:
Outstanding options for common stock have been included in the calculation of
common and common equivalent shares outstanding using the treasury stock method
based on an assumed initial public offering price of $16 per share as the market
price for all periods presented.
(amounts in thousands except per share data)
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Common Stock:
Shares outstanding beginning of period 20,188 20,864
Shares issued during period, net (1) 217 0
SEC SAB 83 shares (2) 5,961 5,961
------- -------
26,366 26,825
Common Stock Equivalents:
Options (3) 365 935
Warrants (4) 398 682
------- -------
763 1,617
Weighted average number of shares 27,129 28,442
Net Income (loss) 2,006 10,765
Net Income (loss) per share $0.07 $0.38
</TABLE>
(1) Weighted average shares acquired, net of repurchase of shares
(2) Shares issued in acquisition of Long Distance Wholesale Club 5,102
Employee options issued June 14, 1995 to June 13, 1996 1,992
Less shares reacquired under treasury stock method (1,133)
-----
Net SAB 83 shares 5,961
=====
(3) Options granted, less shares reacquired under treasury stock method,
on a weighted average basis
(4) Represents warrant held by Signet Media Capital Group to purchase
682,082 shares of common stock at a nominal exercise price.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF TELCO COMMUNICATIONS GROUP, INC.
<TABLE>
<CAPTION>
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
<S> <C>
Dial & Save of Alabama, Inc. Delaware
Dial & Save of Arizona, Inc. Delaware
Dial & Save of Arkansas, Inc. Delaware
Dial & Save of California, Inc. Delaware
Dial & Save of Colorado, Inc. Delaware
Dial & Save of Connecticut, Inc. Delaware
Dial & Save of Delaware, Inc. Delaware
Dial & Save of Florida, Inc. Delaware
Dial & Save of Florida, Alpha, Inc. Delaware
Dial & Save of Florida, Beta, Inc. Delaware
Dial & Save of Florida, Gamma, Inc. Delaware
Dial & Save of Florida, Delta, Inc. Delaware
Dial & Save of Georgia, Inc. Delaware
Dial & Save of Idaho, Inc. Delaware
Dial & Save of Illinois, Inc. Delaware
Dial & Save of Indiana, Inc. Delaware
Dial & Save of Iowa, Inc. Delaware
Dial & Save of Kansas, Inc. Delaware
Dial & Save of Kentucky, Inc. Delaware
Dial & Save of Louisiana, Inc. Delaware
Dial & Save of Maine, Inc. Delaware
Dial & Save of Maryland, Inc. Delaware
Dial & Save of Massachusetts, Inc. Delaware
Dial & Save of Michigan, Inc. Delaware
Dial & Save of Minnesota, Inc. Delaware
Dial & Save of Mississippi, Inc. Delaware
Dial & Save of Missouri, Inc. Delaware
Dial & Save of Montana, Inc. Delaware
Dial & Save of Nebraska, Inc. Delaware
Dial & Save of Nevada, Inc. Delaware
Dial & Save of New Hampshire, Inc. New Hampshire
Dial & Save of New Jersey, Inc. Delaware
Dial & Save of New Mexico, Inc. Delaware
Dial & Save of New York, Inc. Delaware
Dial & Save of North Carolina, Inc. Delaware
Dial & Save of North Dakota, Inc. Delaware
Dial & Save of Ohio, Inc. Delaware
Dial & Save of Oklahoma, Inc. Delaware
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
Name of Subsidiary State of Incorportation
- ------------------ -----------------------
<S> <C>
Dial & Save of Oregon, Inc. Delaware
Dial & Save of Pennsylvania, Inc. Virginia
Dial & Save of Rhode Island, Inc. Delaware
Dial & Save of South Carolina, Inc. Delaware
Dial & Save of South Dakota, Inc. Delaware
Dial & Save of Tennessee, Inc. Delaware
Dial & Save of Texas, Inc. Delaware
Dial & Save of Utah, Inc. Delaware
Dial & Save of Vermont, Inc. Delaware
Dial & Save of Virginia, Inc. Delaware
Dial & Save of Washington, Inc. Delaware
Dial & Save of Washington, D.C., Inc. Delaware
Dial & Save of West Virginia, Inc. Delaware
Dial & Save of Wisconsin, Inc. Delaware
Dial & Save of Wyoming, Inc. Delaware
Long Distance Wholesale Club Delaware
Telco Development Group of Delaware, Inc. Delaware
Tel Labs, Inc. Virginia
</TABLE>
2
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in the Registration Statement No. 333-05857 dated June
12, 1996, as amended through Pre-effective Amendment No. 5 dated August 7,
1996, relating to the issuance of Common Stock of Telco Communications Group,
Inc. on Form S-1 of our report dated May 10, 1996, appearing in the
Prospectus, which is a part of this Registration Statement, and to the
reference to us under the heading "Experts" in such Prospectus.
/s/ Deloitte & Touche llp
_____________________________________
DELOITTE & TOUCHE LLP
Richmond, Virginia
August 7, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
To the Board of Directors
Telco Communications Group, Inc.
Chantilly, Virginia
We hereby consent to the use in this Registration Statement on Form S-1 of
our report, dated March 25, 1994, relating to the financial statements of
Telco Communications Group, Inc., and to the reference to our Firm under the
caption "Experts" in the Prospectus.
/s/ Chase and Associates CPAs, PC
Manassas, Virginia
August 7, 1996
9293 Corporate Circle . Manassas, Virginia 22110 . 703/361-7114
. METRO: 631-2244 . FAX 361-8225
